How much are taxpayers really subsidizing Canada’s fossil fuel industry?

Science·CBC Explains

We’ve heard that Canada’s fossil fuel industry gets billions in subsidies, and that it’s making it harder for us to reach our climate goals. But what kind of funding are taxpayers actually giving the fossil fuel industry in different parts of the country? And what impact does it actually have? Here’s a closer look.

A dump truck is seen outside the Syncrude oilsands extraction facility near Fort McMurray, Alta. The federal and provincial governments provide billions of dollars in supports that make producing and consuming fossil fuels cheaper. (Jason Franson/The Canadian Press)

We've heard that Canada's fossil fuel industry gets billions in subsidies, and that it's making it harder for us to reach our climate goals.

But how much funding are taxpayers actually giving the fossil fuel industry in different parts of the country? What's it used for? And what impact does it actually have? Here's a closer look.

First of all, what's a subsidy, anyway?

There's no agreed-upon definition, even within Canada.

Canada's auditor general says that at its most basic level, a subsidy provides an advantage and can include tax measures such as deductions or credits, grants or direct funding (which may be earmarked for things like equipment or R&D), or government loans or loan guarantees (which are often described by the more specific term public financing).

Subsidies can also include reduced royalties or royalty credits — effectively, a discount on the lease of Crown land for oil and gas production. The lease agreement usually includes a share of the oil and gas produced, or its value.

The auditor general's definition is based on that of the World Trade Organization. It says a subsidy is a "financial contribution by a government or any public body… that confers a benefit."

More generous definitions, such as the International Monetary Fund's, also include "externalities" — costs to society, including environmental damage such as oil spills, health impacts from pollution and damage due to climate change impacts like extreme weather.

Narrower definitions exclude many of these things.

Pumpjacks extract oil in an Alberta oilfield. Unlike many other organizations, including Canada's auditor general, the Canadian Association of Petroleum Producers does not consider tax breaks to be subsidies.(Kyle Bakx/CBC)

Export Development Canada, a federal agency and an important lender for the fossil fuel industry, says the loans, equity and insurance it offers to fossil fuel producers are not subsidies, even though it's been argued that they're crucial for making private financial institutions comfortable about lending the balance of the funding needed for projects.

CAPP (The Canadian Association of Petroleum Producers) says it does not consider tax measures to be subsidies, despite a report from Canada's Parliamentary Budget Officer in December showing that tax deductions by fossil fuel producers reduced annual federal tax revenue by $2.3 billion in 2019.

What exactly is being subsidized?

It may not feel like it, but you and your family are probably the beneficiaries of some fossil fuel subsidies. You're also definitely contributing to some through your taxes.

Subsidies can make it cheaper to:

  • Consume fossil fuels. That can include energy rebates to offset heating bills or tax deductions or exemptions for fuel costs. According to the OECD, consumer subsidies represented 38 per cent of $4.5 billion in Canadian fossil fuel subsidies in 2020.
  • Produce fossil fuels. That can include reduced royalties, lower interest rates or funding for infrastructure, research, development, technology or environmental cleanups such as orphaned wells.

A farm tractor is silhouetted against a setting sun near Mossbank, Sask. Fossil fuel consumption subsidies, such as fuel tax exemptions, are often used to support industries such as agriculture.(Adrian Wyld/The Canadian Press)

How much does the fossil fuel industry actually get from taxpayers?

That depends on who you ask, how they define a subsidy and what data is used to calculate the total — resulting in highly variable estimates.

In Canada in 2020, estimates range from $4.5 billion (OECD) to $18 billion (Environmental Defence, including public financing to support pipelines) to $81 billion (IMF, including externalities), although most reports note that a lack of transparency makes complete and accurate calculations difficult.

Oil Change International, a research and advocacy group focused on getting the world off fossil fuels, recently reported that Canada provided more public financing for fossil fuels than any other G20 country, averaging $14 billion annually between 2018 and 2020.

Some subsidies are federal and some provincial. A recent report from the International Institute for Sustainable Development (IISD) on provincial fossil fuel subsidies estimated B.C., Alberta, Saskatchewan and Newfoundland and Labrador together provided at least $2.5 billion in provincial fossil fuel subsidies in the 2020/2021 fiscal year. A previous IISD report found federal fossil fuel subsidies amounted to $1.9 billion in 2020.

The Hebron Platform, anchored in Trinity Bay, N.L., is shown in 2017. Alberta, B.C., N.L. and Saskatchewan provided at least $2.5 billion in provincial fossil fuel subsidies in the 2020/2021 fiscal year, a recent report says.(Paul Daly/The Canadian Press)

Meanwhile, CAPP, the industry group representing Canada's oil and gas producers, says on its website that Canada's oil and gas producers "do not receive government production subsidies, nor is the industry requesting or expecting any such support."

Why do these supports exist?

Governments support many industries considered beneficial for job creation or local economic development, from farming to the film industry.

Fossil fuel consumption subsidies in Canada are often intended to support other industries, such as agriculture, forestry and ordinary businesses and consumers.

Recent federal supports for production were emergency funding to address the economic impact of the COVID-19 pandemic, including $320 million for the oil industry in Newfoundland and Labrador.

Many of the researchers interviewed by CBC, including Rachel Samson, lead author of a recent Canadian Institute for Climate Choices report on subsidies, acknowledged that while production subsidies may have made sense in the past, they no longer do in the global context of climate change and countries' plans to phase out fossil fuel use.

"Fossil fuel production is really no longer the secure source of growth and job creation that it once was," Samson said.

Why are many groups calling for an end to fossil fuel subsidies?

The United Nations Development Programme, the International Energy Agency and the International Monetary Fund are among numerous groups calling for an end to fossil fuel subsidies.

That's because:

They distort markets and undermine climate policies. Policies such as carbon pricing would otherwise push businesses, investors and consumers to reduce fossil fuel investment, production and consumption. By making fossil fuel production and consumption artificially cheaper, subsidies:

  • Discourage efficiency and encourage overconsumption of fossil fuels.
  • Discourage the transition to cleaner, renewable energy technologies.
  • Help build more fossil fuel projects.

Bronwen Tucker, public finance campaign co-manager for Oil Change International, said that new infrastructure can last 40 years.

"It's really locking in an energy system for the coming decades in a way that goes completely counter to what scientists and everyone fighting for climate action is really encouraging."

Protesters block a rail line in Toronto in 2021 in support of Wet'suwet'en land defenders who were arrested by the RCMP in northern British Columbia. Indigenous people are among the groups that are more often negatively impacted by fossil fuel production, researchers say.(Christopher Katsarov/The Canadian Press)

The money could otherwise be invested in valuable things, and more equitably.

Subsidies are often proportional to energy use, so those who use the most energy — typically the rich and wealthy —tend to benefit the most, the IMF says.

Meanwhile, low-income, fossil fuel-dependent and Indigenous communities tend to be disproportionately affected by the negative impacts of fossil fuel production, wrote Temitope Onifade, author of a Canadian Climate Law Initiative report on fossil fuel subsidies.

The money spent on fossil fuel subsidies could be better and more equitably spent on the clean energy transition, along with things such as health care and education, many researchers argue.

"We're not pumping money where it should be going," Onifade said. "Subsidies take that money from all of us."

Many countries have committed to ending fossil fuel subsidies, including Canada.

In 2009, under prime minister Stephen Harper, Canada joined other G20 countries in agreeing to "phase out and rationalize… inefficient fossil fuel subsidies" over the "medium term."

This past November, during the UN climate summit in Glasgow, Canada was among 24 countries that promised to cut subsidies that help oil and gas companies operate and expand outside the country by the end of 2022. Canada also committed to phasing out "inefficient" domestic fossil fuel subsidies by 2023, including those promoting further exploration and production of fossil fuels, but not investments to reduce emissions in the sector.

A flare stack lights the sky from the Imperial Oil refinery in Edmonton in 2018. (Jason Franson/The Canadian Press)

So are subsidies actually being phased out?

Yes and no.

At the federal level, the government has made changes to some tax measures that used to support fossil fuels, said Samson.

Export Development Canada has committed to net-zero emissions by 2050 and has set a 2023 target for reducing its financing support to the six most carbon intensive sectors by 40 per cent below 2018 levels. But Samson said, "It remains to be seen how that's implemented."

Shell's Quest Carbon Capture and Storage (CCS) facility in Fort Saskatchewan, Alta., is seen in 2021. While the federal government is phasing out some supports for fossil fuel producers, it's also bringing in new supports, such as a proposed tax credit for carbon capture and storage.(Todd Korol/Reuters)

The IISD found that direct spending on fossil fuels under non-pandemic federal initiatives declined to $90 million in 2020, from $600 million a year earlier. (Most of the rest of the $1.91 billion in "quantifiable" federal fossil fuel subsidies were one-time pandemic-related supports — although that was the highest amount ever.)

However, Canada is still behind on its G20 commitment to phase out subsidies. A key early step is that countries have been paired up, and each has to produce a list of subsidies for its partner to peer review. Tucker said while other countries have completed that step, Canada and its partner, Argentina, have not.

The federal government is also adding new support for the fossil fuel sector, including:

At the provincial level, there are no commitments so far to phase out subsidies.

Vanessa Corkal, author of the IISD reports, said B.C.'s ongoing review of its oil and gas royalty system is a "positive first step… Hopefully B.C. will listen to the results from that review and actually implement an ambitious change.."

Could subsidies help fossil fuel companies make the low-carbon transition?

The IEA has suggested that one thing that could help the industry transition is more research and development funding.

However, Corkal warns that strong conditions would need to be attached to prevent companies from effectively using that kind of money to expand fossil fuel production.

Samson acknowledges that the government may need to play a role in helping move forward some riskier investments in new markets, such as hydrogen.

But Samson and Corkal say policies such as carbon pricing and regulations such as methane emission regulations and the Clean Fuel Standard will go a long way to encourage companies to invest their own money in low-carbon assets and projects that reduce emissions.

"I don't always think handouts are the best option," Corkal said. "We can thrive in a low-carbon economy if we make the right policy decisions and if we support workers and businesses and communities to do so. And that's going to be harder the longer that we provide support and the subsidies for fossil fuels, because that will undermine all the positive actions we're taking."

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Credit belongs to : www.cbc.ca

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