Alberta should consider compensation for B.C., economists say

By Karen Kleiss, Edmonton Journal July 25, 2012

EDMONTON – Leading environmental economists say British Columbia’s demand for a “fair share” of Alberta’s oil money may be unprecedented and politically explosive, but it makes economic sense for Alberta to give compensation to B.C. for bearing the environmental risks of a heavy oil pipeline to the West Coast.

B.C. Premier Christy Clark said Monday B.C. won’t support the proposed Northern Gateway pipeline unless her province is compensated for shouldering all of the marine environmental risk and more than half of the risk related to a potential spill on land. Premier Alison Redford has rejected the idea.

Robert Mendelsohn, an environmental economist at Yale University in Connecticut, said offering compensation might get the Northern Gateway pipeline built and could also help secure approval of the Keystone pipeline to the United States.

“This (pipeline) is terribly important for Alberta, but not so much for B.C.; they are taking lots of risk and getting nothing for it. That idea — that nobody wants to take risk for no benefit — that’s an age-old phenomenon,” Mendelsohn said.

Government and industry typically respond to this problem by trying to reduce the risk as much as possible, he said, but “at some point it ends up becoming preposterously expensive to continue to reduce the risk further.

“And there is always a residual risk. The question is, how do you cope with that? Historically, people have gone too far on the risk reduction side, and they’ve not explored enough of the compensation side.

Mendelsohn said compensation is a good way of resolving that residual risk. While making a grab for Alberta’s royalties is likely to hit a raw political nerve, funding a public project, for example, could be “a political win-win for everybody.

“It’s certainly a way of resolving these political debates, where there are some people who are losing a little bit, but where if we don’t do the project, society loses in a big way. We’ve got to do better than allowing local groups to hold an entire society hostage, especially if the local people are making a reasonable claim.”

Mendelsohn added: “This debate might actually free up the American debate as well. The problems the Americans are having with the (Keystone) pipeline were minor, as far as I can tell, and should be easily compensatable.”

Utah State University environmental economist Arthur Caplan said economists first started working to quantify environmental risk after the 1989 Exxon Valdez spill in Alaska, so the idea is relatively new. After the spill, a blue-ribbon panel of Nobel Prize winning economists tried for the first time to assign economic value to damaging something that is not consumable, such as a pristine wilderness.

The idea of compensating B.C. for taking environmental risks — instead of environmental damages — is a small but significant evolution of that idea.

“If the benefits of this pipeline are that great, then I don’t think this idea of compensation is far-fetched at all. But once you start factoring in the political history, then you’ve got an issue,” Caplan said. “Politically, people can’t accept that. People always say, well, I sacrificed and nobody ever compensated me. But two wrongs don’t make a right.

“I would think it would be even more in Alberta’s interest to compensate and say: ‘We’re not going to play this game.’ Just stand up and say: ‘If we can accurately quantify what the … risk of damages are to B.C., let’s break the pattern here, let’s break the mould.’

“Set a new precedent, a softer political path. … Isn’t that going to open the floodgates? That’s a really good comeback. But if you really believe … the benefits so far outweigh the costs, then there is room for compensation.”

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