Research

How are welfare losses distributed across households in a small fossil-fuel exporting economy during a global transition away from fossil fuels and what channels determine the losses? I build a multi-sector small open economy model with finitely lived households with idiosyncratic earnings risk, and endogenous terms of trade. I calibrate the model to Canadian data and find that aggregate losses across households amount to a 2 percent loss in consumption. The lifetime loss in consumption due to a fall in the world price for fossil exports explains between roughly 77 and 85 percent of the aggregate loss while the domestic carbon tax with a per-capita rebate explains between roughly 15 percent and 18 percent. Young households and future generations lose the most. The depreciation in the real exchange rate that is required to replace fossil exports lowers wages, costing young workers while raising the return on savings of older households. A model with endogenous terms of trade roughly doubles the loss of future cohorts relative to a model with a fixed real exchange rate. Compensating households alive at the start of the transition would cost 28 percent of GDP.

We study the behaviour of Canadian Total Factor Productivity (TFP) growth over the past 60 years. We find that the observed stagnation during the last 20 years is entirely accounted for by the Oil sector. Higher oil prices made capital-intensive sources of oil like the oil sands viable to extract on a commercial scale. However, the greater input required per barrel of oil slowed TFP growth. Comparing Canadian TFP growth to those of the United States and Norway reinforces these results. However, our result should not be interpreted to carry any welfare implications.

In Loertscher and Pujolas (2024) we showed that the stagnation of Canadian total factor productivity between 2001 and 2018 is accounted for entirely by the oil sector. Extending the exercise through the most recent data, we find that the oil sector alone no longer carries the result after 2014: oil investment collapsed with the oil price, and the sectors that succeeded it as the economy's capital sinks were transportation and warehousing — where the stock of engineering structures doubled during the pipeline construction era — and utilities, home of the decade's electricity megaprojects. Net of this energy-and-network-infrastructure complex, which holds three-fifths of the business-sector capital stock while producing about a seventh of its value added, Canadian TFP shows no stagnation at all: it grows at a steady 0.84 per cent per year from 2001 to 2021, with no break in 2014. The TFP of the complex itself fell by nearly half over the same period. No other group of three industries does as well, although much of the effect is the weight of capital removed. The pattern is distinctly Canadian: in the United States the complex’s share of private capital fell from a fifth in 1961 to about an eighth and aggregate TFP kept growing, while in Norway, where measured TFP has not grown since 2001, the oil sector accounts for the shortfall and the complex’s capital share shrank after 2014. Only Canada replaced one capital sink with another. As in our earlier work, the result carries no welfare implications: much of the measured decline is capital installed ahead of the output it will eventually move.

Preliminary: How does product concentration affect welfare gains from trade? While traditional quantitative trade models can account for export concentration, they are unable to adequately match import concentration, particularly the fact that richer countries import a greater variety of goods. In this paper we enrich a multi-country Ricardian model of international trade to match both import and export concentration. Our model is also able to account for changes in the Least Traded Products margin (as defined in Kehoe and Ruhl, 2013) after a trade liberalization.