Externalities are the Key to Environmentally Sustainable Development

The key to any company getting the go ahead for their environmentally sensitive project and getting buy-in from the Canadian and world public is to identify all the externalities that concern the environmentalists (and governments) and deal with them as part of the cost of doing business. It doesn't matter whether we're talking about the Enbridge Northern Gateway pipeline project, a new oil drilling area, or the placement of a wind-farm full of windmills, the problems have to be identified from amongst the rhetoric and dealt with reasonably and rationally.

Externalities - those aspects of the cost of an environmentally sensitive project that are not dealt with directly by the project funding, but instead are left for those "external" to the project to deal with; primarily the governments at various levels but in effect, the general population.

These externalities can be directly economic (costs money now or in the future for something like infrastructure; roads, water, etc.), indirectly economic (creates situation that will have to be dealt with at some time in the future at a cost to be born by others than the investors/customers), social (displacement of people or other direct impact), or simply annoyance of some sort (installation is ugly and not in keeping with the general surroundings)

The typical struggle between business and the environmentalist movement obfuscates the fact that it is all about externalities. Only if we can lift the discussions from the morass of almost religious ferver to properly address the core problem will we be able to come even close to dealing with the real problems this world has in terms of coping with our population growth, earthquakes and tsunamis and other aspects of Mother Nature's effects on our planet.

I started writing this article in response to the crazy numbers of people and organizations (over 4000 submissions) wanting to talk to the impact of the "Northern Gateway" pipeline proposal to pipe bitumen from Alberta to the BC coast where it would be loaded on tankers and sent to places like China and other Pacific-rim nations. A second, smaller pipe would send (recycle) "condensate" (used to thin petrolium products for pipeline transport) to Alberta on the same route. Clearly there are a lot of people concerned about this project, yet there may be good reason to complete it.

The fact is, the same basic ideas can be applied to any major environmentally sensitive project, whether proposed by a nation, a business or some sort of consortium. 

The question is: if all the externalities are considered in the actual capital and operating costs of the project, is it still economically feasible?

The problem is, virtually none of those involved in the submissions are going to correctly identify the externalities they are concerned about in a fashion that will allow the federal review panel to come to any reasonable decision or make more than token recommendations on what should happen.

The process of vetting such processes is a long and involved one - and by looking at the Northern Gateway Project we can see some of the categories and concerns that should be dealt with as externalities - and how we might view them in a rational light. I know that I might be shouting into the wind in my writing on this, but maybe, just maybe, I'll strike a chord with enough people that this process might get on track.

Here are the areas that I see need addressing. There are probably others, but these are the ones I see.

Is the (Northern Gateway) project necessary at all?

This is the first question that we as a nation and the world in general have to ask, both of the developer of some mega-environmentally sensitive project and of ourselves.

In our example project, having Enbridge (or any other developer on any other project) simply say "we want to do this so we can produce a profit for our investors" is not good enough. We must look at the overall reasons for such mega-projects in light of politics and the world scene. In general, this is the realm of the Canadian national government. Only it has the mandate of balancing Canada's politically sensitive projects with the world's governments. Only it has the means of enforcing the long-term obligations being met in any project that extends beyond a provincial (or state) boundary or into international territory.

In addition, similar premises may be applied to smaller projects of provincial (state), regional and municipal scope. We'll assume that politicians and businesses at that level can infer their roles for their local projects.

The World View of Environmentally Sensitive Projects

Will the project overall benefit the world in identifiable ways? What, if any, do these ways weigh towards balancing the other externalities we'll be dealing with and is there some way that such balance can be reflected in the actual project costs in some way?

In the case of fossil-fuel projects such as oil sands, new oil production areas, refineries and pipelines, this has to be looked at in light of the overall ideals of moving away from this commodity in general, and the timing of such a move away from reliance upon it in particular. The technologies necessary to replace fossil fuel as feed stock for industrial chemicals as well as for replacing it as an energy source are rapidly becoming cost effective, both due to the nature of new developments and due to the rise in cost of the fossil fuels themselves on the commodity market. It may be that the project will no longer be economically viable before the payback period is over; a point which should be reflected in the risk shouldered by the actual investors alone, not any of the externally involved agencies or individuals.

Note that if this or any other aspect of the whole internalization of externalities makes the project economically unviable for the regular investor, there may still be a need that will be fulfilled by a senior level of government taking it on - but there is still the need to identify all the externalities and deal with them in any case.

With the Northern Gateway project (NGP) in particular and international pipeline projects in general, there are political implications that directly weigh on Canada's and the world's ongoing costs of existing. One of them that kicks in when talking about oil development and transportation in Canada is the fact that as a democratic and friendly country (to the US in specific and the world in general) Canada can provide a means of removing the reliance upon oil from countries whose regimes are less than appreciated by the rest of the world (Iran, etc.) This does not have a direct monetary identity, but for the sake of dealing with the other externalities, the Canadian government should put a price on it of some sort, even if only by setting its approval level of a project to something like high, medium, low and identifying some of the indirect costs that it will impact negatively or positively if allowed to go ahead. This should give at least some people pause to reflect when bringing up otherwise pedantic (stop the project at any cost) arguements.

The (Canadian) National View of Environmentally Sensitive Mega Projects

In the case of fossil fuels, again the quesion is, should we be dealing with this at all, or should we be putting our backing behind some other project that will have better benefit to the country as a whole?

The question has been brought up regarding both the NGP and the Keystone pipeline of whether it makes sense to allow or encourage the export of the raw oil, or should we be pushing investment toward the creation of refinement infrastructure and then exporting the various resulting chemicals, gasoline, diesel, petrochemical feedstocks, etc. For now, we'll leave aside the question of whether the tar-sands oil should be mined at all and take it as a given that it is, since this is already in process. We have to move the oil somewhere, somehow, and pipelines in general are still the safest way of doing so compared to rail and road.

The balance is jobs vs. exporting the environmental problems that refineries have in themselves, and while I have my own thoughts on this subject (maybe for another story) I'll simply say that it is a consideration that needs to be made in light of rational thought and the expectation that some sort of chemical processing plant will be necessary even after the feedstock changes from fossil fuels to renewable resources and recycling, and that such a plant might be adaptable as time passes.

In any case, the method that our government(s) use to promote national focus on the potential project topics, even prior to the creation of a project, is economic persuasion through tax incentives, grants and regulatory changes. The regulations and environmental hoops necessary to establish a new refinery in North America are such that no such facility has been built in many years - but that can be changed, and maybe it should be.

Given that the Northern Gateway project is necessary, what are the externatilities that need to be internalized?

The Federal View

Pretty much by definition, mega environmenally sensitive projects have Federal consequences separate from those of provincial and regional ones. These are the areas that the Feds reserve for themselves including things like fisheries and oceans, business personal income taxation and such. 

Problems that manifest themselves after the project is well under weigh, or after the business has wrapped up its involvement, and that cross provincial boundaries or deal in huge amounts for mitigation or compensation payments will fall to the Federal government to deal with.

Likewise, political fallout and multi-national problems will fall to the Feds. These must be identified and dealt with in a fashion that satisfies the general population and those in special interest groups who have specific areas of concern and/or expertise. 

In the NGP case these include fallout from oil spills once the oil is in tanker transport as well as where Federal jurisdiction covers such direct problem on land, either through the fact that the land is Federally managed, or some affected species is federally protected, etc.

The Regional/Provincial View

A mega project with environmental issues that crosses any boundary and which might cause externality issues in areas that otherwise don't directly benefit from things like employment and taxation put regional and provincial governments in direct opposition unless compensated somehow for the potential problems down the road.

This is where the First Nations come in as well - they have a vested interest for example in the territory a pipeline crosses or where a tanker might spill, yet unless there are agreements put in place and funded during the lifetime of the project, there is little reason for them to support such a plan.

Towns and cities, as well as the province, will need to increase infrastructure to cope with the construction activities, yet since these activities have a definite end that is not all that far in the future, the pay-back for this increase in today's expenditures can't be spread across the project as a whole without some sort of up-front agreement that includes something like and ongoing (tax?) revenue stream, just for the fact that the pipeline is operating in and across the territory. Worse, some infrastructure will be put in place far from where the actual pipeline is being built, yet it still has to be paid for somehow. Just saying that "the payroll and sales taxes from the construction activities will cover this" is blind to the facts and timelines; short lead times to having roads, water and other infrastructure in place and all up-front with little that generates direct economic benefit happening after the line is in use.

The same goes for First Nations and other territorial bodies. The fact that short-term (relatively in terms of the overall lifetime of the project) employment of construction workers will help the local economies ignores the fact that, for example, unemployment benefits and costs in the year following the finish of construction will not be fully funded by the insurance payments during the employment phase. The money has to come from other employees continuing to pay in. Similarly for things like workers' benefits for compensatable injuries (medical and long-term care) incurred during construction. These might continue (or transfer to some other general benefit) after the employment period ends.

All of this needs to be dealt with in some fashion where either premium payments (aka higher than normally charged for similar smaller but more frequent projects) are levied, or some long-term (taxation on goods passing through the area) agreement must be put in place up front. The problem is that various jurisdictions are limited in the types of taxes they may levy - cities typically can't tax goods, only land use and assets such as the pipeline infrastructure; but what if this infrastructure does not fall inside the territory, or is of minimal nature? Again, something needs to be put in place to address this type of problem.

Some will argue that the (projected) $200+ billion boost in the overall Canadian economy for NGP will deal with this, but the problem is one of getting the benefits of this boost into the hands of those who have had to deal with the direct costs. Typically the benefits will accrue to the Federal and other senior levels of government but in no particularly identifiable way, and the idea of simply waiting for the trickle down of this through transfer payments and other grants and methods that are not directly linked to the project at hand simply does not address the problem directly enough and leaves at minimum a cash-flow problem for those jurisdictions on the front lines.

No, some directly attributable method of accounting for and distributing the projected benefits during the lifetime of the project must be found and put in place as part of the overall funding scheme. The risks and cash-flow problems must not be allowed to simply fall off the table.

In the next and subsequent articles, I'll look at specific externalities and maybe how to deal with them so that it is a win-win situation all around.

richard

Tag: environment pipeline fossile fuel oil externalities