Sunday, 27 May 2012

Dutch Disease/Enviro Link: Good Politics, Great Policy, third Decent Analysis

Thomas Mulcair: Leader of the Official Opposition. Recently made statements that angered rightwing politicians in parts of Western Canada

Image Source: Wikipedia
Mulcair is linking Dutch Disease and sound environmental policy, advocating pricing carbon at the oil sands & encouraging a sustainable development of them. This is good politics (as even Andrew Coyne recognizes, in the comical National Post), even better policy (as Coyne fails to recognize), and a third decent analysis.

Mulcair's argument basically boils down to this:

  • The cost of Canada's oil sands extraction to developers is under-priced. The cost generated in terms of environmental degradation, particularly through it's greater-than-crude -oil-extraction greenhouse gas emissions, isn't factored into the cost to developers.
  • This leads to an over-extraction of oil, which leads to greater harm to the environment than we'd otherwise like. 
  • Underpricing oil also leads to upward pressure on the Canadian dollar, which hurts our nation's manufacturing (Dutch Disease).
  • By factoring in the environmental cost of oil sands development (through various schemes, perhaps the cap-and-trade system that the Federal NDP advocated in the 2011 election), Canada won't  be overproducing oil from the oil sands. 
  • By stopping the overproduction of oil from the sands, Canada's dollar will lower and manufacturers will benefit.

The Politics

This is good politics. First, it appeals to many manufacturing workers in Ontario and urban areas across the country - including in prairie cities - who've lost their jobs due to Canada's ever rising dollar (and the global recession). Manufacturing workers in Manitoba, BTW, are also suffering the effects of a resource boom pushing up the dollar if one looks at the graph below - available on the Manitoba government website.

Changes in Manitoba's Employment by Industry
(2000 - 2010) 

Image Source: Manitoba's Department
of Entrepreneurship, Training and Trade.
There was, however, small growth between 2009-2010 in manufacturing.

Changes in Manitoba's Employment by Industry
(2009 - 2010) 

Image Source: Manitoba's Department
of Entrepreneurship, Training and Trade.
Back to the topic at hand, though. Mulcair's Dutch Disease critiques further make good political sense because it's putting the NDP against the Conservatives in an economic debate (see 308's analysis).

It seems that "the environment" tends to be compartmentalized in the minds of voters away from "the economy". I'm pretty confident that relocating flooded coastal towns, redesigning buildings for different weather patterns, revamping agriculture in lieu of ecological changes, and adjusting fisheries to changes in ocean habitats caused by climate change, or any of a number of other potential effects of climate change is going to cause a lot of economic discomfort. The disruption to many supply changes will very likely be enormous and costly. Sadly, few people see it that way.

Advocating cap-and-trade systems or carbon taxes on their "environmental sustainability" merits doesn't woo voters (at least it didn't in 2008). But advocating a solution to job losses in manufacturing does. It's an "economic issue" whereas sustainable development is "just an environmental issue".            

The Policy

This is good policy. Carbon emissions need to be priced to incentivize a move away from them and to more sustainable alternatives, as 230 Canadian economists have testified to. Ideally, it'd work best as a carbon tax, but shamelessly reckless electioneering in 2008 has hindered that, so a cap-and-trade system will have to do.  

Carbon emissions in European Union

Expected drop in carbon emissions in 2009
caused by recession, still moderate
carbon reductions in EU-27 nations due
to carbon emissions trading.

Data Source:
EEA and European Topic Centre — Air and Climate Change

Graph obtained from this site.

A cap-and-trade system will incentivize a move towards more energy efficient, low-carbon, technologies.  The European cap-and-trade system testifies to this. Of course, it is nowhere near as effective as carbon taxation. Still, it's a step in the right direction. 

Andrew Coyne, however, doubts that it'll help manufacturing.
But by tacking on the bit about pricing carbon, Mr. Mulcair is attempting to turn this into an argument, not about resources versus manufacturing, but about the environment and true economic pricing. His premise is impeccably free-market, on its face. It isn’t that we should prefer manufacturing, he’s saying: it’s that we should not be tilting the pitch the other way, by our failure to price the oil sands’ carbon emissions.

Except … we are also failing to price carbon everywhere else in the economy, including manufacturing. There’s no preference for the oil sands in this regard: exports of autos are being “inflated” in the same way. Which means pricing carbon, while desirable in itself, would make little difference to the imbalance Mr. Mulcair decries. So why make a connection between the two?
The notion that environmental levies on the oil sands, new federal oversight for sustainability goals, or a cap and trade system wouldn't help manufacturing is wrong. Many of the manufacturing losses have been in the textiles and apparel industries, industries less carbon intensive than oil sands extraction, which is a very carbon intensive undertaking. Auto-manufacturers themselves can shift towards a less carbon intensive process. Manufacturers would be less effected and oil developers/carbon-intensive resource extraction industries would scale back production, leading to a lower dollar, and an exchange rate more favourable to manufacturing.

In the long-run, this might force oilsands developers to invest in more energy-efficient processes of extracting the carbon, but in the mid-term if the cap-and-trade system is revenue positive than proceeds can be invested into a green industrial policy to revamp manufacturing as well as make it low-carbon and energy efficient, a public investment with long-term benefits for Canada yet one that only the government is in a position to initiate because of collective action problems1.    

The Analysis

There are a few problems in Mulcair's analysis, though. For one, it somewhat obscures the direct cause of Dutch Disease in Canada. The lack of environmental fees or other levies applied to the oil sands is not the reason demand for these raw resources have skyrocketed in the last decade - it's because an emerging middle class in China and India desires these resources for inputs into various goods.

Another quibble I have with Tom Mulcair's analysis is that it obscures the fact that it's not just oil that's driving up the Canadian dollar and making our manufacturers uncompetitive. Other resource extraction industries are playing a role, though oil demand is probably the strongest factor.

All in all, though, the analysis sheds light on something that's been obscured in a lot of economic reporting. There is an institutional background to the economy and there are policy options to deal with uneasy economic shifts like the decline of Canadian manufacturing. Contrary to what Andrew Coyne claims, there are more reasons for worry about an over-dependence on resource extraction than a snobbish preference for manufacturing - resource markets can become quite volatile and tying a nation's economy solely to them results in long-term economic fragility. It's in Canada's best interests to implement a green industrial policy.

1 It doesn't have enough immediate, direct benefit to any one firm or individual to initiate "energy sustainability" policies or build a green infrastructure on their own. Pricing carbon might help incentivize this, but large-scale public investment is still needed to get things going.


  1. Great analysis on this, thanks! Stuff like this is more beneficial than a typical small news article.