More problem with fossil fuel subsidies

(This is the second of three columns about fossil fuel subsidies covering B.C. royalty, direct and indirect subsidies.)

The fossil fuel industry in British Columbia received $765.3 million in subsidies in 2020-21.

The subsidies point to a pattern of public spending that runs counter to both the goal of B.C.’s climate policies and the larger social imperative to undertake meaningful climate action.

The vast majority of these subsidies go to natural gas producers. Royalty reductions and credits are available to fossil fuel producers in B.C. through allowances, exemptions, credits and lower royalty rates (see below).

Reduced royalty programs are designed to address situations where costs are not covered by existing oil and gas royalties. Those programs reduce royalties that companies pay to the government, thereby encouraging fossil fuel exploration, development and production in higher cost environments.

The largest is the Deep-Well Royalty Program, which provides royalty credits to companies that drill deep wells, usually by fracking. According to budget documents, the B.C. government plans to continue expanding the credit to $657 million in 2023-24.

Worth more than $100 million in 2022-23, the second biggest publicly funded fossil fuel windfall is the Clean Growth Infrastructure Royalty Program, which encourages investment in natural gas infrastructure that reduces methane leakage. (The B.C. government does not consider this a subsidy, so you be the judge.)

Royalty payments from oil and gas producers are supposed to provide benefits to B.C. residents by funding social services, like health care and education.

However, each year, fossil fuel producers claim hundreds of millions of dollars in credits to reduce the amount of royalties they pay. Those billions in outstanding credits that fossil fuel producers will never have to pay is money B.C. residents will not see put toward social services, thus contributing to B.C.’s overall deficit.

Finally, not all credits granted in a given year are deducted that same year. The carry-forward element means the B.C. government will provide significant amounts of royalty reductions to fossil fuel producers for many years to come, an enormous future financial burden.

At least $532 million in tax-related fossil fuel subsidies were provided in B.C. in 2021. Some of the most significant ones were the provincial sales tax exemption for residential fuels for fossil fuels (worth $177 million in 2020-21), and the motor fuel tax exemption for jet fuel (valued at $23 million in 2019).

Provincial sales tax on electricity for industry was eliminated in April 2019 in order to encourage LNG producers to use electricity for their energy needs.

B.C. also provides fossil fuel subsidies in the form of direct payments via various government programs and one-off investments. CleanBC building efficiency measures rebates provide a number of rebates for installing natural gas equipment. The CleanBC Industrial Incentive Program exempts carbon tax on emissions below benchmark levels as an emissions reduction incentive.

The CleanBC Industry Fund, valued at $12.5 million in 2019, provides direct investments for greenhouse gas emission reductions projects by heavy industry.

Those programs amount to fossil fuel consumption subsidies since they ultimately reduce costs of fossil fuel use for large emitters.

Most emissions from the oil and gas sector (80% to 90%) are exempt from carbon pricing. Fugitive methane emissions are substantial, likely significantly higher than reported and are exempt from carbon pricing, including provincial carbon tax.

Because the full amount of B.C.’s venting-related emissions is uncertain, it is difficult to calculate the value of this subsidy. It was estimated at least $56 million in 2016 and would be much higher now.

In 2022-23, nearly 30% of all Canadian-controlled private corporations that extract oil and gas (80 in B.C.) paid the lowest income tax rate for small businesses of 9% for some of their taxes, instead of the regular rate of 15%.

Additionally, B.C.’s budget lists its road and pipeline infrastructure credit and other infrastructure programs at $71 million in 2021.

The Clean Growth infrastructure credit allows firms to claim royalty deductions related to GHG emission reductions (without showing any specific expenditures), further encouraging investment in oil and natural gas infrastructure with no guarantee of emissions reductions.

British Columbia fossil fuel subsidies include:

Royalty reductions:

• Low Productivity Well Royalty Reduction

• Marginal Well Royalty Reduction

• Ultra-marginal Well Royalty Reduction

• Net Profit Royalty Program

Credits:

• Clean Growth Infrastructure Royalty Program

• Clean Infrastructure Royalty Credit Program

• Infrastructure Royalty Credit Program

• Deep Well Royalty Credit Program

• Natural Gas Deep Well-Re-Entry Credit Program

Allowance:

• Producer cost of service

• Natural gas allowance

Gas cost allowance exemptions:

• Oil discovery wells

• Natural gas or by-products used for production, drilling or injection

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