Nov 8, 2010

Feds got it right on Prosperity


The federal government made the right decision in rejecting the Prosperity mine proposal. The project would have had significant adverse environmental effects, and that for some is reason enough to deny approval. But even if one were willing to accept the environmental impacts because of the economic benefits the project would have offered, it is not at all clear that there would in fact have been net economic benefits that could offset the adverse environmental effects.

One of the great weaknesses of the environmental assessment process is that it does not properly address the economic benefits and costs of the projects being reviewed. Project proponents, including the provincial government in this case, simply tout the amount of employment, income and taxes the project is estimated to generate. However, they do not consider what the economic benefits of those impacts would be, and what economic costs also need to be taken into account.

Though generally lost in the press releases promoting different projects, there is a big difference between the number of jobs associated with a new project, and the economic benefit those jobs actually offer. The amount of benefit depends on what those hired would otherwise be doing. They would not all have been unemployed, which is effectively what one has to assume to equate number of jobs with benefit.

The same is true for the tax impacts. The estimated amount of taxes generated by a project does not properly measure the benefit to government. Some of the personal income taxes would have been paid in any event. The estimated corporate taxes are uncertain and typically deferred for many years, greatly reducing their present value. And the taxes would in part be offset by increased demands for government services due to any inflow of families into the region or province due to the project.

When the province concluded after its Environmental Assessment that the Prosperity project was justified by the economic benefits it would generate, it didn’t bother to estimate what the magnitude of those benefits would in fact be. It ignored the difference between impacts and economic benefit. Further, it failed even to recognize there would be very significant economic costs because of the large amount of electricity the mine would need – an amount roughly equivalent to one-sixth of the output of the proposed Site C hydroelectric dam.

The problem very simply is that the rate a large industrial customer like Prosperity pays BC Hydro for the electricity it uses less than half the cost of new sources of supply. BC Hydro would have lost at least $35 million per year, possibly much more, to acquire and then sell to Prosperity the electricity the mine would have needed.

It doesn’t matter that Prosperity would have paid the same electricity rate as other large industrial customers. Nor does it matter that as a matter of policy the provincial government has directed BC Hydro to sell power at rates that reflect its historic average costs, not the cost it is incurring to acquire new supply today. The fact remains that BC Hydro would have lost a lot of money if Prosperity were to go ahead – a loss that ultimately would be borne by all existing customers. And that is an economic cost of the mine going ahead that needs to be recognized in any balanced assessment of benefits and costs.

Economic-environmental trade-offs are often central in public policy debates. The province supported the Prosperity project because it considered the economic benefits to outweigh the environmental costs. The federal government decided otherwise.

Inasmuch as trade-off issues like this will no doubt arise again, possibly with Prosperity and almost certainly with other projects, one of the lessons from Prosperity is that major project assessment processes should carefully consider what the economic benefits and costs in fact are. There are well established principles by which this can be done. Important public policy debates should be informed by more than promotional press releases about taxes and jobs.

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