Back to the future on energy and the constitution

By: on December 13, 2017 |

Among the unsung accomplishments of Stephen Harper’s ten-year reign in Ottawa was keeping Quebec largely out of the headlines. For Canadians who endured decades of recurring Quebec-centred turmoil, including terrorism and martial law, endless and costly appeasement efforts, and two secession referenda, this new state was a distinct relief. Although Harper engineered a placating motion recognizing the Quebecois as “a nation within a united Canada”, it was a cost-free gesture that bucked Ottawa’s habit of combining political or economic bribes to Quebec with attempts to loot resource-producing provinces. The Conservative prime minister mostly left the wealth-generating provinces alone to do what they do best. There was plenty to like about his pragmatism but, as with other aspects of his approach, too few voters noticed the benefits.

This element of the Harper legacy is unravelling. Storm clouds are gathering around energy and constitutional issues and Canada may be headed for another period of punishing East-West conflict. As in the 1970s and early 1980s, a left-leaning Liberal prime minister surnamed Trudeau is simultaneously beholden to Parliamentary math requiring assiduous attention to the sensibilities of Ontario and Quebec, and indifferent or hostile towards resource-producing provinces and their political values, particularly Alberta. As before, Alberta feeds the federal fiscal maw to an astonishingly disproportionate degree, even in the depths of an economic downturn, while its contribution goes entirely unappreciated.

The last time around, Pierre Trudeau initially had his hands full with Quebec separatism and it took him most of a decade to come after Alberta. In today’s iteration, the Liberal prime minister is wasting no time. Trudeau the Younger has ramped up federal spending to benefit mainly the subsidy-consuming provinces, introduced a federal carbon tax that will vastly disadvantage Alberta and Saskatchewan versus Ontario and Quebec, altered the National Energy Board’s mandate in an arguably unconstitutional manner to make it all but impossible ever to approve another major pipeline, piled on subsidies to Quebec-based Bombardier, and suggested of Alberta’s oil sands that Canada needs to “phase them out”. With the complicity of an NDP government in Edmonton, the carbon tax alone sets up a massive new west-to-east wealth transfer. In its fiscal impact and moralistic posturing, it evokes the elder Trudeau’s National Energy Program. NEP I was done in the name of national unity; NEP II has the even more grandiose goal of “saving the planet”.

Quebec’s political intelligentsia, always on the lookout for new opportunities and once again sensing weakness, are beginning to float new demands and gird for battle. Last summer, the Quebec Liberal government marked Canada’s 150th anniversary by re-releasing a familiar constitutional wish list titled “Our Way of Being Canadian”. Premier Phillippe Couillard said the document was intended to “start a dialogue” leading to constitutional negotiations. As ever, it was also intended to emasculate the separatist Parti Quebecois. And, this time, to head off the surging Coalition Avenir Quebec (CAQ), a new federalist opposition party which also has a clutch of constitutional demands. Prime Minister Trudeau has said his government has no interest in reopening the constitutional can of worms, but what if Quebeckers elect a can opener in next October’s provincial election? Will the always-ominous question “What does Quebec want?” rise to the fore yet again?

This year’s debacle over the proposed Energy East pipeline suggests it already has. Energy East would have reduced Quebec’s dependence on imported oil (largely produced in countries with sorry environmental and human rights records) and generated large economic benefits in New Brunswick, the export point, as well as greatly aiding Alberta. Yet it became an eco-lightning rod in Quebec, presenting Justin Trudeau with the prospect of facing legions of angry, anti-pipeline Quebec voters in the next federal election. How to avoid this? Expanding the mandate of the National Energy Board to require it to assess the (alleged) upstream and downstream effects on climate change of new pipeline projects was more than grandiose virtue-signalling: it served electoral purposes. The new requirement drove the regulatory risks of Energy East so high that the proponent, TransCanada Corp., abandoned the $16 billion project. Liberal reaction ranged from shrugs in Ottawa to we-told-you-so from the Couillard government to celebration in the Montreal office of then-mayor Denis Coderre. Once again, when Alberta’s core interests clashed with the federal Liberals’ electoral calculations in Quebec, it was no contest.

Weakened from within

Add it all up and it looks like a trailer for a sequel to the 1980s energy and constitutional wars. But unlike last time, today Alberta is altogether unready for combat. Its current NDP government is at best half-hearted about supporting the province’s resource-producing industries, and its policy of conciliation (or appeasement) to gain “social licence” from left-wing anti-energy groups and other governments has stalled. Its relationship with the federal Liberals ranges from supine to servile. The NDP are further weakening the province by plunging it deeply into debt and discouraging international investment needed for future economic growth. In addition, in the 1970s and 1980s Alberta could usually count on strong support from British Columbia and, at times, Manitoba and Saskatchewan. While Saskatchewan under Premier Brad Wall has been very assertive about protecting its natural resources and constitutional status, Wall is retiring and his government’s future is uncertain. Manitoba has limited economic and political clout, while B.C. has morphed into an almost mortal enemy of Alberta’s economic interests.

Elected governments come and go, of course. But even if Albertans dump the NDP in the provincial election scheduled for the spring of 2019 and replace it with the new United Conservative Party under the redoubtable Jason Kenney, the province will still be short much of the intellectual weaponry it once had to defend itself against the Quebec-Ottawa axis of exaction. The arsenal included a loosely associated web of political scientists (centred on the so-called “Calgary School”), economists, foundations and advocacy groups, politicians, senior provincial government officials, outspoken and/or generous corporate executives, legal experts in private practice, and a singular publication that channelled, cheered on and amplified all these voices – the Alberta Report. These were the building blocks of a sturdy and long-lived political consensus that empowered successive provincial governments to advance Alberta’s interests within the Canadian federation.

Jason Kenney, celebrates as he wins the first ever leadership race of the Alberta United Conservative Party in Calgary.

No other province is as dependent for its economic well-being on a constitutional right that is subject to such relentless attack: ownership, control over the development of, and primary financial benefit from non-renewable resources. Alberta and Saskatchewan became provinces in 1905, but it took 25 years of struggle for them to wrest the same rights and control over Crown lands and natural resources that other provinces had from the beginning. It took another 50-plus years, including the battle over the NEP, to win the right to export energy products at world prices with minimal federal meddling.

Most provinces are chronically dependent on fiscal transfers from Ottawa, provided by the few net fiscal contributors, mainly Alberta. The “have nots” typically trade their votes – and self-reliance – for handouts. Alberta has no such tradition or culture of dependency. Its demographics – a younger population, higher labour force participation rate, lower unemployment and higher per-capita income than the national average – reliably produces a net outflow of tax dollars. Its industries, like its citizens and its government, are far less subsidy-dependent than industry in other provinces. These circumstances fostered a culture of independence, sometimes called “Alberta exceptionalism”, that powered one of the few provincial economies in the country that actually deserved to be called “sustainable”.

As a protégé of that culture, former prime minister Harper mainly kept Ottawa out of Alberta’s way, and the province enjoyed one of the longest, strongest periods of economic growth it has ever known. Perversely, these circumstances produced some of the most interventionist and incompetent provincial governments in Alberta’s history. Absent an enemy in Ottawa, the sclerotic old Progressive Conservative dynasty became Alberta’s worst enemy. Its actions shattered the province’s conservative political consensus, resulting in the 2015 election of what Kenney calls the “accidental” NDP government.

Progressive then, United now

If current polling trends hold, there will be a reinvigorated new United Conservative government in Alberta and a re-elected Trudeau Liberal government in Ottawa in less than two years. They will be completely at odds over energy policy and could well spiral into another national psychodrama over the Constitution – this time involving not only Quebec’s eternal wish list but also ever-escalating aboriginal demands for political sovereignty and control over land and resources.

It’s unlikely anyone in Alberta’s NDP government can bring themselves to contemplate these circumstances, let alone prepare for them. And everyone on the right has been preoccupied for two years with reuniting the province’s conservative movement and creating a viable new government-in-waiting.

Among the very few who have given serious thought to preparing for the next energy and constitutional battle is F.L. (Ted) Morton. At 68, he is one of the stalwarts of the Calgary School and a distinguished constitutional scholar, as well as a former provincial finance minister during the twilight years of the PC regime. Now semi-retired, Morton has developed a suite of constitutional objectives for Alberta and a strategy for attaining them.

His primary target is the federal equalization program. Created in 1957 and enshrined in the Constitution in 1982, it is designed to help all provinces achieve “reasonably comparable levels of public services at reasonably comparable levels of taxation”. In the beginning it was a relatively small national fiscal transfer program benefiting just a few provinces and mainly supported by tax revenues from Ontario’s then-muscular industrial engine.

Today, equalization is a massive “pie” of funding tottering atop a much smaller revenue base. It shifts more than $18 billion per year from the three remaining “have” provinces – Alberta, Saskatchewan and recently oil-enriched Newfoundland – to the “have-not” provinces, which now include Ontario. Quebec alone gets $11 billion per year – three times its level 15 years ago. “Whatever its original purpose, equalization has morphed into something seriously distorted,” says Morton. “Its perverse effects include allowing provinces to maintain anti-business, high-tax policies that drive out investment and jobs, and have those mistakes simply made up for by expanding their entitlement to equalization. The worse those provinces do, the more equalization they get.” The biggest beneficiaries of equalization, for example, all outlaw hydraulic fracturing, while Alberta uses it to generate wealth – including wealth that is transferred to provinces that won’t use fracking to unlock their own oil- and gas-bearing shale reservoirs.

Equalization is but one of five major federal programs that collectively hoover over $28 billion per year out of Alberta. The others are the Canada Pension Plan (CPP), Employment Insurance, the Canada Health Transfer and the Canada Social Transfer. In the period 2007-2015, Albertans’ net contribution to Canada totalled $221 billion, four times the province’s annual government spending and equivalent to two-thirds of its entire GDP in 2013. Some of this fiscal imbalance is due to Alberta’s younger population, which means there’s a greater than average proportion of people paying into the CPP and a lower than average proportion drawing benefits. But some programs are deliberately skewed to shrink federal transfers to “rich” provinces and expand them for “poor” ones. As a result, the latter sometimes end up with more lavish government programs. Albertans, for example, pay double the average university tuition and five times the daycare rates as Quebeckers. The programmatic imbalances are huge; simply by shifting a single program, the Canada Health Transfer, to equal per-capita funding in all provinces, the Harper government made Alberta less-worse-off by $2 billion per year.

Overall, though, the imbalance remains and Alberta is still paying the lion’s share of equalization, three-and-a-half years into its worst economic downturn since the Great Depression. “Why do we even have equalization anymore if Ontario’s a ‘have-not’ province?” wonders Morton. “The original premise of an economic powerhouse carrying the smaller provinces on its shoulders has been upended. The former powerhouse is taking handouts, and smaller provinces are carrying the nation.”

La meme chose pour Alberta

Morton’s proposed attack on equalization is two-pronged. First, assuming the NDP is unseated in 2019, he recommends Alberta’s next premier call a provincial referendum on a constitutional amendment to end equalization. Such a move would be based on the Supreme Court of Canada’s decision in the 1998 Quebec Secession Reference. It found that if a province conducts a referendum on a constitutional issue using a “clear question” that produces “a clear majority”, the federal government has “a constitutional duty to negotiate” the issue.

Morton’s second target is the formula used to calculate equalization transfers. It measures each province’s “fiscal capacity” – its ability to pay for public services out of revenues generated by “reasonably comparable” levels of taxation – as part of assessing its eligibility for equalization. The formula excluded provincial royalties from non-renewable resources until the early 1960s – just as Alberta’s oil and gas industry began generating significant revenue. Including money from non-renewable resources not only inflates the resource-producing provinces’ ostensible fiscal capacity, it enlarges the overall equalization “pot”, thus inflating equalization payments to the have-not provinces. “If the Leduc oil discovery of 1947 had happened in Quebec instead of Alberta, would royalties have been added to equalization? No way!” says Morton. “Or, if Ottawa had tried to add Quebec’s huge hydroelectricity revenues to the equalization formula, there’d be a national unity crisis the next day. There’s one law for Quebec, and another for Alberta.”

While a provincial referendum would have to focus on amending the Constitution itself, interpretations of constitutional law can be referred by a province to its court of appeals, and from there to the Supreme Court of Canada. This has been done numerous times, including by Alberta premier Peter Lougheed in fighting the elder Trudeau’s National Energy Program in 1980. Since royalties represent the one-off sale of a Crown asset such as oil, natural gas and related commodities, it seems dubious to consider them akin to a province’s ongoing “fiscal capacity”. Accordingly, Morton thinks Alberta should ask the Supreme Court of Canada for a referral decision on the constitutionality of including them in the equalization formula.

Ted Morton, of the Calgary School, advocates for the next premier of Alberta to launch a two pronged Constitutional attack to end equalization.

Going after equalization could have significant political appeal in Alberta. The law and formula may be complex, but the effects are measurable and, for many, infuriating. Even if successful, it would be largely a victory of principle, with modest impacts on equalization transfers. And the province would still be a massive net contributor to the federal treasury through natural demographic and economic imbalances and continued federal manipulation of statutory programs.

In addition, there’s always the risk of losing in court. “Seven of nine Supreme Court justices are from equalization-receiving provinces,” notes Morton ruefully. Still, he believes a referral is worth the attempt. Alberta’s decades-long and never-certain campaign for control of its natural resources in the first half of the 20th century included passing a law that it knew was unconstitutional, defending the law in court, and losing. Yet, in so doing it won in the court of public opinion, creating political momentum that eventually forced Ottawa to relent.

Perhaps something similar could be brought about with the equalization formula. The province has rallied around its provincial government during previous confederal disputes, especially when perceived federal pandering to Quebec is involved. The struggle over the NEP brought Peter Lougheed successive crushing electoral victories and some of the highest popularity ever recorded for a Canadian premier.

Quebec and Alberta, though at odds on so many issues and culturally so different, have occasionally banded together to protect themselves from federal intrusions. They were victorious allies, for example, in CIGOL v. Saskatchewan, the 1978 Supreme Court ruling that created a categorical distinction between taxes and natural resource royalties. They were also on the same side in the 2010 defeat of Ottawa’s attempt to impose a national securities regulator.

In each instance, Alberta and Quebec collaborated in developing legal arguments that won the day. “I think the likelihood of winning either case would have been much less if we hadn’t gotten Quebec as an ally,” says Morton. “The Supreme Court has proven at best inattentive and at worst hostile to provincial rights issues coming out of western Canada, with one exception: if Quebec ends up on the same side.”

Today, with Quebec preparing a new set of constitutional demands, is exactly the right time for Alberta to start assembling its own agenda – specifically the autonomy needed to maximize the value of its natural resources – while enhancing its bargaining position through an alliance of convenience with Quebec. The more Quebec needs or wants something, the stronger the opportunity for Alberta.

What Quebec wants

Some of Quebec’s new demands are likely to trigger a gag reflex in Alberta, including constitutional recognition of the “Quebec nation” and a singular veto over constitutional amendments. But several items would likely be supportable and indeed welcomed by Alberta. These include regaining the power for provincial governments to appoint superior court judges, providing for the creation of recognized provincial constitutions, and vesting final authority over their interpretation with the respective province’s court of appeal (rather than the Supreme Court of Canada).

On the question of equalization, any concessions by Quebec would have seemed inconceivable until last month, when CAQ leader Francois Legault made this astonishing statement in the National Assembly: “What I want to tell Quebecers is that a CAQ government will aim for zero equalization. A CAQ government will eliminate the wealth gap with the rest of Canada. A CAQ government will have ambition, will aim high for Quebec.” This could be dismissed as meaningless pot-stirring by a third-place party striving for attention but for the fact that the CAQ topped both the Liberals and the official opposition Parti Quebecois in a recent poll.

Even if the CAQ won next year’s election and tried to make good on Legault’s bold ambition, Morton predicts any future constitutional negotiations will be vicious. “Whether it was for premier Brownlee in the 1920s, premier Manning in the 1950s or premier Lougheed in the 1970s and 80s, Alberta has never received any concessions from Ottawa without fighting for them,” notes Morton. If Quebec attempts to reopen the Constitution, Morton thinks Alberta should seize the chance to transform an otherwise bone-wearying grind into “an opportunity for the next premier, and frankly for Jason Kenney right now as Alberta’s new Opposition leader, to throw down the gauntlet and declare that Alberta would support items allowing Quebec to add to its sovereignty and constitutional rights if Quebec were to agree to end equalization.”

And perhaps one other key item: the carbon tax. The idea of a national carbon tax was first mooted in 1990, under Progressive Conservative prime minister Brian Mulroney. The concept was immediately slammed as unconstitutional and, at one point, Mulroney’s entire Alberta caucus reportedly threatened to resign if he did not drop the idea. He did.

When the Liberal government of Jean Chretien signed the Kyoto Protocol in 1998 and tried to revive the carbon tax, there were reports that then-Alberta premier Ralph Klein would introduce legislation declaring carbon dioxide a natural resource (rather than a pollutant). This would have set the stage for a constitutional challenge against attempts to regulate CO2 emissions within Alberta (since regulation of natural resources falls within provincial jurisdiction). Klein never did so, however. But this discarded idea offers intriguing possibilities were another Conservative government under Premier Kenney to repeal the Alberta NDP’s carbon tax and the Trudeau government in Ottawa responded by trying to impose a national levy in its place. Declaring CO2 a provincial resource before or concurrently with repealing the provincial carbon tax would signal powerfully that Alberta was prepared to contest every inch. Might it even deter Ottawa?

At minimum, discussion of these issues could help reinvigorate Alberta’s atrophied intellectual capacity in the areas of provincial rights and constitutional law. The alternative is to stand by, as the province’s current NDP government is doing, and let policymakers in Ottawa and Quebec decide Alberta’s economic and constitutional fate.

This would be akin to what happened in the mid-1980s, when Alberta’s PC government under premier Donald Getty agreed to a “Quebec Round” of constitutional talks in return for a vague promise that it would be followed by discussion of the needs of smaller provinces like Alberta. The duplicity of the Mulroney government in Ottawa and the complacency of the Getty government in Alberta fuelled the rise of the Reform Party which, after seven years of bitter constitutional fighting, succeeded in defeating the Charlottetown Accord.

Memories of all those epic late 20th century battles over energy policy and the Constitution are still coursing through Alberta’s political DNA. With a Trudeau in the PMO, Alberta’s energy future under siege, and Quebec hungering for constitutional change, the stage appears set for another western rebellion.

 


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About George Koch

George Koch is a veteran Calgary journalist who covered the constitutional and energy wars of the 1980s and 90s for Alberta Report magazine.