Yrjo Koskinen is a professor of finance and associate dean of research at the University of Calgary’s Haskayne School of Business. Ari Pandes is an associate professor of finance and area chair for finance at Haskayne.
This is a time of unprecedented economic disruption. The COVID-19 pandemic and the Russia-Saudi Arabia price war have badly affected Alberta’s energy industry, so much so that oil hasn’t even been worth the barrel it’s sitting in. This comes on top of the sector’s continuing existential crisis, as the world slowly transitions to a low-carbon economy – a move driven by everything from anti-pipeline protests impelled by the need to limit climate change to the refusal of large international lenders to finance oil sands projects.
The continued viability of oil and gas development in Alberta is becoming an open question, not least because the industry’s boom-and-bust cycle affects the ability of the province’s citizens to make a dependable living.
So it is only common sense to suggest that diversification into clean and renewable energy could help Alberta, since the sole reliance on the sector’s traditional forms limits the cards the province could be playing right now. But it will take time – five years, at least – to bring new clean, renewable and carbon-capture technologies to a sound commercial footing, and our crisis-occupied governments aren’t exactly flush with the cash needed to produce solid businesses that can attract private investment in new industries (with the exceptions of wind and solar, which are already profitable).
There is an elegant way forward, however. Ottawa can change federal tax regulations around income trusts through a reversal of what is known as the 2006 Halloween Massacre, to incentivize forward-looking investors to invest now in loss-making ventures with the intention to sell or transform the businesses to income trusts once they become profitable.
Here’s how income trusts worked: A corporation’s business income would be paid to a trust, mainly in the form of deductible interest payments. The cash was then distributed to the trust’s unitholders, reducing the underlying corporation’s taxes to zero and maximizing investor payouts. In the early 2000s, such trusts were used by many industries to minimize corporate taxes, and they were particularly vital for the energy sector because of its capital-intensive nature.
But on Oct. 31, 2006, in a bid to curb what then-finance minister Jim Flaherty described as “a growing trend to corporate tax avoidance," the federal government announced that all income trusts would be taxed at rates similar to corporations. Investors in energy trusts were hit particularly hard by the change, with such trusts losing a total of $15-billion in market value over 10 days.
Reviving tax breaks for income trusts to specifically promote and support low-carbon energy technologies – such as hydrogen, geothermal, wind and solar, along with carbon capture and storage – would be a relatively simple measure for the federal government to undertake. It would not require direct infusions of cash at a time when the government faces expensive demands for bailouts; instead, it would only need to rely on market forces to achieve its goals.
These tax breaks would be amply returned through the development of new companies and industries, which would then create new sources of tax revenue. The need for this measure could be reassessed after 30 years or when Canada achieves a net-zero carbon economy, ensuring the long-term stability needed to attract private investment.
Low-carbon energy trusts could be particularly useful in helping spark the birth of a hydrogen industry in Alberta, which could promote new, low-carbon uses for the province’s vast oil and gas reserves. That, in turn, could unlock major competitive advantages for the province in North American and world markets. Early-stage companies such as Calgary-based Proton Technologies are already working on commercializing such technology, while even major oil companies such as Shell Canada are using large-scale carbon capture and storage to produce hydrogen from natural gas without carbon dioxide emissions.
Short-term measures for Alberta’s marquee industry won’t do the trick, especially since time is not on Canada’s side. Other North American jurisdictions with oil and gas industries, such as Texas and California, are further down this road of economic diversification through commercialization.
Besides its energy riches, Alberta has a deep reservoir of talent and expertise created by decades of oil and gas development. Why not put these skills to new uses, potentially creating new industries within the energy sector and slowly easing the province away from the oil and gas roller coaster? The recent alliance between unemployed oil well drillers and Clean Energy Canada to explore drilling for geothermal energy only further proves that such workers do not see oil and gas as an implacable foe of clean and renewable energy.
At the end of the day, a job is a job. The only question that remains is whether we can find the will to see the current economic crisis as the opportunity it truly is, to ensure that jobs continue to flow now and in the future.
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