Oil Rents and the Politics of Equalization in Canadian Federalism

Abstract

Oil production and Equalization payments are two contentious and often overlapping subjects in Canadian politics. Alberta’s Premier recently argued that his province’s energy sector pays a disproportionate share of the Equalization payments that Quebec receives. This came after Quebec’s Premier referred to Alberta oil sands as “dirty energy.” Canadian federalism has become the stage for the debate on oil rents and the politics of Equalization. The purpose of Canada’s Equalization program is to reduce the horizontal fiscal imbalance between provinces to ensure public services of comparable quality. Whereas Canada is the world’s fourth largest producer and exporter of oil, proven reserves are largely concentrated in the Prairies’ oil sands. Eastern Canadian provinces, including Quebec, have so far been the main recipients of federal Equalization payments. But to what extent do oil revenues sustain Canada’s Equalization program? This paper argues that oil rents in no way sustain the Equalization program, because these are revenues that belong exclusively to the provinces. However, provincial ownership of natural resources and their uneven geographic distribution actually contribute significantly to the regional wealth disparities that Equalization tries to mitigate. This study provides an overview of oil policy and federal transfer payments, paying close attention to the structure of Equalization. The objective is to demystify some of the claims surrounding the relationship between oil revenues and their redistribution and thus better inform policy debates on equalization in Canada.