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Upgrader incentives violate property rights

Appeared in the Calgary Sun
Release Date: November 14, 2010
Members of Alberta’s provincial Progressive Conservative party showed their economic naiveté when they passed a motion at their recent convention calling on the Stelmach government to use incentives or legislation to ensure that at least two-thirds of the bitumen produced from the oil sands is upgraded in Alberta.

Whether this proposal was urged on by those who stand to gain from increased upgrading in the province, or party members were seduced by the overly simple “value-added” argument, all sides failed to recognize that funds for special incentives must come from somewhere.

Extracting money from taxpayers to support projects that are not commercially viable generally results in a misallocation of resources. Robbing Martha and Henry down on the farm to allow Ed to provide incentives to reluctant investors is a violation of property rights, since Martha and Henry have no say in the matter and no guarantee of compensation.  

Approximately 60 per cent of the bitumen currently produced in Alberta is upgraded here. As bitumen production expands, ensuring that two-thirds of it is upgraded here could be very costly. Yes, since capital and labor would be required to construct and operate additional upgrading facilities, it might superficially appear that value would be added to the provincial GDP and employment and labour income would get a boost.

What Conservative Party members are forgetting, however, is the value that would be lost to the economy because of the funds that the Marthas and Henrys would no longer be able to spend on goods and services. Even worse, if the additional facilities are not economical and require government dictate to be built, more productive investments may be crowded out. The economy and opportunity are the overall losers.

Taking funds from personal and corporate taxpayers to promote uneconomic projects constitutes a loss of economic freedom because it means the capacity of these same taxpayers to fund commercially-viable endeavors is reduced.

If bitumen producers determine that it makes more economic sense to build upgraders in Illinois or some other U.S. state than in Alberta, there must be good reasons. These could include factors such the availability of skilled workers, lower wages, lower materials costs, lower state and local taxes, economies of scale, the regulatory climate, or other factors.  

If the Stelmach government is concerned that not enough investment is occurring here, it would be well advised to investigate the reasons and strive to return Alberta to competitiveness, rather than attempting to force uneconomical investment on the province. Among other things, it should examine whether removing or lowering non-market barriers, such as regulatory processes and procedures that are unnecessarily time consuming and costly, would make a difference.