The Future of Business in the U.S. Meet the Contenders

These disparities in annual GDP growth rates may look little, but over time, they add up to significant differences in the economy's overall output. For example, under the high oil price scenario, the difference in real GDP by 2050 is around $200 billion, or roughly 7% of GDP at the time. This is the GDP cost of choosing the production phase-out method over the aggressive decarbonization approach. This GDP drop is similar to double the size of Canada's recession during the 2008 Global Financial Crisis, but unlike that recession, which lasted slightly more than a year, the GDP cost in Table 1 is permanent. In comparison, in the low-world-oil-price scenario, the 2050 GDP difference is around $27 billion, or just under 1% of GDP at the time. In this scenario, the phase-out of oil and gas production still has an economic cost, but because that output is less valuable on global markets, the cost of surrendering it is smaller.These findings emphasize three key factors. First, in most plausible scenarios, ceasing oil and gas production would harm the Canadian economy—

for the simple reason that we would be foregoing economic 

activities that would otherwise provide national revenue. Second, the size of that cost is heavily influenced by the global backdrop, particularly the world oil price. The higher the global oil price, the more expensive it will be to phase out oil and gas production. Third, the cost of the production phase out is "excessive" in the sense that it is unneeded; a lower-cost policy solution can achieve the same emissions goal.One final note on the results in Table 1. These possibilities assume that DAC technology is unavailable and that CCS costs are intermediate. However, if DAC technology becomes accessible within the next three decades, or the costs of CCS technology fall dramatically, the appeal of fossil fuels will increase. As a result, the possibility of rising global oil prices increases. In other words, while most conceivable scenarios show a clear and considerable GDP cost associated with the phase-out of Canadian oil and gas production, this cost would be even higher if CCS and DAC became more widely available and cost-effective.

What about employment and salaries under the two policy approaches? 

Given the negative impact on real GDP of implementing a manufacturing phase out, one would expect Canadian jobs to suffer severely. However, the "general equilibrium" model used in the PPF/Navius report assumes that all markets, including labor markets, are brought into equilibrium by adjusting relevant market prices—in this case, real wages. As previously stated, this "full employment" assumption is problematic when dealing with short-run business cycle fluctuations; nevertheless, for long-run assessments involving technological progress and economic growth, this assumption is far more plausible.With the premise that real wages adapt to maintain labor market equilibrium, we can acquire a clearer picture of how the whole economy would likely respond if Canadian policy mandated a phase-out of oil and gas production. This phase-out would inevitably lead to a reduction in employment in that sector. Those displaced workers would eventually find work in other industries, but only after their real pay fell. 

The overall amount of employment in the economy would 

be essentially unaffected, as it is mostly determined by changes in worker preferences and labour supply. However, the labor force would be shifted among sectors, away from oil and gas and toward many other industries that would grow as a result. It should be noted, however, that workers would be leaving a sector with extremely high labour productivity (oil and gas production) and being reabsorbed into sectors with significantly lower labour productivity on average. Thus, while overall employment in the economy would not be considerably impacted, total revenue accruing to workers and overall national income (GDP) would fall, probably dramatically—as the figures in Table 1 clearly show.2 Alberta's GDP under both policy approaches We examined the potential cost to Canadian GDP of phasing out oil and gas production as part of a larger climate policy package. Given that Alberta produces the majority of Canadian oil and gas, it should come as no surprise that the economic impact of this policy approach will be focused there. But how great of an influence would it be?Table 2 below presents the same analysis as Table 1, but only for Alberta. The average GDP growth rate from 2020 to 2050 is illustrated for the two alternative policy approaches, assuming the intermediate scenario and three possible world oil prices.Table 2 shows the average annual GDP growth rate (2020-2050) at different world oil prices.To begin, in the aggressive decarbonization policy package, the Alberta economy shows average GDP growth rates of more than 1 percent per year even when the global oil price is low, and a significantly higher growth rate (due in part to increased oil and gas production) when the global oil price is high.