Canada Already Has a Windfall Tax on Oil & Gas, Let's Have an Informed Conversation.

Canada Already Has a Windfall Tax on Oil & Gas, Let's Have an Informed Conversation.

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Canada already has a windfall tax on oil and gas

Canada already has a working "windfall tax" on oil and gas companies. It’s called a scaling royalty system, so let's have an informed discussion about our world-class energy producers.

Despite the overwhelming treasure trove of evidence and analyses showing how a windfall tax would hurt Canadians and likely constrict global energy supplies even further, select groups still demand the federal government to “take action.”

Anti-Canadian energy activists continue to beat on their drums about implementing a windfall tax on oil and gas companies, knowing very well that such a tax would be a blow to the industry they steadfastly oppose.

Where were these so-called “environmentalists” during 2020 and 2021, when global travel restrictions and lockdowns kept mostly everyone at home and on the internet? Alphabet, Amazon, Apple, Microsoft and Meta – among many others – had stocks soar to new heights.

For example, the five tech companies above saw $1.4 trillion in revenue in 2021, which collectively would rank as the world’s 13th largest economy just behind Brazil but ahead of Australia. Of this $1.4 trillion, they generated $320 billion in profit based on Generally Accepted Accounting Principles (GAAP) [1].

Additionally, the global technology sector is responsible for up to 3 per cent of global emissions [3], which could grow rapidly if left unchecked as more of the developing world comes online. This should be of concern for environmentalists, no?

Big tech wasn’t the only incredibly profitable sector during the pandemic of 2020-21. Banks and grocers join the list of businesses that benefitted handsomely over the past few years [2].

Did activists call for a windfall tax on other industries when profits soared? Of course not.

This brings into question the highly subjective and arbitrary nature of windfall taxes:

• Who decides when an industry’s profits are “normal?”
• Who decides when they are “excessive?"
• What industries do we apply the tax on in the first place?

Here are some good reasons why implementing a secondary windfall tax on Canadian energy is just a bad idea.

#1 – Canadian oil and gas royalty structure acts like a windfall tax

Unanticipated revenues from energy royalties and corporate taxes have been pouring into government coffers due to high energy prices, offsetting the need for another windfall tax.

A July 2022 report from the Royal Bank of Canada shows that mechanisms in the royalty and tax systems are already in place to provide windfall revenues for Canadian governments. According to the report, Canadian oil and gas companies are projected to generate $112 billion for Canadian governments in 2022 and 2023. This includes $48 billion in 2022 and $64 billion in 2023 if energy prices remain elevated.

Canada’s oil and gas sector has only recently emerged from nearly a decade of rock-bottom prices, limited investment, company mergers and job layoffs.

Trevor Tombe, a University of Calgary economist, already sees a windfall tax in the energy sector’s royalty framework.

“We already have in the royalty system a tax rate that increases as oil prices rise,” Tombe said, according to reporting by the Financial Post. “So in a sense, that’s got some of the flavour of ‘windfall taxes’ — it’s just not done in an ad hoc way. It is explicit, it’s formula driven, it’s transparent.

“That’s where I think the problem lies (with a windfall tax): having a government just enact an ad hoc tax out of nowhere based on just whatever they think the rate should be — that’s problematic because it creates uncertainty,” Tombe continued.

With a windfall tax already in place in Canada, adding another onto our already highly regulated oil and gas industry will only hurt Canadian families and our competitiveness in global markets.

#2 – A windfall tax will increase our reliance on foreign oil and gas producers

Canadian oil imports 1988 to 2020 equate to $488 billion

A 2006 report for the American congress researched the implications of the crude oil windfall profit tax of the 1980s. According to the report [4]:

• From 1980 to 1988, the windfall profit tax (WPT) may have reduced domestic oil production anywhere from 1.2% to 8.0% (320 to 1,269 million barrels.)

• The U.S.’s dependence on imported oil grew from between 3% to 13% over the same time period

The U.S. government eventually repealed the windfall profit tax for several reasons, one of those being that it made the country more dependent on foreign oil and threatened domestic energy security.

The report’s findings should be a cautionary tale for Canadians - and quite frankly the rest of the world - as global energy shortages continue to take their toll on countries worldwide.

The question remains: where do we want to get our energy from?

The 2022 war in Ukraine should remind us of what happens when we rely on autocratic countries for the precious natural resources we need.

#3 – A windfall tax scares off investors, creates undersupply and deters climate action

Windfall taxes on Canadian oil and gas would be bad for many other reasons not already mentioned, including [2]:

i. Creates underinvestment in energy supply

Windfall taxes change the risk profile for investors. Why would anyone invest in energy when unusually high profits are subject to an arbitrary tax, but then these investors are left to absorb any losses on their own? Such a tax diminishes long-term return expectations, deterring investment and increasing the associated risks.

Additionally, when investment isn’t adequate to create enough supply, energy prices are higher and cause more difficulties for consumers to drive their cars and heat their homes. Decreased investment leads to less oil and gas production, fewer jobs, and more economic pain for Canadians.

ii. Hinders social progress and climate action

Canadian oil and gas is a world-class leader in deploying emission reduction technologies such as carbon capture and storage. A windfall tax would severely hamper the ability of these companies to find the capital for investment into cleantech and innovation.

Additionally, another windfall tax would drive investment in oil and gas away from Canada to other global jurisdictions with fewer protections for human rights and the environment.

Have we yet to learn that it absolutely does matter where we get our energy from?

iii. Makes Canadian families poorer

A new windfall tax would hit Canadians where it hurts the most amid one of our country’s worst-ever inflationary cycles. Underinvestment in new oil and gas supply would drive energy prices higher, creating more difficulties for consumers already struggling to pay their bills.

Furthermore, a windfall tax would likely make Canadian energy less competitive in global markets. This, of course, would likely have a domino effect on the amount of royalties and taxes being paid to Canadian governments, funds which in turn pay for schools, roads, hospitals and more.

Enough is Enough

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Anti-Canadian energy activists would do well to leave their blind opposition to one of the world’s most responsible oil and gas sectors behind and recognize the disastrous consequences a windfall tax would have on people across our country.

Global demand for oil and gas is growing. As long as the world needs these energy sources, they should come from the most responsible and reliable producers - like Canada, don’t you agree?

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SOURCES:

1 – Market Watch – Opinion: $1.4 trillion? Big Tech’s pandemic year produces mind-boggling financial results, Date Accessed: November 2022 (https://www.marketwatch.com/story/1-4-trillion-big-techs-pandemic-year-produces-mind-boggling-financial-results-11644096594)

2 – Business Council of Alberta – Why we should resist the temptation of a windfall tax, Date Accessed: November 2022 (https://www.businesscouncilab.com/work/why-we-should-resist-the-temptation-of-a-windfall-tax/)

3 – Tech Monitor – The tech industry’s progress on carbon emissions has been mixed, Date Accessed: November 2022 (https://techmonitor.ai/leadership/sustainability/tech-industry-carbon-emissions-progress)

4 - CRS Report for Congress – The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy Policy, Date Accessed: November 2022 (https://liheapch.acf.hhs.gov/pubs/oilwindfall.pdf)