Can national oil companies pass the environment test?

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The oil industry is the major driver of the Canadian economy, but what will Canada do in a carbon-limited future? This week, presents a set of excerpts from a new book laying out what Canada's political parties have not: a plan to transition Canada to a low-carbon society.

After the Sands: Energy and Ecological Security for Canadians is a roadmap to ending oil and natural gas exports and ensuring that all Canadians get sufficient energy at affordable prices in a carbon-constrained future.

Gordon Laxer, founding director and former head of the Parklands Insitutute and the author of After the Sands: Energy and Ecological Security for Canadians will be holding launches for the book in Ottawa and Toronto.

Laxer has picked out excerpts from his book that will inform the debate about Canada's energy future. We'll be presenting them this week at Today we present two selections on resource nationalism. Here is the first section:

National oil companies are easy to vilify. "Historically, government ownership of private companies has been notorious for lowering productivity, wasting resources, and distorting competition," writes corporate lawyer Simon C.Y. Wong, "often as a result of unclear objectives, political interference, lack of discipline, and poor transparency." That's too much of a blanket condemnation, but Wong points out national oil companies' common negative features.

Even if created with the best intentions, they can go badly wrong. They can line the pockets of politicians and corrupt civil servants. Dictators can use them to increase their power. They can be very inefficient. National oil companies also foul the environment as much as transnationals do. Most are owned by Global South governments, where pressures for environmental protection are often weak. If they exclusively operate domestically, they may get away with practices that would not be allowed if they operated in someone else's backyard. Regional context matters. Norway's Statoil has a much better environmental record than the national oil companies of India, Venezuela and China, but is no role model. It's had sizeable oil spills in the Barents Sea and Arctic waters. It went into an ecologically sensitive area, despite protests by Norwegian environmentalists. Statoil also operates in Alberta's Sands. Why does Statoil work in these areas? Partial privatization ensures that it abandons its public interest mandate and acts like a profit-driven transnational. 

In Ecuador, Brazil, Peru, Bolivia and Nigeria, grassroots movements "to keep the oil in the soil" insist that the earth is more valuable if undisturbed. In Nigeria it's a better economic deal, says activist Ivonne Yanez, "to leave the oil in the soil than to sell it internationally, because of the damages," the corruption and all the oil stolen. The movement is strongest in Ecuador. Ecuador hoped to forego development of a 900-million-barrel oil field in Yasuni National Park, part of the Amazon rain forest and South America's most biodiverse area, if northern countries gave Ecuador half the oil reserve's value -- $3.6 billion -- to use for social and infrastructure goals. Germany, Spain, France, Sweden and Switzerland pledged support, but it was not enough. Ecuador discarded the effort in 2013. Indigenous and ecological groups are fighting to revive it.

Neoclassical economists contend that unless national oil companies ditch non-economic purposes and face the market's bracing winds, they develop negative features. Economists first preference is privatization. Second best is to force national oil companies to act like private, for-profit entities. This is narrow thinking. If a national oil company loses its social or environmental functions, why keep it government-owned? What helpful things can only not-for-profits companies do? If advantages do not outweigh disadvantages, public ownership should not be tried. If, on the other hand, Canada can't get sustainable energy security without not-for-profits, it must start them.

What is the Case for Not-for-Profits in Canada? The following are important tests:

• Will they substantially change the political balance in favour of energy security, climate change action and environmental protection?

• Will they bring sufficient revenues for governments, community groups and First Nations?

• Will they foster more conservation and renewable energy?

• Will they help the transition to a low-carbon society?

• Will they preserve nature and secure Canadians' energy needs in times of global shortages?

• Will they end climate change denial campaigns?

• Will they support a Canada-first, eco-energy security plan? (Or is it in their profit-driven dna to explore in ever more dangerous areas and sell as much carbon fuel as possible?)

Equally tough questions must be asked of the privately owned oil transnationals in Canada:

Why Not Profit? 

Rebranding bp as "Beyond Petroleum," bp spent up to $125 million a year on its corporate social responsibility image, gaining first place in Fortune magazine's accountable corporations in 2007. But words are one thing, action another. Driven to save $500,000 a day in rig costs, bp speedily exited from sealing its Deepwater Horizon well in the Gulf of Mexico in 2010. The resulting explosion killed eleven workers, unleashed the biggest U.S. environmental disaster ever and blew the top off BP's public relations efforts. As oil expert Michael Klare remarked, "These managers operated in a corporate culture that favoured productivity and profit over safety and environmental protection." bp was revealed as just another greedy oil corporation. That's what it should be, according to neoliberalism's founder Milton Friedman.

To Friedman, "social responsibility" means the corporate executive is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation. The only social responsibility for business, Friedman adds, is "to use its resources and engage in activities designed to increase its profits." According to Friedman's logic, it's in the nature of corporations to act this way. Corporate managers could try to cut oil output, but corporate law is framed to prevent this, argue David Thompson and Keith Newman in their 2009 Parkland Institute report, Private Gain or Public Interest.

Many oil corporations fund climate-change denial. The "denial industry," writes columnist George Monbiot, are "those who are paid to say that manmade global warming isn't happening. The great majority of people who believe this have not been paid: they have been duped....You keep stumbling across familiar phrases and concepts which you can see every day....These memes were planted by public relations companies and hired experts." Simon Fraser University professor Donald Gutstein documents denial campaigns funded by oil, coal and auto companies. "They sow doubt about climate change in Canada and elsewhere," Gutstein writes. By stoking widespread skepticism, denialists thwart strong government action on carbon fuel use. 

While temperatures rise and glaciers shrink, oil corporations' profits soar. Gutstein documents ExxonMobil's role in backing the climate denial campaign while Lee Raymond headed the company (1993-2005). Shares rose fivefold "when Raymond did everything to prevent action on global warming." Raising climate-change doubts is good for business, but is it in the public or nature's interest to keep a for-profit incentive system that rewards blocking climate action?

In the second section of today's excerpt, Gordon Laxer presents some ways Canada could get there:

Public-interest ownership is an attractive idea. The politics of getting there is the tough part. How can petro-corporations' entrenched power and money be overcome? How can workers for these corporations be assured that good jobs will be available after their fall? Thompson and Newman boldly plan to buy the whole Canadian industry in one fell swoop, the way many countries set up national oil companies. "As with all corporate acquisitions, the purchase cost would be paid out of future profits," they write, through long-term, low-interest bonds from revenue generated by future profits. The authors calculate it would cost about $330 billion to buy the whole oil and natural gas industry in Canada. That's a conservative estimate. Whatever the figure, it would be very costly. But as they also note, it's less than the $490 billion the Harper government announced for military spending over 20 years. I asked Keith Newman why they reject regulation rather than purchase. He replied: "The oil and gas industry has immense power due to the income it generates and the jobs it creates. In theory...the objectives we see for the industry could indeed be achieved through regulation, but politically that is not possible due to the power of the industry. So a key objective of public interest ownership is to eliminate private capital from the industry with the intent of reducing its political clout."

Would the plan work? Thompson and Newman assume that the new entities could pay off owners from future earnings, the public interest entities would collect 100 per cent of economic rents, and oil and gas rents will remain high. Their plan makes sense only if the carbon-fuel industry continues as usual.

The key is for public interest firms to generate enough revenue to promote phasing out of carbon fuels after paying off the old owners. Professor Mel McMillan, a University of Alberta economist, sees "no sense in buying a firm at a high price that you intend to push into non-existence and without value." He continues: "Acquiring the firm's 'share' of the uncollected rent provides no 'bonus' because that has already been capitalized into the high price that you will be paying. In fact, I suspect it would be very difficult for the public firm to pay off the mortgage. Hence, it is unlikely that those financially burdened firms would have any resources available with which to do 'good [environmental] things' and, indeed, could become a burden on the taxpayers." McMillan is right. If public interest firms use most of their revenue to pay off owners, they'll have little left to encourage conservation and energy security. They'd lose their reason to exist.

Some countries set up national oil companies before buying transnationals' assets. Similarly, smart sequencing could make buying oil corporations in Canada affordable. Bring in most of the Canadian enviro-energy security plan and set up public interest energy firms before buying up Big Oil. The eco-energy plan advocated in this book would drive down their anticipated take but also reduce the base for economic rents. They will have to pay the full costs of dumping waste into the air and rivers, which they now do for free. Their stock value will plummet. New public interest firms could buy them for a song and use most of their revenue to promote renewable energy and conservation.

McMillan favours regulation. He argues that governments should collect all the economic rents through royalties, charges, taxes and fees and sell effluent permits that reflect true environmental and other social costs. These measures should substantially raise public revenues and reach environmental goals without ownership costs. However, there's a problem with regulation. Regulation worked well when most economies were nationally oriented, before the era of neoliberal globalization. Canada was an exception, though, because it was already so integrated with the us economy. After 1980, free trade agreements removed restrictions on corporations, enabling them to abandon countries with stringent rules. In the absence of an international carbon-reducing agreement, there are limits to how tough a country can get with transnationals.

Public interest ownership cuts through this weakness because location commitment to Canada could be part of the rules of incorporation. Another problem with only using national regulations is that even if petro-transnationals stay, and ostensibly play by the new rules, they're masters at hiding profits. Low official profits mean low royalty payments to governments. Enron was a notorious case. It hired accounting giant Arthur Andersen to fiddle its books. Outed in 2002, both companies crashed and Enron executives were jailed. 

Buying oil corporations would not quickly end their political clout, which would continue for some time both inside Canada and via U.S. and British pressure on Canada to reverse course. But as powerful as these obstacles are, they could be overcome if enough Canadians were convinced that we must alter course.

Citizens must be alert to the pressure tactics Big Oil will likely use to try to defeat any Canadian eco-energy plan, whether it's through public interest ownership or regulations, such as issuing a nafta challenge. Under NAFTA's chapter 11, corporations can sue Ottawa for lowering their asset value. But Ottawa could counter that its policies are to ensure energy and environmental security, not to punish foreign oil transnationals, and that other countries are adopting similar policies. Better yet, Canada can give six months' notice to exit NAFTA and pass legislation cancelling the older Canada- U.S. Free Trade Agreement. Whether tough regulations or public interest ownership are introduced, oil transnationals will fight hard and dirty. Kevin Rudd, former prime minister of Australia, was turfed by his own Labour MPs in 2010 when the mining industry mounted a multi-million-dollar campaign to discredit his proposed 40 per cent tax on "super profits" of coal and iron ore. If successful at driving Big Oil out of Canada, governments would have to quickly direct the higher economic rents they charge into energy conservation to lower utility bills and create jobs. More jobs are generally gained by conserving a unit of carbon energy than by finding and burning one. It is essential that workers, especially those employed by oil companies, quickly see new jobs open up. It's necessary for Canada to reduce carbon emissions by changing the dna of energy firms. An eco-energy plan would need strong public support to win a showdown with Big, mainly foreign, Oil. It's crucial to convince most Canadians that climate disruption, local environmental damage and energy insecurity are urgent dangers we can do something about, with public interest ownership as an indispensable tool in a broader plan.

Hybrid Strategy 

Rather than fret about buying or regulating petro-corporations, a displacement strategy could combine the strengths of each. If a Canadian eco-energy plan annually cut allowable carbon emissions and provided conservation incentives and revenue streams, public interest firms would flourish. And oil transnationals could stay in place doing upstream production. The transnationals could be told that if they greatly cut carbon emissions, protect watersheds and abide by the eco-energy plan, they can continue -- similar to Bolivia's agreements with oil transnationals. But even if the driven-down price for buying petro-transnationals is right, why buy these old dinosaurs made up of staff, machinery and bureaucracies with corporate cultures skilled at finding, developing and selling carbon fuels; ruthlessly pursuing unearned profits; and freely dumping carbon into the biosphere? It would be like buying General Motors in 2008 instead of letting it die and starting from scratch with new electric car and hybrid firms.

Selling Both Carbon Fuels and Conservation

The genius of public-interest ownership operating within a broader power-down plan is to have the same energy firm sell you both carbon fuels and conservation. Your energy delivery company induces you to buy less of what they sell. This is central to B.C. Hydro's strategy to achieve 66 per cent of its greater capacity needs through conservation by 2020: "This will require building on the 'culture of conservation' that British Columbians have embraced in recent years."58 Reducing demand will save billions in capital costs and lower users' power bills. It's win-win. B.C. Hydro and the B.C. government pay for almost half the cost of energy assessments so homeowners can qualify for a subsidized retrofit. bc Hydro pays residents for their old fridges and picks them up, offers incentives on solar hot water installations and free energy-saving kits for low-income households.

These programs avoid building costly new power capacity. Two conditions enable B.C. Hydro to promote conservation so effectively. First, it doesn't make sense for competing electrical companies to each have their own transmission systems and power lines. That's what makes electric power a natural monopoly. But without a second condition, a public-ownership monopoly, B.C. Hydro would face for-profit competitors luring consumers to buy more power from them than from bc Hydro. That's what Alberta's private, deregulated power model leads to -- growing power use, skyrocketing rates, higher carbon emissions and competition among distributors. Natural gas is publicly owned in many countries, but in few countries is conservation a major part of their mandate. Can we adapt B.C. Hydro's model to natural gas? The key is to have rules so that like bc Hydro, new energy-enviro firms get more net revenue from reducing energy use than from selling more natural gas. The utility model applies to natural gas better than to gasoline.

The Canadian Encyclopedia describes utilities as "businesses so 'affected with the public interest' that they must be regulated by government regarding entry into...the market, rate charges to customers, rate of return allowed to owners" and to require that they serve all customers in an area. Like electricity distribution, it makes no sense for each gas distribution company to build its own lines in every neighbourhood. But natural gas is not publicly owned the way electric power is in most provinces. Natural gas is either a regulated monopoly with one private, for-profit utility covering a territory or has several competing gas marketers offering consumers fixed charges over a common-delivery infrastructure. Either way, gas marketers have an incentive to convince you to buy more.

Natural gas retailing could be brought into public interest ownership, leaving the finding, developing and pipeline functions in private, for-profit hands. But how could the public interest firms save money, like B.C. Hydro does on upstream expenses by encouraging less use? One way is through a vertically integrated public interest firm that produces and retails natural gas and benefits from reducing demand and falling exploration and shipping costs. But a problem would remain. Electricity is renewable if it's generated by renewables rather than coal or natural gas. As long as water falls, winds blow and the sun shines, electrical power is generated. Natural gas is different.

Without continual exploration, domestic output will fall quickly, and so will revenues for natural gas sellers, whether they're for-profit or public interest firms. If successful at weaning you off natural gas, public interest firms will steadily lose revenue unless they can put you on to the renewables that they also sell. But that won't be enough. As Richard Heinberg of the Post Carbon Institute shows, conservation will contribute more than renewables to getting to a low-carbon society. A bigger revenue source will have to come from conservation. The best way to incentivize conservation is through tradable national energy quotas (NEQs), an idea pioneered and passed into law in Britain but not yet implemented. It is detailed in chapter 9 of this book and is the best way, when combined with public interest ownership, for Canadians to move to a low-carbon society where everyone can thrive. Each year the carbon energy quota in Canada will decline a little, giving people, governments and businesses time to adjust to lower carbon use and rising prices.

Under an NEQ  framework, public interest energy firms can get revenue by selling conservation remedies as well as declining amounts of carbon fuel, which will get steadily rising prices. Governments must help, too, by planning better and more public transit, inter-city rail, walkable and denser cities, and safe cycling routes.

What about oil? Oil is easy to transport and can be sold by small retailers without costly infrastructure like electrical or natural gas lines to every customer. But oil's flexibility makes it difficult to create a B.C. Hydro type of framework. Gasoline sales are not a natural monopoly. How then can we reduce the use of gasoline? Vertical ownership is one way, requiring the monopoly of one firm over producing and selling oil and gasoline. NEQs are a better way. They will raise the price of oil while the energy derived from non-carbon sources such as hydro, wind and solar will not rise, making electric cars and hybrids more attractive.

Canada currently exports over 70 per cent of its oil output to the U.S., and NAFTA locks us into that proportion. If Canadians reduce gasoline usage, NAFTA rules stipulate that most of the oil saved will be available for export to the U.S. so more Americans can drive SUVs and Hummers. That won't convince Canadians to cut back. The eco-energy security strategy proposed in the final chapter of this book creates a positive feedback loop. After exiting from NAFTA and phasing out the Sands and oil exports, Canadian oil use and production will fall, cutting Canada's carbon emissions at the wellhead and the tailpipe.

With fewer cars and especially heavy trucks driven, road maintenance costs will drop. Few new roads will need to be built. The savings can be diverted to fund public transit, high-speed inter-city rail, sidewalks in the suburbs and separate cycling lanes. The following questions must be addressed:

• How can we balance maximizing economic rents with "public interest" goals of promoting conservation and securing sufficient energy for all Canadians?

• Would tradable energy quotas provide sufficient revenue for public interests firms to do their conservation work?

• How would governments handle fuel shortages and their impact on transportation, emergency health care and home heating if and when petro-transnationals leave Canada after tough environmental regulations, NEQs and public interest ownership are introduced?

• Can we quickly train enough managers in a non-profit ethos to run new energy firms along public interest lines?

• How can public interest firms balance their revenue needs amidst falling demand for carbon fuels against their environmental mandate?

The goal is reduced carbon energy use, ensuring that every Canadian has sufficient energy supplies and a good living standard. Public interest ownership is key to resource nationalism. First, private for-profit firms can be domestically owned but can slip into foreign hands. Profit, not nationalism, motivates private ownership. Regulations requiring majority domestic ownership can help, but tend to soften under pressure from powerful owners who can get a better price if sales are open to foreign buyers. Second, governments and citizens -- the ultimate owners of the resource -- will demand all the rents. Third, publicly owned firms are more likely to act in the public and environmental interest, especially if their terms of incorporation mandate it.

There have been a few tremors for the new resource nationalisms in Canada. Newfoundland won an ownership stake in offshore oil projects, Saskatchewan forced Prime Minister Harper to block the foreign takeover of the Potash Corporation of Saskatchewan, and Harper restricted future control of the Sands by foreign state-owned companies. Anti-colonial and revolutionary resource nationalisms inspire many in the Global South and have some resonance in Canada. But Canada is in the Global North, and environmental nationalism stirs more people here. Australian philosopher Arran E. Gare calls for "an environmentalist nationalism which can harness the legitimate anger against global capitalism to carry out the massive transformations necessary to create an environmentally sustainable civilization."

Canadians need to ride this wave.

Gordon Laxer will be holding launches for After the Sands: Energy and Ecological Security for Canadians in Ottawa and Toronto.

We'll be featuring an excerpt from the book each day this week. To read them all, click here.

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