The problem with fossil fuel subsidies

Photo: Trans Mountain

The now completed Trans Mountain expansion project under construction.

A subsidy is a financial aid, granted by the government, to assist an industry so price of its commodity is artificially lowered.

Fossil fuel subsidies increase sales of gas, oil and coal—sources of the carbon pollution we must lower. Rather than making pollution expensive, subsidies make it cheaper. This is like raising taxes on cigarettes to discourage smoking, while also giving tobacco companies tax breaks so they can make more cigarettes and profits.

To make matters worse, fossil fuel subsidies disadvantage clean energy. They make fossil energy cheaper than renewables. Consequently, investing in renewable energy becomes less attractive. Subsidies distort the market, pushing investment toward sectors that might not otherwise be viable.

When fossil fuel producers receive hundreds of millions of dollars in subsidies each year, vital government resources aren’t available for important sectors, such as renewable energy and social services.

There are three major types of fossil fuel subsidies, royalty reductions, direct subsidies such as grants, loan guarantees and fossil fuel specific tax measures and indirect subsidies such as public infrastructure investments, reduced utility rates, general tax measures and the cost of pollution borne by society.

All of these help fossil fuel companies lower their cost of business and increase profits. Some incorrectly think that removing fossil fuel subsidies means advocating for job losses and energy insecurity. In truth, fossil fuel subsidy reform can be done in a way that supports job creation and enhances energy security, setting Canada up to thrive in the emerging low-carbon economy.

Four of the top oil companies in Canada (Cenovus, Imperial Oil, Suncor and Canadian Natural Resources Ltd.) had a combined annual profit of more than $25 billion in 2021. Oil and gas extraction companies in Canada made more than $63 billion in profits in 2022.

In 2009, at the G20 meeting, Canada committed to eliminate “inefficient” fossil fuel subsidies by 2025. The G20 decision on fossil fuel subsidies set an important international precedent. Unfortunately, Canada has failed to significantly reduce its level of support to the fossil fuel industry. Canada is one of the largest international fossil fuel financers in the world, ranked last among 11 OECD countries on progress in ending fossil fuel subsidies.

• In 2019, the Canadian government purchased the Trans Mountain pipeline and expansion project for $4.5 billion.

• In 2022, Environmental Defence Canada reported tracking $21 billion in federal fossil fuel subsidies, adding that it believed that was likely an underestimate.

• In 2023, the Government of Canada provided at least $18 billion in financial support to fossil fuel and petrochemical companies, including:

• $8 billion in loan guarantees for the Trans Mountain expansion pipeline.

• $7.3 billion in public financing through crown corporation Export Development Canada

• More than $1.3 billion for carbon capture and storage projects.

One of the last things Chrystia Freeland did as federal finance minister was to authorize an additional $20 billion loan to the Trans Mountain pipeline project, bringing the total disclosed federal commitment to nearly $50 billion. The guarantee appears to violate a commitment made by Freeland in 2022 that no further public money would be invested in the project after the pipeline’s cost swelled to $21.4 billion.

In 2022, the Government of Canada introduced a 15 per cent windfall tax on excess profits in the banking and insurance sectors (the Canada Recovery Dividend). Oil and gas companies were not included in this new tax.

The Parliamentary Budget Office estimated that applying the Canada Recovery Dividend to oil and gas profits in 2022 would have generated $4.2 billion in one year alone.

In addition to those supports, federal subsidies are available through numerous funds, such as Canada Infrastructure Bank, Clean Fuels Fund, Strategic Innovation Fund, Sustainable Development Technology Canada (not monitored for use for sustainable development), and Trade Corridors Fund and tax credits, such as the Accelerated Capital Cost Allowance for LNG, Canadian development expenses, Canadian exploration expenses, Canadian oil and gas property expense, Flow through shares, and foreign exploration and development expenses.

Avoiding financial responsibility for climate pollution created by oil and gas companies is an indirect subsidy. Climate costs borne by society include health costs, property damage from extreme weather events and decreased agricultural productivity due to changing weather patterns.

The Government of Canada has developed a tool to calculate these costs, and they would have been over $52 billion in 2023.

(This is the first column in a three-part series about fossil fuel subsidies. The second part, on April 15, will cover royalty, direct and indirect subsidies in B.C. and the third, on April 29, will cover LNG, coal and offer some conclusions.)

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.