Privacy Protection in the Federal Public Service

Introduction

In one single day, the 23rd of March 2015, the privacy protection issue in the Federal Public Service was under the spotlight, for two reasons: the Ottawa Citizen headlined that complaints relating to the weakness of the security measures protecting personal information in the Federal Government had reached a never-before-seen record, and the CBC as well as Radio-Canada disclosed new Edward Snowden revelations questioning the legality of gathering of personal information by the   Communications Security Establishment Canada (CSEC).
As is the case for all other institutions, privacy protection in the Federal Public Service in the digital age has become an unprecedented challenge, in its importance as well as in its nature. Even experienced managers find themselves unequipped to deal with the convergence of two towering phenomena: an information technology that is wreaking havoc with all traditional patterns of data protection, and a public security environment that calls for the collection and analysis of personal information at an unprecedented rate. The coupling of totally new data collection capacity with a new interest for it, forces a questioning of the acquired schemes of protection, and development of new measures in this area.
Beyond the technical measures required by these new information technologies, the Federal Public Service must update its policies relating to privacy protection so they reflect the unique challenges of these technologies. If no corrective legislative measures are taken — there is no real appetite — the Treasury Board Secretariat (TBS) becomes the main source of standards for privacy protection in a digital environment. I propose five main steps, which result from observations I made during the time I managed the Office of the Privacy Commissioner of Canada (OPC) over almost six years. I start with the main challenges found by OPC studies within the Federal Public Service and that resulted from the arrival of digital technologies:

  1. Management of new information technologies’ vulnerabilities
  2. Definition of personal information in the digital environment;
  3. Debate on the storage of personal information in the cloud;
  4. Differential repercussions of the Internet on the need for public transparency and privacy requirements; and,
  5. Emerging challenges.

 
I will treat them separately in order to define the issues, and propose policy directions for the protection of personal information.

Management of New Information Technologies Vulnerabilities

One can summarize the risks affecting personal information protection brought on by the arrival of new information technologies in the Federal Public Service, as is happening everywhere else, as follows: i) their complexity is such that it overwhelms the common abilities of employees and senior staff, ii) these technologies collect data on such small devices that the best controls can miss them, and on such powerful devices that if the data is lost, the private life of thousands of individuals can be compromised in one fell swoop, iii) the virtual mode of access of these technologies complicates the control over this access, and iv) permanent files created, correctly or erroneously, have massive dissemination possibilities, appropriate or not.
Through all these violations to privacy protection, especially in relation to the digital environment, I saw these risks materialize around four constants: i) the small size and the enormous complexity of the devices became increasingly challenging because of insufficient employee digital training; ii) governance structure is incomplete relative to the realities of the risks; iii) protection from indiscretion is lacking, and iv) new technologies are adopted without proper assessment of the risks involved.
To illustrate the lack of digital literacy, an employee left a USB key uncoded on the desk of a colleague, without any physical protection, thinking that a USB key was more secure than an e-mail. To this day, the USB key is missing. It contained medical information concerning approximately 6,000 individuals. In another case, a lack of digital literacy caused an employee to record on his electronic organizer the reason for a meeting with another employee (for disciplinary action), unaware that the content of his organizer could be read by 17 people who, by the way, knew the employee.
This lack of literacy is due to governance weakness, which does not ensure proper training of employees before letting them use information technology devices.
These incomplete structures of governance have been found in studies by the OPC, even in the case where departments run excellent personal data protection policies. Simply put, these policies were not accompanied by an efficient implementation mechanism. For example, movable devices were not identified, or registered, or entrusted to anyone. With no one responsible, protection of the devices was totally lacking. The devices that contained personal data were lost and never found because there was no mechanism to protect them, hence to find them, or at least to permit tracing of persons responsible for the protection of these devices.
This lack of protection from indiscretion is also quite frequent: the studies of the OPC, from 2008 to 2014, have uncovered the severity of the problem within the public service as well as in the private sector. In the Federal Public Service, we witnessed employees searching in the medical records of a former lover, employees distributing tax returns of celebrities, or accessing tax returns of new lovers and their family. Even if these indiscretions are quite rare, they reveal the systemic weaknesses that make them possible: access authorizations are too wide, controls such as journaling and reviewing are insufficient.
We already know that the main differential repercussion of the digital environment is the following: the smallest mistake can cause enormous damage. For example, a file that really got my attention made me write in 2012 “Ten Thing HR Professionals Need to Know“. It was a case whereby a Director General had her abilities assessment mistakenly sent to 321 colleagues. The mistake being: someone has hurriedly pressed on the button without even being aware of the consequences of the act, furthermore, the department had not restricted the distribution through e-mail of human resources information. The result was: the humiliation of the person and the damage to her reputation. It also triggered an inquiry by the OPC. I would venture to add, along with the damages to the person: the loss of employee confidence in the management of personal information in the department.
How can these blunders be avoided? My recommendations are in “Ten Tips” regarding the digital environment:

  • Avoid sharing sensitive information electronically, even though it is the current method of communication for all other types of communications;
  • Continuously ensure that the technology is mastered by the employee before handing it to him as a working tool, and test the capabilities of the person using it; and,
  • Develop a regime of access authorizations, as restrictive as possible while preserving the functionality of the organization, and support this regime by establishing a journaling process, and regularly review the access data it contains.

 
However, the complexity of information technologies does not affect employees exclusively. Higher level management in the public service, economy and political science experts, do not necessarily have the reflex of owning, as they should, the issue of their privacy protection on new technologies devices. This is what the 2010 audit of the OPC concluded on the use of wireless technologies within five Federal entities.  Those entities had all adopted those technologies and none had implemented an adequate risk assessment. The expected consequences occurred: the employees did not protect their devices through a solid password, the devices were not kept in a safe place, and the adequate protection policies had not been established because the risk had not been determined. I believe, however, that this complacency has now been replaced with greater acknowledgment of the risk, especially since the loss of a hard drive at Employment and Social Development Canada containing the financial data of some 600,000 individuals.
My recommendations in this regard were part of the Special Report of Inquiry relating to this incident and submitted to Parliament on March 25, 2014. Briefly, they were:

  • Protection of personal data in the digital environment should be addressed as an ecosystem of interacting components, i.e., physical, technological, administrative and employee security checks, including the digital literacy needed to handle those work tools.
  • Protection of personal data must be considered as being an institutional issue and not as a distinct and separate issue, that is, of the exclusive domain of the administrators of information technologies or of the office of access to information and privacy. Its implementation must be accompanied by a governance structure that:
    • Reflects the accountability regime established by the Privacy Act, which defines the attribution of this responsibility to the very senior public servants within an organization ; and
    • Insures that the necessary supervision imposed by the Act is present at all levels in order to abide by this regime of personal information protection.

Definition of Digital Personal Information

Internet has challenged the established definitions of both the “personal information” and the private sphere. Two notions that have been challenged in the last while within the Federal Public Service: the privacy aspect, or not, of the Internet subscriber’s data and the IP address, as well as free or protected access to personal accounts on the social networks.

1. Personal Data on the Internet

The question as to whether proprietorship of IP (Internet Protocol) addresses (name, address and other identifiers of the subscriber) or personal data, do or do not constitute personal data, was pressing in the last few years as regards the many successive bills that would have allowed access to these data by the executive and security authorities without court approval. Much of the argument touched on two different contradictory understandings: one concluded that the IP address and personal data, and the relevant personal data of a subscriber, do not carry more value than a phonebook, and that the absence of such a phonebook for Internet cannot determine the judicial statute of the data. The other, of which I approve, said that the subscriber’s data contained in the IP address of the subscriber constitutes a key to the subscriber’s interiority by giving access to his Internet searches – i.e., his areas of interest, his worries or his allegiances – and, consequently, should be considered a static and limited data of a physical address and a phone number.
In June 2014, in its decision re. R. v. Spencer, the Supreme Court ended the debate: it declared that the subscriber’s data in the IP address, allowing access to the Internet searches, is so revealing as to constitute protected personal data, to which the controlling forces can only have access after court authorization.
The consequences for the Federal Public Service are mostly felt within the RCMP and CSIS, but they also have a wider reach: the Privacy Act has just been modified to include, within the interpretation of personal information, the name to which the IP belongs.
Consequently, the federal institutions have to abide by the following constraints:

  • The subscriber’s data in the IP address, or the IP address that can lead to the identification of the subscriber, can only be collected if there is a direct link with the programs or activities of the institution ; and,
  • These data must be obtained through their owner, unless that constrains the use for which these data are intended (for example, a police inquiry).

 
The analytical framework of the OPC  A Matter of Trust: Integrating Privacy and Public Safety in the 21st Century,  published in 2010, gives the four steps of applicable considerations for integration within the measures of public security, of the relative obligations towards privacy protection. They also apply to a regime of access to personal data on Internet:

  • Establishing the legitimacy of the measure on the base of empirical data, which proves its necessity, its proportionality and its efficiency compared to the need and absence of less intrusive alternatives;
  • Implementation of security measures in order to protect data gathered and used legitimately;
  • Development of an internal governance framework that ensures conformity with these security measures; and,
  • Development of an external and internal supervision framework that ensures the accountability of the organization in regard to its duties regarding privacy protection.

 
Therefore, privacy protection is not a hindrance to the carrying out of the main duty of Canada’s government, i.e., to protect the security of its population. It rather provides an implementation framework that protects fundamental freedoms as well as personal security.

2. Access to Personal Accounts on Social Networks

The right of access, or not, of federal institutions to the personal accounts of individuals has been contested in at least two major cases of the OPC: a Privacy Impact Assessment (PIA) of the factors involved in the private life of a program that would have allowed the surveillance of accounts on public servants’ social networks in order to control their political activities, and a study on the surveillance by two departments of the Facebook account of an activist.
In the PIA’s case, OPC’s reaction had a sobering effect on the project: it violates Section 4 of the Privacy Act, as there is no direct link between the project and the activities or programs of the institution. Even if public servants are mandated, in different capacities, to stay away from political demonstrations and the public service is entitled to ensure that this rule is obeyed, the wide gathering of data inherent to the surveillance of the accounts on social networks would have widely exceeded what was deemed necessary in order to ensure that these restrictions to partisan activities are respected.
The project has been vehemently criticized by the upper echelons of the public service following the comments of the OPC, nevertheless, it constitutes an illustration of the consequences such straying can have on the digital surveillance ability without a framework.
One other illustration of this phenomenon was noted in a study by the OPC in 2013. An activist alleged that two departments had gathered her personal information from her Facebook account. None of the departments denied it. However, both said that they had not broken the Privacy Act, as Facebook accounts are in the public domain, hence, the information appearing there is also public and not protected by the Act.
The OPC rejected this argument: the information available does not lose its personal confidentiality just because it is available on Internet. The information still belongs to an identifiable person and is destined to selected people, not the government. And if there is no direct link with the department’s program or activities, it remains out of bounds for the department in question.
The study highlights the uncertainty stemming from the legal status of personal information deliberately posted on Internet. In order to clarify this legal status and the obligations of international institutions in this regard, the Special Report of the OPC to Parliament on January 28, 2014, Checks and Controls: Reinforcing Privacy Protection and Oversight for the Canadian Intelligence Community in an Era of Cyber-Surveillance recommends:

  • Regulating access to sources of open personal information sources accessible to the public; and,
  • Developing outlines defining specifically the gathering, use and dissemination of personal information on line and on social media sites.

 
This recommendation remains valid … and awaits implementation.

Hosting Personal Information in the Cloud

The commitment of governments towards protection of data on Internet has caused some to ask for the government to have its data hosted on its territory. In practice, this excludes government institutions from financial and functional benefits of the cloud because suppliers of cloud computing are mostly Americans. Edward Snowden revelations in June 2013 have increased mistrust to the point where governments that had planned a loosening of these rules had to backtrack.
The Government of Canada has, wisely, not imposed hosting of electronic data in Canada. However, the Canada Revenue Agency reserves the right to allow, or not to allow, the storing of accounting and financial information outside of Canada. The increasing use of cloud computing casts a doubt on the pertinence of this rule, which has, at least, to be explained within the cloud computing environment.
British Columbia and Nova Scotia governments require their institutions to store their data within Canada, except for a few conditions, excluding or complicating the use of cloud computing. I think that the residency requirement of the electronic data in Canada, with all its good intentions, weakens the security of personal data because it eliminates a particularly secure platform for hosting data: the dependable supplier of cloud computing.
I will now move to the strategic factors that should guide Federal institutions for converting to cloud computing.

1. Benefits and Risks of Cloud Computing

A policy paper published jointly by the OPC, the Office of the Information and Privacy  Commissioner of Alberta and the Office of the Information and Privacy Commissioner of British Columbia, and a Fact Sheet authored by the OPC, describe the benefits and risks of data stored by cloud computing hosts: in its favour, cloud computing is an on-demand Internet service that does not require the user to have his own technological infrastructure, allowing for “on-demand self-service, broad network access, resource pooling, rapid elasticity and measured service”. As a result, the user saves money, benefits from a lighter management load, improved efficiency, and the supplier being dependable, enjoys greater security of the data because it is handled by professionals. In this regard, OPC clarifies:

“For businesses that are considering using a cloud service, cloud computing could offer better protection of personal information compared with current security and privacy practices. Through economies of scale, large cloud providers may be able to use better security technologies than individuals or small companies can, and have better backup and disaster-recovery capabilities. Cloud providers may also be motivated to build privacy protections into new technology, and to support better audit trails.”

In stating the potential risks of cloud computing, the OPC refers to physical distance of the data hosting locales, the multiplicity of clients of the supplier, the possible misuse of the data, i.e., using them for other ends than what they were gathered for, and, because of the low cost of storage, the keeping of excessive amounts of data.
The OPC concludes that, in regard to the implementation of cloud computing, “Privacy is not a barrier, but it has to be taken into consideration.”
One can summarize as follows the relevant factors the Federal Government should consider when implementing cloud computing:

  • How is the existing infrastructure improved if cloud computing is adopted?
  • Which data can be stored in the cloud, and according to what criteria?
  • How would users of government services know that the data is in the clouds?
  • Is the cloud supplier dependable, certified ISO/IEC 27018 in privacy protection in cloud computing?

 
This brings me to the perfect combination: one where technological security of cloud computing by renowned suppliers pairs with a contractual mechanism that ensures conformity with certified ISO/IEC/ 27018 cloud computing security.

2. The ISO/IEC 27018 Standard for Privacy Protection in Cloud Computing

The OPC acted upon its beliefs concerning cloud computing: for a long while, the Office provided its expert advice for the development of standard ISO/IEC 27018 Information technology — Security techniques — Code of practice for protection of personally identifiable information (PII) in public clouds acting as PII processors, adopted on April 25th, 2014.
This standard increases dramatically the security of personal information in the cloud by creating a security certification base that combines the supplier’s technological strength with a framework that ensures that the conformity is really solid: by contract, the observance of which is checked through audits, the client organization using cloud computing keeps its control over the data and the supplier cannot use it for any other purpose than that defined by the client. Moreover, the supplier must support the client in respecting his own legal obligations. Finally, the obligations of the cloud computing supplier are subject to audit by the client as well as by the certifying organization, to ensure the level of adequacy. To be certified, the supplier must implement all the security measures required by Standard ISO/IEC/ 27018. Not only does a supplier that does not respect the standard lose his clientele, he also loses his certification.
How is this normative development relevant to the Canadian Public Service? It allows, at lower cost, a maximal protection of personal data by storing it in the most sophisticated technological infrastructures, as per the most efficient and demanding governance model. Standard government institutions are being asked more frequently to share their data beyond Canada’s borders and to hire suppliers that would enhance the efficiency of their services, when they do not possess the required resources to be able to render these services. The ISO/IEC 27018 Standard is universal and is accepted by the various players in the transborder flow of data.
Following the recommendations of the OPC, the Treasury Board Secretariat (TBS) has published, in the framework of its policies of information management, the document Privacy Matters: The Federal Strategy to Address Concerns About the USA Patriot Act and Transborder Data Flows, as well as the Guidance Document: Taking Privacy into Account Before Making Contracting Decisions. These documents should now be supplemented by the ISO/IEC 27018 Standard. But first, let’s have a look at the ISO Standards.
ISO, International Standardization Organization, and IEC, International Electrotechnical Commission, constitute the specialized system of international standardization. Both have members, states, institutions and experts. They are at the heart of the certification of compliance to some ISO standard by an accredited organization to do so. (Rewrite.) Certification is maintained, or revoked, following regular audits.
TBS already uses the universal standards, the ISO Standards. For example, the TBS Standards for the geospatial standard is based on the implementation of ISO Standards 19115 and 19128. The ISO/IEC 27018 Standard would be the perfect and most comprehensive contractual model in order to implement the conversion of federal institutions to certified cloud computing, thus achieving economies of scale and greater data security.
Avoiding cloud computing is obsolete, adopting it without guidance would be irresponsible. The adoption of the ISO/IEC 27018 Standard by TBS would show other Federal institutions the way towards secure cloud computing for personal data according to universally recognized settings.

Balance Between Public Transparency and Privacy

The legislative framework defining the balance between transparency and privacy is based on the complementarity of the Privacy Act (PA) and the Access to Information Act (AIA). Section 19 of the AIA bridges the gap between transparency and privacy. It forbids a public servant in charge of a Federal institution from communicating documents that would contain personal information as defined by the Privacy Act, i.e., information relating to an identifiable person. Three exceptions: the identifiable person agrees to this communication; the public already has access to the information; or, the AIA allows for a special case communication.
The weakness here stems from the fact that the disclosure imperatives emanate from principles that rival in strength the fundamental right to privacy in relation to administrative tribunals since Internet became public. In reality, I am of the opinion that transparency of judicial tribunals must be reviewed within the framework of the differential consequences of Internet. But judicial tribunals are not part of the Federal Public Service. Administrative tribunals are, and are therefore subject to the Privacy Act.
The Federal Public Service has eleven administrative tribunals, of which four work regularly on personal data issues: Canada Agricultural Review Commission; Public Service Labour Relations Board; Human Rights Tribunal; and, Social Security Tribunal. The Public Servants Disclosure Protection Tribunal also publishes decisions that contain personal and even very sensitive information, but they are subject to such disclosure restrictions that the tension between transparency and privacy is resolved within the legislative framework applicable to the tribunal. Furthermore, the other tribunals are proceeding quite cautiously towards a resolution of the natural tension between transparency and privacy.
In 2009, the OPC published, jointly with its provincial and territorial counterparts, a Guidance Document Electronic Disclosure of Personal Information in the Decisions of Administrative Tribunals. The incentive to act came from an observation of real cases of differential consequences of Internet on the materialization of the transparency principle. It is worth noting that, in the Internet environment, the transparency principle does not give prominence to the tribunal, although it is subject to the principle that ensures its impartiality; it gives it to the parties whose identity is of no public interest. The massive and permanent distribution of this information can unjustly damage the parties’ reputation and would cause them to lose all hope of finding work due to such an insignificant cause. And this hinders the access to justice, due to the fact that complainants decide not to exercise their rights, fearing loss of reputation due to the Internet posting of their cause.
The Guidance Document of the Canadian Commissioners of Privacy is based on Section 8 of the Privacy Act, which restricts the communication of personal information without the consent of the concerned individual, except in very rare exceptions that seldom apply to the decisions of administrative tribunals. In summary, here are the proposed parameters, subject of course to the specific rules applicable to each tribunal:

  • Employees of the tribunal should inform the parties, as soon as a recourse has been filed, of the risks relating to privacy and what the safeguard measures are, and encourage the parties not to disclose more personal information than what is strictly needed;
  • The decisions should not divulge any identifier, directly or indirectly. Transparency applies to the reasoning of the tribunal and not to the parties. For example, names should be replaced with initials and addresses deleted or generalized. ISO/IEC 27018 becomes crucially important in the transborder flow of data and the outsourcing services;
  • The decision might contain an identifier when, in accordance with Section 8 (2) m) of the Privacy Act, it is in the public interest to publish the parties’ identities (for example, in criminal or fraud cases);
  • The tribunal would develop criteria to exercise its discretion in the application of the public interest concept.

 
This discretion is an absolute necessity for personal security reasons (a plaintiff contesting her disability pension was threatened by thugs who, having seen the tribunal decision on Internet, knew her address, the amount and payment date of her pension), but also for reasons relating to reputation and financial integrity (two complainants couldn’t find employment for ten years because any Internet search concerning them revealed their grievance).
The TBS must pick up after the OPC and issue policies aimed at re-establishing a fair relation between public transparency and privacy for administrative tribunals in the digital era.

Conclusion: Emerging Challenges

I summarized, from the start, the actual and important challenges that face the Federal Public Service in relation to privacy protection, and the double effect of two fundamental transformations in our means of communication: the arrival of new, complex, powerful and vulnerable information technologies; as well as the increase in cyber-surveillance capacity in a public security environment largely dependent on personal information.
The growing number of new security technologies is clearly moving ahead, mainly in one direction: risk assessment is being refined and multiple technological restrictions are being used following the risk analysis. New applications, like information hubs, where information management is centralized but respects the separation of the different databases, abide by the Act in this regard.
However, the limits of Internet surveillance in a free and democratic society have yet to be defined in view of its progress as well as the evolution of risks concerning physical security.
Privacy protection challenges to Internet surveillance are at the heart of the relationship between the citizens and the state. Section 12 of the Universal Declaration of Human Rights illustrates eloquently this essential character of the right to privacy by declaring:

“Section 12. No one shall be subjected to arbitrary interference with his privacy, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks.”

Brought ahead in the debate on Bill C-13, the current Protecting Canadians from Online Crime Act, the issue of the legitimacy of Internet surveillance reappears in Bill C-51, whose short title is the Anti-terrorism Act, 2015. While the Bill traces the legislative process, it also highlights the manner in which the Internet surveillance capabilities force an upgrade of public service obligations towards privacy, i.e.:

  • Section 8 of the Canadian Charter of Rights and Freedoms protects against unreasonable surveillance, which under the Privacy Act includes all gathering of data that have no relation to government programs or activities, which in turn includes the legitimate purposes of inquiry based on a reasonable suspicion, and individualized;
  • Restrictions that regulate the sharing of personal data between government agencies in order to avoid citizen profiling that produces new information beyond what has already been collected from the individual himself, and over and above the reason for which the data was gathered;
  • Natural justice principles of impartiality and accountability, specifically within Internet surveillance, which is meant to be secret and, thus, has to define its own form of accountability to the citizen.

 
The other double-edged sword of technological evolution resides in the analysis capabilities of data, leading to possible data mining.
As, on a smaller scale, the Census data supported, even anonymously, the government’s decisions at all levels, as well as the business decisions, according to demographic, social or economic movements, we therefore will have to develop an ethical framework for the analysis of Big Data that we store to draw conclusions for the greater good of the citizen. These data can improve the government’s services, refine decisions and adequately adapt the programs. Solutions seem to favour a governance framework based on anonymity, necessity and consent, i.e.:

  • When the public service develops efficient policies and programs and needs unidentified demographic data for census purposes, the Privacy Act does not forbid it, on the condition that an efficient anonymization process be applied. This would include the separation of data between demographic and nominative data that are pertinent in such a way as that the demographic data do not relate to an identifiable person, because the re-identification would be so difficult that it would become improbable.
  • For all nominative data needed by the operations of a public institution, Section 4 of the Privacy Act allows their gathering, and Section 7 allows for their compatible use.
  • If the Public Service needs to use personal data for other purposes than the ones that justified its gathering, even if it is in the public interest, it has to request and obtain the consent of the person concerned. For example, if a department wished to contact people for medical research purposes, it would have to explain the purpose of the research, how the personal data would be used, and ask if, in the interest of science, they would consent to this new use of their personal data.

 
These basic parameters show a general trend, insufficient, though, to settle the ethical challenge between reconciling privacy and public interest within the analysis of big data. This subject of conversation, like the one relating to Internet surveillance, must be raised more frequently, in order to ensure privacy protection within a new technological frame.
At this point, the priority of the public service should be to develop a normative framework that reflects what Canada considers to be legitimate in relation to the gathering and use of data in the digital age. In a certain way, Bill C-51 has provoked this debate, concerning both Internet surveillance and the analysis of personal data. But this debate is not what it should be: the die is cast, and the discussion is framed in a limited and political debate instead of within a social blueprint taking into account the real challenges, in a thoughtful and empirical manner.
That’s the next step we need to take in order to preserve privacy in the digital age, and it has become urgent.
 

Appendix

Chantal Bernier, Legal Counsel, Dentons Canada LLP, is a Senior Fellow at The Graduate School of Public and International Affairs (GSPIA), University of Ottawa and Former Interim Privacy Commissioner of Canada. For more information, visit Dentons.com.

Open Government in Transition

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Open Government is a new movement whereby governments around the world are making their vast data holdings available to the public to use in the development of new knowledge products, to support more evidence-based decision-making, and to make government more transparent.
Government data holdings range across every area of human interest, from health and finance to labour markets, culture and the environment. These datasets are said to be to the knowledge economy what natural resources were to the industrial economy: they are the raw material from which wealth in the knowledge economy will be created. They are among our most important public assets for the future.
The Canadian Geomatics Community Round Table (CGCRT) is a multi-stakeholder body whose members come from across the geomatics community,1 including governments, private-sector organizations, NGOs, universities and colleges, and data/service consumers. It operates as a collaborative body that neither has nor seeks the authority to make decisions that are binding on its members or on other organizations. 1 Geomatics is the discipline of gathering, storing, processing, and delivering geographic information.
At present, the CGCRT’s primary focus is on the development and delivery of a pan-Canadian geomatics strategy. The origins of this project are rooted in major technological changes in the field of geomatics, underway for more than a decade, and in the economic opportunities created by opening up the access to government geospatial data.
In the fall of 2007, Canadian governments launched a country-wide consultation process to re-think the way the geomatics community operates in a digital world. The final report identified eight “elements” on which a new national strategy was to be based.
However, it soon became clear that these elements were less a strategy than elements that needed to be included in a strategy. For example, while the report called on the community to collaborate more effectively to modernize the sector, it provided no real direction on how to make collaboration happen.
Over the next three years, a second wave of conferences and meetings was convened to discuss what a real strategy to modernize the sector would look like. During this period, two key developments took place.
First, a Round Table was formed and eventually emerged as an independent body whose main purpose was to act as a multi-stakeholder advisory group to existing government bodies. However, views on this began to change quickly, which lead to the second development.
Some participants argued that the geomatics community needed a credible and influential body that could propose and advocate for broad directions for the community as a whole. To compete globally and to become leaders in the global geomatics industry, the Canadian sector needed to distinguish itself; it needed to find a “Canadian niche.”
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Rebuilding Public Trust: Open Government & Open Dialogue in the Government of Canada

Introduction: Trust in Government

A long list of polls and studies tells us that people are turning away from politics and that public trust in politicians has plummeted, but do we know why or how to fix it?
When people watch newscasts or check out political debate online, what do they actually see or hear about politics? Increasingly, it is little more than the shrill and hyper-partisan tone of the “constant campaign,” from cynical negative ads to the barrage of talking points and political spin.
Nor is it clear how or why important policy decisions are made. Too often, they emerge from a black hole or reflect short-term political gain, rather than the public interest. Looked at through this lens, it is not hard to see why people are questioning what politics has to offer them.
This disconnect between citizens and politics appears to be part of a long-term trend that may be reaching a critical point, as the following slide by Frank Graves from Ekos Research suggests:
Chart 1 - Trust in Government
The blue and green lines show a stunning drop in the number of Canadians and Americans who trust their national governments to do what is right. According to these figures, over the last 50 years trust has plummeted from a high of about 78% into the low twenties here in Canada and the teens in the US.
If accurate, we think this should be of deep concern to the policy community. In a democracy, the legitimacy of governments arises from citizens’ participation in the democratic process, especially elections. A collapse in public trust is likely to be followed by a collapse in participation; and that, in turn, means loss of legitimacy. There are worrying signs that this is already happening: voter turnout is falling, especially among youth; and, as Graves and others have been warning, public trust appears to be tumbling.
We think this trend is connected to two others that have unfolded over the same time period: globalization and the digital revolution. Together, these two forces have transformed our world, making it far more fast-moving and interconnected.
As a result, events and trends are increasingly difficult to predict and manage. Big shifts can happen with little or no notice, such as the terrorist attacks of 9/11, the financial crisis of 2008, or the collapse of oil prices in 2014.
Nor is anyone sure how such events—or our responses to them—will impact on other systems and trends. But if we have learned anything in recent years, it is that, in an interconnected world, they will.
So the speed of change, the interconnectedness of events, and a general volatility around public affairs are defining features of the contemporary world. Making and implementing decisions in this environment requires new ways of gauging public support and establishing legitimacy. The less engaged or trusting citizens are, the more difficult this becomes for governments.
Rebuilding public trust and reengaging citizens should be one of a government’s highest priorities. We believe that Open Government is the way forward on this. It sets new standards for governance that will put an end to many of the cynical or outdated practices and establish new ones that are far better suited to our needs and to citizens’ expectations.
This paper sketches the way forward for a new Parliament after the next election. It begins with an overview of Open Government and explains our reasons for focusing in on one key aspect of it: Open Dialogue. The Open Dialogue Initiative we propose provides a compact and cost-effective plan to build a new capacity for Open Dialogue in Parliament and across the public service, as quickly as possible. This, in turn, will ensure that a government that wants to pursue Open Government after the next election will have a plan that is fully formed and robust enough to make a major contribution to reengaging citizens and rebuilding trust.

2. What is Open Government?

The Open Government Partnership is an international movement of some 65 countries who have joined together to promote better governance through the innovative use of digital tools and a deeper commitment to transparency, openness and public engagement.
The Government of Canada joined the partnership in 2012 and in its initial Action Plan identified three streams of activity: Open Data, Open Information, and Open Dialogue. Open Data calls on departments to make their data holdings available to the public to use to develop new knowledge products, support more evidence-based decision-making, and make government more transparent.
Open Information calls on departments to advance freedom of information. Lastly, Open Dialogue recognizes the need to engage the public more directly in the policy process. Open Government results from the convergence of these three streams, as follows:
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“Openness” is not a new concept. Citizens have always needed information to hold government to account and to make informed decisions. However, Open Government is taking this to a new level.
In 2014, a second Government of Canada Action Plan recognized the principle of “Open by Default” as the basis for these three streams. This implies that government information and data should be available to the public by default. When information is withheld, the onus should be on government to explain why.
If fully implemented, we think the principle of Open by Default would be transformative. It implies nothing less than a reversal of the culture of secrecy and control that surrounds governments. And this, we think, is the key to renewing government for the digital age. While there is a long way to go, the principle has now been officially recognized and adopted by the Government of Canada. The challenge for a new government will be to implement it.

3. Focusing on Open Dialogue

Much of the progress so far on Open Government has focused on Open Data. Many government data sets are in a format that allows them to be shared easily and their content is relatively uncontroversial, so observing the principle of Open by Default requires little change to the culture of government and, from a political viewpoint, is largely risk-free.
The Government of Canada currently has a fairly ambitious plan to advance Open Data and officials are hard at work on it. While adjustments to the program might be needed, a government that wanted to pursue a comprehensive Open Government would not need to reinvent it.
Open Information is more challenging. Documents that contain policy advice, program performance assessments or information on the state of the government’s finances are usually treated as confidential and released only when a government feels ready to do so. Declaring that they should be freely available to citizens—Open by Default—would require a major reversal of the culture of secrecy that now dominates the federal government.
Nevertheless, Freedom of Information has a long history in Canada and elsewhere and has provided policymakers with lots of experience, so the risks are well known. The question for a post-election government is mainly one of leadership: will a new government be willing to take this step?
For at least one party, the Liberals, the decision to move forward on freedom as already been made. Justin Trudeau’s Private Member’s Bill outlines a plan to renew Canada’s 1983 Access to Information Act based on the principle of Open by Default. As a result, all kinds of confidential information and documents would become accessible to the public.

Of the three streams, Open Dialogue is the least well understood and for many politicians and officials, the most worrying. They fear that it could turn over control of the policy agenda to interest groups, saddle ministers with bad decisions or degenerate into a free-for-all that paralyzes decision-making. Such concerns leave them wondering about the upside of Open Dialogue.
In our view, many of the concerns over Open Dialogue are either unfounded or relatively easily mitigated. We also see Open Dialogue as vital to the success of Open Government. Open Data and Open Information are not enough to prepare government for the digital age. As noted, policymaking today occurs in a highly interdependent, fast-moving and volatile environment, often involving many stakeholders. In this environment, dialogue processes can make a major contribution to policymaking in two basic ways:

  • They can help ensure legitimacy through key “process values,” such as transparency, responsiveness and inclusiveness.
  • They can increase effectiveness by bringing the right mix of people, skills and resources into the policy process to ensure the best decisions are made and implemented.

But to achieve this, the processes must be well designed and well executed—something the current Conservative government has shown little interest in exploring or improving. It has been unwilling to invest time or political capital in building the capacity or skills needed for Open Dialogue. In most departments, traditional consultation (see below) remains the standard approach.
Indeed, what the government often refers to as “consultation” is barely even that. Often, it is little more than an “information session,” where the government announces its plans, provides limited information about them and minimal opportunity for feedback, and then pushes ahead regardless of what others say.
We think this refusal to listen and respond to public concerns is a major contributor to the falling levels of public trust, as well as to a deeply worrying trend in which public policy increasingly conflicts with expert opinion and/or lived experience. As a result, Ottawa is falling further and further behind other national (and provincial) governments, such as the United Kingdom, which has made itself an international leader and trend-setter on Open Dialogue.
Given the Conservatives’ refusal to allow the public service to experiment and evolve, a different government in Ottawa would find that within the public service the pressure to advance Open Dialogue has been building for some time. A new government must be ready with a plan that can address this deficit quickly, while ensuring the job gets done properly.
The Open Dialogue Initiative, to which we now turn, is designed to ensure that genuine capacity-building on Open Dialogue occurs within the federal public service as quickly as possible, but in a discipline way; and that the learning, skills, relationships and culture-change that result become institutionalized and are shared with the broader public policy community.

4. Objectives for the Open Dialogue Initiative

The Open Dialogue Initiative has five key objectives:
Make Open Government the standard for the digital age
Through the principle of Open by Default, Open Government sets new standards for governance in the digital age. The Open Dialogue Initiative will establish Open Government as the “brand” for improving governance in the Government of Canada and introduce the Canadian public policy community to the key ideas behind it.
Establish Open Dialogue as the indispensable third stream of Open Government
The Initiative will examine, test, document and demonstrate the critical contribution Open Dialogue makes to Open Government; and, in particular, to reengaging citizens and rebuilding public trust.
Ensure that Open Dialogue is guided by a principled policy framework
The Initiative will produce a comprehensive policy framework to guide Parliamentarians and officials in designing and delivering effective Open Dialogue processes at the federal level.
Assess how digital tools can be used to support and strengthen Open Dialogue processes
The Initiative will explore the contribution digital tools can make to Open Dialogue. How effective are they at overcoming distance and including large numbers of people? Can they support genuinely deliberative discussions? Are there new tools or techniques on the horizon that might prove to be “game-changers”?
Build a group of Open Dialogue champions who will foster further experimentation and culture-change within Parliament and the Government of Canada
The Initiative will build a group of Open Dialogue champions at both the political and public service levels, who will be informed, experienced and able to speak authoritatively about Open Dialogue processes and their role in the future of governance.

5. Towards an Open Dialogue Framework

A key objective of the proposed Open Dialogue Initiative is to develop a principled policy framework to guide the development of Open Dialogue processes. In fact, much work has already been done on the foundations of such a framework and, based on this, we believe the Open Dialogue Framework should rest on four distinct kinds of dialogue processes:
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Transactions
A transaction is a one-way relationship in which government delivers something to the public. This could be information, but it could also be a form of permission (licence), an object (drugs) or a service (policing). Transactions thus include not only information exchanges, but also the delivery of many public services.
Consultation
Consultation provides members of the public with an opportunity to present their views on a subject to public officials. The process ensures they have a chance to make their views known to government. Once they have done so, the officials retreat behind closed doors to review the arguments, weigh evidence, set priorities, make compromises and propose solutions. Their conclusions are then presented to the government, which makes the final decisions.
Deliberation
Deliberation allows participants to express their views, but it also asks them to engage one another (and possibly government) in the search for common ground. Whereas consultation assigns the task of weighing evidence, setting priorities, making compromises and proposing solutions to officials, Deliberation brings the participants into this process.1
Collaboration
Collaboration involves sharing responsibility for the development of solutions AND the delivery or implementation of those solutions. A government shares these responsibilities when it agrees to act as an equal partner with citizens and/or stakeholders to form and deliver a joint plan to solve and issue or advance a goal.
Open Dialogue makes appropriate use of all four types of processes. At present, policymakers in the federal government tend to reply on just two approaches—information sharing (transactions) and consultation—for almost every issue. Too often, this results in a mismatch of processes and issues that leads to solutions that are ineffective, difficult to implement or that lack buy-in from citizens and stakeholders.
The motivating idea behind the Open Dialogue Framework is simply that different kinds of issues should be approached differently. The Framework is supposed to help officials choose the right kind of process for the issue at hand.
However, if Open Dialogue rests on recognition of these four generic types of processes, we should not lose sight of the fact that every government is different. The challenge in developing an Open Dialogue Framework is not just to identify the four types and provide criteria to match them with the right kinds of issues. It is also to provide guidance on how to design processes that incorporate or respect the special or unique characteristics of the community in question.
The Open Dialogue Initiative would use the demonstration projects to produce a “made in Canada” approach to Open Dialogue that is appropriate for the Government of Canada. For example, the new Framework would recognize and incorporate our commitment to federalism, the historical place of aboriginal peoples, and the role of official languages.

6. The Project: Who are we engaging?

The Open Dialogue Initiative that we are proposing includes two distinct but complementary streams of activity: the Public Service Stream and the Parliamentary Stream. The former focuses on how Open Dialogue would transform the work of ministers and the public service; the latter on how it would make the work of Parliament and parliamentarians more meaningful.
The public service stream would include five major demonstration projects from five departments (a single project could involve multiple departments), and the parliamentary stream would include three to five projects from the House of Commons, possibly including the Senate. The two streams would proceed in parallel.

A. Open Dialogue Initiative: The Public Service Stream

The Public Service Stream would be led by a new Open Dialogue Centre in the Treasury Board Secretariat. The Centre would scout out departments that were planning to launch a significant consultation initiative on an issue and then hold meetings with the officials from that department.
Through these meetings, the Centre would be looking for consultation processes that were also good candidates to be transformed into deliberative or collaborative processes. The Centre would discuss this with departmental staff. If the prospects were promising, staff, in turn, would discuss this with the minister.
The Centre’s goal would be to identify five promising projects from various policy areas that could be completed within 18 months or less. Following discussions with the minister and his officials, the Centre would invite those five departments to participate in the Open Dialogue Initiative by redesigning their consultation processes as deliberative or collaborative ones and then allowing them to be used as demonstration projects for ODI.
Each demonstration project would still be planned, managed and executed by officials from the sponsoring department. However, the Centre would also strike and chair an interdepartmental committee, with representation from each of the departmental project teams. This committee would provide advice and oversight to all of the departmental teams to help ensure that the five projects conformed to basic principles and best practices of Open Dialogue.
The committee would also be responsible for consolidating learning from the projects and producing the new Open Dialogue Policy Framework for TBS. This would eventually become the official policy framework of the Government of Canada for Open Dialogue.
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In addition, the Centre would be responsible to inform and engage the public service and the broader public policy community on the progress of the projects. It would also work with the Canada School of Public Service to develop a training program and materials based on the projects.
The Open Dialogue Initiative would conclude with a national conference to educate the public service, MPs, the broader public policy community, and governments across the country on the merits of Open Dialogue and to showcase the results of the project.
Finally, development and execution of the five projects should require few new resources. The principal cost would lie in executing the demonstration projects. However, as each one would be a process that the sponsoring department had already planned to carry out, resources would have been allocated to the project through departmental budgets. In this way, ODC would leverage existing resources and commitments to carry out the work to produce the new framework.

B. Open Dialogue Initiative: The Parliamentary Stream

Many MPs today feel removed from decision-making, which increasingly is vested in the executive, in party leadership and, at times, among political staff.
The Parliamentary Stream of the Open Dialogue Initiative would provide an opportunity to change this by striking special committees of MPs and assigning them the responsibility of leading an Open Dialogue project.
First, House Leaders would meet to identify a list of multiparty issues that could be the focus of such a dialogue. A “multiparty issue” is one that transcends partisan lines enough that members of a special committee could reasonably be expected to work collaboratively. House Leaders would then agree to strike three to five special committees, each with a mandate to use Open Dialogue to find solutions to their respective issues.
A committee’s mandate would charge its members with leading either a deliberative or collaborative discussion aimed at producing a consensus report. House Leaders would agree to a hands-off approach, as long as a committee continued to work within the boundaries and parameters defined by its mandate.
The committees would contain equal representation from each of the official parties in Parliament. Committee members would agree to engage in a non-partisan dialogue and, where the public was involved, to play a new kind of “facilitative” role through the committee.
In our view, the Library of Parliament is well positioned to assume a new and important role in helping Parliament build capacity and carry out successful engagement processes. Its value here was clearly demonstrated in a 2002/3 study on CPP (Disability), when it provided special support to the Sub-Committee on the Status of Persons with Disability.
The government would make a meaningful commitment to act on consensus recommendations, as long as they remained within the boundaries of the mandate and met any special conditions set out there, such as guidelines on recommendation that involve spending.
Should the committee members fail to reach consensus on their recommendations or reach beyond the committee’s mandate, the government’s commitment to act on the recommendations would be invalidated.

C. Realigning Parliament and the Executive

In the final stage of the Open Dialogue Initiative, The Open Dialogue Centre would convene a meeting with members of the parliamentary committees, ministers responsible for the demonstration projects and their senior officials, and representation from the Prime Minister’s Office. Together, the group would discuss the lessons from these exercises for how Open Dialogue could be used to help realign the relationship between Parliament and the Executive.

D. Deliverables

The following is a list of the principal deliverables from the Open Dialogue Initiative:

  • Establishment of the Open Dialogue Centre in TBS
  • Completion of five Open Dialogue projects in five departments, involving stakeholders and/or individual citizens
  • Completion of three to five all-party Open Dialogue projects in the House of Commons, possibly including the Senate
  • Completion of an Open Dialogue Framework that establishes an official approach to Open Dialogue for the Government of Canada
  • Development of a suite of public engagement learning tools to help build capacity in the Public Service of Canada
  • Establishment of a community of articulate and experienced champions for Open Dialogue
  • Review of the lessons for realigning the relationship between the Executive and Parliament

7. Conclusion: Back to Public Trust

Since the beginning, modern governments have relied almost exclusively on two basic processes to involve citizens and stakeholders in the policy process; what in the framework above we called information sessions (transactions) and consultation.
But if the engagement approach hasn’t changed much in 200 years, the policy environment has. Citizens today are far less willing than their grandparents to allow governments simply to make decisions on issues of the day. They often want a say on issues that matter to them and they regard this as their democratic right.
Further, globalization and the digital revolution have transformed our world. Issues, events and organizations are often so interconnected that governments are unable to determine how the different options are likely to impact on the environment. To find the fairest and most effective solutions they must engage citizens and/or stakeholders in their deliberations, as they are often far better positioned than government to assess how a policy will impact on them.
Finally, good policymaking often requires more than public involvement to identify solutions. It also requires public involvement to implement them. Community health is an obvious example. Citizens may come together to discuss and develop a promising community health plan, but unless they also commit to acting on it little progress will be made. Engaging them in the deliberations that forge the plan is not enough. The process must go a step further and also secure a commitment from them to help deliver it—and that is a different discussion.
We believe that building the capacity for a more ambitious use of Open Dialogue processes to address issues like this would greatly enhance both the legitimacy and effectiveness of government decision-making.
Our goal is to ensure that democracy continues to work between elections; that citizens and organizations can meaningfully engage with government and Parliament to help shape the direction of a government after it has been sworn in.
As we plan for the next 150 years of Canada, we should be putting in place the processes and institutions that will assure Canadians there are better ways to participate in the policy process than yelling at their televisions or, worse, just turning them off. Meaningful participation should be palpable and therapeutic. Open Dialogue would be an effective antidote to the cynicism that is infecting our democratic institutions.
And this, in turn, would go a long way toward the essential task of rebuilding public trust.

Once More Into the Breach

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1. Introduction

The tabling of new, omnibus anti-terrorism legislation, Bill C-51, in the Canadian Parliament in January 2015, has re-energized calls for greater “oversight” of Canadian intelligence and security practices. Many voices have weighed in, from former Canadian Prime Ministers, to the NSA whistleblower, Edward Snowden, who called out Canada for having one of the “weakest oversight” frameworks for intelligence gathering in the Western world.1 The concern is understandable. Not only are there significant legacy problems with our existing system of accountability, but the various new powers proposed in Bill C-51 are bound to impact greatly on security and intelligence practices. If the Bill is passed in its present form, a new information sharing regime within the Canadian government will be established; Canada’s ‘no fly’ list will be re-tooled; the Canadian Security and Intelligence Service [CSIS] will acquire a new “disruption” mandate; criminal offenses for the advocacy and promotion of terrorism will be added to the Criminal Code, expanding the national security law enforcement mandate of the Royal Canadian Mounted Police. Additional provisions for dismantling web sites deemed to support terrorism “propaganda” will inevitably involve the Communications Security Establishment, Canada’s signals intelligence and cyber security agency. Higher secrecy walls will be built around the use of security certificates under the Immigration and Refugee Protection Act. How all these measures will impact exactly is hard to determine without experience, but it is precisely in this unknown space, moving forward, that strong accountability needs to operate.
These new legislative powers, for which the Government aims to acquire Parliamentary approval before the summer recess, build on more than a decade of significant increases in the power, resources and capabilities of Canadian intelligence and security agencies. Major changes, post 9/11, to the agencies and departments that comprise the Canadian security and intelligence community have not been matched, to date, by any increased ability to scrutinize their activities. Indeed there has been some rollback, notably in the decision of the Harper government to abolish the function of the Inspector General of CSIS in 2012.
Now we are into a further expansion of powers, with a growing demand that a concomitant increase in accountability finally be afforded. Unusually, this demand has not been fueled by scandal, as has been the case in the past. Scandal was the root cause of the creation of Canada’s two principal review bodies, the Security Intelligence Review Committee (SIRC), twinned at birth with CSIS in 1984, and the Commissioner for the Communications Security Establishment, created in 1996, and charged with a watchdog function over Canada’s electronic spy agency. It was the scandal of the Maher Arar affair that led to recommendations for reform of Canada’s accountability system in 2006 (recommendations which were not acted on).2 The current demand for greater accountability stems instead from legitimate concerns that Canada has reached a point of imbalance between measures to protect our security and measures to protect our basic rights. Because finding the right balance is so difficult in a world of changing threats and increased security powers conducted in an environment of secrecy, we look to systems of accountability as a check on abuses, as a restorative mechanism, and as a vital form of public reassurance.
Finally, and importantly, the public and political environment has changed. Canadians have experienced more than a decade of persistent terrorism-related security threats, culminating in two unfortunately successful, if small scale, terrorist attacks in October 2014. Current concerns about terrorism threats may now be at their highest level since the 9/11 attacks, stoked by a succession of terrorist attacks around the world, by concerns that Canada may truly be a target, as the Islamic State group has publicly proclaimed, and by the heated political debate around new anti-terrorism legislation. In the period since 9/11, Canadians have learned more about Canadian security and intelligence practices than has ever been the case in any previous era of Canadian history. Attention is being paid, including in unprecedented ways by both the traditional and new media, and with that attention has come an appetite for more—more knowledge, more information from government, more explanation, more transparency. The secret world now confronts a public demand for more openness, and into that breach stronger accountability must rush. There is no more ominous recipe for failure, both for operational performance and the maintenance of civil liberties, than if security and intelligence institutions lose public trust and legitimacy.
For all of these reasons: concerns about the potential loss of our ability to balance security needs and rights protections, fears of new powers and their unknowable usage, a fast changing security environment, heightened public awareness, and new demands for knowledge of state practices, we face an unusual moment of a crisis of confidence in the existing mechanisms of security and intelligence accountability. The crisis might pass, but the opportunity to fix an antiquated and wholly inadequate system of accountability should not be let slip.
The Canadian accountability system for intelligence and security was once widely touted as pioneering and impressive—once being in the 1980s and early 1990s. We even engaged in some quiet, behind-the-scenes, efforts to export our model of accountability to newly emerging democracies in places like Eastern Europe after the fall of the Soviet Union. It is not far-fetched to imagine that we could return Canada to being a world leader among democracies when it comes to holding a burgeoning spy and security system to proper account, while letting them get on with doing their needful, lawful work to protect national security and contribute to international security.
To push in this hopeful direction, three things need to be established:

1) What purpose does accountability serve (or who benefits)?

2)What is wrong with the current system of accountability?

3)What changes are needed?

But first, a word about words. As many other commentators have noted (and political points have even been scored on this front), there is a great confusion around the terms used in this debate. “Oversight,” “review,” “accountability” are the major phrases of the art, sometimes used interchangeably in ways that are bound to create confusion. The most over-arching concept, and to my mind the preferable one, is “accountability.” Striving for accountability best represents what Canadians need from a system that scrutinizes the activities of our security and intelligence agencies from multiple perspectives and vantage points. Accountability contains elements of both oversight and review, an idea embraced by Justice O’Connor in his study of a new mechanism for scrutiny of the RCMP’s national security activities (Arar Inquiry, Part 2). Oversight in the professional lexicon means engagement with current and on-going intelligence and security activities. This professional definition (which captures how the intelligence committees of the US House and Senate operate) is at odds with a common sense one, that takes oversight to mean a capacity to scrutinize a security and intelligence system as a whole, from a strategic perspective. We can avoid this confusion by agreeing to talk about accountability instead. Accountability incorporates elements of “oversight” conducted in the Canadian, Westminster system by the executive branch, and of retrospective “review” conducted by external, independent agencies. It embraces internal measures within agencies, and external judicial controls. There is a place for an important role by Parliament in a system of accountability. Accountability represents the big picture objective of a system operating at numerous points of contact with, and scrutiny of, security and intelligence agencies.


2.Accountability for security and intelligence

Who Benefits?

In their public letter arguing for strengthening the accountability regime for Canada’s security and intelligence agencies, four former Canadian Prime Ministers, offered this succinct statement of purpose:

“A strong and robust accountability regime mitigates the risk of abuse, stops abuse when it is detected and provides a mechanism for remedying abuses that have taken place.”3

While this statement accords with Canadian practice and reflects the scandal driven context in which we have created elements of our accountability system in the past, I would argue that it is too narrowly constructed. The focus on abuses is an important part of the role of any democratic accountability system, and must remain a perennial feature. But to erect an elaborate system of accountability solely to catch abuses, while it might mirror public concerns, is insufficient. Accountability plays other, important roles both within the secret space of security and intelligence agencies, and in the public domain. Accountability systems are meant to provide support to internal cultures of lawfulness generated by leadership directives and training programs. It is in this internal cultural space that any abuses of law or government direction are best nipped in the bud. Accountability is also meant to assist in improved operational performance, in a wide variety of ways, including learning lessons from past operational or policy errors.
Accountability systems have to be acknowledged as a burden to security and intelligence agencies: they take time, attention, personnel resources away from purely operational matters. But they must not be seen as an unnecessary, unproductive burden. Too singular attention to abuses magnifies this problem. An understanding of the role of accountability in internal cultural and policy support and in performance improvements is vital. Most security and intelligence agencies know this, however reluctantly; but the public needs to know it as well.
The other important function of accountability operates in the public, political space. Here accountability offers more than a check on abuses. It also has the power to provide for public reassurance and public education. In an age when publics are rightly concerned both about threats to national security and about the enlarged, intrusive powers of security and intelligence agencies, accountability can offer an authoritative, independent source of information about the nature of threats, the nature of responses undertaken by security and intelligence agencies, about lawfulness issues and, on occasion, about the ultimate question of how well (or badly) our security and intelligence agencies are doing to provide for public security—what is sometimes referred to as the efficacy question. It can be a major contributor to sustaining public legitimacy around secret intelligence and security functions.
Accountability thus has multiple purposes and multiple audiences. It is meant to sustain lawfulness and contribute to successful performance. It is meant to speak in secret internally and to speak loudly in public. It has to manage these multiple audiences, and to find the right balance between internally directed messaging and messaging for public consumption.
Who benefits? In theory, everyone. Intelligence and security agencies benefit; government benefits; the public benefits. In practice, a major impediment to strengthening Canadian accountability is precisely the absence of recognition that everyone benefits. The root causes of this are a reluctance on the part of security and intelligence agencies to openly embrace accountability; a reluctance on the part of Government to see the benefits in contrast to seeing the costs of exposure and loss of informational control; an inability on the part of the public to truly grasp the value of accountability, largely because national security accountability mechanisms in Canada, particularly our existing review agencies, SIRC and the CSE Commissioner, have been so bad at addressing the public audience.

3.What is Wrong with the Current (Canadian) system of accountability?

The current Canadian system of accountability can be measured against many variables, but two in particular are on offer in the joint letter from our former Prime Ministers: robustness and integration. As their letter states:

“We all also share the view that the lack of a robust and integrated accountability regime for Canada’s nationals security agencies makes it difficult to meaningfully assess the efficacy and legality of Canada’s national security activities.”4

Robustness refers to the general capacity of the accountability system to see into those dark spaces of security and intelligence where it needs to peer (access) and to report appropriately. Integration refers to the ability of the different moving parts of an accountability system to work together–to be, in fact, a system. It has another meaning that looks outward to the scanning capacity of accountability.
To explore these problems further, it is helpful to distinguish between internal mechanisms for oversight, generally in the hands of agency heads, deputy ministers and Ministers, and external review mechanisms.
It is, admittedly, extremely difficult to pronounce on the adequacy of internal oversight in the Canadian system, as this is conducted largely out of sight. It would appear to be the case that internal cultures of lawfulness within security and intelligence agencies are currently sound and that agency leadership is strong. Deputy Ministers have a clear mandate to ensure lawfulness and efficacy of their portfolio agencies and “serve at pleasure.” Greater problems may exist at the Ministerial level, the pinnacle of internal oversight, in terms of the capacity of Ministers to perform their accountability function. This requires knowledge, engagement and clear direction and can sit uncomfortably with notions of the complexity and secrecy of national security operations, their necessary degrees of independence, the desire to avoid overt politicization and even the desire to have some degree of plausible deniability. Ministers engage too closely with national security agencies at their peril; they remain too distant and removed from national security agencies also at their peril. It’s a fine balancing act that needs constant adjustment and cannot stand alone.
There are documented hints that not all is well, including a recent 2013 study commissioned by the Department of National Defence on the review of Defence Intelligence activities, that argued:

“While the Minister of National Defence provides Ministerial direction to DND/CAF on the Government’s intelligence priorities each year, strategic direction for DI [Defence Intelligence] activities is otherwise weak, outdated or ad hoc.”5

Included in the Defence intelligence portfolio are the Communications Security Establishment and the Chief of Defence Intelligence, whose remit includes elements of counter-intelligence, security, threat assessment and overseas operational support.
Controversial Ministerial directives, from the Minister of Public Safety to CSIS, the RCMP and CBSA, on the handling of information and intelligence possibly derived from torture suggest that the Minister of Public Safety has been content to push decision-making authority on such matters down to the level of agency heads, or even managers within agencies.6
The most recent annual report (2013-14) from the Security and Intelligence Review Committee (SIRC) argued that with respect to one (unnamed) CSIS “sensitive” activity that “The Minister of Public Safety is not always systematically advised of such activities, nor is he informed of them in a consistent manner.”7
These are worrying straws in the wind that suggest that Ministerial accountability may not be as robust as desired. This problem is compounded by the fact that Ministers do not have to account for national security activities to any dedicated, security cleared Parliamentary body and that substantial public Ministerial statements on national security matters are rare.
Ministerial accountability in the Canadian system also goes unexercised in the sense that Ministers do not currently have a Cabinet level forum for discussions on national security; a brief experiment in creating a Cabinet committee on National Security chaired by the Prime Minister was abandoned. Canada also lacks any mechanism for bringing key portfolio Ministers together with Deputies and agency heads to deal with national security emergencies or major policy discussions—a role played, for example, by the COBRA committee in the UK system.
Internal oversight in the Canadian system thus appears dependent on bureaucratic leadership and internal cultures, which can always be subject to change. Top-level oversight, conducted by Ministers, may be the weakest link.
The robustness of external review is another matter. The key external review bodies are the Security Intelligence Review Committee, with a mandate to scrutinize the activities of CSIS; and the CSE Commissioner, with a similar mandate to scrutinize the lawfulness of the Communications Security Establishment. SIRC was established in 1984 in the CSIS Act; the CSE Commissioner’s Office was first created by Order in Council in 1996. There are important differences in their construction, and some similarities. SIRC consists of a steering committee of part-time Privy Councillors (up to 5) appointed by the Prime Minister after consultation (which may be limited) with the Opposition parties. SIRC is supported by a small, full-time staff. The CSE Commissioner is a part-time retired judge, also supported by a small, full-time staff. There are currently no mandated requirements for knowledge of national security issues as a qualification for being a member of SIRC or being appointed as CSE Commissioner. Staff appointments to both bodies are non-transparent as are any appointments of persons on contract.
Access (to classified documents and officials) on the part of the review agencies is, in theory, guaranteed, short only of access to Cabinet confidences. In practice, access depends on a good working relationships between the review agency and the service being scrutinized. It depends on the expertise and persistence of the review body staff.8Struggles over access compound resource scarcities on the part of review bodies, leading to delays in reporting.
In any case, the existing review bodies are only capable of doing partial audits of national security activities on the basis of pre-approved review plans that are multi-year in nature and can sometimes fail to catch breaking issues or developing trends. Review agencies, it has to be accepted, will always be restricted to a partial audit function; the questions become how partial and how timely. Stickiness in relations between review agencies and their subjects, alongside significant resource constraints and possible expertise deficiencies, can tip partial audit away from its intended goal of producing meaningful national security scans, to mere unfinished ‘pointillism’—imagine canvases of scattered painted dots and brush strokes where no meaningful image ever coalesces.
The robustness of external review bodies is also affected by the fact that they are torn between two desired audiences for their reporting. One audience is the agency being scrutinized. Review agencies want their reports to be treated with respect, their recommendations (and they can only make recommendations), listened to and followed so as to improve lawfulness and even raise efficiency. This requires a close working relationship—a kind of closed loop of reporting, protected and shrouded by official secrecy. Such desired closeness can distort the critical faculties and independence of a review body. It can also lead to an over-valuing of the relationship between reviewer and reviewed at the expense of the review body’s public function.
The second audience for an external review agency is Parliament and the Canadian public. But in order to serve that audience, the review body has to step outside the ring of secrets, learn how to report declassified findings, and learn how to contribute to a public debate. This is more challenging than it might seem, and both of our external review agencies, SIRC and the CSE Commissioner, have struggled mightily over the years with public reporting, an especial problem for the CSE Commissioner. This on-going struggle to find ways to tell important national security stories in public without the deadweight of euphemistic language, the screen of obscurity, the excessive obeisance to official secrecy, has lowered the public legitimacy of these bodies to a dangerous extent.
In sum, the robustness of internal oversight may be compromised by weak Ministerial accountability and is subject to the vagaries of bureaucratic leadership and agency cultures. The robustness of external review is compromised by lack of resources and expertise, conflicts between reviewer and reviewed, by tensions pulling review bodies in different directions as they try to address different audiences for their reporting, and ultimately by lack of public standing.
If the current Canadian system clearly lacks robustness, as I have defined it; there is little to save it in terms of its integration. The meaning of integration cuts in two directions. One refers to the ability of elements of the accountability system to work together. Internal oversight is department and agency specific, with little overall coordination, especially in the absence of a Cabinet level standing committee or emergency body. The National Security Adviser can play a limited oversight role over the Canadian security and intelligence community as a whole but has to avoid delving into the details of individual agency and departmental issues. Justice Major’s Air India Inquiry report called for the strengthening of the powers of the National Security Adviser, but these recommendations were not accepted and would have required a significant re-engineering of the Canadian system with unclear payoffs.
The existing external review bodies, SIRC and the CSE Commissioner, represent siloed entities, with little capacity to coordinate their work, even in the face of increasingly integrated operations by national security agencies themselves. Their mandates limit them to the study of CSIS and CSE respectively, and nothing further. Beyond informal and limited exchanges between their professional staffs they cannot conduct joint inquiries. Justice O’Connor proposed in his Part 2 Arar Inquiry Study of national security review that statutory gateways should be constructed to allow for such coordination and joint inquiries, but the Government chose not to act on this recommendation.
Other external review agencies operate on the periphery of national security review, with only an occasional or tenuous foothold, owing to specialized mandates and sometimes lack of expertise and sufficient security-cleared staff. This is the case for the federal Privacy Commissioner, the Auditor General, and even the re-named Civilian Review and Complaints Commission for the RCMP.
Even more striking than the lack of integration between existing external review bodies, is that fact that they are wholly inadequate to confront the reality of integrated and multi-faceted national security operations conducted by a wide range of agencies, many of which are not subject to any form of external review. The basic explanation for this is historical. The external review system was first created to deal with the then limited number of intelligence agencies with an operational capacity that included intrusive surveillance powers, and hence where abuse and scandal might lie—CSIS and CSE being the prime candidates. But the review system has not kept pace with the expansion of intelligence and security activities conducted by a wider range of agencies, some with intrusive operational mandates and powers.
One illustration of the gap between reviewed and non-reviewed government bodies can be found in the listing of entities to be included in the proposed national security information-sharing regime under Bill C-51. The list includes 17 entities, of which only only 3 (CSIS, CSE, and the RCMP) are subject to some form of independent, external review. The list of non-reviewed entities includes the Canada Border Services Agency, the Department of National Defence/Canadian Armed Forces, the Department of Foreign Affairs, Trade and Development, the Department of Public Safety, and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). All have important intelligence and national security mandates and functions.
External review, to be effective, has to have the capacity to scrutinise the operations of the Canadian security and intelligence community as a whole, or if that is too ambitious, at least its key components. Our external review system is founded on an antiquated idea of what ‘key components’ means, and has been completely outstripped by the pace of change in the Canadian security and intelligence system since the 9/11 attacks and the many organisational changes that have followed in the Canadian governmental context. Since the 9/11 attacks we have seen the creation of the Department of Public Safety, the establishment of CBSA and FINTRAC, the growth of defence intelligence within DND/CAF, and the establishment of new security and information gathering functions, including the Global Security Reporting Program (GSRP), by the Department of Foreign Affairs, Trade and Development. Too much of the Canadian security and intelligence system goes un-reviewed and this undermines confidence in the review of those few government agencies currently watched by external agencies. The review system is Swiss-cheese in nature.
Arguably the greatest gap in the Canadian system of accountability, when it comes to the ability to scrutinise the Canadian security and intelligence system as a whole, concerns Parliament. The size of this gap is far greater than many Canadians understand. There are currently standing committees of both the House of Commons (the Standing Committee of Public Safety and National Defence) and the Senate (Senate Standing Committee on National Security and Defence) whose mandates include issues of security and intelligence. But several things are worthy of note about the current committee system. One is that the mandates of both existing committees are very broad (including Defence) and not just focused on intelligence and security matters. The second is that the membership of these committees is chosen in the usual and obscure manner of jockeying among the parties and does not involve considerations of expertise on the part of MPs and Senators, which may help explain their frequent descent into partisanship. The third is that these committees have only minimal research expertise at hand, relying on assistance from the staff of the Library of Parliament. Their budgets are constrained. And if this list was not long enough, the biggest problem they face is that the MPs and Senators who sit on these committees are not security cleared, so they have no access to classified briefings and classified documents. These are committees seeking to understand the secret world without having access to the secret world.
As has often been pointed out, Canada stands apart from the practice of many of our close allies and partners, especially in the Five Eyes intelligence community, by not having any dedicated, security cleared Parliamentary body to engage in review of security and intelligence and intelligence community. Among Westminster style legislative bodies, The United Kingdom has its Intelligence and Security Committee, with a recently expanded mandate; Australia has its Joint Committee on Intelligence and Security; and tiny New Zealand punches above its weight with a Parliamentary Intelligence and Security Committee. The United States has the mother of all legislative branch review systems, dating back to the 1970s, with separate committees of the House and Senate devoted exclusively to intelligence issues. There are many models out there to choose from and best practices to adapt to Canadian needs, but we have done none of this, despite sincere attempts including proposed Government legislation in the dying days of the Martin Liberals, which had all-party support, and despite subsequent private members bills and Senate motions to create such a body. The most recent effort, voted down at second reading by a Government majority in the House of Commons in September 2014 and not sent for Committee study, was the private member’s bill, C-622, by Joyce Murray, the Liberal defence critic. The Murray bill, which was two-part in nature, aimed at improving the accountability and transparency of CSE, as well as creating a committee of Parliament to scrutinise intelligence and security matters more broadly.
In Ms. Murray’s private members bill, the mandate of a proposed committee of Parliamentarians was described as three-fold:

1) Review the legislative, regulatory, policy and administrative framework for intelligence and national security in Canada

2) Review the activities of federal departments and agencies in relation to intelligence and national security; and

3) Report publicly on its activities, findings and recommendations

This mandate would have provided for what Craig Forcese and Kent Roach aptly describe as “pinnacle” review, of the sort missing not just in Parliament, but in all the external review mechanisms of the current accountability system. [vi]
To the extent that the value of Parliamentary review has not completely penetrated the Canadian Parliament, it is illustrative to turn to Australian commentary. Perhaps the most succinct argument for true Parliamentary accountability was provided recently by Australian Senator John Faulkner, a former Cabinet Minister who serves on the Australian Parliamentary Joint Committee on Intelligence and Security. Like Canada, Australia is trying to come to grips with new national security threats from terrorism and other sources and is expanding the legal powers of its security and intelligence agencies. Faulkner stated:

“The Australian Parliament’s responsibility is clear. It must ensure our intelligence and security agencies have the necessary powers and resources to protect Australian citizens and Australian interests. But these powers can impinge on the values and freedoms on which our democracy is founded—qualities which Australian citizens rightly expect Parliament to protect. So Parliament must strike a balance between our security imperatives and our liberties and freedoms. Key to achieving this balance is strong and effective accountability.”9

Would a new Parliamentary capacity be a magic solution to Canadian accountability gaps? The reasonable answer would have to be no. It would be part, an important part, of a broad based system of internal oversight and external review. But it could command the strategic heights. It would take time for the Committee to mature and gain the trust of both the security and intelligence community and the Canadian public. Qualifications for membership on the committee would have to be carefully considered. It would be a challenge for Parliament to set aside partisanship, as any such committee must. Its reporting would inevitably be hampered by official secrecy constraints. But should we worry that such a committee would simply disappear down the rabbit hole of secrecy, leading as Philippe Lagasse opined, simply to “ a select group of parliamentarians knowing more about national security affairs, but the public knowing, and perhaps caring, less”?10 The answer is no—based on both the experience of other established Parliamentary or legislative bodies among our close allies, and on the self-interest of Parliamentarians, and Parliament, itself.
The best that can be said, and it is something, is that accountability exists in the Canadian system. But it is wholly inadequate to the task of watching over a greatly enlarged sphere of security and intelligence operations conducted by a wider range of Canadian federal agencies, and fails to meet enhanced public fears around national security and expectations of transparency and debate and the guarding of public interest about such important issues.

4. Conclusion

What Needs to be Done?

The argument of this paper is that if we have a clear understanding of the purpose of accountability, a grasp of the current context of accountability in Canada, and of its historical roots, and a clear appreciation of the current and sizeable gaps in the system, then we have a roadmap for change. The new Rome of strengthened accountability won’t be built in a day, but we need to make a start. In fact a start has been made in terms of the heightened public and political debate around these issues.
The roadmap suggests that we need to focus our attention on four areas of change:

1.Improved Ministerial accountability (internal oversight)

2.Strengthened and broadened external review so as to capture under its watchful lens the full range of intelligence and security operations that are now being conducted by the Canadian government

3. The creation of a true Parliamentary capacity to review intelligence and security matters

4. Better public reporting by all components of the internal oversight and external review system

There are some solutions at hand to satisfy to satisfy many of these requirements for change. The argument can be made that we just need the political will and sense of urgency to implement them, starting with a more strategically focused and more wide-ranging expert external review body, often referred to as the “super SIRC” model, and with the establishment of a Parliamentary review capacity.
But we have to accept that the current Government believes that existing accountability mechanisms are adequate and has rejected arguments for change. In the context of the debate around C-51 the Government has, in particular, expressed a reliance on the Security and Intelligence Review Committee to police new CSIS powers, and on judicial “oversight” to ensure that Canadians’ rights are protected and the balance between security and rights are ensured. Judicial oversight exercised, for example, through scrutiny of warrant applications, the conditions imposed on peace bonds, controls on the use of preventative detention measures, and through the trial process (or judicial proceedings in the case of security certificates), is clearly very important to a system of accountability. But I would also, without going into the details here, second the concerns of legal experts such as Craig Forcese and Kent Roach that judicial oversight can never be complete, obviously does not reach the exercise of intelligence and law enforcement powers that fall beneath thresholds for judicial engagement, and contains no built-in requirements for on-going monitoring (or feedback loops).11 Judicial oversight, like SIRC review, is part of a system; if the overall system of accountability is weak, it cannot be saved by exaggerated reliance on individual components.
But if we are faced by political stalemate at the moment, as we appear to be, the question of what can be done slips ahead of what needs to be done. What can be done might take the form of minor and unsatisfactory changes, such as statutory gateways and more resources for existing external review bodies, to the overall accountability system. In that way what can be done might fool us into thinking we have solved the problem, or solved enough of it to allow it to be safely punted into the future.
My own preference would be to substitute further (purposeful) study for inaction or incomplete action, so as not to let slip the opportunities that currently exist to make headway on a problem that has (unusually) seized the political agenda and public imagination. I would argue for further, purposeful study, on two grounds. One would be that there exist a multiplicity of possible solutions to Canada’s accountability problems that warrant careful examination. There are best practices abroad that need careful scrutiny; there is a Canadian context and history that similarly needs careful attention. The other ground for further study is to avoid missing some important additions to accountability while in hot pursuit of the obvious changes (in which basket I would put a super SIRC and a Parliamentary capacity). As we consider changes to our accountability system, maybe with the idea of returning us to a leadership role among democracies, we need to consider such things as changes to the machinery of government for dealing with security and intelligence, greater application of outside expert knowledge on complex security threats and responses, (possibly though the re-constitution of the Prime Minister’s Advisory Council on National Security). We need to consider the requirement for greater transparency, without which accountability is hobbled. One measure would be a return to the practice of issuing a National Security Strategy on a regular basis. We need to consider adopting the practice of some of our close partners in terms of establishing an independent senior judicial authority to scrutinise the ever more complex and layered nature of national security legislation.
What would constitute purposeful study? Here are two suggestions. One would be a dedicated Parliamentary review of the matter, conducted by one or both of the House and Senate. The other would be the creation of an independent external body of experts to study the accountability waterfront. Both endeavours would have as their purpose the collection and analysis of evidence about accountability gaps and the practices of our close partners; both would reflect on public requirements for accountability; both would be charged with offering, within a reasonable time frame, concrete recommendations for change, to be presented as public reports to the Prime Minister and Parliament.
Further study is needed, further study would be beneficial, further study would capitalize on the opportunity of public attention. Further study can bridge, hopefully, the gap between the necessity for change and the current political stalemate. Even if our political system chose to consider further study as a form of punting a problem over the horizon that, too, would be OK. The issues aren’t going away. And an election is coming up, and, no doubt, another one after that.

Appendix

Wesley Wark,Visiting Professor,Graduate School of Public and International Affairs,University of Ottawa
Professor Wark is one of Canada’s leading experts on national security, intelligence and terrorism. He is a frequent contributor to the Canadian and international media and is currently working on two books dealing with the history and current practises of Canadian national security.

The case for a carbon tax in Canada

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1. Introduction

Climate change is widely recognized as the preeminent environmental threat facing the world’s current and future generations. A recent report by the International Energy Agency suggests that with current climate policies, global mean temperature is likely to increase by between 3.6 and 5.3 C, with most of that increase occurring this century. This is far outside the temperature range experienced in the history of humanity.1
A temperature increase of this magnitude would cause significant hardship, in the form of rising sea levels, reduced freshwater and food availability, increased disease spread, reduced biodiversity, increased conflict, reduced productivity, and other factors.2 The highly-cited Review of climate change economics by Nicholas Stern estimates that the costs of unchecked climate change could be as much as 20 percent of gross world product.3
Globally, annual emissions of carbon dioxide, the primary greenhouse gas, reached 32 billion tonnes (gigatonnes, or Gt) in 2012, their highest level ever. In fact, during the last decade worldwide annual emissions growth was higher than at any time in the past, as Figure 1 illustrates. As a consequence, in May of 2013, the atmospheric concentration of carbon dioxide eclipsed 400 parts per million – its highest level in at least several hundred thousand years.
It has been estimated that to avoid “dangerous anthropogenic interference with the climate system” – generally defined as a global mean surface temperature increase of more than 2 C relative to pre-industrial levels – the atmospheric carbon dioxide concentration should be stabilized at no higher than 450 parts per million. Calculations by climate modellers suggest that meeting this target will be extremely challenging. In order to have a relatively high probability of not exceeding the 2 C “dangerous” threshold, the Intergovernmental Panel on Climate Change estimates that total cumulative emissions from CO2 should not exceed 2900 Gt.4 Through 2011, humans have emitted about 1890 Gt CO2, leaving about 1000 Gt CO2 as a remaining worldwide carbon budget. Comparing this to Figure 1 helps to illustrate the scope of the climate mitigation challenge. At today’s emission levels, the carbon budget will be exhausted in approximately 30 years. To maintain within the 450 ppm limit, emissions would need to fall to zero (or even to negative values) after that point. Even achieving less ambitious climate targets, such as seeking to limit temperature change to 3 C with just 50 percent probability, require significant reductions in carbon emissions both in the near and long term.5 Given that annual emissions are currently growing, the scale of the challenge is evident.
So far, the world has not effectively responded to this challenge. Because of the global nature of climate change, most countries have been reluctant to undertake significant effort to reduce emissions without a guarantee that others will do the same, perceiving that the majority of benefits from such an effort will accrue to other countries. The sentiment is expressed recently by Canada’s Environment Minister at a climate change conference in New York, where she stated: “we want a fair agreement that includes all emitters and all economies. It’s not up to one country to solve [global climate change].”6 The resulting stalemate hurts all countries, and is unlikely to change without a new approach.
There is, however, some recent optimism around an (old) approach that turns the historic approach to climate change negotiations on its head: rather than waiting for a worldwide agreement before undertaking significant emission reductions at home, an alternative approach would use domestic climate policies as a springboard for coordinating international action. Under such an approach, some countries would unilaterally implement modest but meaningful climate change mitigation policies. These policy statements would include escalators – promises to increase the ambition of the policy under the condition that other countries also undertake meaningful policies to reduce emissions.7 Such an approach would focus on the actions which government is directly able to control – its policies – and de-emphasize commitments focused on the level of emissions, over which government has less direct control.8 Additionally an approach beginning with unconditional unilateral emission reductions could help to foster increased trust in international climate negotiations, and could encourage other countries to follow suit. If escalation clauses were built into domestic climate policies, the result could be a gradual tightening of global emissions constraints. Such a bottom-up approach may help to ease the deadlock in international climate negotiations.

Figure 1
Figure 1: Annual global emissions of carbon dioxide. Source: International Energy Agency

Indeed, this bottom-up type of approach already complements the formal negotiations over emission reduction targets and timelines that occur through the United Nations. The European Union, for example, has implemented an emission trading system as well as renewable energy targets, and conditions the stringency of its domestic emission reduction targets on action by other countries. The United States, Canada, and other countries have also taken modest steps to reduce emissions. As a result of recently-implemented policies, it appears that the US is on pace for meeting its 2020 emission reduction target. However, Canada is increasingly falling behind other countries in the ambition and scope of its climate policies, and appears almost certain to miss (by a significant margin) its 2020 emission reduction target. Limited action on climate change in Canada helps to provide a foil for other countries seeking to delay or weaken domestic emission reduction efforts.
Canada has repeatedly affirmed its commitment to avoiding dangerous climate change during its participation at conferences to the United Nations Framework Convention on Climate Change. However Canadian domestic action has so far fallen significantly short of international promises, such that Canada has failed to achieve its prior commitments, including at the World Conference on the Changing Climate and the Kyoto Protocol. Its recent commitment, made at the Copenhagen United Nations conference in 2010, is likewise incompatible with current policies and emission trends.9
Canada produced around 700 Mt of greenhouse gas emissions in 2012. Although Canadian emissions have fallen slightly since 2005 – due especially to phase-out of coal fired power plants in Ontario – the long-term trajectory of emissions in Canada is upwards. Emissions have increased by about 15 percent since 1990, and a recent government forecast suggests that emissions are likely to increase through at least 2020 under current climate policies.10
The increase in emissions in Canada and the consequent failure to meet international commitments reflects the absence of strong policies to curb greenhouse gases. At the federal level, climate change policy essentially consists of four regulations, governing the greenhouse gas intensity of the new light duty and heavy duty vehicle fleets, the greenhouse gas intensity of new coal-fired power plants, and the renewable fuel content in gasoline and diesel. In each case, these regulations are more costly than necessary, and the total amount of greenhouse gases that will be reduced by the policies is small, especially in the near- to mid-term. Most importantly, the limited set of policies covers only a small amount of emissions in the economy, allowing emissions in the remainder of the economy to increase unabated (see Figure 2).
Figure 2
Figure 2: Greenhouse gas emissions by sector in Canada. Source: Canada’s emissions trends, 2013, Environment Canada. Sectors currently regulated at the federal level are below the dark line. Only a portion of total emissions in regulated sectors are subject to federal emission regulations.

This paper suggests an alternative approach to domestic greenhouse gas policy is required. I begin by outlining a set of key objectives that should confront any effort to develop a domestic greenhouse gas policy. I then contrast these objectives with current Canadian climate change policies, and show how a new approach is required. Finally, I articulate a policy that can meet federal climate change objectives. The policy I favour – an emission pricing policy such as a carbon tax – is not novel; environmental taxes have been economists’ recommended policy approach for solving environmental problems for close to a century and carbon pricing has recently been promoted by a wide range of stakeholders as a necessary policy to address climate change. My aim is to articulate the possibility for a carbon tax to efficiently and effectively contribute to significantly reducing greenhouse gas emissions in Canada. I explain the particular strengths associated with carbon taxes relative to the existing regulatory approach for reducing emissions, and provide evidence to show that implementation of such a policy could reduce emissions at very low cost to the economy. Indeed, relative to the current approach for reducing emissions, a carbon tax would be associated with significant cost savings. Adopting such a policy could achieve Canada’s domestic greenhouse gas targets, help to salvage our international reputation as a responsible environmental steward, encourage global mitigation of emissions, and help to reduce costs associated with reducing emissions. Clearly implementing a meaningful carbon tax is a political challenge, but the potential rewards to such an approach are large.

2. Goals to structure approach to climate change

Reducing greenhouse gas emissions has proven to be one of the thorniest public policy problems the world has faced; William Nordhaus refers to it as “the granddaddy of public goods problems.”11 Difficulties arise in particular because of the long-term and global nature of the problem, as well as the lack of a simple and low-cost technological fix. For public policy makers, this means designing a policy that minimizes costs imposed on current generations since benefits accrue mostly to future generations, that recognizes the global context for reducing greenhouse gas emissions, and that recognizes that an approach focused on particular technologies will be insufficient. In Canada, policy makers face the additional challenge associated with navigating issues associated with division of powers and distribution of costs and benefits across the federation. Given these constraints, an effective policy should aim to satisfy a number of goals.

2.1 Encourage mitigation by the rest of the world

Canada produces just 2 percent of the world’s emissions.12 As a result, even substantial reduction of emissions in Canada will have a trivial impact on the atmospheric concentration of carbon dioxide and other greenhouse gases, which are the result of cumulative emissions over time by all countries. Meaningful mitigation of climate change can be achieved only through the combined efforts of all major emitters.
Yet cooperative global action on climate change has so far proven extremely elusive. Since the costs of reducing greenhouse gases are borne by the individual country taking action, while the benefits accrue to all countries, climate change mitigation has all the features of the famous ‘prisoner’s dilemma’: it is in each country’s interest to free-ride off the efforts of others, such that none take serious action. Countries, in other words, avoid cooperating. And just as the two prisoners end up with more jail time than they would each prefer as a result of their failure to cooperate, in the absence of cooperation all countries end up with more climate change than they would each prefer.
In the case of climate change, it is hard to see a way around this fundamental difficulty of the problem. International environmental agreements (IEAs), which have productively been employed to address other transboundary environmental problems, have so far not encouraged significant effort.13 The lack of success from IEAs like the Kyoto Protocol and the Copenhagen Agreement results from the lack of central authority to compel states to reduce emissions. Without a central authority forcing each state to limit its emissions (as occurs in the case of domestic environmental policy), each state can defect from the treaty or participate but agree to only trivial cuts in emissions. A recent review summarizes IEAs as follows: “Overall, the thrust of the IEA literature is that cooperation, even in simplified settings where countries are viewed as individual, rational actors, is difficult and achievable only under specific conditions.”14 Economic theory and real world practice suggest that this pessimistic result holds especially in the case of climate change, where the costs of reducing emissions are non-trivial.15
Yet some hope can perhaps be derived from other similar public goods problems, albeit on a much smaller scale. Elinor Ostrom received the 2009 Nobel Prize in Economics for her work in examining the emergence of self-government institutions in similar prisoners dilemma-type environments.16 For example, she carefully documents a number of small-scale community fisheries that – lacking outside government or defined property rights – were over-exploiting their fishery and experiencing significant hardship as a result. She shows how in some cases these communities were able to develop institutions to effectively govern the fishery – even in the absence of a centralized institution. Drawing from a large body of evidence, she writes: “The prediction that resource users are led inevitably to destroy [the environment] is based on a model that assumes all individuals are selfish, norm-free, and maximizers of short-run results. . . However, predictions based on this model are not supported in field research or laboratory experiments . . . ”17 In particular, there is evidence that reciprocal cooperation can be established if the proportion of participants that act in a narrow, self-interested manner is not too high.18
There are a number of challenges associated with scaling up from the examples of community- scale resource management that are central in Ostrom’s work, but it seems reasonable to suggest that if countries do act as narrowly self-interested norm-free maximizers of short-run results, little cooperation will emerge on climate change mitigation. Conversely, if a country takes a concrete step to reduce emissions, at least some other countries will likely be a little more willing to reduce emissions. Unilateral action by a country may help contribute to increased trust and action by other countries, and as a result create additional benefit for the original country. In the same vein, inaction on the part of a country is likely to undermine trust and limit the willingness of other countries to pursue mitigation efforts. Global action on climate change is likely to begin with domestic action, not the other way around.
It needs to be said that there is little evidence on the global level that supports this assertion – it could be that other countries will continue to pursue narrow self-interested strategies even if one or several countries take a lead in reducing emissions. There are two rebuttals. First, if pursued efficiently the cost of modest but meaningful unilateral action on climate change is low, as I will document later in the paper. Canada can afford to, and has a moral obligation to, take a step to reduce emissions. Second, if all countries do continue to behave in a narrow, self-interested manner, we can be virtually sure that the climate change problem will remain intractable. Solving the climate change problem requires some countries to act first. As a high-emitting wealthy country, Canada has the moral obligation and the capacity to be one of those countries.
Importantly, since one of the major goals of domestic action should be encouraging other countries to increase the level of their effort, one of the key features of domestic policies should be the ability to clearly communicate to other countries the concrete steps that a country is taking to reduce emissions. Complicated policies, which contain a large number of provisions and technology-specific mandates, are not straightforward for other countries to understand, and will likely do little to foster reciprocity by other countries. In contrast, simple policies that clearly communicate the level of emission abatement effort are more likely to communicate policy ambition to other countries, and potential encourage reciprocity.

2.2. Contribute a fair share to global emission reductions and set goals commensurately with domestic policies

In addition to encouraging other countries to reduce their emissions, Canada’s greenhouse gas reduction effort should be commensurate with its global ambitions for climate change mitigation. Canada has repeatedly affirmed its commitment to avoiding “dangerous” climate change, which – as described previously – requires dramatically reducing global emissions today through mid-century. Determining how to allocate the global emission reduction effort across emitting countries is not scientific, but is instead the domain of ethics and economics. A large literature describes alternative philosophical principles for sharing a joint burden, and has informed different proposals for sharing the worldwide greenhouse gas abatement challenge between countries.19 Potentially important factors for determining an appropriate division of effort between countries include the relative contribution to historic emissions, the relative population, the relative capacity to reduce emissions, and the relative cost of reducing emissions. As a high-emitting wealthy country, Canadian action on climate change should be greater than the worldwide average, suggesting a moral imperative for aggressive Canadian climate action.20
Of course, Canada should not and will not naively implement the aggressive policies consistent with achieving a 2 C target, since this would ignore the global nature of the climate change problem, where benefits of policy implementation accrue mostly to other countries. Instead, Canada should implement a modest but meaningful emission reduction policy that shows its willingness to productively engage on reducing emissions. It should accompany this policy with a promise to significantly increase the stringency of domestic emission reductions given other countries also undertake similar efforts to reduce emissions. Such an approach helps to both minimize the cost of action as well as promote global engagement on reducing emissions.
Importantly, Canadian domestic policy on greenhouse gas reductions should be commensurate with its international stance on emission reductions. It undermines the international consensus for a country to call for stringent action abroad while implementing weak policies at home. Like- wise, it reduces the goodwill and trust of other countries when internationally-promised emission reduction targets are repeatedly jettisoned. Coordination of domestic and international positions would improve Canada’s moral standing on climate change. A sensible manner for this coordination to take place is for implementation (or planning) of emission reduction policies to precede the establishment of emission reduction targets. Governments have direct control over policy implementation, but generally have substantially less control over total emissions in a country. International commitments should be made over the elements over which governments have control.

2.3 Reduce emissions cost effectively

Reducing greenhouse gas emissions need not be expensive. The recent report from the Intergovernmental Panel on Climate Change, which summarizes evidence on mitigation of greenhouse gas emissions, suggests that the deep greenhouse gas reductions required throughout the 21st century to limit warming to 2 C would cost around 2 percent of global world product over the course of the century.21 Although deep greenhouse gas mitigation is required for stabilizing climate change, the modest reductions in emissions that would comprise a first meaningful step can be extremely low cost. For example, Canadian studies suggest that reducing emissions by 20 percent is likely to cost less than one percent of GDP. If these emission reductions were achieved over the course of a decade, they might cause a reduction in the growth rate of GDP by less than one tenth of a percent per year. Additionally, there are likely to be co-benefits to reducing greenhouse gas emissions, such as improved air quality, which have the potential to render action on climate change cheaper and potentially cost-free, even when undertaken unilaterally.22
There is also scope for substantially reducing the cost of climate policy through effective policy instrument choice and design. If reductions in carbon emissions are pursued through a revenue- neutral tax swap, as I will describe later, then the net cost of climate policy can be significantly reduced. Some studies suggest that with a tax-shifting approach, the net costs of modest climate policy might even be negative.23
Prior experience with carbon policies in other jurisdictions suggests similarly that reducing greenhouse gas emissions can be done without significant economic cost. For example, a recent analysis of British Columbia’s carbon tax suggests that no discernible impact on aggregate economic output can be attributed to the carbon tax.24 Macroeconometric modelling of the European carbon taxes suggests similarly that the effects on aggregate economic output of modest carbon taxes are small.25
However, while reducing emissions need not be expensive, it can be expensive, if policies are not designed efficiently. And just as we know what makes reducing greenhouse gas emissions relatively cheap, we have a good idea of what makes reducing emissions relatively expensive. Expensive policies are likely to be those that (1) provide different incentives for reducing emissions to different sectors of the economy, or even for emission reductions within a sector, (2) overlap with existing policies in a way that aggravates costs, (3) pick technological winners. These elements are precisely what characterize the current Canadian approach to reducing greenhouse gas emissions. The current “sector by sector regulatory approach” uses different targets for different sectors, and leaves a substantial portion of the economy with no incentive at all to reduce emissions, favours incumbents over new entrants, features policies that overlap, and sometimes directly contradict one another, at federal and provincial levels, picks technological winners, and generally adopts features that likely significantly aggravate costs compared to a more efficient approach. While the excess costs for such an approach are not easily apparent when the stringency of policies is limited, the use of inefficient policies essentially prohibits the pursuit of deep greenhouse gas reductions, for which a cost-effective approach is required.

2.4 Avoid inter-governmental conflicts

Canada’s constitution is silent on environmental protection. As a result, constitutional authority over environmental protection is divided between federal and provincial governments through other provisions in the constitution. The resulting division of powers renders the environment “an abstruse matter which does not comfortably fit within the existing division of power without considerable overlap and uncertainty”, according to former supreme court Justice La Forest.26
Partly as a result of the ambiguous status of environmental protection in the constitution, past efforts to reduce greenhouse gases in Canada have resulted in conflict between the two levels of government. For example, prior to the signature of the Kyoto Protocol in 1997, the Canadian federal and provincial governments negotiated extensively regarding the appropriate target for national greenhouse gas reductions. When the federal government committed internationally to a more stringent target than it had agreed to with provincial counterparts, federal-provincial discussions on climate change became strained.27 More recently, divisions have emerged between emissions-intensive Alberta and Saskatchewan and relatively low-emissions provinces such as Quebec and British Columbia. Indeed, determining how to allocate the emission reduction effort across provinces in the federation may be as important to securing an acceptable climate policy in Canada as the overall target.28
Given this reality, any federal-led greenhouse gas mitigation policy in Canada needs to place a high importance on maintaining cohesion within the federation. Policies that place one or some provinces at a perceived disadvantage relative to others are likely to face stiff opposition. Potential for such disadvantage is high as a result of the uneven distribution of greenhouse gas emissions within the country. As shown in Figure 3, per capita emissions in Alberta and Saskatchewan are roughly seven times as high as in Quebec and Ontario. Unless it is modified somehow, a traditional carbon pricing policy risks imposing high costs in Alberta and Saskatchewan relative to these other provinces, and as a result will likely be impossible to implement.29 A successful federally-led climate change policy will need to effectively address federal-provincial issues to be relatively palatable to all provinces.

Figure 3
Figure 3: Provincial per capita greenhouse gas emissions, 2012. Greenhouse gas emissions from Environment Canada. Population from Statistics Canada.

3. Current approach to climate change is inconsistent with criteria

At the federal level, the government’s current approach to climate change is based on a sector-by- sector regulatory approach, under which regulations have been implemented to address emissions from coal-fired electricity generating plants, and heavy- and light-duty vehicles.30 In each case, the main purpose of the regulation is to reduce the greenhouse gas intensity of new the capital stock. In addition to these regulations, government has implemented regulations requiring the blending of renewable fuels in diesel and gasoline, and it maintains a number of modest financial incentive programs aimed at improving energy efficiency.31
It hardly needs to be said that Canada’s current approach to climate change mitigation is lacking, as the limits of the policy approach have been the subject of significant media attention. Here, I briefly outline the key shortfalls. First, the level of ambition embodied in Canada’s policies is inconsistent with stated commitments to reducing greenhouse gases. The key federal climate regulations are estimated (by the federal government) to reduce emissions by around 27 Mt by 2020.32 This compares poorly to the 250 Mt gap between a no-measures counterfactual and Canada’s current 2020 emission reduction target.33, 34
Second, the cost effectiveness of existing policies is poor. A cost effective policy should seek out the cheapest sources for reducing emissions throughout the economy. By contrast, the existing federal policy focuses on just a small subset of the economy, leaving a large majority without regulation, even though costs of achieving reductions in this uncovered portion of the economy may be low. Even within regulated sectors, the regulations seek emission reductions from some measures, but not others. For example, purchasing a more fuel efficient vehicle helps to meet the Light Duty vehicle regulation, but driving an existing vehicle less intensively does not, even though both actions contribute to emission reductions. Likewise, regulations govern the operation of coal-fired power plants, while natural gas-fired power plants are free to emit greenhouse gases. The regulations additionally focus only on emissions from new capital stock, leaving the existing capital stock free to produce greenhouse gases. All of these features worsen the cost effectiveness of the sector-by-sector regulatory approach. Cost effectiveness is also hampered by policy overlap. In a number of cases, there are overlapping regulations at federal and provincial levels, which can aggravate costs. As an example, both provinces and the federal government require blending of biofuels in gasoline and diesel (with differing amounts between federal and provincial governments), and neither level of government recognizes the other’s policy for compliance purposes.
A number of other more subtle disadvantages are also associated with the sector-by-sector regulatory approach. One important one is that they are complicated, with their design requiring specialized knowledge of the trends and technologies available in the regulated sector. Their complexity leaves government bureaucrats at an informational disadvantage relative to industry insiders, who can play a large role in shaping the regulations. This likely helps explain the structure of the regulations, which leave incumbent firms relatively unregulated and focus effort on reducing emissions from future capital stock (e.g., in the case of coal-fired power plants). Their complexity also means that they are opaque to the average Canadian, which hampers a meaningful engagement on climate change policy. Finally, their complexity means that it is difficult for other countries to easily measure the strength of Canada’s domestic greenhouse gas mitigation agenda.
These features of the policies are directly related to policy design. Sector-specific regulations by their nature only cover emissions from a subset of the economy (a sector). Designing sector regulations to cover a substantial portion of the economy takes significant time; recent regulations have taken multiple years to develop and implement and regulations governing oil and gas emissions were first proposed 8 years ago. Different regulations in different sectors implies different stringencies in different sectors which increases costs of compliance.
Just as the federal approach to climate change is wanting domestically, so it is internationally. Canada is widely viewed as an impediment to the securing of a more robust international agreement on mitigating emissions. The international environmental community has been especially critical of Canada’s international positions, awarding it with five “fossil of the year” awards to single it out as the largest impediment to environmental action. Particular critique was focused on Canada’s abrupt withdrawal from the Kyoto Protocol, immediately following the conclusion of a large meeting in Durban where diplomats were working on shaping an international agreement for reducing emissions in years following 2012. Canada’s confrontational approach on climate change is also evident in an open letter written by the Prime Minister to his Australian counterpart in 2014, congratulating him on eliminating his country’s carbon tax. In general, the flippant nature with which Canada regards its international commitments to reduce greenhouse gases – it appears to most observers that Canada’s Copenhagen commitment to reduce emissions by 17 percent from 2005 levels by 2020 will not be met – undermines the international process aimed at securing collaborative emission reductions between countries.
Overall, the existing approach to tackling climate change is significantly disconnected from the goals I suggest should guide climate policy. The limited ambition, poor coverage, and lack of transparency associated with the sector-by-sector regulatory approach causes Canada to be perceived as a laggard on climate change, and helps to provide license for other countries to follow suit. The approach also significantly exacerbates domestic costs of achieving emissions reductions. On the international front, Canada has made commitments with no plan to meet them, snubbed the established international process, and encouraged other countries to reduce the ambition of their own climate policies. Rather than promoting worldwide effort to reduce emissions, Canada’s actions – both at home and abroad – have undermined it.

4. A rising carbon tax can achieve objectives efficiently

Adoption of an economy-wide carbon tax, at a modest but meaningful level, is much better aligned with Canada’s climate change goals than the existing sector-by-sector approach. Through such an approach, Canada could cost-effectively reduce emissions as well as signal to other countries its commitment to reduce emissions. In this section, I articulate the particular strengths of the carbon tax approach to reducing emissions and international engagement.
While I single out the carbon tax as the optimal policy for reducing emissions, there are a number of close similarities between a carbon tax and other policies that put a uniform price on carbon emitted from different sources in the economy. In particular, cap and trade policies have been implemented in a number of jurisdictions to reduce emissions of greenhouse gases, including California, Europe, and Quebec. Likewise, so-called “benchmark-and-credit” systems have been used to reduce greenhouse gas emissions in Alberta. While each of these systems offer different advantages and disadvantages, these are of second-order importance in comparison to the difference between any of these emission pricing systems and the current sector-by-sector regulations that form the core of Canada’s current emission reduction strategy. Indeed, when actually implemented, the various emission pricing systems can be designed to be very similar to one another. For example, the price level of a carbon tax can be adjusted over time, just as a cap and trade system can be implemented with price collars on the trading price, such that the difference in practice between various emission pricing policies is at least in part semantic. As a result, in this article, I focus on the implementation of a domestic carbon tax, but note that many of the same advantages could result from appropriate design of other emission pricing policies – most notably an economy-wide cap and trade system.35

4.1 Why carbon taxes

Amongst policy analysts, international organizations, many large companies, and academics, there is a nearly universal acknowledgment that a carbon tax represents the optimal policy instrument for reducing greenhouse gases. For example, a recent International Monetary Fund report suggests that countries should implement energy taxes that reflect environmental externalities,36 and a recent World Bank initiative aims to encourage countries around the world to adopt carbon pricing to stimulate greenhouse gas reductions.37 The highly-respected bipartisan US Congressional Budget Office claims that “a tax on emissions would be the most efficient incentive-based option for reducing emissions and could be relatively easy to implement.”38 Major corporations also support a carbon tax; for example, a recent statement by major institutional investors, together managing $24 trillion in assets, calls for “stable and economically meaningful carbon pricing.”39 In a similar vein, a recent survey of top US economists found near unanimity on the optimality of a carbon tax as an instrument for reducing greenhouse gas emissions.40 This high degree of consensus is also echoed in the academic literature, which affirms the significant economic efficiency benefit of market-based emissions reduction programs such as a carbon tax.41
There are a number of reasons for the near-universal support of a carbon tax (or other emission pricing policy) amongst economists and other policy analysts, amongst the most important of which are:

4.1.1 Carbon taxes are cost effective

The primary asset of a carbon tax (which is shared with other market based instruments, such as cap and trade) is that it minimizes the cost of reducing emissions.42 Since sources of emissions are heterogeneous, attempts to control emissions using a technology or performance standard cause some sources to be forced to undertake relatively costly abatement activities, and leaves other sources relatively under-regulated or un-regulated altogether. The advantage of a carbon tax is that it provides the same incentive to all firms and households to reduce emissions, resulting in an optimal allocation of emission reductions across the economy. The cost savings that result from this optimal allocation of emission reductions can be significant. Costs for a market based instrument are estimated to be half of a comparable technology standard that controls emissions of nitrogen oxides from power plants in the US.43 In a variety of other contexts, Tietenberg finds costs of market based policies are 40 to 95 percent lower than conventional regulatory instruments.44

4.1.2 Carbon taxes raise revenue that can be used for productive purposes

A defining feature of carbon taxes, compared to other policy instruments aimed at reducing pollution, is that they raise revenue. This revenue can be used for a number of purposes, but economists have focused in particular on the potential for carbon tax revenue to be used in a revenue-neutral tax swap.45 In this arrangement, carbon tax revenue funds a reduction in other taxes in the economy, such as taxes on personal or corporate income, or payroll taxes. Since these other taxes also impose costs on the economy, reducing their rates can offset some or all of the costs of a carbon tax, rendering emission reductions cost-free or nearly so at an economy wide level. Sometimes the approach is neatly summarized as: “tax bads [i.e., pollution], not goods [i.e., jobs, investment],” or more graphically: “tax what you burn, not what you earn.”

4.1.3 Carbon taxes can drive innovation

For deep greenhouse gas mitigation over the long term, it is important to consider how and whether emission reduction policies stimulate innovations in low carbon technology, which offers the potential to dramatically reduce the cost of achieving reductions in emissions. Because carbon taxes raise the cost of emitting carbon, they can direct both the rate and direction of technological change, as suggested by Hicks nearly a century ago: “a change in the relative prices of the factors of production is itself a spur to invention, and to invention of a particular kind – directed to economizing the use of a factor which has become relatively expensive.” More recent studies have confirmed Hicks’ induced innovation hypothesis, showing that high energy prices cause innovations in energy efficient technologies.46 Theoretical work suggests that carbon taxes are likely the most effective policy instrument at government’s disposal for spurring technological change.47

4.1.4 Carbon taxes are transparent and simple to design

Legislation to support a carbon tax could be short and simple. In a recent interview, Henry Jacoby, an economist at MIT, says that carbon tax legislation could fit on a single page.48 Actually implemented carbon tax legislation runs somewhat longer than a page,49 but both in theory and in practice a carbon tax is extremely straightforward to design: fuels are taxed in proportion to carbon content. The necessary tax infrastructure is already in place, since fuels are already subject to other taxes. In contrast, other types of policies to reduce emissions are much more complex. Canada’s regulations on passenger and heavy duty vehicles are long and difficult to under- stand, and the (failed) US cap and trade bill of 2009 famously was well over 1,000 pages long. The simplicity of a carbon tax makes it easy to understand, both for individuals within the country – which facilitates engagement and understanding – and for other countries – which makes it straightforward to explain the stringency of policy being pursued to other countries. British Columbia is widely considered a leader on climate change primarily as a result of implementing a carbon tax, even though other policies it has implemented may contribute as much or more to recent emission reductions.50

4.1.5 Carbon taxes minimize information requirements

A carbon tax is a market based instrument, meaning that it creates incentives for market participants to reduce emissions. When firms and individuals face a cost for reducing emissions, they can make informed choices to reduce emissions that are both in their own best interests and collectively achieve reductions in emissions. Government’s role is limited to setting an appropriate price for emissions, and monitoring and enforcing the policy. In contrast, with conventional environmental policy instruments, government’s role is much broader, and typically involves choosing particular emissions targets or technology requirements that are differentiated by sector, as well as selecting particular promising green technologies to promote. As such, conventional policy instruments require significant information on the part of government, which it likely does not possess (what emission reductions are possible in the oil and gas sector at low cost? Are electric vehicles ready for widespread adoption? How much can the efficiency of natural gas power plants be increased?).

4.2 Myths associated with a carbon tax

Despite the obvious academic appeal of a carbon tax, there is certainly limited political appetite for implementation of such a policy. In part, this is a result of several myths which are commonly associated with carbon taxes. Here, I briefly identify and attempt to counter some of the more prominent of these.

4.2.1 Carbon taxes are regressive

A frequently articulated concern associated with carbon taxes is that they could be regressive, having a substantial impact on the disposable income of poor households compared to wealthy households. This concern is based on the relative expenditure shares of households across the income distribution, where households at the bottom of the income distribution spend a larger share on carbon-intensive products like gasoline, electricity, and natural gas compared to wealthy households.51, 52 A number of recent contributions to the literature, however, assert that carbon taxes can be progressive or only mildly regressive when differences in both household expenditure sources and income sources are accounted for.53 In a recent analysis, my colleagues and I find that the carbon tax in British Columbia is progressive across the income distribution even before taking into account the specific tax measures that accompanied introduction of the carbon tax that favour low income households.54 In any case, the revenues from a carbon tax are easily large enough to compensate lower income households enough to leave them at least as well off as prior to the tax.55

4.2.2 Carbon taxes are ineffective if other countries don’t do anything

The global nature of the climate change problem makes securing international action the central challenge to tackle for addressing the problem. However, an even more pernicious aspect of the global nature of climate change is the potential for unrestricted trade in goods to undermine the emission reductions undertaken by a country acting alone. The concern is this: if a country undertakes a policy to reduce emissions, it could increase the cost associated with producing emissions-intensive goods in that country, causing facilities to become uncompetitive compared to those operating in countries without comparable carbon-reduction policies. Unless trade is restricted, there is potential that emissions intensive goods production will simply relocate to the unregulated region, and that the increase in emissions in the foreign facility could offset the reductions in the domestic facility, leading to no net change in emissions. If the foreign factory is less efficient, there is even potential that a unilateral policy in a country could increase global emission levels. Fortunately, extensive empirical investigation provides little support for this narrative. A recent review of more than 50 studies suggests that emissions leakage associated with unilateral regulation is likely between only 10 and 25 percent of the emission reductions associated with the policy, even if no additional measures are taken to curb leakage.56

4.2.3 Carbon taxes kill jobs

Carbon taxes are often seen as a challenge to economic growth, and particular concern has been voiced by policymakers around the potentially negative impact of a carbon tax on employment. Indeed, when carbon taxes have been discussed in recent House of Commons debates, they are almost always referred to as “job-killing.” Yet, there is very little evidence that supports the idea that carbon taxes harm employment – in fact the available evidence suggests the opposite. A useful recent analysis is based on the UK’s Climate Change Levy (CCL), which is a tax on industrial fuel use that raises prices of energy by an average of about 15 percent.57 The study finds that the CCL reduced energy intensity in manufacturing plants by about 18 percent, but that there was no measurable effect on employment, total factor productivity, or plant exit. A similar study examines the impact of the European Union’s Emission Trading System on German manufacturing firms, and finds the policy reduced emissions intensity by about 20 percent but had no identifiable effect on employment, gross output, or exports.58 Preliminary evidence from British Columbia likewise suggests that overall employment in that province increased as a result of the carbon tax.59

4.2.4 Carbon taxes are unpopular

In Canada and the US, “tax” is often considered a four-letter word, such that it is politically toxic to consider increases in the rate of any tax. Some consider carbon taxes to be especially divisive, since they are highly salient and are aimed at tackling climate change, which is not a goal universally considered important. Indeed, one the political lessons drawn from Stephane Dion’s failed election campaign in 2008 seems to be that support for a carbon tax renders a candidate unelectable. Of course, anecdotal evidence is a poor basis for important decisions, and at any rate, points both ways: Gordon Campbell was re-elected in British Columbia following his introduction of a carbon tax.60 Polling results are perhaps more useful. The polling firm Environics has tracked stated support for carbon taxes in annual public opinion surveys since at least 2008, and finds that carbon taxes are supported by the strong majority of Canadians.61 Support is not limited to individuals either. Carbon taxes have been supported in a number of open letters from industry associations to government. For example, in 2010, the Canadian Council of Chief Executives wrote that “governments at all levels should commit to a national approach to GHG reductions and carbon pricing.” This sentiment is echoed by 13 out of 14 industry associations in Canada surveyed for a report by Sustainable Prosperity.62 A national carbon tax even receives strong support from major oil and gas companies in Canada, who see it – like others – as the most efficient solution to reducing greenhouse gas emissions.63 This isn’t to say that the politics of carbon taxation is uncontroversial, merely that support for such policies is stronger than commonly assumed.

4.2.5 Carbon taxes are ineffective at reducing emissions

Discussion of carbon taxes eventually turns to their effects on emissions. One concern that is raised is that carbon taxes will have no effect on emissions. The concern is based on the notion that energy demand is inelastic – that is, demand does not change much in response to a price change. However, while it is true that energy demand is relatively price inelastic (especially in the short term), changes in price, such as due to a carbon tax, do affect consumption. For example, Figure 4 shows the relationship between per capita gasoline consumption and gasoline price in 22 large high income countries. There is a clear negative relationship between prices and gasoline consumption, both within a country and between countries. Evidence from British Columbia’s carbon tax likewise suggests a reduction in emissions attributable to the policy, with a reduction in emissions likely around 10 percent.64 Similar evidence is available from the UK Climate Change Levy (which reduced emissions intensity in manufacturing plants by about 18 percent)65 and from European carbon taxes,66 and the EU emission trading system.67

4.3 The design of a carbon tax

The basic design of an efficient carbon tax could be very simple, consisting of a uniform charge on coal, refined oil products, natural gas, and other fuels in proportion to the amount of carbon embodied in each fuel. The necessary tax infrastructure is already in place, since fuel retailers already collect and remit to government existing taxes on fuel. Such a tax would cover between 70 and 80 percent of total greenhouse gas emissions in the country (the remainder are not related to fuel combustion, and would need to be addressed with other policies or extensions to the carbon tax). The policy would provide all emitters with a uniform incentive to reduce emissions, resulting in a cost effective distribution of mitigation activities.
As with most types of government policy aimed at reducing emissions, the first-order concern for a domestic carbon tax relates to the stringency of the policy: how much will it reduce emissions?

Figure 4
Figure 4: Gasoline taxes and per capita gasoline consumption in large, wealthy countries (greater than 1 million inhabitants, and greater than $30,000 US per capita GDP). Data from the World Bank. Using this data in a cross-country regression yields a price elasticity of gasoline consumption of -0.79. Controlling for country fixed effects (i.e., using a within-country regression) yields a price elasticity of gasoline consumption of -0.37. Both estimates are statistically significant at the 1% level.

 
In the case of a carbon tax, the stringency is measured as the level of the tax, with higher carbon taxes providing larger incentives to households and firms to reduce their emissions, as well as larger incentives for innovation of low-carbon products. It is likely that a carbon tax would have to be quite high to produce deep greenhouse gas reductions. For example, analysis for the National Roundtable on the Environment and Economy suggests that reducing greenhouse gas emissions by 70 percent by 2050 would require a carbon price between $200 and $350/t CO2.68 (For reference, each litre of gasoline produces about 2.4 kg of CO2, so a $200/t CO2 tax would increase gasoline prices by almost $0.50/L.) Similarly, the most recent Intergovernmental Panel on Climate Change report suggests a global carbon price increasing to around $200/t CO2 by mid-century would be required to have a high likelihood of avoiding dangerous climate change.69 At the same time, there are concerns that high carbon prices could damage the economy, particularly if they are imposed without adequate time for transition. Likewise, since the benefits from reducing greenhouse gas emissions are global, while the costs are local, it would be both poor strategy and poor politics to implement a highly aggressive carbon tax without some promises about equivalent action from other countries. Choosing the appropriate level of stringency requires balancing the desire for deep greenhouse gas reductions with concern relating to transitory and longer term disruptions to the economy, as well as with the aim of stimulating other countries to implement similar policies.
Given these concerns, one potential choice for the level of carbon tax would be the social cost of carbon (SCC) as calculated by Environment Canada and counterparts at the US Environmental Protection Agency.70    The SCC is a measure of the present and future damage associated with emissions of greenhouse gases. Although there are significant uncertainties associated with the calculation of the SCC, it reflects our best current understanding of the external costs associated with activities that generate greenhouse gas emissions. By setting a carbon tax at the level of the SCC, Canada could cost effectively internalize the external costs associated with its greenhouse gas emissions.71 The current best estimate for the social cost of carbon is about $40/t CO2, and this value increases over time in real terms to about double that value by mid-century (at a rate of about $1/t annually).72  Setting a carbon tax at this level would be efficient, supported by the best available evidence, and consistent with a “polluter pays” approach to environmental regulation. Importantly, it would be possible to signal to other countries our willingness to increase the stringency of domestic carbon tax conditional on reciprocal action by other countries. Adopting a modest carbon tax such as described would contain abatement costs to very manageable levels (see below), while conditionally promising a more ambitious domestic policy would leave open the possibility of more significant emissions reductions, such as would be required to reach the 2 C goal to which Canada subscribes.
Canada’s key diplomatic failure on climate change has been to make extravagant international promises to reduce emissions, but then fail to implement policies commensurate with the commit- ments and as such to reach the promised levels of emissions. This divergence between promises and action has generated antipathy towards Canada, and reduced incentive for other countries to implement meaningful greenhouse gas mitigation policies of their own. By adopting a carbon tax set at the level of the social cost of carbon domestically, Canada would be able to estimate future levels of emissions to credibly commit to to help forge international collaboration of climate change. Importantly, in this model, the policies adopted at home would be used as inputs for setting inter- national goals, rather than the other way around. Internationally, adopting the carbon tax at the level of the SCC could also be an independent signal of Canada’s emission reductions. Increasingly there is pressure for the international climate change process to move away from its traditional focus on “targets and timetables” towards international coordination of emission reduction policies.73 For Canada, an international approach based on policy coordination rather than coordination of emission reduction obligations could be especially beneficial, since Canadian emissions are likely to increase faster than those in other developed countries absent GHG mitigation policies, especially as a result of faster population growth and structural change in the economy.
A key challenge associated with federal implementation of a carbon tax is its potentially heterogeneous impacts on the provinces. In particular, Alberta and Saskatchewan, with per capita emissions five to seven times as high as other provinces, are likely to resist implementation of a new federal government carbon tax, since they would pay a significantly larger amount per capita than other provinces.74 A federal carbon tax could be made more acceptable to all provinces if it was structured to permit equivalent carbon taxes in a province to override the federal tax. This type of equivalency agreement is relatively common in federal environmental policy making (in- deed, current federal regulations on coal fired power plants permit equivalency agreements). In this case, the federal government would set a national carbon tax at the level of the SCC, and agree to eliminate the tax in any province that implemented its own carbon tax at a level equal to or greater than the federal level. This approach would maintain the benefits associated with uniformly pricing carbon, and also be more acceptable to provinces than a federal carbon tax without equivalency provisions. Simulation suggest that under such an approach, the cost to provinces would be small and distributed relatively evenly across provinces.75
An important consideration associated with the implementation of a carbon tax concerns what to do with the revenues that are raised. A $40/t CO2 carbon tax would raise on the order of $25 billion per year. Since under an equalization scheme as described above, provinces would keep all carbon tax revenues, this decision would be made at the provincial level. A few options present themselves for provinces to disburse this additional revenue. One widely discussed option involves using carbon tax revenues to reduce pre-existing taxes elsewhere in the economy (for example, on personal or corporate income). Following this approach, the net burden of taxation is not increased at all, taxes are merely switched from one base (income) to another (pollution). Because of the revenue-neutral character of this tax-swap, most studies find minimal total economic costs (or even benefits) associated with a carbon tax swap.76 Another option is for government to earmark a portion of carbon tax revenue for investment in green technology, such as public transit or renewable energy. While the efficiency of this approach is likely worse than for a tax-swap, some polling results suggest that respondents are more likely to favour a carbon tax if a portion of the revenue is re-invested in green projects.77

4.4 The effect of a carbon tax

A simulation model-based estimate of the domestic effect of a carbon tax as described above is given in Figure 5. In this analysis, a carbon tax of $40/t CO2 is adopted in 2015 and gradually increased by $1/t CO2 every year. The modest tax described here is estimated to reduce emissions by about 20 percent – roughly consistent with Canada’s current target for greenhouse gas reductions. The cost of reducing emissions is calculated at about 0.2 percent of income – for an average individual or household earning $50,000 per year, this works out to about $100 per year. (These costs are consistent with other estimates of the cost and effectiveness of carbon price policies.) Aggregate costs could be lower still if the revenue from the carbon tax was used to reduce other distortions in the economy, such as income or payroll taxes. Likewise, if co-benefits, especially from reduced air pollution, were taken into account, the cost of the policy would likely be lower than estimated here.

Figure 5
Figure 5: Simulation of a carbon tax in a recursive-dynamic computable general equilibrium model of Canada. A carbon tax of $40/t CO2 is imposed in 2015 and increased by $5/t CO2 every five years through 2030. Revenues from the carbon tax are returned in lump sum to households.

5. Conclusion

Obviously, there are clear political impediments to implementation of a carbon tax. However, just as obviously, the current sector-by-sector approach to reducing emissions is much less efficient than a carbon tax. For significant reductions in greenhouse gas emissions, the difference in the cost of these approaches could easily be in the billions or even tens of billions of dollars. In addition to domestic benefits, the adoption of a carbon tax could offer global benefits. First, it would help to improve Canada’s tarnished international reputation as a responsible environmental citizen. Second, it would advance global greenhouse gas reductions, especially if paired with an escalation clause.
This is the leadership challenge surrounding a carbon tax – convince voters to accept a green- house gas reduction policy that implements a price on greenhouse gas emissions, and collectively make Canadians better off by a significant margin.
 

About the Author

Nicholas Rivers earned his PhD in Resource and Environmental Management at Simon Fraser University in Vancouver, British Columbia. He holds a Master’s degree in Environmental Management and a Bachelor’s degree in Mechanical Engineering. His research focuses on the economic evaluation of environmental policies, and has been published in economics and energy journals as well as in other popular publications. Additionally, he is co-author of a recent book on climate change policy, Hot Air: Meeting Canada’s Climate Change Challenge. Mr. Rivers has worked for all levels of government, industry, and non-governmental organizations as a consultant on issues related to energy efficiency and climate change program evaluation, policy analysis and development, and economic modelling. He has received awards for his research from the Trudeau Foundation, the Social Science and Humanities Research Council, and the National Science and Engineering Research Council.

Energy Policy Update: Canada’s Oil and Gas Potential At a Cross-Roads

Canada’s emergence as a global energy exporter is at hand. Long a continental supplier to the world’s erstwhile largest energy consumer (China passed the US in 2012), the Canadian oil and gas sector was secured by the principle of “Alberta makes and the US takes.” By the end of this decade, Canadian oil and liquefied natural gas (LNG) will begin to flow away from the increasingly saturated US market to offshore markets, primarily in the high growth Asia-Pacific region.
The how, when, and where of this assertion remains in questions. Options for export exist on all four coasts- Pacific (BC, Oregon), Atlantic (Quebec City and St John’s), US Gulf Coast (re-exports of Canadian imports), or even to the north via Alaska or Churchill/Hudson’s Bay. Each option has cost and risk and has been, and will continue to be, debated and evaluated.
But it will happen. Canada’s oil sands reserves are too valuable to leave in the ground and failure to find some route to market would be a failure of both public policy imagination and market forces of epic proportion. What underpins this view is a world in which strategic, worldscale oil development opportunities are in short supply, while petroleum demand continues to grow, albeit not at the torrid rates of 2002-2008.
Natural gas/LNG exports are perhaps a more tenuous scenario, but only in terms of timing, not likelihood. Even if the world energy industry determines BC’s LNG plays to be marginal at the present time, the double-digit pace of annual demand growth for natural gas in Asia means LNG in BC will move forward eventually.
Of course, for these scenarios to emerge, industry and government cannot just stand still and wait for things to happen. The familiar but intractable – so far- challenges of infrastructure/market access and social license to operate on First Nations and GHG emissions will need to be overcome. Canadian voters will have a chance to judge the effectiveness of the current government’s efforts on these fronts come Octobber 2015, while the opposition parties must demonstrate to a skeptical electorate and industry that they have better ideas and solutions.
As a non-partisan institute, Canada 2020 and the author offer these ideas to all interested parties with the express hope that we can play some small role in helping Canada realize its global potential as a competitive and responsible energy power, with all the benefits that would entail not just for Western Canada but for the country as a whole.
Meanwhile, capital markets and international oil companies around the world will be watching too. There is no where they would rather do business in than Canada- including many of their home countries- if we can finally overcome the obstacles of the last decade.
We also challenge government and industry to think ahead to the risks and opportunities that await once our hydrocarbons exports reach global markets. Will there be the expected windfall that appears to be there today- or will global markets evolve with new suppliers emerging and changing demand patterns that will diminish the prize? The world is not standing still while we figure out our own internal challenges. The export markets we covet are also being targeted by a wide array of competitors, many with geological and geopolitical advantages that we lack. While we bring many assets to the table as well, we must seek to understand and plan for the global energy landscape that is emerging. Part of this understanding must account for growing concern about climate change not just among environment activitists, but among governments, corporate executives, and institutional investors.

I. The Oil Sands

They are big. They are costly. They are unpopular (most places outside of Alberta, Bay Street, and Houston). But unless and until there is a massive transformation in oil-dependent global transportation systems, they are irreplaceable. The world needs 91 million barrels a day of oil to match demand. Even the most bearish forecasts predict 1% annual demand growth, or roughly another million barrels a day, per year, for the foreseeable future. If (a big if because demand could just as easily exceed, rather than miss, these forecasts) demand slows, we still likely need 105mmbpd by 2035. Moreover, the world’s existing oil fields have a natural production rate decline between 3 and 10% a year, depending on whose numbers you use and the type of production you are talking about. So the replacement rate to add the incremental 14mmbpd is likely double that, once declines are accounted for.
This is generally understood but the implications perhaps are not fully appreciated. If these numbers- which again are considered conservative by many of the world’s leading government and private sector forecasters- are right, then the denial of Keystone XL or Northern Gateway, the introduction of a $30/ton carbon tax, cost challenges in labor and materials markets, and hesitation about allowing open access to investment by state-owned enterprises won’t matter. The oil sands will be developed.
There are not enough other sources of accessible oil- low cost, medium cost, or high cost- to keep up with growth. [insert supply curve table]. High cost oil from Alberta (and a number of other places) will effectively set a price floor. Even if our efforts to build coastal pipelines fail, the resulting discount in the Alberta heavy oil price would likely be steep enough to incent US and Canadian refiners to build new refineries that are equipped to process our output. A new market would be created and barrels from Mexico and OPEC countries would go elsewhere.
The main argument against Keystone XL from leading environmental groups acknowledges much of this but states that the denial of the project would represent both a stop to “unbridled” development of oil and gas resources without concern for future climate change impact, and a start to a new era where public policy prioritizes the development of non-hydrocarbon resources. So far no government has accepted either proposition without at least without massive hedges, caveats, and conditions. There is too much risk politically in switching from the fossil fuel world of the near term to the post-hydrocarbon world of well, sometime, but the sometime always seems beyond the next election.
The most likely event to “kill” the oil sands and trigger a new era of non-hydrocarbon development would be peace breaking out in the Middle East- a losing bet since 1967. Conversely, a catastrophic geopolitical event in the Persian Gulf could have the same effect, in that it would spike prices in the short term but force major Western and Asian consumers to take action to begin to shift the transport sector from petroleum to other fuels, through onerous taxation and massive subsidy of alternative transport. A disruptive technology to displace the internal combustion engine could do the same and do to the auto/oil complex what the internet has done to Canada Post, record companies, and the print media.
These scenarios fit into the category of “possible” but not “probable.” Public policy and corporate strategy should emphasize the probable while not losing sight of the possible, from the perspective of risk management.

II. LNG

On the LNG side, Western Canada is watching its “baseload” export market disappear as the US absorbs more of its booming natural gas domestic production. Industry optimism is tethered to the spate of LNG projects along the BC coast, none of which are actually under construction or have received final approval from their developers. Asia’s robust gas demand growth (much more material than comparable numbers for oil) is a magnet for “stranded” gas resources in northeastern BC that are no longer needed in the US or Eastern Canadian markets. Yet that same “magnet” is a powerful signal to every other potential gas play in the world- all roads in the global gas market lead to Asia. BC is competing with the US, Russia, East Africa, Central Asia, and Australia to supply Asia with gas. Giant Persian Gulf producers like Qatar may opt to increase supply in response to demand, while dormant mega-reserve holders like Iran and Iraq also loom as medium to long term alternatives.
Canada can compete in global LNG markets but we are unlikely to be the supplier of choice due to high costs. Many of the same international oil companies developing LNG in BC have been burned by runaway supply and labor costs in Australia and see the same risks in BC. The August 2014 decision by Apache Energy to sell its stake in the Kitimat LNG project was driven by the desire of its shareholders to move away from “complex” projects, not just in politically-unstable emerging markets but in high cost plays. Like Australia (where Apache is also selling its interests), the Kitimat/Prince Rupert sites will be high cost for industry because they are remote, lack indigenous skilled labor, and have environmental sensitivities. Despite this, two or more BC LNG projects will likely be built- eventually. Developers will look to lower cost projects first (the US primarily but places like Papua New Guinea and Qatar as well) but will move on Canada once the expected demand emerges in Asia. Canada’s rule of law and proximity to northeast Asia will be attractive for investors.
The core challenge is whether the industry timetable matches the needs of the BC and Alberta governments. The BC government has promised a lot to the public on the fiscal windfall from LNG, promises that were premature and under-estimated the price sensitivity of these projects and the availability of alternative investment destinations.

III. Strategy

Given the challenges above, what strategy makes sense for the oil sands and Canadian LNG going forward? Is there a role for public policy? The role of the federal government, in our view, is likely to become more important in the very near term- despite industry, provincial and government aversion to “national energy policy.”

1. Government should take more risk in stakeholder engagement

This is a call for more action and less talk on two fronts. First, no one is quite sure what to do with First Nations opposition to West Coast pipeline projects. Many voters and investors are unsure exactly what the problem is.
The solution here is two-fold. First, clearly define what is required under the principle of “duty to consult” with First Nations groups along the pipeline corridors. The government should state what that process looks like- where it begins and where it ends. The government should also clearly state what sovereign rights it is prepared to assert once the newly-clarified duty to consult process is complete. This should not be left to the provinces, or worse, to industry, to have to explain. The Western provinces and industry are not neutral actors in this process despite best intentions and Ottawa must define and defend its standards. Ultimately such standards would be reviewed by Canadian courts but a clarification of intent by the legitimately-elected government in Ottawa would be helpful. Such a clarification, in the eyes of many oil patch industry leaders, should simply confirm that the granting of a public interest determination by the National Energy Board with follow-on approval by the federal cabinet does in fact constitute a “social license to operate.” While such a confirmation may seem unnecessary, it would put an end to the growing view that there is an additional, open-ended, multi-stakeholder process of negotiation that must follow any NEB determination before work can begin.
Once Ottawa has unambiguously and clearly stated its approach and timelines on First Nations consultation, the Prime Minister should then decide whether or not these projects are in the public interest, once conditions around economic benefit and environmental safety are in place. In the context of the Northern Gateway project decision confirmed by the federal cabinet earlier this year, it is quite evident that the NEB process was simply the beginning of the process but not the end, as once intended in the 1959 National Energy Board Act . Given this reality, the Prime Minister should then facilitate and lead a dialogue between industry, provinces, and First Nations to reach a commercial agreement with a fixed clock time period for negotiation.
The government can determine that the First Nations have an effective veto either through a de jure “high bar” definition of duty to consult, or through a stated unwillingness to enforce pipeline approvals through the sovereign authority of the government. While such a policy would be unpopular in the oil and gas industry, it would at least clarify what the actual protocol is for energy infrastructure development and force project developers to account for First Nations “buy-in” much more aggressively and earlier in the planning cycle.
The government can also determine that there should be no de facto veto by First Nations groups (or provincial/municipal governments) once the duty to consult has been completed and a public interest determination has been made. It would then also need to declare that it will back the public interest determination with the force of the law. Obviously, this would be the preferred position of industry, to know that the duty to consult standard is high and must be met, but once it has been the government will enforce its permitting decisions as it routinely does in the building of public works projects.
Fairly or not, the current perception in industry is that no one knows which of the above two positions are held by the government or either of the opposition parties. Certainly, it is risky for any of the three parties to take a strong stand in either direction. But it is worse to have ambiguity- it doesn’t serve the interest of the First Nations or of industry and has created little more than a regulatory logjam.
Many elements of the above also apply beyond the First Nations, whether in Burnaby where the local government opposes the TransMountain pipeline expansion, or in Eastern Ontario/Western Quebec border towns with respect to Enbridge’s 9B pipeline development. Ultimately, the national public interest must be reconciled with local opposition.
The same risk-taking approach should also apply to climate change policy. The current government has so far opted not to move ahead with GHG regulations for the upstream oil and gas sector, to build on the carbon penalty system introduced by Alberta in 2006. The resistance appears to be driven by two factors. The first is an apparent distaste in some quarters of the government, particularly in the caucus, for GHG policy stemming back to the devastating attacks on Stephane Dion’s “Green Shift” program in the 2008 election. In fairness, that has not prevented government from taking action on emissions from power generation or heavy-duty trucks, but nothing yet on upstream oil and gas.
The second and likely more material cause for the delay is a desire to align the Canadian regulations with the US system. This seems smart at first glance given the vast amount of cross-border trade of commodities and manufactured goods. Yet the US carbon policy debate will ultimately be about coal, while ours will ultimately be about the oil sands. The Obama administration’s regulatory approach to reducing GHG emissions in the coal-fired electric power generation sector is not an obvious model for the oil sands. The oil sands industry would prefer a more simple system that allows for flexibility in meeting GHG emissions reduction requirements, through a carbon tax.
We will never know if proactive action on say, a $25/ton carbon tax tied to a 25% reduction in GHG emissions would have pushed the Obama administration to approve Keystone XL, by giving further comfort that the Canadian government has a plan for the climate change effects of the oil sands. Claims that such action would have “guaranteed” the project’s approval are over-stated and under-estimate the impact of the Nebraska-level issues and the strategic political importance of inflows of donations from environmentally-motivated Democrats. The point is we will never know but we might have found out if we had taken the risk of leading on a policy, that may not have been politically popular across the board and might have received some pushback from industry. Such leadership would also help inoculate a host of actors, from European super-majors to California refiners, from political resistance from home governments that feel Canada has not done enough on climate change.
It is noteworthy that three Canadian provinces (BC, Alberta, Quebec) have a carbon tax. Yet inaction on the upstream oil and gas sector at the federal level undermines the larger climate change mitigation, given the rapid growth of GHG emissions expected as oil sands production doubles or even triples, as some forecasts predict, over the next 20 years. In this context, even a lower rate of GHG intensity will not prevent the overall growth of GHG emissions due to production growth. That is not to say that greater steam-oil ratios (meaning less natural gas burned to create steam for well injection) and other programs such as carbon capture and sequestration cannot be game changers over the medium term. But from today’s perspective and today’s technology, Canada’s GHG emissions will grow with the oil sands as the largest driver.Instead of meaningful policy action at the federal level to address the concerns, too often our industry and government leaders have tried to match scientific arguments from oil sands opponents with their own scientific studies and analyses. It used to be said that you can choose your arguments but not your facts. That is not necessarily true when oil sands opponents just need to create confusion and uncertainty about the environmental impact of the projects. Even studies from Obama’s own State Department showing Keystone XL would be climate neutral were muddied by other (less robust) studies arguing that developing the oil sands would cook the planet. Oil sands industry leaders have argued (not without merit) that the emissions of the oil sands are dwarfed by a handful of the largest coal power plants in the US. Our government officials and diplomats have pointed to improvements in energy efficiency and carbon intensity in the oil sands. It wasn’t enough. It didn’t work.
Canada needed, and needs, to do something bigger and meaningful, particularly now that the Obama administration has finally released its draft rule for GHG standards on coal-fired power plants. Outsiders don’t understand the primacy of the provinces on energy policy and want to see what Ottawa thinks, and is prepared to do. The carbon tax seems like the best available idea and has been supported across industry, although not by everyone in the oil patch to be sure. The risk is that Canada will move ahead of the US and upstream oil and gas plays in Texas and North Dakota will gain a cost advantage, although that advantage could be offset by a US carbon tax. Or the US could move on policies that do not synch up with the carbon tax approach north of the border, forcing industry to manage two systems instead of one. The reward is that unilateral action would put the ball back in the US court. Talk to industry and decide what price, baseline year, and reduction target we can live with- then go out and defend it against all critics.

2. Reduce market risk by supporting innovation and a move away from our current status as the “marginal” barrel

Canada’s position as a high cost producer could, under certain scenarios, become a precarious one again in the future. This has happened most recently in 2009, in 1998-99, and in the mid-1980s. When oil demand slows and prices fall, the high cost or marginal producers are usually affected first. Projects are put on hold, rigs are idled, and the inflows of taxes and royalties to the Crown dries up.
How is this likely to play out in the next five years? No one has a crystal ball with respect to oil prices, but there are few “possible” scenarios that are worth considering as they would likely threaten Canada as a high cost oil supplier:
• US/Iran deal on sanctions- a breakthough on Iran’s nuclear program could lead to a gradual lifting of sanctions. Even acknowledging that new investment in Iran would take a decade or more to generate new oil, the simple effect of Iran returning to its pre-sanctions level of oil production in 2011 would be very bearish;
• US liberalization of crude export restrictions- the US will likely have a surplus of light sweet barrels beyond what its refineries can handle, if current rates of production continue. If the political decision to allow this surplus to be exported is made, it will push down the price of Brent oil;
• Reversal of resource nationalism- after watching US, Canadian, and European companies redirect capital to the North American shale gas, tight oil, and oil sands plays, governments like Mexico, Brazil, and even Russia are offering less rent-seeking and more competitive terms to maintain investment; if this trend continues and spreads to other resource-rich states it will trigger a surge in investment and corresponding supply.
The purpose of the paper is not to evaluate the likelihood of any of these, or similar scenarios. Rather, the goal is to point out that if Canada cannot lower its cost, we will always be the first one to lose our chair in the game when the music stops. The above scenarios are the triggers for such downside risks.
The good news is the free market works and the lowest cost producers in the oil sands are being rewarded by investors with more capital which in turn spurs more innovation. Other companies seek to replicate or exceed the success of the leaders and the cycle continues.
The data show that significant parts of the oil sands are becoming more cost competitive. SAGD production for the most efficient in-situ wells at Cenovus Energy is less than $50/barrel- a target for others in industry to pursue. Industry is also being much more cautious about capital allocation. Sequencing of projects by each major operator means less competition against themselves for labor and materials. This is a change from the growth at all costs period of 2003-2007 when the major players couldn’t break ground on projects quickly enough, only to face soaring cost inflation.
There are lessons here for the BC LNG projects. There is almost no possibility that BC will have more than two LNG projects under construction at the same time. This does not suggest collusion by developers but rather smart self-regulation, particularly for majors that can deploy capital across dozens if not hundreds of projects around the world.
While market discipline on cost is effective, government can encourage innovation in cost reductions through tax credits and public-private partnerships. Some notable partnerships through the Alberta universities are in place, but industry appears to have appetite for more. In many ways, the appetite is driven by the fact that today’s CEOs and oil sands leaders saw the benefits of research and development from AOSTRA under Peter Lougheed and understand what it can mean.
Some taxpayers might reasonably ask why the government should subsidize the same companies responsible for those maddening trips to the gas station where the price is already too high. Yet the answer is that it is in the taxpayer interest to give up a bit of the upside to protect the against the downside. Innovation and lowering costs will protect the golden goose and make us less vulnerable to the next downturn. Anyone who was around in 2009, 1998-99, or the mid-1980s knows how bad that can be.

3. Know your customer

At times it feels like knowledge in certain parts of the oil patch about China and India is limited to the fact that they need a hell of a lot of oil and gas. If these countries are to be our new customers, we should understand our competition, the nuances of local market conditions, and how these markets are likely to evolve in the future. These countries will eventually face limits to growth similar to the US, where gasoline consumption peaked in 2005. Moreover, the energy outlook in these countries must be understood in the context of their appetite for specific grades of crude, further shaped by the existing web of geopolitical and commercial relationships.
China’s refineries are built to process light and medium barrels, not the heavy sour acidic grades from the oil sands. India’s newest private refineries can process virtually any kind of barrel but the bulk of their refinery sector is decrepit and controlled by state-owned companies. Future refinery investments in these countries will emphasize flexibility to allow the maximum range of crudes to be utilized, portending intense competition among suppliers, especially when demand is weak in a number of large “legacy” markets. Governments in both countries are also deregulating prices for petroleum products like gasoline and diesel, with China well down this road already and India likely to do more under its new government. Higher prices could temper demand growth at the margin. New taxes and social policies to curb consumption of imported oil and gas should be watched closely, as should efforts to bolster domestic supplies like Indian coal or Chinese shale gas.
The emerging Asia market is prized by the Persian Gulf OPEC states who have watched their market share decline in North America while demand stagnates in traditional “sinks” like West Europe and Japan. West Africa, Russia, and Latin America are eyeing the same prize and have opening their upstream to Chinese national oil companies, embracing the state capitalist model China offers and the low cost financing it provides. China’s incumbent gas suppliers from Turkmenistan to Qatar will seek to protect market share, even if it means accepting lower prices.
Demand attracts supply. Incumbents compete to protect and preserve market share from new challengers. Oil and gas are no different than other goods in this respect. While oil is a commodity, suppliers can be creative not just on price but on using other carrots to differentiate and secure commercial contracts. For many suppliers, this is a “state to state” transaction, between governments and giant national oil companies. When CNPC sits down with Rosneft to do an East Siberia gas pipeline deal, Mr. Putin and Mr. Xi are front and center, not just to cut a ribbon but to ensure that deals get done in the interest of the state. This is not the right model for Canada but it’s important for us to understand who we are up against.
So what can Canada offer to compete? Plenty. Open up our markets. Share our expertise. Train their regulators. Look for opportunities to work together in 3rd party markets. Invest in joint R&D. Work together on sustainability and community development. Create a true partnership going beyond buyer and seller to shared strategic interest. Security of supply meets security of demand. In this context, Canada should be very cautious about restricting investment opportunities in our upstream oil and gas sector from our future customers. While all energy companies, whether private or state-owned, should operate according to Canadian market and regulatory principles, Canada will need capital from all corners to ensure we reach our potential as a global energy exporter.

4. Services, the real “value-add”

The market access debate has focused on hydrocarbon exports. Yet there is a second and highly dynamic source of “energy” exports that is a national asset- our oil services companies. Here we are exporting not the raw commodity but the technology to develop increasingly complex oil and gas resources elsewhere, along with the know-how to make the technology work. Many companies that most Canadians (and most non-Albertan politicians in Ottawa) have never heard of are best-in-class providers of a broad array of oil services technologies that are in demand in every oil and gas province around the world. Without these technologies, overwhelmingly dominated by US and Canadian firms, there is no shale gas or tight oil revolution.
These fiercely entrepreneurial and independent companies are not looking for a helping hand from Ottawa although they too will benefit from the market access initiatives that will help their Canadian customers in the upstream move oil and gas to higher priced offshore markets. If anything, these companies have a story to tell Ottawa about success in the high growth emerging markets and how to navigate the dynamics of state capitalism and dealing with giant national oil companies. They do it all the time.
The best thing Ottawa can do to support this dynamic sector is to help ensure a continuing stream of engineering talent and skilled labor to sustain growth. In addition, a unified and coherent message about best regulatory and in “in the field” practices for safe hydraulic fracturing operations will support development of services opportunities in overseas markets. In many of these markets, public mistrust of fracking is high even when central governments are supportive. Yet it will be hard for Ottawa and the industry to convince skeptical landowners in shale-rich Eastern Europe or Colombia to drill when we can’t even convince our fellow Canadians in Quebec and New Brunswick.

Conclusion:

Canada is at an inflection point in its path to being a major oil and gas supplier to an energy-hungry world. New Alberta Premier Jim Prentice will try to overcome the political, economic, and social barriers to linking Alberta’s energy abundance to global markets. BC Premier Christy Clark hopes that by the end of 2014, at least one of the dozen or so LNG projects under consideration in her province will move to a “yes.” Many oil and gas executives in Alberta have a fatalistic view, hoping that “just one” LNG or oil sands pipeline moving forward would be a positive signal that we, as a country, still know how to get difficult projects done. To get there, it is the author’s view that greater leadership from Ottawa will be required. Most importantly, this leadership must define core principles on energy infrastructure development and climate change policy, and then move swiftly to implement and defend such principles. Waiting for the courts, industry, or Washington to move first is no longer good enough.
At the same time, we must look beyond our North American market to see what our competitors are doing and how demand-side dynamics in Asian markets are evolving. The world is not standing still while Canada debates its own path to getting our oil and gas to tidewater. Canadian oil sands and LNG projects are part of a global competition for capital and we must understand that failure to smooth the path for growth and development will lead to capital flowing elsewhere. While our political stability and huge resource base are major advantages, we have lost ground by failing to manage social and environmental issues effectively. These issues can be viewed either as a moral imperative or as a critical commercial challenge, but either way few would dispute they are the biggest factor standing between the Canadian oil and gas sector and its aspirations.

Crisis and Opportunity: Time for a National Infrastructure Plan for Canada

1. Introduction

Infrastructure is central to every aspect of life in Canada. As a key driver of productivity and growth in a modern economy, as a contributor to the health and well-being of Canadian citizens, as a critical component of transporting goods and services across the country. It is a method for enabling communication and sharing of information between citizens, a means for providing core services such as water, electricity and energy and is a shaper of our how our communities grow and contribute to our collective social fabric.
And, yet, across the country, Canadians are impacted by infrastructure that has failed to be maintained or that remains to be built. This is apparent in the deterioration of our roads and highways, the over-capacity of our public transit systems, underinvestment in affordable housing and social infrastructure, and the increased prevalence of environmental incidents, such as flooding in our urban areas. Canada’s infrastructure, along with the institutional frameworks that fund and finance these assets, are in need of repair.
This paper attempts to set out the need for urgent federal attention to this issue. It will discuss some tools and levers the federal government has at its disposal to engage in what is a national issue, including proposing the creation of a national infrastructure strategy for the country.
This paper will start by reviewing the economic benefits of public infrastructure and highlight how current market conditions create a historic opportunity for increasing infrastructure investment. It will then review current estimates of the size of Canada’s infrastructure deficit, followed by an examination of how the federal government’s role in financing infrastructure has changed over the last 50 years. Finally, it will end by proposing an increased federal role in infrastructure planning and postulate what could be included in a National Infrastructure Plan.
As many have commented before this paper, it should no longer be a question of if we need to devote more resources to public infrastructure or if the federal government should be involved. The question for the Canada at this moment is how the federal government should engage and in what form and capacity.

 

Increasing Focus on Infrastructure:

In recent years, an increasing number of papers have been issued drawing attention to Canada’s infrastructure needs. A select few include:
Rebuilding Canada: A New Framework for Renewing Canada’s Infrastructure, Mowat Centre, 2014
The Foundations of a Competitive Canada: The Need for Strategic Infrastructure Investment, Canadian Chamber of Commerce, 2013
Canada’s Infrastructure Gap: Where It Came From and Why It Will Cost So Much To Close, Canadian Centre for Policy Alternatives, 2013
At The Intersection: The Case for Sustained and Strategic Public Infrastructure Investment, Canada West Foundation, 2013
Canadian Infrastructure Report Card, Federation of Canadian Municipalities, 2012

 

2. Economic Benefits of Public Infrastructure

The economic case for investing in infrastructure has never been stronger. In recent years – and particularly in the aftermath of the financial crisis – a consensus regarding the positive economic benefits of stronger infrastructure spending has emerged among economists and policymakers. In addition to the non-economic benefits of infrastructure, a dollar of infrastructure spending has a positive effect on economic conditions in two ways: in the short-term, by supporting jobs and businesses, leading to lower levels of unemployment and higher levels of economic growth; and, in the long-term, by boosting the competitiveness of private businesses, thereby leading to greater wealth creation and higher living standards.
Within Canada, a recent Conference Board of Canada report undertook a detailed examination of the impacts of infrastructure spending on job creation and found that for every $1.0 billion in infrastructure spending, 16,700 jobs were supported for one year1. Moreover, these jobs are not just concentrated in the construction sector, as manufacturing industries, business services, transportation and financial sector employment also benefit from the spillover effect of infrastructure spending.
Increased investment in infrastructure will not only have direct impacts on the economy but will also spread through the economic through a series of multiplier effects 2.
Examining the impact of infrastructure spending on GDP growth has found similar results. The same Conference Board report estimated that for every $1.0 billion in spending, GDP would be boosted by $1.14 billion, resulting in a multiplier effect of 1.143. Other studies have shown similar effects, with estimated multipliers ranging from 1.14 to a high of 1.78, including Finance Canada’s “Seventh Report to Canadians” estimating a multiplier of 1.64.
Critical to this analysis is that virtually all recent estimates estimate the multiplier to be greater than 1.0, implying that every dollar of spending on public infrastructure boosts GDP by more than one dollar. Thus, infrastructure spending generates a positive economic return before projects are even completed, as the construction stage alone generates enough economic activity to justify the expense.
However, the most important economic benefit of public infrastructure is the long-term effect it has on productivity and business competitiveness, which are critical components of a modern, growing economy.
In this case, investments in public infrastructure, such as roads and transportation systems, communication infrastructure, utilities, water and wastewater systems, and health and social infrastructure, result in lowered business costs and increased labour productivity.
Lower business costs result in increased private sector returns, allowing for higher rates of private investment and ensuring Canadian companies can remain competitive and grow on a global stage. Similarly, increased labour productivity results in higher wages and greater wealth creation for Canadian citizens. (See Cost of Inadequate Public Infrastructure for a discussion of the impacts of failing to properly invest in public infrastructure.)
The Conference Board has estimated that roughly a quarter of all productivity growth in recent years is a result of public infrastructure investment5. Similarly, looking over a longer period of time, Statistics Canada estimated that up to half of all productivity growth between 1962 and 2006 can be attributed to investment in public infrastructure6.
Finally, increased economic activity and higher productivity rates allow the government to recoup a portion of its initial investment through higher tax revenues. Although estimates vary, the Conference Board study estimated that governments recover between 30% – 35% of every dollar spent on public infrastructure through higher personal, corporate and indirect taxes7.
Investment in public infrastructure has an immediate, short-term benefit to the economy, while also ensuring that businesses remain competitive in the long run. The alternative is to postpone investment, allowing existing infrastructure to decay and demand for new infrastructure to accumulate, ultimately restricting Canada’s potential for future economic growth.

 

Cost of Inadequate Public Infrastructure:

“The literature shows that inadequate public infrastructure is a threat to long-term economic growth. Inadequate public infrastructure lowers economic potential in a direct and obvious way according to this simple progression:
• Inadequate infrastructure results in increased costs for business.
• Increased costs result in lower return on private investment
• Lower returns—profits—mean less money for business to re-invest in new plants, machinery and technology.
• Less investment means fewer jobs and less productive labour.
• Lower productivity means less economic output and lower personal incomes.
The end result is a loss of competitiveness and lower rates of economic growth.”
At The Intersection: The Case for Sustained and Strategic Public Infrastructure Investment, Canada West Foundation (2013)

 

3. A Window of Opportunity: The Time to Invest is Now

While the general case for investing in public infrastructure is clear, current economic conditions create an even more compelling rationale for investing in infrastructure – right now. Canada is at a unique moment in time where the need for a stimulative macroeconomic policy, historically low long-term interest rates and a large infrastructure deficit, together, combine to dictate the need to accelerate the rate of investment in public infrastructure.
While Canada has fared relatively well compared to its peers, economic recovery from the recent global financial crisis has nonetheless been slow, with employment and GDP growth rates lagging pre-recession levels8. Within this context, an increased focus on reducing fiscal deficits has resulted in a slowing of public spending just when economic conditions could most benefit from increased investment and infrastructure spending.
In a recent paper, David Dodge, former Governor of the Bank of Canada, called on governments to shift emphasis away from short-term deficit reduction to instead “expand their investment in infrastructure while restraining growth in their operating expenditures so as to gradually reduce their public debt-to-GDP ratio.”9 Dodge cites Canada’s lagging productivity growth as a justification for additional infrastructure spending, as increased investment would “enhance multifactor productivity growth and cost competitiveness in the business sector and open up new markets for Canadian exports.”10
In addition, faced with sluggish employment and weak economic growth, and with further monetary stimulus limited by near-zero interest rates11, economists are returning to the idea that targeted fiscal stimulus should be a component of government economic policy. As former United States Treasury Secretary Larry Summers writes:
In an economy with a depressed labor market and monetary policy constrained by the zero bound, there is strong case for a fiscal expansion to boost aggregate demand. The benefits from such a policy greatly exceed traditional estimates of fiscal multipliers, both because increases in demand raise expected inflation, which reduces real interest rates, and because pushing the economy toward full employment will have positive effects on the labor force and productivity that last for a long time12.
According to this recent line of research, traditional benefits of public infrastructure investment are even greater during periods of economic slowdown, as more traditional means of spurring the economy are much less effective. A 2010 paper by Berkeley economists Alan Auerbach and Yuriy Gorodnichenko estimated that the multiplier on government investment is significantly higher (as much as 3.42) in times of recession13. This finding was further supported by a 2012 paper by two economists from the Federal Reserve Bank of San Francisco, Sylvain Leduc and Daniel Wilson, which focused specifically on public infrastructure spending and found that the multiplier on public infrastructure investment had a lower bound of 3.0 14.
Long Term Interest Rates - 1974-2014
Source: OECD
Finally, historically low long-term interest rates have created market conditions that are ideal for increased infrastructure spending. As can be seen in the above chart, long-term interest rates (that is, government bonds with terms greater than 10 years) have been hovering at levels lower than any point over the past 40 years. Given the long horizon associated with infrastructure assets, long-term, fixed-rate debt financing is an ideal instrument for providing the necessary capital required to increase investment levels. Lower debt-servicing costs effectively reduce the cost of infrastructure investments, while fixed-rate financing insulates projects (and governments) from future increases in interest rates.
These macroeconomic conditions – low interest rates, a sluggish economy, and a looming infrastructure deficit – create a unique window of opportunity for the federal government. Focusing on public infrastructure investment can be a key tool for enhancing economic growth, resulting in increased productivity and employment, and improving the quality of life for Canadians.
 

4. Canada’s Infrastructure Deficit

Many recent studies have attempted to quantify the current size of Canada’s infrastructure needs. Determining a single number can be problematic, as various studies have focused on specific sectoral needs and have approached the challenge using different methodologies, sometimes resulting in overlap. Thus, instead of trying to determine one figure that represents the size of Canada’s infrastructure deficit, we will briefly review a number of areas that require urgent attention from Canada’s policymakers.

Urban and Municipal Infrastructure:

Since the turn of the century there has been growing interest in urban issues and the role that cities play in securing Canada’s economic competitiveness and high quality of life. Today, municipal infrastructure in Canada has reached a breaking point.
The majority of municipal investment was made when there was little understanding of the role that infrastructure plays in maintaining and strengthening social bonds, public health and the integrity of our natural environment. In many cases, these decisions have locked residents and communities into ways of life that are now perceived as unsustainable. This challenge is magnified by the lack of fiscal levers available to Canadian municipalities as they plan for the future.
Faced with the dual problems of declining investment and aging infrastructure, the Federation of Canadian Municipalities has estimated that Canada’s municipal infrastructure deficit is $123 billion and growing by $2 billion annually15. This estimate is comprised of four categories, including:

  • • Water and Wastewater Systems ($31 billion);
  • • Transportation ($21.7 billion) and Transit ($22.8 billion);
  • • Waste management ($7.7 billion); and
  • • Community, Cultural and Social Infrastructure ($40.2 billion).

Moreover, this methodology likely underestimates the size of the municipal infrastructure deficit, as it fails to incorporate other types of infrastructure that are pillars of modern cities and communities. For example, affordable housing and safe shelter, low-carbon energy systems and reliable information and communication technologies help mold municipalities into livable, resilient and economically competitive places.

Road Networks, Transportation and Electricity Infrastructure

Efficient road networks and transportation systems are critical for the functioning of a modern economy. Reducing gridlock ensures that goods can be easily transported across the country, reducing business costs and enhancing trade. Effective public transit and uncongested road networks allow for faster commute times, reducing worker stress and increasing labour productivity.
Within this context, the need for investment has been highlighted by a number of studies:
• The McKinsey Global Institute has estimated that Canada must invest $66 billion into maintaining and repairing urban roads and bridges between 2013 and 2023.16
• Transit systems across the country require $4.2 billion annually for repair and replacement of existing assets. This estimate excludes meeting unmet or future demand.17
• The Canadian Chamber of Commerce has estimated that congestion is costing the country, as a whole, $15 billion per year, which is equivalent to almost one per cent of Canada’s GDP.18
• It is estimated that upgrading Canada’s electricity infrastructure between 2010 and 2030 will cost over $300 billion, requiring an annual investment higher than any level of investment in any previous decade.19

 

Extreme Weather: Too Costly to Ignore

Extreme weather is becoming increasingly more prevalent throughout Canada. The recent spike in natural disasters has resulted in unprecedented social and economic consequences for residents, businesses and governments across Canada. Prior to 1996, only three natural disasters exceeded $500 million in damages (adjusted to 2010 dollars). However, beginning in 1996, Canada has averaged one $500 million or larger, disaster almost every single year.20 And, according to the Insurance Bureau of Canada, for the first time water damage passed fire damage in terms of the amount of insurance claims across the country last year.21
Property damage created by small weather events has also become more frequent. Canada’s sewage systems are often incapable of handling larger volumes of precipitation.22 This is particularly a problem for older cities in central and eastern Canada where there is great need to rehabilitate water and sewage systems to mitigate the chance of flooding. By 2020, it is estimated that almost 60 per cent of Montreal’s water distribution pipes will have reached the end of their service life.23 This is particularly concerning given that the International Panel on Climate Change determines that extreme weather, such as heavy precipitation, will become more frequent over the next 50 years.
The need to prepare for the new reality of extreme weather and climate change becomes clear when the economic consequences are exposed. The average economic cost of a natural disaster is $130 billion and lowers GDP by approximately 2 per cent.24 This is attributable to the rising occurrence of severe weather affecting urban areas that have high-density populations and high-value assets. In the aftermath of a disaster, lost tax revenue and demands for relief and reconstruction place enormous fiscal strain on governments. On average, it is estimated that natural disasters increase public budget deficits by 25 per cent.25

 

Global Estimates:

Finally, a number of global estimates of Canada’s infrastructure deficit – across all sectors and sub-national jurisdictions – do exist. A 2013 study by the Canadian Chamber of Commerce estimated that the breadth of investment needed to address Canada’s infrastructure deficit could be as high as $570 billion.26
Additionally, a recent study by the Canada West Foundation estimated the accumulated infrastructure debt at $123 billion for existing infrastructure, with an additional $110 billion required for new infrastructure.27 Finally, in a sobering report, the Association of Consulting Engineers of Canada estimates that 50 per cent of public infrastructure will reach the end of its service life by 2027.28
Moreover, estimates of the effect of chronic underinvestment in infrastructure have shown that the infrastructure deficit is hindering our national competitiveness. Between the mid-1990s and 2006, infrastructure investment within Canada declined, while the United States increased spending by 24 per cent. During the same period, Canada went from near parity with the productivity of the United States to 20 per cent lower.29
It is clear that, regardless of the exact size of Canada’s infrastructure needs, the various estimates show that the problem is significant in scale and that drastically increased levels of public investment are warranted.
 

5. Declining Federal Involvement in Infrastructure

Over the past 50 years, there has been a significant shift in the ownership and funding of public infrastructure between the three levels of government. In 1955, the federal government owned 44 per cent of public infrastructure, the provinces owned 34 per cent and local governments owned 22 per cent.30 Today, provincial, territorial and municipal governments own and maintain roughly 95 per cent of Canada’s public infrastructure.31

Chart 1: Asset Shares by Order of Government

Canadian Center for Policy Alternatives, 2013
(Canadian Center for Policy Alternatives, 2013)
Municipalities own 52 percent of public infrastructure, but collect just eight cents of every tax dollar.32 In our existing taxation structure, the federal and provincial government collect more than 90 per cent of all taxes paid by Canadians.33 Senior levels of governments benefit from sales, income and corporate taxes, which are responsive to economic growth. Local governments are increasingly dependent on property taxes, a regressive funding tool that is the least responsive to growth and impacts middle-and-low-income people the hardest.34 While transfer payments from the federal government to the provincial government increased throughout the 2000s, a corresponding increase in transfer payments from the provincial government to local governments has failed to materialize.35 The shift in responsibilities without corresponding capacity to respond has created a structural imbalance between local authorities and federal and provincial governments.

Chart 2: Intergovernmental Transfer Payments, % of GDP, 1961- 2011

Intergovernmental Transfer Payments, % of GDP, 1961- 2011
(Centre for Policy Alternatives, 2013)
Recognizing that a new approach to federal funding for provincial, territorial and municipal infrastructure was needed, the Government of Canada began to re-enter the municipal infrastructure conversation in the early 2000’s. This renewed interest led to the creation of the Department of Infrastructure and a series of shared-cost infrastructure programs.
And governments of all political stripes have recognized the importance of infrastructure and have continue to invest. The 2007 Building Canada Plan for example, divided funding between transfer payments and projects that were deemed of national significance. Municipalities would receive $17.6 billion in predictable revenue over the course of seven years derived from the federal gas tax and GST rebate. At the same time, the federal government would invest $13.2 billion in national priority projects.
While we should be encouraged by the interest the past few federal governments have taken in financing infrastructure across the country, according to the OECD our federal government continues to play a relatively small role in funding infrastructure.36 The provincial, territorial and local governments in Canada play a larger role relative to the federal government in public infrastructure funding than is the case in comparative countries like Germany, Australia, the United States and other similar OECD countries.37
The renewed interest in the role and importance of infrastructure saw public investment in Canadian infrastructure reach just over 3 per cent of GDP in 2008.38 This investment barely surpasses the annual investment of 2.9 per cent of national GDP that is required just to maintain the current infrastructure stock.39 By way of comparison, the world average expenditure on public infrastructure is 3.8 of GDP per year.40 To promote prosperity and improved productivity throughout Canada, experts have postulated that a total annual investment of 5.1 per cent of GDP is required.41
While our federal government has shown great progress over the past number of years re-engaging in the infrastructure challenge, clearly there is more work to be done. The next sections lays out the case for a National Infrastructure Plan and its potential components.
 

6. A National Infrastructure Plan for Canada

Given the national importance of public infrastructure and its critical effect on economic competitiveness and quality of life, it is clear that the federal government needs to assume a leadership role with respect to the coordination and financing of infrastructure within Canada.
In particular, a larger federal role is necessary, and a rebalancing of financing responsibilities is required, for the following reasons:
Better Alignment of Funding Responsibilities with Fiscal Capacity: As the previous section makes clear, while the federal government’s fiscal capacity is roughly equal to that of all the provinces and territories combined, it contributes only 12% of annual infrastructure expenditures. Municipalities are even worse off, shouldering almost 50% of infrastructure costs, while having the smallest fiscal capacity of all three levels of government.42 To correct this imbalance, the federal government should target a higher level of investment, by both increasing net infrastructure investment levels as well as assuming some of the burden for financing projects that is currently the responsibility of municipalities.
Aligning Infrastructure Spending with National Macroeconomic Policy: As argued above, fiscal stimulus and, in particular, investment in public infrastructure is an increasingly important tool of macroeconomic policy for national economies. Within Canada, only the federal government has the ability and the responsibility to set economic policy at a national level. As such, to coordinate public infrastructure spending with other macroeconomic tools such as fiscal and monetary policy, the federal government needs to take a stronger role as a coordinator and funder of public infrastructure.
Increased Investment in Federally-Owned Infrastructure: Certain areas of public infrastructure, such as ports and border crossings, airports, military infrastructure, and national rail and transportation infrastructure, are the sole responsibility of the federal government. Thus, with provinces and municipalities already strained by existing infrastructure demands, only an increase in federal funding will result in higher levels of infrastructure investment in these areas.
Champion Nationally-Significant Projects: While many areas of infrastructure investment technically fall within areas of provincial jurisdiction, it is nonetheless incumbent upon the federal government to champion – and fund – projects of national significance. Projects such as urban transit and transportation systems, high-speed rail, climate change adaptation, affordable housing and social infrastructure, electricity transmission, and communication systems and rural broadband all touch on national economic priorities, as well as impact the quality of life of all Canadians. While respecting provincial jurisdiction, the federal government should accelerate its rate of investment within these areas.
While recent federal government initiatives such as the 2014 extension of the Building Canada Plan represent a positive step for greater federal involvement in public infrastructure, much more needs to be done to address Canada’s infrastructure deficit.
It is evident that one piece that is missing from the federal landscape is a comprehensive National Infrastructure Plan that could coordinate Canada’s planning and investment decisions with respect to public infrastructure. While a complete, comprehensive plan is beyond the scope of this paper, it is nonetheless instructive to review possible components of what could be included in a National Infrastructure Plan for Canada.

 

UK’s National Infrastructure Plan

In 2010, the UK government introduced its first National Infrastructure Plan.
“…the Government is setting out, for the first time, a broad vision of the infrastructure investment required to underpin the UK’s growth.”
“The role of the Government in this work is clear. It is to specify what infrastructure we need, identify the key barriers to achieving investment and mobilise the resources, both public and private, to make it happen.”43
By 2013, the UK’s NIP, updated annually, included a pipeline of projects valued over £375 billion, status reports on projects valued over £50 million, detailed funding tools and mechanisms, and a comprehensive framework for evaluating and prioritizing infrastructure investment across the country.44

 

What Could a National Infrastructure Plan Look Like?

The need for a National Infrastructure Plan is clear. Countries that exhibit best practices for infrastructure investment have decision-making frameworks driven by a strong central government committed to innovation and economic development. Within these frameworks, projects move forward based on 50 to 100 year forecasting and planning, establishing a platform for innovation, resiliency and prosperity.45
For example, in the Netherlands, the Dutch government has been actively involved in setting strategic infrastructure plans since the 1960’s, particularly with respect to projects of national interest. A recent World Economic Forum report on global competitiveness ranked the Netherlands 1st for quality of port infrastructure and electricity supply and ranks Netherlands 5th overall out of 144 countries in global competitiveness.46
Moreover, national governments are helping cities execute visionary plans that are embedded in infrastructure as a means to enhance global competitiveness. These countries recognize that providing integrated, efficient infrastructure is essential to offering a high quality of life and business environment that prospective investors and residents find attractive and find the means to finance it.47
To help shape this concept, the authors propose that a National Infrastructure Plan could, at minimum, include the following components:
A comprehensive, multi-year plan that would prioritize infrastructure projects across a number of areas of national significance. This plan would include a pipeline of projects, prioritized by status such as completed, under construction, funded and awaiting approval. Under this structure, the plan would be updated at least once a year to reflect movement in the project pipeline and changes in strategy or emphasis.
Transparent disclosure of infrastructure planning and project prioritization. Building on the last point, any infrastructure plan would need to transparently describe the infrastructure planning and prioritization process, including publishing decision-making criteria and detailing the status of projects under consideration for funding.
Dedicated annual targets for infrastructure investment. For example, targeting a certain percentage of GDP each year would ensure that the infrastructure deficit is slowly reduced, while demands for new infrastructure are met. The plan could include flexibility to accelerate planned infrastructure investment in times of economic slowdown or recession.
A decoupling of infrastructure investment decisions from annual operating budgets. The long-term benefits of public infrastructure investment require a decoupling from the short-term incentives associated with deficit reduction. Although infrastructure spending obviously cannot be undertaken in complete isolation of the government’s fiscal situation and would need to be publicly reported in a transparent manner, it should nonetheless but somewhat insulated from the volatility of annual fiscal budgeting.
A detailed inventory of infrastructure needs, including maintenance and new build requirements. The federal government should play a coordinating role in collecting and assessing infrastructure needs across Canada. This inventory should then be used by policymakers to prioritize future infrastructure funding levels and project investment decisions.
Clear, transparent rules for infrastructure funding programs. For programs that involve partnering with provinces or municipalities, application rules should be transparent and predictable. Program funding levels should not be capped, but rather provided with annual allocations, thus ensuring that projects that are unsuccessful in one year can be prioritized in a following year.
Accounting and budgeting provisions that recognize the multi-year nature of infrastructure investment, including a separate Capital Budget. Again, as infrastructure planning operates on time horizons well beyond annual budgeting cycles, accounting rules and budget planning for infrastructure should be updated to reflect this reality. This should include separately accounting for capital spending within the government’s fiscal budgeting process and ensuring that all infrastructure investments, including projects that are partnerships with provinces or municipalities, are appropriately capitalized over the life of the asset.
Financial tools for municipalities and public sector entities who cannot efficiently access capital markets. Building on the success of P3 Canada, the federal government should create centres of excellence in financing, access to capital, project planning and infrastructure budgeting that smaller public sector entities can utilize. This centralization of expertise will result in the promotion of best practices across Canada and allow for smaller players to benefit from the economies of scale associated with a pan-Canadian infrastructure plan.
Dedicated funding mechanisms to address the misalignment of infrastructure responsibilities with fiscal capacity. This could include, among other mechanisms, transferring fiscal capacity from the federal government to municipalities, as the greatest imbalance exists between these two levels of government.
Finally, this list is not an attempt to comprehensively describe what may be included in a National Infrastructure Plan, but rather an attempt to start a dialogue on the subject. The authors invite policymakers and thought leaders to build upon this outline to develop a comprehensive vision for what should be included in a National Infrastructure Plan for Canada.
 

7. Conclusion

Modern public infrastructure is a crucial component of national prosperity and high living standards. But decades of neglect and underinvestment have left Canada on the precipice of a national crisis in terms of our collective infrastructure needs.
Numerous studies and analyses have shown that Canada faces a substantial infrastructure deficit, both in terms of maintaining our existing assets, as well as servicing unmet demand for new infrastructure. This deficit extends across almost all areas of public infrastructure, including transportation and transit, water and wastewater, social and cultural institutions, affordable housing, electricity transmission, environmental and climate change adaptation and many more. The long decline of federal involvement in infrastructure spending has exacerbated the problem, as the vast majority of infrastructure inventory is in the hands of Canada’s municipalities and provinces, creating a misalignment between funding responsibility and fiscal capacity within the country.
This challenge, while dire, also represents a key opportunity for Canada’s federal government. The economic benefits of investing in public infrastructure are numerous and substantial, with additional investment providing badly-needed stimulative effects in the short-term and contributing to higher productivity and a more competitive economy in the long run. Moreover, current market conditions, including historically low long-term interest rates, create a window of opportunity for decisive action by an active and committed federal government.
It is time for the federal government to play a more active role in the planning and funding of public infrastructure within Canada. A critical starting point would be the creation of a National Infrastructure Plan, following the example of other countries such as the U.K. A national strategy, while respecting provincial and municipal jurisdiction, would coordinate infrastructure efforts across Canada, take advantage of the federal government’s greater fiscal capacity, create clear, transparent rules for infrastructure programs, enhance transparency of infrastructure planning and prioritization and share best practices across Canada. Only the federal government has the ability, authority and fiscal capacity to play this role within Canada.
The state of Canada’s infrastructure represents both a crisis and opportunity for our country. Only by taking decisive action now, can the federal government ensure we collectively seize the latter and avoid the former.
 

8. Authors

John Brodhead is a former advisor to the Honourable John Godfrey, Minister for Infrastructure and Communities, and a former Deputy Chief of Staff for Policy for Ontario Premier Dalton McGuinty. He was Vice-President of Metrolinx and is now the Executive Director of Evergreen CityWorks, an initiative designed to build better urban infrastructure in Canada. John has a Masters Degree in Political Science from the University of British Columbia.
Jesse Darling is an Urban Project Designer for Evergreen CityWorks. She has previously conducted research and policy analysis for the Martin Prosperity Institute and Harvard Graduate School of Design in urban affairs and municipal governance. She has a Masters degree in Urban Planning from the University of College London.
Sean Mullin is an economist, policy advisor and consultant, and has previously worked in senior roles at the Province of Ontario and in the asset management industry.  Sean has a Masters degree in Economics from McGill and an M.B.A. from the University of Oxford.

9. Sources

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Centre for Policy Alternatives (2013): http://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2013/01/Canada’s%20Infrastructure%20Gap_0.pdf
“Bennett Jones Spring 2014 Economic Outlook”, David A. Dodge, Richard Dion and John M. Weekes (2014): http://www.bennettjones.com/Publications/Updates/Bennett_Jones_Spring_2014_Economic_Outlook/
David Dodge (2014): http://www.cbc.ca/news/business/david-dodge-says-low-rates-should-encourage-infrastructure-spending-1.2673828
Dupuis and Ruffilli (2011): http://www.parl.gc.ca/content/lop/researchpublications/cei-24-e.htm?Param=ce4
Economist Magazine, 28 September, 2013
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Federation of Canadian Municipalities (2008): http://www.fcm.ca/Documents/reports/Infrastructure_as_Economic_Stimulus_EN.pdf
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Federation of Canadian Municipalities (2012), State of Canada’s Cities and Communities http://www.fcm.ca/Documents/reports/The_State_of_Canadas_Cities_and_Communities_2012_EN.pdf
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Understanding Canadian Intergovernmental Relations

As Canada’s Premier’s meet in Prince Edward Island this week at the Council of the Federation, Canada’s intergovernmental relations agenda has rarely been this packed, with agreements on equalization, the Canada Health Transfer, and the Canada Social Transfer (CST) set to expire – in addition to existing work on energy, climate change, new developments in job training, and the ongoing issues in the immigration and refugee files.
But as new anonymous interviews published in 19th Century Division of Powers, 21st Century Problems: Understanding Canadian Intergovernmental Relations suggests, the way federal-provincial-territorial relations is conducted in Canada needs a systematic renewal for progress to be made. The paper asks three questions:

  1. Why should Canadians care about intergovernmental relations?
  2. Why are intergovernmental relations often fraught with conflict?
  3. What can we do to make intergovernmental relations run more smoothly?

 
Written by Jennifer Wallner, Assistant Professor at the University of Ottawa, the paper’s findings are based on in-depth interviews with more than two-dozen current and former officials from all 14 jurisdictions (federal, provincial, and territorial). From these interviews and additional research, the paper makes five recommendations for how Canadian intergovernmental relations can be improved.
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An Agenda for Democratic Reform in Canada

Democratic reform is an issue that should concern all Canadians: how decisions are made by our national government have a direct impact in our daily lives.
From mandatory voting to overhauling Question Period to a striking a non-partisan selection committee for Senate appointments, “An Agenda for Democratic Reform in Canada” by University of Ottawa professor and Canada 2020 Advisory Board Member Robert Asselin, takes a hard look at the health of Canadian democracy and makes practical, yet transformative recommendations for reform.
Key recommendations from the paper:

  1. Canada should implement a Preferential Voting (or PV) system;
  2. Further and serious study should be given to mandatory voting for Canadians – similar to the Australian model;
  3. Each party should substantially ease party discipline, encouraging more free votes (particularly on matters of non-confidence);
  4. Parliament should substantially reform Question Period – through the introduction of a Prime Minister’s Question Period, adding challenge functions to the Speaker’s role, and doubling the amount of time for both questions and answers; and
  5. Parliament should create a non-partisan consultative committee for Senate appointments.

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