Should Canada slap a new tax on oil & gas industry profits? & More News Here

With no clear finish in sight to rising power prices, might a U.Ok.-style windfall tax on the income of Canada’s oil and gas producers be within the playing cards as Ottawa appears to be like to ease the pressure on family budgets?

If inflation continues to run sizzling and costs on the pumps stay excessive, Ian Lee, an affiliate professor at Carleton University’s Sprott School of Business, says the thought might make its means throughout the pond in time for the federal government’s Fall Economic Update.

“It would allow the government to stand up in the House of Commons and say they’re doing something about the problem,” Lee mentioned in an interview. “I don’t think it makes economic sense, but with the political optics of it, I wouldn’t be shocked if they did.”

Last week, U.Ok. Finance Minister Rishi Sunak introduced a non permanent 25 per cent windfall tax on what he described as “extraordinary profits” booked by firms within the nation’s oil and gas sector. Sunak says the extra tax contains an “investment allowance” to encourage firms to re-invest their income. The measure was introduced alongside a $18.9 billion package deal to assist these struggling to pay rising power payments.

The tax represents an about-face for Boris Johnson’s authorities, which beforehand dismissed the thought as dangerous to funding in power. The transfer by Downing Street follows efforts by European governments, together with Germany, France, Italy and Spain, to melt the blow for customers by slicing taxes and issuing gasoline rebates.

Meanwhile, lots of the oil and gas firms that benefited from surging commodity costs within the wake of Russia’s invasion of Ukraine have signalled plans to pay down debt and enhance shareholder payouts, relatively than pour extra funds into boosting oil manufacturing or adopting climate-mitigation applied sciences.

Oil continued to rally on Tuesday, following information that European Union leaders reached an settlement on a partial embargo of Russian oil. Patrick De Haan, head of petroleum evaluation at GasBuddy, referred to the news in a tweet on Monday, writing “this is your warning – today is the calm before the storm” for gas costs.

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Lee agrees with the U.Ok. authorities’s first evaluation, saying Ottawa’s “unlimited taxation power” shouldn’t be used to select winner and loser industries inside the financial system. Doing so, he says, would ship the flawed message to traders trying to deploy capital in Canada. If a U.Ok.-style windfall tax have been to be proposed, Lee recommends the federal government couple it with a non permanent lower to the excise or gross sales taxes customers pay on gasoline.

“Governments in the past have declared temporary tax holidays in recessions, so there is a precedent for it,” he mentioned, referring primarily to provincial governments.

“We know that the cost of living is a real concern for Canadians,” Adrienne Vaupshas, press secretary for Deputy Prime Minister and Finance Minister Chrystia Freeland, wrote in an e-mail to Yahoo Finance Canada in response to questions on measures to handle rising power prices. “That is why affordability was at the heart of the budget released last month.”

While borrowing from the U.Ok. playbook might sound like a tempting concept to fight rising prices, power industry specialists warn that evaluating the 2 nations is extraordinarily difficult, given the position of provincial governments in Canada’s power industry, and the royalties linked to the value of oil that firms pay.

“[The] U.K. vs here is not comparing apples-to-apples on many dimensions,” mentioned Peter Tertzakian, ARC Energy Research Institute’s deputy director, in an e-mail. “Windfall royalties are baked into our royalty formulas through the sliding scale structure. The higher the oil and gas price, the higher the royalty rate.”

The U.Ok. authorities abolished royalties from its oil and gas fiscal regime in 2003.

Tertzakian was a member of Alberta’s 2015 royalty evaluation panel. It issued a report rating the U.Ok. eighth on a checklist of 15 oil and gas-producing jurisdictions most analogous to Alberta.

Kevin Krausert, a former oil area companies govt and CEO of Avatar Innovations, says a windfall tax in Canada could be “counter-productive and work against both outcomes the public wants – lowering the price of energy and emissions.”

“What policymakers need to do is incentivize energy producers to invest in energy transition technologies with these windfall profits,” he added. “This is the only way to lower energy costs in the short term and lower emissions in the medium.”

Werner Antweiler, director of the Sauder School of Business Prediction Markets on the University of British Columbia, referred to as the thought “a popular sentiment,” however one which’s in the end “ill advised.” He warns a windfall tax would disrupt funding in an industry recognized for excessive increase and bust cycles.

“Windfall taxes would do nothing to reduce the high price of crude oil and refined petroleum products. In Western/democratic countries [it] would also distort the within-industry capital allocation, because it would punish investment in Western countries while leaving investments in OPEC countries (many of which are not democratic) in a more advantageous position,” he wrote in an e-mail. “Do we really want to boost OPEC’s power?”

Roger McKnight, chief petroleum analyst at En-Pro International, says a higher approach to pacify annoyed customers could be to cap the value at which the federal and provincial governments cost HST on the gasoline pumps.

“As this is a percentage, not a fixed amount, and is charged at the end of the pricing train, the higher the end price goes, the more cash goes out of the consumer’s wallet and into various government bank accounts,” he mentioned. “My observation would be that perhaps the oil industry isn’t the only one profiting from high petroleum-related pricing. Government cash tills also benefit from an influx of oil revenue.”

Dan McTeague, president of Canadians for Affordable Energy, says “moves by governments to choke off production, regulation, [lack of] take-away infrastructure and ESG mandates have played no small role in undercutting supply that is falling short in addressing burgeoning global demand.”

Lee, of Carleton University’s Sprott School of Business, agrees.

“We are making a mistake. Not in trying to decarbonize, but in beginning to shut down existing energy supplies before we build alternative energy infrastructure,” he mentioned.

“We put the cart ahead of the horse.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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