Pipeline vs. People
This article was derived from Episodes 2 and 3 of Everything Economics, published on June 10, 2018. Everything Economics is a bi- A weekly podcast hosted by Tahlia Murdoch, on the Cave Goblin Network.
As a new immigrant to Canada, back when I first recorded this podcast, I was fascinated that this supposedly ‘green’ nation was so aggressively divided over whether or not a new pipeline should be built. I wanted to explore both sides of the story, as a good economist should, though these days I have stopped trying to appeal to the masses and instead, present my true, more radical self.
So in this article I will be exploring the issue of the Trans Mountain pipeline, discussing the history of the project, the externalities associated, who benefits from its construction, and the opportunity cost of the money being spent by the government on this purchase.
So first up, what is the Trans Mountain pipeline?
Well, TransCanada was founded in 1951 to develop the Trans Mountain pipeline in order to supply Eastern Canadian markets with natural gas from the West. The company expanded in the 1980s, developing and acquiring pipelines in Argentina, Chile and Malaysia, moving to an international company. In 1985 Trans Mountain suffered their biggest oil spill in the Edmonton area. Up to 10,000 barrels of oil was spilled, with a value of about $270,000 USD at the time. Today, that amount of oil is equal to $650,000 USD or $850,000 CAD, let alone the environmental and community costs.
Interestingly, the company began to undertake green initiatives at the turn of the century, including support for Foothills Research Institute study on grizzly bears and their interactions with linear features, such as the pipeline, the acquisition of US hydro-power assets in New England, and the construction of Cartier Wind Farm in Quebec in 2006. Whether these actions were reactive or proactive, I still think it’s great that they happen, and also find it to be an interesting signal for economic change which contradicts the continuation of wanting to expand oil production today.
In 2011, another contradictory green initiative, the company enters the Canadian solar industry with the development of eight solar power facilities in Ontario. What is going on? Does this company actually care for renewable energy and a green economy? Or are they simply reacting and trying to lower their risk of negative press?
I find it incredibly hard to believe that they do in fact care about the planet and its people. If they did, then they would stop expanding and focus as many resources as possible into transitioning to a clean energy producer. As of May 2017, TransCanada’s net worth was $40.6b USD so it isn’t like they don’t have the capital to do so.
Where do Kinder Morgan fit in?
Kinder Morgan is the biggest pipeline in the US. The founders, Richard Kinder and Bill Morgan, used to be Enron Executives. Alarm bells ringing yet? This company bought the pipeline that runs from Edmonton to Burnaby in 2005. In 2012, they put forward their plan to expand the pipeline by ‘twinning’ the existing one to increase the amount of oil being transported from 300,000 barrels per day to 890,000 per day. A massive 297% capacity increase. Their plan? Turn the Burrard Inlet into a major tar sands oil export facility.
So now 7 years since proposal, the additional pipeline is yet to built. Kinder Morgan originally planned to begin construction in 2017 and have oil and diluted bitumen flowing through the pipeline by December 2019.
It’s pretty well clear, this project has faced a lot of opposition from the people of British Columbia over the years. In 2014, over 100 people were arrested after camping out in Burnaby to block crews from drilling and surveying the area in relation to the pipeline expansion, with most charges being later dropped. In 2016, the federal Liberal government, headed by the current Prime Minister Justin Trudeau, said that this project, among others, will now be assessed in part on the greenhouse gas emissions produced in the extraction and processing of the oil they carry, and not the just the impact of the construction itself.
Additionally, such projects would have to improve consultations with First Nations. These conditions are economically responsible and force the companies involved to assess the externalities of the project and consider impacts beyond their own. This same year, the expansion was officially given the federal government stamp of approval.
What happened between then and now that led the exact same government to want to buy the pipeline for a huge $4.5b of taxpayer funds? Opposition from B.C. in the 2017 provincial election, the NDP and Greens formed a minority government, and I mean minority. They hold a one seat majority in the BC house of representatives. A key election promise was to block the pipeline being built on B.C. soil, whatever the push-back may be, of which they have held true. This sparked threats of a provincial trade war between BC and Alberta who would respectively ban the imports of Albertan diluted bitumen and BC wines, into their province. Political muscle was flexed!
So the NDP, environmentalists, coastal communities and First Nations continued to stand together in unity against this project. The constant opposition, protesting and lawsuits led Kinder Morgan to suspend non-essential spending on the Trans Mountain expansion. A victory for opponents? Not quite. Just last week the federal government stated that they would buy the Kinder Morgan pipeline for $4.5b to see that it is expanded.
I now want to take a look at each sides reasons, and the economic costs and benefits of each path.
We’ll start with pro-pipeline.
Those who support the expansion, argue that it is in the national interests of Canada. The expansion is estimated to cost $7.4b to construct, a massive injection into the Canadian economy. The key argument by supporters is relevant to the number of jobs the project will create in the short-term, and in the long-term as oil production can increase.
The multiplier effect should absolutely be considered when understanding the economic benefits this project will bring. The multiplier effect refers to the increase in final income arising from any new injection of spending into an economy. This is because, every dollar injected into the economy will be spent again, and this continues as more and more businesses and people are paid.
For example, construction materials would need to be purchased so that business will be paid, and pay their workers. Those workers will then have more income to spend in their community, and someone else will be getting paid. It continues on and on for every facet of production and the overall benefit is higher than the fixed amount spent by the construction company. It was tough to find out what the multiplier in Canada is currently estimated to be so I’ll just use the standard response here. Assuming the multiplier is 1.5, the Canadian economy would end up enjoying an $11.1b injection, allowing the economy to grow.
Directly related to economic growth is jobs. The federal and Alberta government continue to state that the project will create 15,000 construction jobs initially. If this turned out to be true, the economics benefits would be huge. Assuming that every worker is earning the average experienced construction worker wage of $51,000 per year, after tax, communities would share upwards of $765m in income. And remember, this is an average and we know that there would be workers earning upward of $100,000.
Additionally, TransMountain states on its website that the first 20 years of expanded operations will provide $46.7b in tax revenue to Canada, about $2.3b per year. 5.7 of this will go to B.C, 19.4 to Alberta, and the remaining 21.6 will be shared by all of Canada. Such revenue would give the government the funds to invest in a wide variety of projects. For example, $2.3b per year would fund at least 10% of healthcare spending or send over 185,000 kids to public school each year.
I did face some caveats in my research. Historically, estimates for construction jobs creation have been inaccurate, and actual job creation has often been much lower than the original forecasts. It looks like this may also be the case with the Trans Mountain pipeline. Where the 15,000 job creation estimate that is so heavily depended on by those in favour, is unclear. In their original application the National Energy Board, Kinder-Morgan stated that the project will “require over 4,475 direct construction workers in Alberta and BC combined (the peak month…anticipated to be July 2017).” This includes environmental, dock, pipeline, pump station and terminal jobs, with pipeline jobs making up the lion’s share.
As a whole and across all regions involved, Kinder-Morgan forecast that the project would employ an average of 2,616 workers per month over a two-year period. All calculations appear incredibly thorough and take into account, the workforce of each area, what percentage holds the skills that will be required, and what is expected to happen to the workforce, including labour gaps, up to 2021.
Seems weird right? Kinder-Morgan now say that this 15,000 jobs figure was derived by taking the person years of employment during project development of 58,037 (provided in a discredited report by the Conference Board of Canada), and dividing it by 3 years and 10 months. Voila, 15,000 jobs created, but now over almost 4 years, then the originally projected two years? In addition to this, this number of hours worked would completely blow-out. Now look, I don’t know what is real and what is not, but this seems like an arbitrary misuse of information to gain support for a controversial project.
Now let’s move onto the anti-pipeline arguments.
Starting with the most obvious, and most pressing, reason why this pipeline should not be expanded. Climate Change. The environment, its inhabitants, will be subject to some very negative production externalities if this goes ahead.
In 2016, the Ministry of Environment and Climate Change Canada undertook a review of related upstream greenhouse gas emissions estimates for the Trans Mountain Expansion Project. Upstream means all industrial activities from the moment the resource, in this case oil, is extracted. In general, this includes extraction, processing, handling and transportation. This does not include emissions from refining and end use (things like burning for fuel).
In this review, it was forecast that the upstream emissions, Including carbon dioxide, methane, and nitrous oxide, associated with the expanded nominal capacity of the Trans Mountain pipeline system, so including the existing line, could be between 21 and 26 megatonnes of carbon dioxide equivalent every year. When we remove the existing line, so forecasting now for only additional upstream emissions from the expansion, this figure drops to between 13 and 15 megatonnes per year. This is still a massive amount of emissions being released that we don’t necessarily need, further contributing to climate change.
These are some seriously large numbers, but without a comparison, it can be pretty hard to understand what they actually mean.
To put it into context, 1 megatonne is equal to 1 million tonnes. So when we take the lowest number of emissions, 13 megatonnes, we’re talking 13 million tonnes of carbon dioxide equivalent, released into the atmosphere, every single year. So what is this equal to? Here are a few comparisons:
- Over 2.5 trillion passenger vehicles driven for one year
- Over 1.2 trillion homes energy for one year
- 2.9 billion wind turbines running for a year
- Consider here, that an average wind turbine can power almost 332 households per year, so in this instance, we’re looking at emissions comparative to over 992 billion households, and the world population last year, was 7.6 billion.
Something I do want to address though, is that in 2016, Canada emitted 704 Mt of CO2 equivalent, so when we’re looking at the pipeline expansion, we’re only looking at about 2% of all emissions. Regardless, this is still a significant release, and the costs far outweigh the benefits, as the world transitions to a green economy.
It is absolutely certain that the overall negative impact on the environment and on society, would be greater than the 13 to 15 Mt of carbon dioxide each year.
Why is this so certain? Well to begin, I have so far touched on upstream emissions, and not brought end-use emissions into the equation. Upstream emission account for anywhere between 5% and 37% of fossil fuels overall emissions, according to the World Resources Institute. They have put together an awesome map of upstream, and remaining life-cycle emissions you can take a look at here.
This, I think, is a critical piece of information to consider, as it reminds us that while the oil may not necessarily be refined and burned in Canada, this will happen somewhere else. We already know, that once this product leaves the shores of BC, to go to exactly who, we do not know, but most likely the US, China, Japan and South Korea, it will be refined and used to create a variety of products such as petroleum, plastics, asphalt, chemicals, and more.
Now, in episode 1 of the podcast, I explained the theory of externalities, or the social costs, in this type of scenario. This theory, or reality if you like, is why all of these findings are essential to the arguments against the Trans Mountain Pipeline expansion. Emitting greenhouse gases contributes to climate change. We know that climate change is real, and we know that the oil industry, does not help to mitigate increasing global temperatures. Yes, some climate change is natural, but at least half can be attributed to human activity.
One of my go-to places for economic research and information is The Organisation of Economic Co-operation and Development, or OECD. They published a report in May last year, titled “Investing in Climate, Investing in Growth.” Just a quick note, this organisation have been around since 1961 and provide incredibly thorough, well-research, credible information to promote policies that will improve the economic and social well-being of people around the world.
In this report, it is estimated that inaction on climate change will lead to a loss in GDP (that’s gross domestic product) on average across all G20 countries, of 2% per year.
(Side note, G20 stands for the global 20. These are the 20 largest economies, measured by GDP, in the world, and includes Canada. Combined, the G20 account for 85% of global GDP and 80% of carbon dioxide emissions.)
So while the economy might look like it’s growing by an acceptable 2% per year, this is made completely void by indirect losses associated with climate change, such as damage from natural disaster, changes to land use because of warmers climates, etc. Across the world, losses of up to $12 trillion USD will be suffered by 2050 if nothing changes.
Further, the longer climate change is left unaddressed, the more expensive and more problematic the issue becomes. If a country decided to undertake ghg intensive projects, such as the pipeline, this would not only increase emissions, but make it more difficult and costly to transition to renewable energy and a green economy, as the obsolete and inefficient infrastructure will still exist. It is also far less effective to modify old technology into new, compared to just building a new solution from the ground up. Like a solar or wind farm for example.
Dollars aside, people will lose their homes, their families, their way of life, their own life for that matter. Thinking globally, a tiny investment, equal to less that half a percent of GDP in Canada, is not worth the cost to the Earth.
As for that small an investment? There are other places where this money, labour and capital can be spent. This is known as opportunity cost, the cost of a foregone opportunity and its gains, when any alternative is chosen. This is essential to consider when analysing these types of projects.
If Canada instead took a more climate friendly policy path, and chose to invest in green technology, as opposed to fossil fuels, they could add an additional 1% to output. This sounds small, but 1% of additional growth is substantial. Imagine how a loss of 1% would feel for example. The OECD also forecast that if you factor in the benefits of avoiding climate change impacts, like flooding, fire, storm damage, ocean acidification, loss fish stocks, and more, the net increase to GDP (per G20 country which includes Canada), would be nearly 5% to 2050. So short-term and long-term growth will prevail, while the oil industry is forecast to decline.
Additionally, climate-friendly technology is more energy efficient than the alternative, and would lead to fossil fuel savings of $1.7 trillion USD per year. Sounds better than losing trillions of dollars and unrecoverable ecosystems right?
This is a direct quote from the OECD Secretary-General, Angel Gurria “There is no economic excuse for not acting on climate change, and the urgency to act is high.”
Let me repeat that. “There is no economic excuse for not acting on climate change.” We are finally at the point where a green investment will get a greater return, in a capitalist, financial sense, and have a far more beneficial outcome for all. Not just the small handful of shareholders who will honestly still lose out indirectly, via the negative externalities of the Trans Mountain Pipeline expansion.
On average, the renewable energy industry employs about 3 times as many people as its fossil fuel alternative. In the US, green energy jobs are growing up to 15 times faster than the US average. So what could $4.5b be used for in Canada, instead of nationalizing a pipeline?
Well for starters, in January this year, the Government of Canada announced it will invest $700 million over the next five years, to grow the clean-tech industry, protect the environment, and create jobs. This is part of their unprecedented $2.3b budget set aside for clean tech in the 2017 budget. Why not double it? Completely accelerate the cleantech industry and transition to new growing world. The Solow Growth model tells us that actual growth can only be achieved with growth in new technology and knowledge that is innovative and increases a country’s output capacity with similar resources. Sure, a new pipeline might be innovative and use new tech, but as we’ve just discussed, it also has a lot of unrecoverable costs attached to it.
Even the Organization of Petroleum Exporting Countries (OPEC) recognizes that energy markets are changing and will drive down the demand for oil over the long term. Prices right now, are already volatile. So why even bother. On top of this, Global Affairs Canada found that while 87% of the country’s clean-tech firms export their products or services, with support from private and public funds, they are yet to fully capitalize on the growing market, forecast to be worth $3 trillion by 2020. This is huge investment opportunity. Government investment and support for this industry also acts as a type subsidy, encouraging positive production externalities to be created.
So in the end, I am strongly against the Trans Mountain Pipeline expansion project. I do not think that an average of 2000 jobs per year, is worth the direct and indirect costs, particularly when, that investment could be diverted into something more efficient, with a greater return, like cleantech. The issue of climate change is pressing, and an economy cannot actually grow without taking action anymore. Markets are changing, so why should Canada stay behind?
I acknowledge that the land I work, live and play on is the unceded territory of the Coast Salish peoples, including the territories of the Səl̓ílwətaʔ/Selilwitulh (Tsleil-Waututh), the xʷməθkwəy̓əm (Musqueam), and the Skwxwú7mesh (Squamish) Nations.
