Economy, Trade & Finance

Alberta’s Oil Sands: Key Issues and Impacts

George Hoberg — Wed, 18 Jun 2008 09:32:40 -0600

Northern Alberta’s oil sands are increasingly becoming a source of political conflict, both domestically and globally, as scrutiny of the world’s second-largest known oil reserve intensifies. While recent production in the oil sands has driven rapid economic growth in Alberta, there is increasing concern that this growth is causing unprecedented ecological harm. Major environmental non-government organizations (ENGOs), such as Greenpeace and the Pembina Institute, and local First Nations have begun to call for a moratorium on new oil sands projects until associated environmental destruction can be mitigated. At the same time, prominent political observers, such as former Alberta Premier Peter Lougheed, have argued publicly that development in the oil sands is proceeding at a rate that is not economically and socially beneficial for Alberta. As the primary regulatory body responsible for the oil sands, the Alberta government is responsible for shaping most of the economic, social and environmental policies that guide oil sands development. Numerous complex and divisive policy problems that all demand resolution compete for the government’s attention. The provincial government, however, has remained generally hostile to any calls for a slowdown in oil sands growth.

This article provides an overview of the major environmental, social, and economic policy problems that figure prominently in the debate over the future of oil sands development.

Overview of Oil Sands Development in Alberta

Numerous stakeholders are involved in shaping oil sands policy

Environmental Issues and Impacts of Oil Sands Development

Impact on water, greenhouse gases and on northern Alberta ecosystem a major concern

Social Policy Issues and Impacts Oil Sands Development

Alberta's Social Services and First Nations are impacted by oil sands development

Economic Issues and Impacts of Oil Sands Development

The negative impact of oil sands development on Alberta's and Canadian economy

Sources and Links to More Information

List of article sources and links to more on the development of the Alberta Oil Sands

Overview of Oil Sands Development in Alberta

Numerous stakeholders are involved in shaping oil sands policy

The Alberta government, as owner of the province’s resources, has played the dominant role. Different divisions of the Albertan government are responsible for the various aspects of oil sands policy. The Energy Resources Conservation Board is responsible for regulating the oil and gas industry in Alberta, while Alberta Energy is responsible for granting rights to industry for exploration and development, collecting royalties, and administering the energy sector’s fiscal regime. Alberta Environment, through relevant legislation and guidelines, regulates the impact of oil sands development on air, land, and water in the province. Recently, the Oil Sands Secretariat was created within the Treasury Board to strengthen policy coordination.

To inform policy development the Government of Alberta has also turned to processes involving a multitude of stakeholders. To guide the direction of future growth in the oil sands, the Alberta government created the Oil Sands Multi-Stakeholder Committee to consult with all relevant stakeholders in the province, including the general public. The committee released its report in June 2007. As of the end of May 2008, the government has yet to respond. The Cumulative Environmental Management Association (CEMA) was created in 2000, with the charge to propose a framework for environmental management for the Athabasca oil sands region. For various reasons, its progress has been slow. In January 2008, CEMA did call for a halt to the issuance of new tenures in one area while it continued deliberating , but the provincial government rejected the request, saying it would consider the issue when CEMA delivered its complete report. CEMA released its Terrestrial Ecosystem Management Framework on June 5, 2008.

The federal government’s role in managing the oil sands has been minimal. While the Government of Canada has jurisdiction over waterways, fisheries, Indian lands, and environmental assessments, it has been hesitant to exercise this jurisdiction in a way that would threaten Alberta’s perceived right to develop its resources as it sees fit.

The oil and gas companies involved in oil sands production have been extremely powerful stakeholders in the province. As of the end of December2006 there were 21 companies operating 74 projects in the Alberta oil sands. Some of the companies producing the largest amounts of oil included Imperial Oil, Suncor, Shell Canada Limited and Canadian Natural Resources. Of the 21 producing companies, the largest seven accounted for about 84 percent of production in 2006.

Today, environmental groups are increasingly asserting their concerns regarding oil sands development, and have gone so far as to challenge government policies in court. As the Alberta government remains relatively hostile to these groups’ demands, environmentalists find themselves largely removed from the formal political sphere in this arena.

Finally, the 23 Aboriginal groups that live in northern Alberta are increasingly asserting their right to shape the development of their ancestral lands. Many of their concerns are articulated in the recent First Nations’ consultative process.

All of these stakeholders are attempting to shift the pace, scale and direction of oil sands development in a particular direction that suits their respective needs or interests. To this end, some of the challenges with oil sands exploration – outlined further in this feature – are cited by many of these groups as they attempt to articulate their vision for the oil sands.

The absolute scale of current development in the oil sands, and the consequent environmental, social and economic implications of this development, are massive. Since the mid-1990s, production of oil from the region has increased exponentially. In 2006, oil sands production was at approximately 1.2 million barrels a day – a figure representing about 42 percent of Canada’s total crude output. Accordingly, the potential for future growth is enormous, as to date less than five percent of the established reserves have been produced. Alberta Energy estimates that production could reach five million barrels a day by 2030. As production continues to propel the Alberta economy forward, the policy problems that remain unresolved today will only increase.

Environmental Issues and Impacts of Oil Sands Development

Impact on water, greenhouse gases and on northern Alberta ecosystem a major concern

The Impact on Water Consumption in Alberta

Oil sands production requires an extremely large quantity of water. In general it takes about 2 to 4.5 barrels of water, most of which is withdrawn from the Athabasca River, to produce one barrel of oil. While much of this water is recycled and used many times over, the oil sands use more water per year than the entire city of Calgary. The key policy problem regarding water for this purpose is the need to allocate water supplies in a way that properly balances oil sands production needs with ecosystem and human needs in the region. While the amount of water consumed per barrel of oil produced has been declining, a 2006 Government of Alberta report warned that there simply may not be enough available water to meet the needs of all planned oil sands projects while maintaining adequate stream flows.

Criticism from academics and activists has primarily focused on the effects of water withdrawals on fish populations, particularly during low-flow months, and the water security of communities within the Athabasca watershed. Alberta’s current regulatory framework has been criticized because the quantity of water withdrawals it authorizes does not adequately ensure ecosystem protection or the long-term conservation of the Athabasca watershed. As the federal government has jurisdiction over fisheries and the Athabasca watershed is shared by the province of Saskatchewan, the Northwest Territories and numerous First Nations communities, there is a large potential for future jurisdictional disputes and power-sharing arrangements. Some affected communities are becoming increasingly vocal with their demands that a moratorium be placed on development, citing the negative effect that oil sands production is having on the region’s water systems. As new projects will require further massive withdrawals of water, the availability of freshwater sources may very well limit the continued expansion of oil sands production.

The Impact on Greenhouse Gases and Climate Change

More than any other environmental issue, the Alberta government is increasingly being criticized for its approach to climate change. Currently, Alberta is responsible for one-third of Canada’s Greenhouse Gas Emissions (GHGs). Specifically, the oil sands are Canada’s largest-growing source of GHGs, and these emissions are expected to increase substantially in the future. It is clear the Alberta government’s intention is to allow total GHG emissions from the oil sands to continue to rise. It recently released a GHG plan that relies heavily on intensity-based targets , which focus on reductions in emissions per unit of production, instead of setting absolute limits on total emissions. The Government of Alberta’s long-term target is a 14 percent reduction in GHGs, below 2005 levels, by 2050. Its most ambitious goal is to have emissions stabilized by 2020.

Like the provincial government, the current federal government’s climate change plan considers carbon capture and storage to be the solution to the oil sands’ ever-increasing emissions, but the concept has yet to be proven technologically or economically feasible. While recent funding announcements for carbon capture research are important, the amount of funding allocated falls far short of what is required to jump-start an industry-wide capture-and-storage program. If carbon capture and storage continues to form the foundation of Alberta’s climate change plan, finding a way to overcome the large associated financial and technological hurdles will prove extremely challenging.

The Alberta government’s lack of progress on mitigating oil sands emissions may prove to be a political liability in the future. Already, vocal international environmentalists have begun targeting the oil sands on the issue of climate change. As perhaps the global environmental issue of the 21st century gains increasing international attention, Alberta’s ability to ignore this growing chorus of voices may prove impossible. At the same time, many predict that a large political showdown between the provincial and federal government is looming; the belief is that it’s only a matter of time before the federal government moves to aggressively limit industrial sources of GHGs in Canada. Recently, the Federal Court of Canada struck down the environmental assessment of a proposed major oil sands project, arguing the project did not have an adequate plan to deal with its GHG emissions.

Even the United States, which buys the vast majority of oil from the region, has begun taking steps that could force the Government of Alberta to take the issue of GHG emissions from the oil sands more seriously. California has enacted legislation to reduce the emissions intensity of its transportation fuels, a move that may limit the ability of oil derived from the oil sands that is to be sold in that state. Moreover, a recent US federal law forbids the US government from purchasing oil from ‘non-conventional’ sources whose production creates greater emissions counts than that of ‘conventional’ oil resources. While the Alberta government lobbied the US successfully to ensure this law did not apply to the oil sands, it is likely that pressure from the US will only increase.

The Government of Alberta’s ability to continue developing the oil sands while largely ignoring growing concerns about climate change, both in the domestic and international political arenas, is uncertain. Public attention to climate change issues is only now beginning to focus on the oil sands, and this attention is only likely to increase.

The Impact of Oil Sands Development on the Northern Alberta Ecosystem

Oil sands development causes large-scale spatial disturbances to Alberta’s northern boreal forest . According to critics, the cumulative effects of deforestation, habitat fragmentation, and species loss caused by exploration, open pit mines, in-situ developments, urban development, forestry, and road clearing in the region are not being adequately managed or even considered.

In April 2008, the impact on habitat received widespread media attention when hundreds of migrating ducks died in a Syncrude tailings pond. There is also concern about links between habitat loss and declines in populations of at-risk species, such as caribou. The Alberta government, as articulated in its Mineable Oil Sands Strategy, has always maintained this disturbance is “temporary” and that production sites will be reclaimed when projects are completed. Provincial requirements for reclamation, however, are considered by environmentalists to be an inadequate means of ensuring that reclaimed land resembles a functioning ecosystem. In this context, reclaimed land is not actually required to resemble the site as it existed prior to development. Environmentalists point out that ecologically complex wetlands will be replaced with dry tree plantations, though there is uncertainty as to whether trees will even be able to grow on the sites used by oil sands projects.

To date, only one oil sands project has been awarded a reclamation certificate, which means that the reclaimed land has been formally approved by the provincial government. Critics were quick to point out, however, that this site was only minimally disturbed by oil sands activity and is not reflective of the massive land disturbances that take place in most oil sands project sites. Despite uncertainty as to whether the land base can be adequately reclaimed and how much money this will cost in the future, approvals for new oil sands projects continue to be granted. There is concern, however, particularly among environmental groups, that the Alberta government (and thus taxpayers) will be stuck with the future cost of reclamation. Though operators are required to provide the government with “financial security” that can be used if the land is not adequately reclaimed, it is the oil sands companies that tell the provincial government how much this deposit should be. It is also unclear whether this amount of money will be close to the amount required for ecologically sound reclamation, if needed.

Alberta's Social Services and First Nations are impacted by oil sands development

The Impact on Social Services in Alberta

There is much concern in Northern Alberta communities about their ability to keep up with the pace of development in the oil sands. In towns like Fort McMurray and Cold Lake, housing costs are spiralling upwards, such that many newcomers cannot find adequate housing. The region’s physical infrastructure, from roads to water and sewage systems, are severely overtaxed, with communities reporting massive infrastructure deficits. Social services, including health care, crime prevention and education, are inadequate and unable to meet the demands of population pressures. Communities in Northern Alberta feel they are absorbing a disproportionately high amount of the negative impacts of oil sands growth while failing to receive their fair share of the benefits. Many mayors, municipal councils, and individuals from these communities outlined their concerns in submissions to Alberta’s Oil Sands Consultations process. While the Government of Alberta has acknowledged there are indeed gaps in social services and infrastructure, few of its own recommendations have been implemented.

To alleviate some of these major social problems, communities have requested large investments from the provincial government and a new arrangement for tax and royalty regimes to ensure communities in the oil sands region can meet both infrastructure and social demands. Despite budgetary surpluses, the Alberta government has been slow to provide these communities with the requested funding. Massive social and infrastructure deficits remain; finding a way to fairly share the economic costs and benefits of the oil sands will remain a politically difficult policy problem for the foreseeable future.

The Impact on First Nations in Alberta

Over 30 different First Nations live in the oil sands region of Northern Alberta. Unlike in most of neighbouring British Columbia, formal treaties cover the area and, as with many resource extraction industries, the oil sands industry has been a mixed blessing for rural First Nations communities. While many First Nations members are indeed employed in the oil sands, there is much concern that oil sands companies are not doing enough to hire local First Nations. That said, the amount of business flowing to First Nations-owned companies (such as trucking and construction) has been extremely large. Furthermore, many of the larger oil sands companies have strategies and targets for hiring specific numbers of First Nations employees, and for purchasing from, and contracting with, First Nations-owned businesses, as outlined in a report published by the National Energy Board in 2004. These economic benefits, however, have not been sufficient to mute the resistance of many First Nations members to the scale and pace of development in their ancestral lands.

The problems cited by First Nations members regarding oil sands development include: lack of proper consultation and accommodation of First Nations interests; lack of adequate compensation; loss of traditional hunting and trapping territory; habitat destruction (particularly fishing grounds); health concerns relating to surrounding air and water pollution; and general concerns regarding the wide range of environmental issues pertaining to oil sands development. As many of the First Nations affected by oil sands development are located downriver in Saskatchewan and the Northwest Territories, this poses challenges for other governments (provincial and territorial), as well as the federal government. Several First Nations groups, including the Decho, have made high-profile calls in support of declaring a moratorium on oil sands development. Recently, the Assembly of Treaty Chiefs, which is comprised of representatives from all First Nations groups in Northern Alberta, unanimously passed a resolution calling for the provincial government to cease granting approval for new oil sands projects until certain conditions, including the development of a proper water management strategy, are met. While recent consultations with Alberta’s First Nations about the oil sands have concluded, it remains too early to determine how the Alberta government will respond to the issues raised during these proceedings.

Economic Issues and Impacts of Oil Sands Development

The negative impact of oil sands development on Alberta's and Canadian economy

The Impact on the Alberta Economy

Despite the enormous economic growth that oil sands development has spurred in Alberta, distribution of benefits has been uneven overall. In general, the level of investment and growth in the oil sands has hurt the province’s conventional oil and gas industry. Rising real estate costs and general inflation have hurt sectors such as agriculture and manufacturing particularly hard. Consequently, today there is a growing income split between those Albertans who are employed in the oil sands and those who are not employed by the oil sands – but who are faced with the rising daily cost of living. There is also concern that the economic benefits associated with oil sands development are being concentrated geographically and not diffused throughout the province. Moreover, despite recent changes to the province’s royalty regime, the Government of Alberta has been criticized for not collecting enough economic rent (in the form of royalties) from the oil sands on behalf of Albertans (the so-called ‘owners’ of the resource), and for allowing the vast majority of oil sands profits to flow to industry. Also worth noting here is that since labour demands for the oil sands are so large, a significant proportion of oil sands employment is going to non-Albertans. Consequently, more oil sands-related economic benefits are flowing beyond Alberta. Accordingly, it has been argued that a more prudent economic strategy would see oil sands development slowed, thereby ensuring Albertans can fill any related jobs and benefit from oil sands employment over the longer period. While economic benefits are the primary motivation behind the current pace and scale of development in Alberta’s oil sands, the manner in which these benefits are distributed within the greater Alberta economy remains a contested policy issue.

Oil sands development to date has been fuelled largely by natural gas. While many factors are contributing to the increase in price of natural gas in Western Canada, it is important to note that massive demand from the oil sands is a major factor. In the future, this rising price trend is likely to lead to large increases in home heating costs. At the same time, many have questioned the logic of using a relatively clean-burning fuel (in terms of greenhouse gases and air pollutants) such as natural gas to aid in the extraction of an extremely dirty form of crude oil for the purposes of export. Faced with the rising cost of natural gas, and expected shortages due to increased demand from the oil sands, as a fuel source, nuclear power is now seriously being considered to help power oil sands extraction.

The Impact on the Canadian Economy

The oil sands bring economic benefits to other areas of the country outside Alberta. Increasingly, however, development in the oil sands is having an overall net-negative economic impact. Attracted by record profits in the oil sands, investors are pulling their money from other economic sectors and concentrating their investments in the oil sands. This has created problems for other sectors as they struggle to attract required investment. At the same time, the rising Canadian dollar, caused in part by the economics of oil sands growth, is hurting export-orientated sectors. The forestry industry in BC and the Ontario manufacturing industry serve as two prominent examples. As a result, there is increasing discord, with some provinces – such as the Government of Ontario – becoming increasingly vocal in criticizing the federal government for allowing the oil sands to develop so rapidly without considering (or compensating) other important national economic sectors. Indeed, friction between the provinces around this issue, and also between specific provinces and the federal government, is likely to increase following a recent announcement by Conservative Prime Minister Stephen Harper that it is not the federal government’s responsibility to bail out struggling industries.

Sources and Links to More Information

List of article sources and links to more on the development of the Alberta Oil Sands

Sources Used for this Article

Dunbar, R.B. Existing and Proposed Canadian Commercial Oil Sands Projects. Calgary: Strategy West, April 2008. Available at: <http://www.strategywest.com/downloads/StratWest_OSProjects.pdf>
National Energy Board. Canada’s Oil Sands. Opportunities and Challenges to 2015: An Update. Ottawa: National Energy Board, 2006. Available at: <http://www.neb.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/lsnd/lsnd-eng.html>
Radke, Doug. Investing in our Future: Responding to the Rapid Growth of Oil Sands Development. Edmonton: Oil Sands Ministerial Strategy Committee, 2006. Available at: < http://www.alberta.ca/home/395.cfm>
Standing Committee on Natural Resources. The Oil Sands: Towards Sustainable Development. Report of the Standing Committee on Natural Resources. Ottawa: Library of Parliament, March 2007. Available at: <http://cmte.parl.gc.ca/Content/HOC/committee/391/rnnr/reports/rp2614277/rnnrrp04/04_TOC_ENG.htm>
Vlavianos, Nickie. “Key Shortcomings in Alberta’s Regulatory Framework for Oil Sands Development.” Newsletter of the Canadian Institute of Resources Law Calgary 100 (2007). Available at: <http://www.ucalgary.ca/~cirl/pdf/Resources100.pdf>
Westman, Cint. “Assessing the Impacts of Oil Sands Development on Indigenous Peoples in Alberta, Canada.” Indigenous Affairs 2-3, 2006. Available at: <http://www.iwgia.org/sw161.asp>
Woynillowicz, Dan et al. Oil Sands Fever: The Environmental Implications of Canada’s Oil Sands Rush. Drayton Valley: The Pembina Institute, 2005. Available at: http://pubs.pembina.org/reports/OilSands72.pdf

Links for More Information

The Canada-US Softwood Lumber Dispute

Jay Makarenko — Tue, 10 Jun 2008 09:57:34 -0600

The Canada-US softwood lumber dispute has been one of the longest and most significant trade disputes between the two countries in modern history. Central to the dispute is not only competition between Canadian and US softwood lumber companies, but also conflict over basic forestry management styles. This article discusses the North American softwood lumber industry and explains the nature of the dispute, including its basic issues, its history and the signing of the 2006 Softwood Lumber Agreement.

The North American Softwood Lumber Industry

Structure and importance of the softwood lumber industry

Issues in the Canada-US Softwood Lumber Dispute

What exactly is the softwood lumber dispute about?

History of the Canada-US Softwood Lumber Dispute

Overview of the dispute between 1980 and 2001

2001-2006 Canada-US Softwood Lumber Dispute

Issues and litigation in the recent Canada-US softwood dispute

2006 Canada-US Softwood Lumber Agreement

Highlights of the recent Canada-US softwood lumber deal

Sources and Links to More Information

List of article sources and links to more on this topic

*Note: This article was originally written by Rhonda Parkinson. It has since been altered and updated by Jay Makarenko.

The North American Softwood Lumber Industry

Structure and importance of the softwood lumber industry

What is Softwood Lumber?

It is important to remember that the Canada-US softwood lumber dispute does not involve the entire North American lumber industry, but simply one component; namely, the softwood lumber sector.

Softwood is a classification of wood based upon the tree’s method of reproduction. Softwood trees are gymnosperms, developing from seeds that produce no outer covering. A pine cone is an example of the type of seed produced by a gymnosperm. Hardwood trees, on the other hand, are angiosperms, growing from seeds that are fully enclosed. While softwood trees have needles or scale-like leaves, hardwood trees have broad, flat leaves. Softwood includes a number of trees such as cedar, Douglas fir, pine and spruce commonly found in North America.

Softwood forests are found in both Canada and the United States. In Canada, softwood forests make up two-thirds of forested land available for timber production, and can be found in most provinces and territories. The largest Canadian softwood forests are in British Columbia. In the United States, softwood forests are predominant in the Pacific Northwest and in the southern US.

Softwood Lumber Industry

Softwood lumber forms the bulk of wood used commercially in North America. It has a wide range of uses, the most important of which is for structural building components. Softwood is also used for furniture, millwork (mouldings, doors and windows), paper production and for various types of boards, such as MDF.

Canada is one of the largest softwood lumber producers and exporters in the world, with a large portion of the industry in British Columbia. Canadian export of softwood lumber to the US is a multi-billion dollar industry, employing thousands across the country. In 2005 alone, Canada exported 21.5 billion board feet of lumber to the US, totaling $8.5 billion in trade (Foreign Affairs and International Trade Canada, 2006).

Different Forest Management Styles

A key element of the softwood lumber dispute involves differences between Canada and the US concerning forest ownership and management styles. In the United States, the majority of forest land is privately owned; nearly 90 per cent of lumber production takes place within privately owned forests. Under this system, forested land is held in fee-simple ownership, whereby the owner (and his/her heirs) can manage, sell or transfer the property as s/he sees fit.

The situation is very different in Canada, where more than 90 per cent of the nation’s forests lie within lands owned by federal or provincial governments (also known as Crown land). The provinces own the majority of Crown land (78 per cent), while the federal government owns 22 percent. Overall, the provinces own 90 per cent of land classified as productive forest land, that is, land capable of producing more than a certain quantity of wood annually. The territories fall into a separate category, and will be discussed later.

This difference between Canada and the US, in terms of public and private ownership of forestry resources, has led to a significant divergence in the stewardship of their respective forestry industries. In the United States, companies compete for the right to harvest wood through an auction method on the open market.

In Canada, companies wishing to harvest wood from government-owned land do not compete with one another on the open market. Each company enters into a tenure agreement with the provincial government, whereby the company is granted a licence to harvest trees from a specified portion of Crown land. Tenures can be of short- or long-term duration. They may be area-based or volume-based tenures, granting the company either the right to manage the area or simply to obtain a specified volume of wood. The tenure holder then pays the provincial government a fee for the wood they harvest, commonly referred to as a “stumpage fee.”

A similar situation exists in the territories, where significant portions of federal Crown lands are located. In recent years, the federal government has handed responsibility for managing these lands to territorial governments, while retaining ownership. Accordingly, companies wishing to harvest wood enter into an agreement and pay stumpage fees to the territorial government, not the federal government.

Each province or territory is responsible for setting the terms of tenure agreements. All tenure agreements require the tenure holder to follow responsible conservation and forest management practices. This is particularly true of longer-term tenures, where the company is granted a licence to manage the designated forest area.

Each province or territory is also responsible for the method of determining stumpage fees. Often, governments factor in non-market-based criteria when setting stumpage fees, such as provincial revenue goals or the job-creation potential of the contract. Stumpage rates may also reflect the cost, to the forest company holder, of following responsible forest management policies. The goal is to encourage forest companies to be “good stewards” of the forest. Consequently, stumpage fees are often lower than the market price.

Issues in the Canada-US Softwood Lumber Dispute

What exactly is the softwood lumber dispute about?

The softwood lumber dispute comprises many different issues. The following provides a brief overview of a few key elements.

Provincial/Territorial Stumpage Fees

Canada’s system of stumpage fees, whereby forest companies pay a fee to a provincial or territorial government for the right to harvest and/or process wood on a specific piece of land, is a major source of contention. The US contends that Canada’s provincial and territorial governments are subsidizing forestry companies by setting the stumpage fees too low. This gives Canada’s softwood lumber exporters an unfair pricing advantage over American softwood suppliers, who must sell their lumber at a price that reflects the real economic cost of harvesting the wood.

International trade laws stipulate that if Canada is subsidizing the softwood lumber industry, the United States has the right to even out the situation by applying a “countervailing duty” to imports of Canadian softwood lumber. International trade panels have ruled, however, that Canada’s system of stumpage fees does not meet the legal definition of a subsidy.

Allegations of Canadian Dumping

A more recent issue in the softwood lumber dispute involves American claims that Canadian forest companies are “dumping” lumber — pricing softwood lumber in the US market at a price below the cost of production or, at least below the price for which it would sell in Canada. The Americans allege that “dumping” has allowed Canada’s softwood lumber exporters to claim a higher portion of the American softwood lumber market than would otherwise be the case. In this regard, the US has won several decisions under the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) on this issue, although both concluded that the mechanism used by the United States to determine the percentage of duties to be applied was flawed.

Canada’s Multi-Jurisdictional Forestry Management System

Attempts to resolve the ongoing softwood lumber dispute between Canada and the United States are complicated by the number of players involved. Instead of dealing with one government (Canada), US trade negotiators must enter into talks with, and understand the forestry management systems of, several provincial governments.

The process is further complicated by the frequent lack of consensus among the provinces over how softwood lumber negotiations should proceed; a concession that one province is willing to make in order to reach an agreement may be unacceptable to another. Furthermore, the provinces may also disagree with the federal strategy. Prior to reaching the most recent agreement in 2006, for example, the federal government took a very adversarial position towards the United States, at least publicly. By contrast, several provinces, such as British Columbia, made it clear they were more interested in reaching a compromise with the US than in starting a trade war.

History of the Canada-US Softwood Lumber Dispute

Overview of the dispute between 1980 and 2001

The softwood lumber dispute between Canada and the United States has been an ongoing disagreement which began in the early 1980s. In actuality, there have been four different trade disputes, which are commonly referred to as Lumber I, Lumber II, Lumber III and Lumber IV. The following provides an overview of each dispute.

Lumber I: 1982-1983

The first Canada-US lumber dispute occurred in 1982, when the US Department of Commerce investigated the stumpage programs of British Columbia, Alberta, Ontario and Quebec. Upon completing its investigation in 1983, the Department of Commerce concluded that the provincial stumpage programs were not open to countervailing duties, because stumpage was generally available and not limited to a specific industry. Under US law, a good from another country is only considered subsidized if the program is available only to a specific industry. Provincial stumpage programs, however, were available to the entire timber sector, not just to the softwood lumber industry.

Lumber II: 1986-1987

Following the first softwood lumber dispute, two significant changes occurred. First, the US Department of Commerce began to apply US trade law more aggressively, especially in natural resource countervailing duty cases. Second, the Coalition for Fair Lumber Imports, the US lumber industry coalition and lobby group which favours high duties on Canadian softwood lumber, emerged as a well-funded and politically connected group in the US.

In 1986, the US Department of Commerce initiated another investigation of Canadian stumpage programs, this time concluding that they represented unfair subsidies. As a result, the US government levied a 15 per cent tariff on Canadian softwood lumber imports.

Later that year, the governments of Canada and the United States signed a five-year Memorandum of Understanding (MOU), under which the US would drop its 15 per cent tariff. In its place, the Canadian government agreed to impose a 15 per cent export charge on lumber exports to the US. The MOU also allowed provinces and territories to replace the export charge through other policy changes, such as increased stumpage fees.

The Memorandum meant that Canadian softwood companies would have to submit to a 15 per cent charge when exporting their products to the US. However, it did have several advantages for Canada. By making it an export charge collected by Canada, the money was kept within the country, as opposed to going to US coffers in the form of a countervailing duty. Moreover, it gave Canadian companies some measure of predictability, as Canada itself controlled the level of the charge, as opposed to it being controlled by US authorities.

It is important to note that under the Memorandum the Canadian government did not admit that stumpage fees represented a form of government subsidies. Instead, it simply volunteered to impose the 15 per cent export charge on softwood lumber exports.

Lumber III: 1991-1996

The Memorandum increasingly became viewed by some provinces, in particular British Columbia, as an infringement of provincial sovereignty. Pressure grew within Canada to eliminate the Memorandum, and the federal government unsuccessfully attempted to negotiate its termination with the US government. In 1991, Canada unilaterally withdrew from the agreement and ended the practice of imposing a 15 per cent charge on softwood exports to the US.

This initiated another investigation of provincial/territorial stumpage fees by the US Department of Commerce. In 1992, the Department imposed a 6.51 per cent countervailing duty on Canadian softwood lumber (although, the precise duty varied from province/territory to province/territory, depending on its particular stumpage programs).

This led to a number of legal battles between Canada and the United States under the Canada-US Free Trade Agreement. As a result of these battles, the US Department of Commerce eventually revoked its countervailing duty order in 1994. That same year, Canada and the United States agreed to implement a consultative process on softwood lumber trade in order to eliminate any further trade disputes.

This consultative process resulted in the 1996 Softwood Lumber Agreement. Under the agreement, Canada was permitted to export 14.7 billion board feet annually to the United States free of any export charges or duties. Exports above this threshold would then be open to escalating charges. The US, in turn, agreed not to initiate a trade case for the duration of the agreement. It is important to note that these restrictions applied only to the softwood exports of Alberta, British Columbia, Ontario and Quebec.

For more information on the 1996 Softwood Lumber Agreement:

Government of Canada: Softwood Lumber Agreement 1996

2001-2006 Canada-US Softwood Lumber Dispute

Issues and litigation in the recent Canada-US softwood dispute

The 1996 Softwood Lumber Agreement managed to bring some level peace in Canadian-US trade relations in softwood lumber. In 2001, however, the agreement expired, leaving both countries without a framework for managing softwood lumber trade. This led to another softwood lumber dispute between Canada and the US, commonly referred to as Lumber IV.

US Actions Against Canadian Softwood Lumber

Immediately following the expiration of the 1996 Agreement, the US Coalition for Fair Lumber Imports filed a countervailing duty and anti-dumping petition against the Canadian softwood lumber industry. This represented the first time allegations of dumping had been made against Canadian companies.

See the Issues in the Canada-US Softwood Lumber Dispute section of this article for more information on the dumping issue.

In 2001, the (US) International Trade Commission made a preliminary ruling that subsidies to Canada’s softwood lumber industry posed a threat of injury to the United States softwood lumber market. In August 2001, the US Department of Commerce imposed a countervailing duty of 19.31 per cent on Canadian softwood lumber imports.

In October 2001, the US Department of Commerce determined that Canadian companies were “dumping” softwood lumber (selling it in the US market at a price below market value) and that an additional “anti-dumping” duty of 12.57 per cent should be applied to US imports of Canadian softwood lumber.

In April 2002, the Department of Commerce reached a final determination that the countervailing and anti-dumping duties should be lowered to 18.79 per cent and 8.43 per cent, respectively. The total amount of duties charged on imported Canadian softwood lumber was set at 27.22 per cent.

Litigation of the Softwood Trade Dispute

Canada responded to the duties by launching several trade challenges. At both the World Trade Organization (WTO), and under the North American Free Trade Agreement (NAFTA), Canada requested separate panels to examine all three determinations made by the US Department of Commerce: 1) Canadian softwood lumber exports are unfairly subsidized; 2) the subsidies pose a threat of injury to the US market; and 3) Canadian lumber firms are “dumping” softwood lumber onto the US market.

The history of this litigation has been rather complex, largely due to contradictory rulings by separate panels. Additionally, rulings against the US have often been based on technical issues, or the need for more information, as opposed to a clear victory in Canada’s favour for the right to export softwood lumber to the US duty free. Due to the complexity of the issues, both countries often hail rulings as victories.

Under NAFTA, a July 2003 ruling supported US anti-dumping duties, but also ruled that the method used to calculate the duties was flawed. Similarly, in August 2003, a NAFTA panel ruled that the Canadian softwood lumber industry was indeed being subsidized, but, again, that the method the US used to determine the level of subsidy was flawed (resulting in excessively high duties).

Despite these findings, in August 2003, a subsequent NAFTA panel ruled that the US had not provided sufficient evidence to show that domestic softwood lumber producers were threatened with injury from Canadian softwood lumber imports. In 2004, following similar rulings by subsequent panels, the US requested an Extraordinary Challenge Committee under NAFTA to review the issue. In August 2005, the Committee affirmed the original decision. This was significant, as countervailing and anti-dumping duties can only be imposed if the dumped or subsidized imports are deemed to cause, or have the potential to cause, a threat of injury to the domestic industry.

In March 2006, a NAFTA panel ruled in Canada’s favour, finding that the Canadian stumpage program did not constitute a subsidy of softwood lumber exports. By this time, the total duties collected by the US had reached $5.2 billion (CBC, 2006).

The WTO panels customarily made rulings similar to those of the NAFTA panels. However, in August 2005, the WTO reversed itself on an earlier decision, concluding that Canadian softwood lumber imports did constitute a threat of injury to the US market.

Dispute over Repayment of Duties

The contradictory rulings of the NAFTA and WTO panels led to a further dispute over whether or not the United States was obligated to repay billions of dollars in softwood lumber duties it has collected. Canada took the position that the US must return billions of dollars in duties it has charged on imports of Canadian softwood lumber. The US took that position that Canada must return to the bargaining table before it would discuss any repayment of duties. Canada broke off scheduled talks on softwood lumber after the US announced it would ignore the decision of the 2005 NAFTA Extraordinary Challenge Committee and would continue to pursue its case at the WTO.

2006 Canada-US Softwood Lumber Agreement

Highlights of the recent Canada-US softwood lumber deal

In April 2006, the Canadian and US governments announced that they had reached a framework agreement for settling the softwood lumber dispute. In July 2006, representatives from both countries formally signed the legal text of the agreement, and it was passed into law by the federal Parliament in December 2006.

Highlights of the 2006 Softwood Lumber Agreement

Under the new softwood lumber agreement, the United States agreed to remove its countervailing and anti-dumping duty orders on Canadian softwood lumber. Furthermore, the US agreed to return more than $4.5 billion in duties it had collected since 2002. This represented a large portion of the total duties it had collected. The US also agreed not to initiate any new investigations against Canadian softwood lumber during the period of the agreement.

In exchange, Canada agreed to a cap on its softwood exports to the US at 34 per cent of the US market. Furthermore, Canada agreed to impose an export charge on Canadian softwood lumber exports when the price of lumber is at or below US$355 per thousand board feet. These charges are collected by the federal government, and then transferred back to the provinces.

Both Canada and the United States further agreed to terminate all litigation before the entry into force of the agreement (such as pursuing cases through NAFTA and the WTO). The 2006 Agreement also provided a broad framework for dispute settlement. Disputes relating to the agreement are to be resolved through a final and binding dispute-settlement process. The process is to be neutral, transparent and expeditious.

The new agreement only applies to the provinces of Alberta, British Columbia, Saskatchewan, Manitoba, Ontario and Quebec. The Atlantic Provinces and the territories are excluded from the agreement because their timber industries do not operate on a provincial/territorial stumpage fee system. As such, they may export softwood lumber to the US free of any restrictions or duties.

The length of the agreement is seven years, beginning in 2006, with an option to extend it for an additional two years. Although, under the initial agreement signed in July 2006, either country could unilaterally exit after three years.

Amendments to the Initial Softwood Lumber Agreement

While the initial Softwood Lumber Agreement was signed in July 2006, there remained some opposition in the Canadian softwood lumber industry, as well as from the government of British Columbia. Of particular issue was a provision that allowed either Canada or the United States to unilaterally terminate the agreement after only three years. The concern was that this would undermine the value of the agreement, and allow the US to reintroduce duties unilaterally as early as 2009.

In response, the federal government negotiated with the US to rework the deal, to make it harder for the US to exit the agreement. For example, under the amendments, if the agreement isn’t renewed, or if the US unilaterally decides to terminate the agreement, then it cannot re-impose duties until one year after the end of the deal. The US is also now required to provide Canada with six months’ notice before ending the agreement, up from three months in the initial deal.

Sources and Links to More Information

List of article sources and links to more on this topic

Sources Used for this Article

“Softwood Lumber Dispute.” CBC. 23 August 2006. 04 May 2008. <http://www.cbc.ca/news/background/softwood_lumber/>
“Softwood Lumber.” Foreign Affairs and International Trade Canada. 11 October 2006. 04 May 2008. <http://www.dfait-maeci.gc.ca/eicb/softwood/intro-en.asp>
“Softwood Lumber Agreement 1996.” Foreign Affairs and International Trade Canada. 11 October 2006. 04 May 2008. <http://www.dfait-maeci.gc.ca/eicb/softwood/sla-en.asp>
“The Canada-US Softwood Lumber Agreement.” Foreign Affairs and International Trade Canada. 17 October 2006. 04 May 2008. <http://www.dfait-maeci.gc.ca/eicb//softwood/SLA-backgrounder-en.asp>
“Canada-US Lumber Trade Disputes.” British Columbia Ministry of Forests and Range. 05 July 2002. 04 May 2008. <http://www.for.gov.bc.ca/HET/Softwood/disputes.htm>

Links for More Information

Auto Insurance in Canada: Overview and Issues

Jay Makarenko — Fri, 02 May 2008 11:24:47 -0600

Auto insurance is a central issue in provincial and territorial politics, and a highly complex area of public policy. In Canada, the industry reflects a collection of provincial and territorial systems, each differing significantly in how auto insurance is delivered and regulated. This article offers an introduction into auto insurance policy in Canada, and includes a look at auto insurance in the context of federalism, alternative models of auto insurance, provincial/territorial auto insurance systems, and key issues and debates in this public policy area.

Auto Insurance and Canadian Federalism

Federal and provincial jurisdictions in auto insurance

Alternative Models of Auto Insurance

Overview of different possible auto insurance systems

Auto Insurance Systems Across Canada

Comparison of provincial/territorial auto insurance systems

Issues in Auto Insurance in Canada

Key public policy debates on auto insurance

Sources and Links to More Information

List of article sources and links to more on this topic

Auto Insurance and Canadian Federalism

Federal and provincial jurisdictions in auto insurance

Canada does not have a national auto insurance system, but instead a collection of different provincial and territorial regimes. This is due, in large part, to Canada’s system of federalism, and its division of powers and responsibilities between the different levels of government.

Provincial/Territorial Jurisdiction in Auto Insurance

Under the Canadian Constitution, jurisdiction over auto insurance falls predominantly to the provincial level of government. Only provincial governments have the constitutional power to create auto insurance schemes and regulate auto insurance practices. As such, provincial governments have the power to establish public or private auto insurance schemes, to regulate the conduct of auto insurers (providers of auto insurance policies), and regulate the rights and obligations of the insured (holders of auto insurance policies). In sum, the various auto insurance options that are available to Canadians are the direct result of decisions and policies chosen by their respective provincial governments.

As territories, the Northwest Territories, Yukon, and Nunavut do not have any autonomous powers under the Canadian Constitution, but are instead entities of federal legislation. Nevertheless, the federal government tends to provide the territories with similar powers and jurisdictions as the Canadian provinces. This is also the case in the area of auto insurance; the territories enjoy the same powers as the provinces – both to create their own auto insurance schemes and to regulate general auto insurance practices.

Federal Jurisdiction in Auto Insurance

Under the Canadian Constitution, the federal government does not have jurisdiction over the establishment and regulation of auto insurance regimes. Nevertheless, it does have a significant role to play in the industry as a whole.

The federal government is responsible for the prudential supervision of auto insurance providers that are incorporated under federal legislation. This includes Canadian insurers that operate in more than one province, as well as foreign insurers that have branch operations in Canada. In its role as “prudential” supervisor, the federal government is responsible for ensuring these insurers exercise caution and good judgment in the management of their business matters. Of primary concern is protecting the solvency of insurers and reducing the risk of a general collapse of the insurance industry, which would be highly detrimental to the national economy.

For more information on the federal prudential supervision of auto insurers:

Government of Canada: Office of the Superintendent of Financial Institutions Canada

Federal responsibility in this area does not extend to regulating the general market conduct of insurers (such as the terms and conditions of their insurance policies). This falls strictly under provincial jurisdiction. Moreover, Canadian insurers that operate in only one province may incorporate under provincial legislation, with the respective provincial government being responsible for the prudential supervision of these insurers.

In addition to its role as prudential supervisor, the federal government also has an indirect influence on the basic terms and conditions of auto insurance policies. Many auto insurers, for example, deny insurance coverage in cases where a motor vehicle is operated in a prohibited manner, or is used in the commission of an illegal act (such as a robbery). What counts as an illegal act depends largely on federal legislation, such as the Canadian Criminal Code.

Another important aspect of federal influence is the Canadian Charter of Rights and Freedoms and the judicial branch of government. The Charter is legislation, entrenched in the Canadian Constitution, which sets out the basic citizen rights and freedoms. All government laws and regulations, including those regarding provincial and territorial auto insurance systems, must be consistent with the Charter. In Canada, the judicial system also plays a central role in relation to auto insurance in that it settles auto insurance-related legal disputes, in addition to reviewing provincial and territorial systems from a Charter perspective. At the pinnacle of the Canadian judicial system is the Supreme Court of Canada, a federally appointed and administered court.

Several examples illustrate the significance of these federal institutions on provincial and territorial auto insurance systems. In 2008, a provincial court struck down an Alberta law which capped insurance claims on soft-tissue injuries, concluding that the law violated the Canadian Charter (at the time of this article, the Government of Alberta had stated that it would appeal the decision). Additionally, during the 1970s, the Supreme Court of Canada rendered several decisions that effectively placed an upper limit on what persons could claim in financial compensation for non-pecuniary damages due to a motor vehicle accident. (These include damages such as a loss of future earnings, cost of future care, and awards for pain and suffering.)

Implications for Auto Insurance in Canada

The structure of federalism in Canada has an important impact on the auto insurance industry. As jurisdiction over the creation and general regulation of auto insurance falls exclusively under provincial and territorial authority, there is an absence of national institutions and legislation to create uniformity across the country. Instead, auto insurance in Canada is made up of a set of separate provincial/territorial auto insurance schemes based on rules and practices that differ greatly from one province/territory to another.

See the Auto Insurance Systems Across Canada section of this article for a comparison of auto insurance regimes by province and territory.

This, however, is not to suggest that national standards are impossible. Provinces and territories can voluntarily agree to uniform rules and practices. Moreover, the federal government also does enjoy some leverage in creating national standards through the use of other constitutional powers, such the federal spending power. In employing such as strategy, the federal government can offer financial enticements to persuade provincial and territorial governments to implement federal policies in auto insurance, much in the same way the federal government influences provincial/territorial health care insurance regimes. At the time of writing, however, no such cooperation has ever been pursued in any robust manner by either level of government.

Alternative Models of Auto Insurance

Overview of different possible auto insurance systems

Concept of Auto Insurance

Auto insurance is simply a system by which the owners/operators of motor vehicles may obtain financial protection against losses associated with that vehicle. This may include financial protection against the loss or damage of the vehicle, as well as personal injury or property damage caused in the vehicle’s operation.

Under most auto insurance schemes there is an insurer, which is the party (usually a private insurance company or government agency) that issues the insurance policy and provides the financial protection. Additionally, there is the insured, which is the party (either the operator or owner of the motor vehicle) that purchases the insurance policy and receives the financial protection.

In most cases, the insured purchases the insurance policy by paying an annual or monthly fee (or premium) to the insurer. In return, the insurer provides some guarantee of payment for any losses associated with the insured’s motor vehicle. If, for example, John (the insured) has his car stolen, then his auto insurance company (the insurer) will financially compensate John for the loss, usually by paying him the monetary value of the vehicle at the time it was stolen. The same is true in cases of personal injury. If John gets into an accident where the driver of the other vehicle is injured, then John’s insurance company will cover any financial liability incurred by John as a result of the accident (or up to the maximum compensation as set out in the insurance policy)..

Auto insurance, therefore, operates as a sort of financial safety net for persons in relation to the operation of their vehicles. On the one hand, it protects the insured from large financial losses stemming from the operation of his/her motor vehicle. Instead of having to pay for a new car, or pay for injuries incurred by others as the result of an accident, the insured only has to pay a regular and smaller insurance fee.

On the other hand, auto insurance provides financial protection to other persons besides the insured by guaranteeing financial compensation in cases of property damage or personal injury. If John didn’t have auto insurance, then the other driver may not have been able to receive compensation for his/her injuries, as John simply may not have had enough money on his own to pay. By having insurance, however, the other driver is guaranteed compensation – regardless of whether John personally has enough money, as the insurer should always have the capability to pay.

Within this basic framework, however, auto insurance schemes can operate in a number of very different ways. The following provides an overview of some key characteristics of different auto insurance systems.

Public versus Private Insurance Systems

One key distinction, especially in Canada, is private versus public systems of auto insurance. Public insurance systems are characterized by a single auto insurer which is publicly administered in some manner. The insurer may be a crown corporation or some other agency which is controlled by the government. Under pure public systems, then, persons seeking auto insurance only have the option of purchasing policies from the public insurer. Moreover, the public insurer is solely responsible for covering all financial liabilities incurred by insured owners and/or operators of motor vehicles in their jurisdiction.

Private insurance schemes, by contrast, are characterized by a plurality of private auto insurers. In a purely private system, auto insurers are non-governmental financial companies or institutions (such as banks or insurance corporations) which provide insurance policies to customers for profit. As such, persons seeking auto insurance may choose from a variety of different auto insurance products offered by a number of competing insurance providers.

It addition to purely public or private schemes, there can also be hybrid insurance systems, which incorporate both public and private characteristics. It may be the case that basic insurance products are provided through a single public insurer, while additional insurance products can be obtained through private auto insurance providers. Under such a system, all insured persons would have the same basic public coverage, but have the option of purchasing additional or secondary coverage from a variety of private, for-profit insurers.

Mandatory versus Voluntary Insurance Systems

Another key distinction is mandatory versus voluntary insurance system. Mandatory systems are characterized by government laws which require all persons whom own and/or operate a motor vehicle to purchase some level of auto insurance. As such, it is illegal, punishable under the law, to own and/or operate a motor vehicle without proper insurance. The purpose of this type of system is to ensure financial protection in the case of all losses associated with the operation of motor vehicles. As all persons or vehicles have (or should have) insurance attached to them, cases should not arise in which an injured party is unable to receive financial compensation because the driver does not have enough money to pay damages.

Voluntary insurance schemes, by contrast, are characterized by an absence of laws that require all persons whom own and/or operate a motor vehicle to obtain auto insurance. Persons are, instead, free to decide themselves whether or not to purchase insurance, and may own or operate a vehicle without coverage if they so choose. Under such a system, those without insurance are directly responsible themselves to cover any financial liabilities associated with operation of a motor vehicle.

Again, there can be hybrid systems, which blend characteristics of both a mandatory and voluntary system. It may be the case, for example, that persons are required to purchase insurance for certain kinds of financial liabilities (such as those arising from the injury of another party), but are free to purchase or decline insurance for other losses (such as theft, damage to one’s vehicle, or injury to one’s self).

Theoretically, public and private systems can involve either mandatory or voluntary insurance stipulations. In practice, however, it is generally the case that public systems involve some level of mandatory insurance. This can be due to a number of different factors. For example, public insurance systems are often viewed as “public goods,” in which the benefits and costs are to be shared by all in the community. It may also be the case that the government wishes to ensure the financial stability of its public insurance scheme by requiring all owner and/or operators to pay into the system.

Fixed versus Flexible Compensation Systems

Another key difference centres on the level of financial compensation that persons can receive when incurring property damage or personal injuries from automobile accidents.

Under a fixed system (also commonly referred to as a “cap system”), the level of compensation for specific damages or injuries is established by government legislation. In other words, the government explicitly sets out how much money persons can receive for particular sorts of property damage and/or personal injury. Persons are thus prohibited from negotiating or litigating for monetary settlements above the thresholds set out in the government legislation.

In a flexible system, by contrast, there is no fixed level of financial compensation – at least, not through government legislation. Under this sort of system, persons are free to negotiate or litigate whatever monetary settlement they desire. As such, compensation can range widely from case to case, as well as over time. What a person receives depends on what s/he can negotiate with the other party (be it an individual or insurance institution), or what is deemed proper by a court of law if the parties proceed to court.

Again, public and private schemes can have either a fixed or flexible system of compensation. Generally speaking, fixed systems are implemented as a means of reducing costs for the insurer, not only in terms of what they must pay for damages or injuries, but also in terms of the cost of litigating cases in the courts. Under a fixed system there is no opportunity to litigate the level of compensation; this is dictated by government legislation. Such savings can be beneficial in both a public or private context as a means of reducing or stabilizing insurance premiums.

At-Fault vs. No-fault Insurance

Another important distinction is between at-fault and no-fault insurance schemes. The key distinction here is which insurer is responsible for paying compensation for the damages or injury resulting from a motor vehicle accident.

Under an at-fault system, responsibility for paying compensation falls to the insurance institution that insured the person responsible for causing the accident and associated damages or injuries. Consider the example that follows: John and Jane are involved in an accident in which John ran a red light and side swipes Jane, causing damage to her car and minor injuries. As such, John is completely at fault for the accident. Under a fault-based system, John’s insurer is responsible for paying for the damages and injuries incurred by Jane. Moreover, in order to receive her compensation, Jane must either negotiate with John’s insurer or take her case to court.

Under a no-fault system, responsibility for paying compensation falls, at least initially, to the insurance institution of the person who experienced the damages or injury. In John and Jane’s accident, then, Jane would receive compensation for her loss from her own insurance company, even though it was John that caused the accident. Jane’s insurer would then be entitled to sue John’s insurer in order to recover the monies they paid out to Jane.

The commonly cited benefit of no-fault insurance is that it allows persons quicker access to financial compensation in addition to other insurance benefits (such as health care benefits). Under an at-fault system, responsibility for the accident often has to be established first before persons can access the benefits of their insurance. This can take some time, especially if the parties decide to litigate the case in court. Under a no-fault system, the issue of fault has no bearing on access to compensation or benefits. It is simply an issue for the insurers to figure out later on.

Regulation of Insurance Premiums

Auto insurance systems can also differ in their regulation of auto insurance premiums. Under a completely unregulated scheme, insurance institutions are free to charge any level of premiums to their clients they wish. Under a regulated scheme, the government establishes rules which restrict what insurers can charge their clients for insurance.

The level of regulation can differ substantially. It may be the case, for example, that a government simply wishes to protect consumers from large annual increases in insurance premiums. As such, it will enact legislation that limits the amount by which insurers can raise their premiums from one year to another. In may also be the case that a government wishes to deter profiling by insurance institutions when determining insurance. In this way, the government will pass legislation that prohibits insurers from charging higher premiums to particular individuals or groups because of their age, gender, or ethnicity. In the most extreme case, a government may wish to control insurance premiums completely, and will institute a government board or agency which has the power to set insurance premiums.

Auto Insurance Systems Across Canada

Comparison of provincial/territorial auto insurance systems

As already discussed, Canada’s auto insurance system is made up of a set of separate and different provincial and territorial regimes. The following section provides an overview of these provincial and territorial systems.

Mandatory Auto Insurance Regimes

All provinces and territories in Canada have mandatory auto insurance regimes which require motorists to purchase basic auto insurance. While this mandatory basic insurance always includes some level of coverage for property damage, personal injury, and third person liability, the precise level of this coverage can differ significantly from one jurisdiction to another. Above this mandatory basic insurance, motorists in all provinces and territories have the choice of whether to purchase additional coverage.

Public and Private Auto Insurance

All provinces and territories in Canada allow private institutions to offer insurance products to motorists. The level of this private participation, however, ranges greatly from one jurisdiction to another.

Nine provinces and territories have purely private auto insurance systems: Ontario, Alberta, Newfoundland and Labrador, Nova Scotia, New Brunswick, Prince Edward Island, Northwest Territories, Yukon, and Nunavut. In these jurisdictions, residents purchase their auto insurance strictly from private insurance institutions.

The four remaining provinces have hybrid auto insurance systems, which combine both public and private insurers. The hybrid systems of British Columbia, Saskatchewan and Manitoba are divided along “basic” and “additional” coverage. The mandatory basic insurance must be purchased through the provincial government insurer. If, however, residents desire additional insurance coverage, they have a choice of purchasing it either through the government insurer or through private insurance institutions.

Quebec’s hybrid system is divided along different lines. There, the government insures against injuries to people resulting from the operation of motor vehicles, while private institutions insure against damage to property. As such, residents have two auto insurance policies – one from the government and another from a private insurer.

Fixed versus Flexible Compensation Systems

All provinces and territories in Canada operate a fixed system in at least one respect. In a series of decisions during the 1970s, the Supreme Court of Canada established an “upper limit” or “cap” for non-pecuniary general damages resulting from motor vehicle accidents, which is applicable to all provincial and territorial auto insurance systems. As noted earlier, “non-pecuniary damages” include, for example, a loss of future earnings, the costs associated with future care, and awards for pain and suffering. “Pecuniary damages,” by contrast, include damages incurred during the accident. In 1978, the upper limit was set by the Court at $100,000, to be adjusted annually for inflation.

Generally speaking, most provinces and territories operate under a flexible compensation system within this general upper limit on non-pecuniary damages. Persons are entitled to claim any amount of financial compensation for pecuniary damages, and any amount up to the judicially established limit for non-pecuniary damages. The level of compensation persons receive depends on what they can negotiate with the insurer or successfully litigate in court.

Between 2000 and 2005, however, several provinces instituted elements of a fixed compensation system in order to curb rising auto insurance costs. New Brunswick, Nova Scotia, Prince Edward Island, and Alberta all introduced caps on compensation for minor injuries, ranging from $2,500 to $4,000.

These provincial caps for minor injuries have been recently challenged in the courts. In February 2008, an Alberta court ruled that Alberta’s $4,000 cap unconstitutionally violated the Canadian Charter of Rights and Freedoms. The decision potentially affects not only that province’s cap system, but also those of New Brunswick, Nova Scotia, and Prince Edward Island. At the time of this article, the Government of Alberta had announced its intention to appeal the decision.

No-fault Insurance Regimes

All provinces and territories in Canada have instituted some form of no-fault insurance, which provides motorists with some access to compensation and/or benefits through their own insurers, rather than having to deal strictly with the insurer of the at-fault party. The precise operation of no-fault insurance, however, ranges across jurisdictions.

On the one hand, Alberta motorists are only entitled to access very modest accident benefits through their own insurer, and must deal with the at-fault party’s insurer to recover additional damages. On the other hand, Quebec motorist have access to very substantial accident benefits through their own insurers, and are disallowed from suing the at-fault party’s insurer for additional damages. The other provinces and territories fall somewhere in between the Alberta and Quebec examples.

Regulation of Insurance Premiums

Each province and territory in Canada has its own system of regulating insurance premiums. Most jurisdictions have some government body which oversees the market conduct of insurers (private or public), including the amount of money they charge for their insurance policies. The power of these regulatory bodies, however, can range from jurisdiction to jurisdiction.

In Alberta, for example, the Automobile Insurance Rate Board (AIRB) has very robust powers to control premium levels for basic insurance coverage, including the authority to set the maximum chargeable premium for basic coverage. Private insurers (Alberta has a private insurance system) are prohibited from charging premiums above this government-set threshold; although, they are free to charge any amount less than the maximum allowable level. In Ontario (also a private system), the provincial government’s Financial Services Commission is responsible for overseeing auto insurance premiums. Unlike its Albertan counterpart, the Commission does not have the authority to set maximum chargeable premiums. That said, all insurers are required to submit applications to the Commission before changing their premiums. The Commission has the power to deny an application if it deems an increase to be unreasonable.

Additionally, all provinces and territories prohibit insurers from using certain profiling techniques when determining premiums for particular motorists. Again, this differs from jurisdiction to jurisdiction. Some provinces/territories place fairly severe restrictions on insurers, denying them from considering such things as age, ethnicity, marital status, and not-at-fault accident history. Other jurisdictions are more lenient in what insurers may and may not consider.

It’s also important to note that some jurisdictions have acted directly to regulate auto insurance premiums. During the early years of the new millennium, for example, several governments introduced legislation to temporarily freeze or reduce auto insurance premiums. This included the governments of Ontario, Alberta, Nova Scotia, New Brunswick, and Newfoundland and Labrador.

Issues in Auto Insurance in Canada

Key public policy debates on auto insurance

Auto insurance in Canada is often a highly political issue. The following section offers an overview of some of the key issues and debates that dominate this policy area.

Private versus Public Auto Insurance

One of the more contentious debates has been over basic framework of auto insurance; in particular, whether it should be a public or private system. The precise nature of this debate differs from jurisdiction to jurisdiction. In the Atlantic Provinces, for example, the debate is centred on whether or not to scrap current private auto insurance systems in favour of public systems. In British Columbia, by contrast, the debate revolves around whether to introduce more private participation in a predominately public industry.

The “private versus public” debate comes in many different shapes and sizes. Supporters of private auto insurance tend to emphasize the potential benefits of a free market system, such as greater choice for consumers and reduced premium cost due to competition by insurers. On the other side, supporters of public auto insurance tend to focus on the potential benefits of a universal, not-for-profit, and publicly administered insurance regime. This includes lower premiums overall (stemming from a larger economy of scale), reduced discrimination against certain groups of motorists (private insurers often charge higher premiums for certain demographic groups), and the ability to funnel any profits into other public goods, such as transportation infrastructure.

For an argument in favour of public insurance:

Canadian Centre for Policy Alternatives: Down the Road: The Implications of “Full Competition” for Public Auto Insurance in British Columbia (PDF)

For an argument in favour of private auto insurance:

Fraser Institute: The False Promise of Government Auto Insurance (PDF)

In assessing arguments in the private versus public debate, it’s important to remember the reality of auto insurance in Canada. There are no purely public or private systems. Instead, there are predominately public systems that have some level of private participation or predominately private systems that have high levels of government regulation. As such, the question is not necessarily which is better, a government system or a free market system? Instead, the issue is to what extent, and in what form, public and private actors should participate in the auto insurance industry?

Escalating Costs of Auto Insurance

Another key issue in auto insurance has been escalating premium costs. This issue was particularly resonant during the 2000-2005 period when many jurisdictions in Canada experienced substantial increases in insurance premiums from year to year.

One Year Change in Auto Insurance Premiums (2002-2003)

Jurisdiction	Type of System	Percent Increase

National Average		26.3
Alberta	Private	50.1
New Brunswick	Private	41.2
Newfoundland and Labrador	Private	40.0
Nova Scotia	Private	39.8
Quebec	Public/Private	30.9
Ontario	Private	27.7
Prince Edward Island	Private	24.8
Yukon	Private	18.1
Northwest Territories	Private	12.3
Saskatchewan	Public	9.5
British Columbia	Public	7.3
Manitoba	Public	0.1

(Source: CBC, February 18, 2005)

As the above table shows, jurisdictions with private insurance systems experienced the highest increases during this period. This resulted in public demands for governments to intervene in order to address the issue. As a result, several provincial governments took measures to curb auto insurance costs, ranging from instituting caps on damages for certain injuries, to enacting legislation which temporarily froze or reduced auto insurance premiums. New Brunswick even explored replacing its private insurance system with a fully public one, although the reform was never instituted.

One the more robust sets of reforms were implemented in 2004 by the Government of Alberta. Under new legislation, the government put into a place a Premium Grid which set out maximum thresholds private insurers could charge customers for basic coverage, in addition to placing a temporary freeze on auto insurance rates. Also, in an effort to control costs for insurers, the government instituted a $4,000 cap for minor injuries, such as minor sprains, strains, and minor whiplash. The limit did not extend to other damages, such as loss of income or medical expenses, or to serious injuries. (This limit was successfully challenged in court in 2008. See remaining paragraphs.)

Government Limits on Compensation

In 2003 and 2004, three provincial governments implemented caps on damages for minor injuries: New Brunswick, Nova Scotia, and Alberta. The purpose of these caps was to reduce auto insurance premiums for motorists by controlling costs for their insurers. With lower payouts for minor injuries, insurers could offer insurance policies at cheaper prices.

The government-instituted caps, however, were contested in court, and the first major ruling delivered in February 2008. An Alberta court found that province’s cap on minor injury damages to be in violation of the Canadian Charter of Rights and Freedoms on the grounds that it was discriminatory. At the time of this article, the Government of Alberta had stated its intent to appeal the court’s decision. If upheld, the decision could have important consequences for Nova Scotia and New Brunswick, whom have also instituted caps for damages in cases of minor injuries.

The issue highlights a difficult problem in auto insurance for both private and public systems: how precisely does one balance the rights of injured persons to receive fair compensation, while ensuring that persons have to access affordable auto insurance?

In this context, it’s worthwhile to note that other jurisdictions in Canada have attempted to address escalating auto insurance costs through other non-cap means. Newfoundland and Labrador has implemented a $2,500 deductible for all minor injury claims. While this is not a cap, it does reduce the sum that persons may receive for minor injuries. Other provinces, such as Ontario, have instituted special thresholds for minor injury claims. This threshold reduced the number of people eligible to make claims for minor injuries.

Sources and Links to More Information

List of article sources and links to more on this topic

Sources used for this Article

“Property and Casualty Insurance in Canada.” Department of Finance Canada. 11 December 2007. 17 March 2008. <http://www.fin.gc.ca/toce/2003/property_e.html>
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