Donald Trump’s significant election win and the Trudeau government’s controversial emissions cap on the oil and gas sector are interlinked. Let me explain.
Economists and other policy experts often argue that climate policy ought to aim to meet our emissions targets in a way that minimizes the economic costs. This is typically characterized in macroeconomic terms. The goal is to have an inverse relationship between declining emissions and rising economic output.
It’s hard to see how the government’s emissions cap on the oil and gas sector conforms to this type of quantitative thinking. Singling out Canada’s most productive and export-oriented sector for its own emissions target—one that quite possibly requires lower production in the short and medium term—will doubtless create economic harm that economist Trevor Tombe has shown will extend across the national economy.
Yet that only tells part of the story. As high as the quantifiable costs may be, the qualitative ones may prove even worse for the economy and society.
Over the past quarter century or longer, there’s been a growing sense in many Western societies of declining middle-class opportunity and rising economic insecurity for median workers. This intuition is backed up by evidence.
As advanced economies have transitioned from a goods-producing economy to a knowledge- or service-based one, we’ve seen the relative demand for mid-skilled workers (typically defined as those with more education and training than a high-school diploma but less than a four-year degree) has fallen. The rise of what’s known as “job polarization” has created a labour market that looks something like an hourglass. There’s growing demand at the high and low levels of the skills distribution and decreasing employment opportunities in the middle.
The decline in manufacturing employment is a big part of the explanation. The manufacturing sector for most of the second half of the 20th century was the quintessential source of middle-class jobs. It consistently provided high levels of demand for mid-skilled workers—particularly men.
As manufacturing employment has declined due to a combination of technology and trade, most jurisdictions have lacked a comparable source of alternative demand for these workers. Although one doesn’t want to oversimplify too much, it’s fair to say that these labour market developments have played a key role in the growing sense of attenuation and insecurity that has come to mark modern society.
Canada has been something of an outlier on these issues. Although we’ve seen declining manufacturing jobs and mid-skilled employment overall, the latter has been far less marked than elsewhere. Our labour demand for mid-skilled workers has held up more than our peers.
It prompts the question: why? The short answer is Canada’s energy sector.
Economists like David Green and Kevin Milligan have documented the extent to which the natural resource economy in general and the oil and gas sector in particular have sustained middle-class demand in our economy. As Milligan has written: “Nothing has contributed more than natural resources to buttressing the Canadian middle class against the rapidly changing global economy of the 21st century.”
One way to think about it is this: as the manufacturing sector’s demand for mid-skilled labour systematically fell over the past three decades or so, the natural resource sector in general and the oil and gas sector in particular hoovered up a lot of the excess supply. The types of workers who would have otherwise been displaced and left to slide down the skills distribution into lower-paying jobs were able to find well-paying alternatives developing the country’s oil and gas resources.
The broad-based effects of this middle-class employment cannot be overstated. One can even argue that the oil and gas sector’s demand for mid-skilled labour has played a key role in protecting Canada from the social pathologies and political excesses that have marked other advanced economies.
These considerations—particularly in light of Trump’s re-election—shouldn’t be lost on Canadian policymakers. At a minimum, they ought to be cautious about how their policy choices affect one of the remaining sources of middle-class opportunity in the economy.
This is what makes the Trudeau government’s proposed emissions cap on the oil and gas sector so bewildering. Not only will targeting a high-value sector impose macroeconomic costs, but when also one accounts for its socio-economic contributions, the effects could be even more far-reaching. It risks contributing to declining mid-skilled labour demand, lower labour force participation rates (particularly for men without post-secondary credentials), and ultimately higher rates of inequality in our society.
The U.S. election demonstrates the political consequences. Trump’s electoral appeal on jobs, trade and immigration contributed to major gains with the types of voters who’ve been affected by job polarization and declining middle-class opportunity. These socio-economic trends have also been key factors in the rise of disruptive politics elsewhere in the advanced world. Why then would Trudeau government enact a policy like the oil and gas emissions cap which risks creating those conditions here?
If Ottawa wants the oil and gas sector to do more on emissions reductions, it could consider accelerating the rise of industrial pricing or increasing fiscal support. But singling out the sector with punitive measures is imprudent as a matter of statecraft. The risks far outweigh the benefits.
Canadian policymakers ought to recognize that the rise of job polarization and political populism are inextricably linked. This, of course, doesn’t mean that the government shouldn’t advance climate-change policies that may conflict with resource-based employment. But given the role that the oil and gas sector has played in sustaining middle-class employment and opportunity, we must be judicious in balancing the benefits and costs of different policy actions.
As Milligan rightly put it: “For Canadians concerned with inequality, the equalizing effect of resource development on our economy is too strong to ignore.”
If we ignore it, the costs and consequences could be significant. Trump’s re-election should be a salutary warning.
This article was made possible by the Canadian Association of Petroleum Producers and the generosity of readers like you. Make a one-time contribution today.
Sean Speer is The Hub's Editor-at-Large. He is also a university lecturer at the University of Toronto and Carleton University, as well as a think-tank scholar and columnist. He previously served as a senior economic adviser to Prime Minister Stephen Harper....
