This column by Armine Yalnizyan was originally published by the Toronto Star on Wednesday October 19, 2022. Armine is a Contributing Columnist to Toronto Star Business featured bi-weekly.
It’s a low of 3 C in Ottawa as I write this column. Sweater weather to be sure, but nothing compared with what’s predicted to be a bone-chilling winter. If you think you’re shivering now, just wait until the shock of your next heating bill sets in.
Enbridge Gas Inc., which serves approximately 75 per cent of Ontario residents, adjusts its prices every three months, and on Oct. 1, a new rate increase kicked in after the Ontario Energy Board approved a hike of five to 10 per cent. That comes on top of a rate hike in July of between 18 to 23 per cent. Some households will be paying $500 more than last year. Commodity prices are double what they were this time last year.
Energy analysts say the price we pay for heating could double this winter. That’s gruesome math for a million or more Canadian households struggling with “energy poverty,” whose cold choice could be between heating and eating.
At the same time, as global commodity prices have risen, Canadian corporate profits and profit margins in the oil and gas sector have soared faster than any other major sector of the economy.
How high will prices go? And what will governments do about it? There’s a remarkable experiment in politics-meets-policy unfolding right now that we should be watching very closely.
With a cold winter looming large, and in light of gas prices that have almost doubled since last year, the European Union moved recently to cap energy company revenues and charge a “solidarity” levy of at least 33 per cent on excess profits, defined as 20 per cent more than the average over the last four years.
Governments expect to collect $140 billion (U.S.) to plow right back into their efforts to reduce energy use, shift to renewable sources, and help consumers with their bills. Spain, Italy and other smaller European nations had already passed such “windfall tax” legislation on energy firms. This just broadened the approach.
The move begs the question: Why not here?
Not one Canadian party has addressed the soaring escalation in profits for commodity producers, particularly in oil and gas. Not the Official Opposition, who rail against both federal action and inaction; not even the NDP, who rail against corporate greed in the food sector, but are less outspoken on soaring prices in oil and gas.
One reason: the placement of any limits on the energy sector in Canada became the third rail of public policy after Ottawa’s National Energy Program in 1980. Touch it and risk death.
Plus, big profit windfalls mean big revenues. That’s why Alberta turned a pandemic deficit into a $13.2-billion surplus this year; and why the federal deficit fell to $25.8 billion in a year from $97 billion last year, less than half the original forecast.
This isn’t the first time governments have dealt with the promise and problems of excess profits. The U.S. and Canada capped prices and taxed excess profits during the First and Second World Wars and the Korean War.
Today’s war, Russia’s invasion of Ukraine, triggered action by individual European nations to limit the predictable increase in prices and profits. Since drastic falls in supply guaranteed soaring global gas prices, on Sept. 14, a Europe-wide plan to tame energy inflation was introduced: set price caps, define “windfall” profits and tax them.
Incredibly, by Sept. 30, the 27 fractious members of the European Union voted yes to windfall taxes. They are working through details of where to apply price caps, which are always difficult and controversial, especially where energy is concerned.
That’s because energy companies have outsized political influence, everywhere. They routinely balk at anything that erodes their profits, citing concerns about less money for future critical investments, even as today’s prices hobble current users.
In the energy sector, price controls usually mean subsidies to the consumer by the taxpayer; more an apology than a limit. That’s effectively what the government of Ontario is doing: spending $7 billion of public funds just this year to cap electricity bills for residents and industry.
Price controls have also proved to be a double-edged sword historically in Canada. In response to the oil price spikes of the 1970s (and after first dismissing them), then-prime minister Pierre Trudeau introduced wage and price controls in 1975. They ended up mostly as wage controls.
Still, the dynamics of the moment provide room to act; and the contours of the European approach to soaring energy prices — timely, targeted and temporary — are applicable here, leading to action that could help millions of Canadians.
When governments try to decide what private sector prices should be, it’s a torturous, long and often reversed process — unlike the savvy PR move to freeze prices on 1,500 No Name products until the end of the year by Loblaw Co.
But defining and taxing “excess profits” is actually quite straightforward. It has historic precedent and policy heft, and not only in the distant past.
In the April 2022 budget, the federal government brought in a one-time 15 per cent tax on domestically generated bank and insurance company profits over $1 billion, and a 1.5 per cent surtax on incomes over $100 million in the financial and insurance industries. Modified since the budget, this measure will yield $5.3 billion in revenues over the next five years.
Even though the Official Opposition, several provincial governments and many economists would argue there is no such thing as excess profit, only profit and more profit, profitability in the oil and gas industry has been spurred by global commodity prices, not productivity, innovation or good management. We are witnessing a classic case of windfall profits, in real time.
Yes, Virginia, there is such a thing as excess profit, in reality if not in theory.
Why not put that cash to good use? Excess profits could help us get through what promises to be a winter of excess hardship for too many people.