This week, Press Progress and the Vancouver Sun’s Peter O’Neil reported that Kinder Morgan had quantified the economic benefits of oil spills in its application to expand the Trans-Mountain Pipeline from Edmonton, Alta. to Burnaby, B.C. Yes, the benefits of oil spills—they create jobs in the communities where the spills occur. Beyond being a public relations disaster for the company, this should lead us to re-examine what we accept as proof of the economic benefits of projects in general.
Companies facing regulatory hearings like Kinder Morgan, groups promoting events like the Vancouver Olympics, or politicians justifying public expenditures like the new hockey arena in Edmonton generally talk about the benefits of their projects using a tool called economic impact analysis. This technique takes spending, runs it through a statistical model, and predicts impacts of that spending on both GDP and employment.
There are, basically, two issues with this method, and both are wonderfully illustrated by the oil spill example. First, the method is agnostic as to what the money is spent on, so money spent cleaning up an oil spill looks remarkably similar to money spent building a new hospital or school in terms of economic impact. Second, the technique generally does not account for where the money comes from, or how it would otherwise have been spent. Money spent on a hockey arena in Edmonton might otherwise have been spent on light rail or tax reductions, both of which would also have economic impacts. In the case of an oil spill cleanup, the costs are likely to be directly incurred by an insurance company, but the premiums paid for that insurance come at the expense of the value of the oil transportation service—the higher the expected clean-up costs from oil spills, the higher insurance premiums will be, and this will mean higher pipeline tolls, which in turn implies lower profits, taxes, and royalties on the products shipped. Simply-put, there’s no free lunch.
Read more at Maclean’s Magazine.