Clean Energy Manufacturers Spared from Rising Petro-Dollar Job Losses

Canada's clean economy has so far been spared the damaging effects of 'Dutch disease' caused by oil sands exports. How long can it last?

Ontario Premier Dalton McGuinty tours Essar Steel Algoma, which manufactures ste
Ontario Premier Dalton McGuinty (right) tours steel manufacturer Essar Steel Algoma. The company makes steel that is being used to build wind towers for turbines. Credit: Ontario Liberal Party

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Canada’s oil sands boom is pitting two Goliaths of its economy against each other—the oil sands industry in Alberta and the country’s manufacturing sector, based largely in the eastern provinces of Ontario and Quebec.

Since the early 2000s, manufacturers have shed more than 600,000 jobs, affecting industries ranging from auto parts to lumber. Many analysts say the timing is no coincidence. Production of tar sands crude began booming at that time—the wild growth in the sector sent the value of the Canadian dollar to all-time highs, making it tough for suddenly high-cost Canadian goods to compete in export markets.

This phenomenon has a name: Dutch disease. It was coined in a 1977 Economist article that detailed how the discovery, extraction and export of natural gas in The Netherlands drove up the value of its currency. The rise nearly wiped out the country’s non-booming manufacturing sector.

Amid Canada’s presumed outbreak of the affliction, however, there appears to be one bright spot: the fledgling clean energy economy. “I don’t think we’ve seen any casualties as a result of Dutch disease in the clean energy manufacturing sector,” said Keith Brooks, program manager for Blue Green Canada, an alliance of labor unions and environmental groups.

The reason is simple. So far, makers of solar panels and wind parts in Ontario—home to most of the country’s renewable energy manufacturers and installations—haven’t had to tap export markets to generate income. That’s mainly because of a mandate requiring that at least 50 percent of components used in Ontario’s renewables installations be made by Canadian suppliers.

Concerned that the rule might eventually lapse, however, local clean energy advocates are starting to ask whether clean energy manufacturers could compete abroad if domestic demand dropped off.

The answer is probably no, according to some of the economists and experts interviewed for this story. If the dollar keeps rising on the back of the oil sands boom, they said, it would harm the cleantech sector’s chances in a market dominated by cheap products from countries like China.

With a strong currency, “it will not be easy for Canadian manufacturers to export clean energy products,” said Serge Coulombe, an economics professor at the University of Ottawa.

Oil Sands and Dutch Disease

Alberta’s first oil sands mine opened in 1967, but for decades output was insignificant because it was too expensive to exploit.

Compared with pumping conventional oil up from a well, tar sands production consumes a lot of energy, adding significantly to operating expenses. It requires extracting a mixture of sand, clay and bitumen—a relatively dirty grade of oil—from deep beneath Alberta’s boreal forests. The bitumen must then be upgraded into a product that can be piped and refined.

The oil sands sparked interest of oil majors in the early 2000s, as oil prices increased and technologies improved, making it worthwhile to extract the bitumen. Today, tar sands crude accounts for about 70 percent of Canadian oil exports, the bulk of which is shipped to refineries in the U.S. Midwest.

The Alberta government expects oil sands production to more than double within the decade—but not without costs.

Environmental effects of oil sands production include the loss of forest and wetlands, waterway contamination and rising greenhouse gas emissions. One economic effect of the boom has been to push the Canadian dollar up against the U.S. dollar.

The Canadian dollar, worth just 62 cents ten years ago, is now about equal in value to the U.S. dollar—helping oil sands producers and the Alberta government, but harming Ontario and Quebec, where three-fourths of the nation’s manufacturers are located. Companies that ship goods like car parts, lumber and wood pulp primarily to the United States saw their competitive edge slip as the Canadian dollar climbed, even before the recession curbed U.S. appetite for exports.

Manufacturers shed 322,000 jobs—one in seven positions—between 2004 and 2008, according to the federal agency Statistics Canada. Nearly all were in Ontario and Quebec. Ontario lost 198,600 jobs and Quebec lost 86,700 positions during that four-year period.

Analysts have attributed some of the job losses to other factors, such as the sluggish U.S. construction market and declining newspaper sales. At least 36 percent of all layoffs were due to Dutch disease, said Coulombe, the University of Ottawa economist. He based the figure on findings from a 2009 study he co-authored with economists at the Universities of Luxembourg and VU Amsterdam.

Last month, Robyn Allan, a prominent Canadian economist and former CEO of Insurance Corporation of British Columbia, affirmed the concerns raised by labor unions on the impact of oil sands production to manufacturers.

“The phenomenon of Dutch disease is real,” she wrote in an analysis to the National Energy Board, a federal agency. The board is considering an application from Enbridge Inc. to build a $5.3 billion twin oil pipeline system. The controversial Northern Gateway pipeline would pump 525,000 barrels of Alberta oil sands a day to a new marine terminal in Kitimat, British Columbia, for export.

Allan, who supports oil sands development, said the pipeline would continue to drive up oil prices, appreciate the Canadian dollar and raise inflation. “The crowding out of Canada’s manufacturing sector will be more intense with the Northern Gateway than without it,” she wrote.

The issue has reached the top of provincial politics. On a February trip to Chicago, Alberta Premier Alison Redford called on Ontario to show more support for tar sands production. Dalton McGuinty, the Ontario Premier, lashed back, blaming Canada’s high “petro dollar” for his province’s battered export sector.

Still, not all economists agree that Dutch disease is infecting the Canadian economy. Benoit Durocher, a senior economist at Montreal-based Desjardins Group, a financial services firm, told InsideClimate News that the inflated Canadian dollar would have to “almost erase the manufacturing sector” for the term to be properly applied.

More than 1.7 million people work in Canada’s manufacturing sector, or 10 percent of the country’s workforce—down from 14.4 percent of all employment in 2004, according to Statistics Canada.

Clean Energy Still a Bright Spot

As traditional manufacturing industries fired workers and closed factories during the past decade, Canada’s clean energy industry took off, said Brooks of Blue Green Canada.

In Ontario, 30 solar panel and equipment makers employ nearly 3,000 people, and four wind turbine plants employ 1,000 workers, according to figures compiled by InsideClimate News using Blue Green Canada data.  There were three solar manufacturers and two wind companies in Ontario in 2009, Brooks said.

Overall, the Ontario government estimates that some 13,000 people now work in the province’s still-small clean economy, compared with nearly 90,000 people in its automotive sector and more than 40,000 people in the lumber and paper industries. Ontario expects to have 50,000 clean energy jobs by 2018.

Ontario’s solar and wind companies are least affected by the tar sands-related phenomenon because “they have a vibrant domestic market to produce for,” said Charles Campbell, research director at the United Steelworkers union, a member of the Blue Green alliance.

Local demand helps buffer domestic green firms from the strong Canadian dollar, he noted, because both makers and purchasers of clean energy goods use the same currency.

Ontario’s Green Energy and Green Economy Act of 2009 is the main driver of domestic demand. The policy established a feed-in tariff that requires utilities to buy electricity from solar plants or wind farms at above-market prices so renewables can compete with fossil fuels.

The key piece of the policy is a “domestic content requirement,” which requires wind projects to source at least 50 percent of components from Canadian companies, while solar photovoltaic projects must get 60 percent of the parts they use from local suppliers.

To date, nearly 4,800 megawatts of renewables projects have feed-in tariff contracts, or about one in seven installations, according to a report by the Green Energy Act Alliance, an advocacy coalition, and Shine Ontario Association, a solar trade group.

The feed-in tariff was passed in part to help Ontario phase out all coal-fired generation by 2014, and to slash its greenhouse gas emissions. The provincial government says it is on track to shut down 19 coal units at five coal plants within the next two years.

But the renewables incentive was also an effort to replace the hundreds of thousands of traditional manufacturing positions lost in Ontario over the past decade, said Gillian McEachern, deputy campaign director for Ottawa-based Environmental Defense Canada—in a sense, acting as a hedge against Dutch disease effects in other sectors.

“The green energy act was a happy marriage between being able to create new manufacturing jobs and [addressing] the problems related to climate change,” she said.

Will the Clean Energy Sector Get Infected?

Ontario’s clean energy manufacturing base is expected to remain resilient in the short-term, experts said. But some aren’t convinced the industry can grow if rampant tar sands production keeps boosting the Canadian dollar.

Tapping into export markets is key for new industries like clean manufacturing to stay competitive, said Coulombe, the co-author of the 2009 analysis of Canada’s Dutch disease.

Coulombe said that shipping solar panels and wind turbines to the United States and elsewhere “will not be easy.” To do so, he said, manufacturers would have to improve productivity—meaning, they would have to spend fewer resources and hours to produce the same goods—by “around 20 percent because of the Dutch disease.”

Even then, Canadian exports to global solar markets would face fierce competition from China, whose cheap goods have had a devastating impact on U.S. and European solar manufacturers, including the bankrupt California startup Solyndra.

Expanding into the other nine Canadian provinces could also be tricky for manufacturers because provincial governments have a patchwork of clean energy requirements and uneven financial incentives that are subject to shifting political priorities.

Tim Weis, the Alberta-based director of renewable energy and efficiency policy at the Pembina Institute, an environmental think tank, questioned whether Ontario would continue to increase its feed-in tariff by enough to maintain the growth the clean economy has enjoyed in the last few years. (Editor’s note: On March 22, Ontario’s Ministry of Energy completed its regularly scheduled review of the feed-in tariff program. The agency announced steep cuts to its feed-in tariffs, reducing prices for solar power by 20 percent and wind power by 15 percent.)

“We haven’t heard anything on longer-term targets” post-2020, he said. In its 2010 long-term energy plan, the Ontario government set a target to get 13 percent of its electricity from wind, solar or biomass by 2018, up from about 3 percent today.

Compared to the United States, Canada’s federal government offers few incentives to its renewables sector. Its three-year-old Clean Energy Fund, which offers grants for R&D projects through 2014, will allot less than half of its $800 million to renewable energy, green buildings and smart grid technologies. The rest will go to experimental carbon capture and storage projects in Alberta to help cut greenhouse gas pollution from tar sands projects.

By contrast, oil sands producers received $1.3 billion in subsidies from the federal government in 2008, according to a study by the International Institute for Sustainable Development, a Canadian policy institute. The Canadian Association of Petroleum Producers has denied that the industry receives any special treatment.

Weis suggested that Canada establish a national renewable energy mandate, or even set a price on carbon emissions, to encourage the development of cleaner sources, though both seem a long shot in Prime Minister Stephen Harper’s administration.

“If there’s a bigger market within the country, [manufacturers] are less susceptible to the ups and downs of the dollar,” he said.

Campbell of the United Steelworkers union agreed that it would be “well worth advancing” policies that prop up the clean economy. With no end in sight to oil sands production, “it’s the bright spot in this whole thing,” he said.