"Even the poorest developing countries are reassessing the objective of attracting any and all investment, in favour of attracting quality investment."
Over the past few days we’ve watched Alberta, British Columbia and the federal government in a game of chicken, with billions of taxpayer dollars potentially in play in an end run around BC’s opposition to the Trans Mountain pipeline. It has felt a little like watching a bad horror movie, the kind where you crouch at the edge of your seat praying the hapless protagonist won’t be stupid enough to open that door.
And yet it’s argued that the Federal government should do just that. The main argument is that Alberta oil needs foreign markets, but two new arguments have emerged: if the pipeline isn’t built it will shake foreign investor confidence in Canada, and the proponent may react to project failure with international arbitration against Canada under NAFTA.
Let’s unpack those arguments. Yes, it would be nice for Alberta’s oil to have another export route (though the recent estimates of losses via price differential are grossly overstated). But is it the place of Canadian governments, federal or provincial, to support private sector profits when these are not otherwise supported by the market? Some would argue that the obstacles in this case are not market-based but political. This is a badly outdated understanding of the dynamics of large extractive projects; if the proponent has done such a poor job of obtaining its social licence to operate that protesters are surging to the barricades in waves, ready to be arrested, that is a market problem.
More fundamentally, if billions of dollars of Canadian taxpayer support is to go to any sector, why should it be the fossil fuel sector? This sector already benefits from over $3 billion a year in public subsidies, an amount that could actually be dwarfed by promises to de-risk this project alone. The point of a good industrial policy is to invest in emerging sectors. Pouring money into zombie-like infrastructure whose days are as numbered as the internal combustion engine is not a future oriented economic development strategy.
As renewable energy costs hit parity with conventional sources, and electric vehicles start their inevitable exponential rise, there is an ever-increasing certainty that fossil fuel resources and infrastructure will be stranded, becoming uneconomic before the end of their anticipated productive lifespan because of regulatory and/or costumer preference changes. Why should Canadian taxpayers sink billions into assets with that kind of risk profile?
Will Canada lose standing with foreign investors if Trans Mountain is not built? Hardly. Canada has a solid rule of law framework, a sound fiscal framework, an educated work force – all the elements needed to continue to attract investment.
But even the poorest developing countries are reassessing the objective of attracting any and all investment, in favour of attracting quality investment. It may be that if Trans Mountain fails Canada will be seen as riskier for fossil fuel investors. But not for all investors. And ultimately Canada should be targeting investment that diversifies our economy away from it’s unhealthy over-dependence on fossil fuel exports. That would be true even if it were not a doomed sector for both economic and environmental reasons. But the realities of climate change, and the speed of change in private sector and governments worldwide, make diversification even more urgent. If we want to signal to the rest of the world that Canada is a great place to invest in fossil fuels, then by all means we should spend taxpayer money. If we want to say it is time to shift, as other governments are doing, then this will be a small blip on the radar that disappears as quickly as it was manufactured by Kinder Morgan’s threats.
Finally, we have the risk of arbitration under NAFTA. Though Kinder Morgan has said it is too early to consider this possibility, it is unfortunately real and may have the federal government running scared; NAFTA’s Chapter 11 gives firms the right to force binding arbitration on governments that can result in multi-billion dollar payouts. The risk is made worse by the government’s potential response to Kinder Morgan’s threats: to publicly promise first that the pipeline will be built at all costs, and second that the governments of Canada and Alberta will de-risk the project. Should the project fail, this could give Kinder Morgan the very arguments it needs to initiate and potentially win an international arbitration against Canada, based on a doctrine called “legitimate expectations”.
Canada will have given the firm every reason to legitimately expect first that the pipeline will be built and, secondly that it will be profitable.
Yet, it can guarantee neither; it can only make Canadian taxpayers liable to pay for any failures. De-risking here is not about removing risks of failure – the federal government cannot alter the government of BC’s right to take legal actions to stop the pipeline, nor can it avert the inevitable demise of the fossil fuel sector. Rather, it is about allocating the liability for paying for the failures, shifting it from Kinder Morgan to the Canadian public.
NAFTA arbitration is not just a problem if the project is blocked. If the pipeline goes ahead and Canadian governments vow to de-risk it, they are putting taxpayers on the hook for anything other than long-term success. If the pipeline fails, whether due to climate change policies, changing demand, or other factors, the “de-risking” language may give Kinder Morgan the ability to sue Canada not just for monies invested, but for lost future profits as well.
Does it make sense from any perspective to put Canadian taxpayers on the hook for billions of dollars chasing assets at odds with climate realities and rapidly changing technologies? No. But we can picture Kinder Morgan’s shareholders crouched on the edge of their seats, impatiently listening for the creak as that door opens.
This blog was originally published by iPolitics here
Aaron Cosbey is a climate change economist and a frequent UN and OECD analyst on international investment policy. Howard Mann is an international lawyer who specializes in international investment law, and is a former Canadian government climate change negotiator.
The views, opinions and positions expressed by all iPolitics columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of iPolitics.