September 2018: The International Institute for Sustainable Development (IISD) has provided an update on Canadian federal subsidies for fossil fuel production. The briefing note indicates that while overall fossil fuel subsidies are lower in the period 2016-2018 compared to 2015, this decline can be attributed to improvements in the design and administration of subsidies, oil price fluctuations, and adjustment in company practices in the use of subsidies, rather than a substantive subsidy reform.
Titled, ‘Public Cash for Oil and Gas: Mapping federal fiscal support for fossil fuels,’ IISD’s briefing note focuses on two kinds of federal subsidies to oil and gas production in Canada: direct transfers; and fiscal policies specific to fossil fuel extraction and production. The authors note that their scope is limited to the production subsidies because policies that subsidize or incentivize the consumption of fossil fuels in Canada are generally found at the provincial and territorial levels.
The first section explains that the motivation for many subsidies, such as flexible tax provisions, aim to even out volatile oil prices to allow companies to plan their cash flow over longer time horizons. The report notes that most Canadian oil reserves require a relatively high price of oil to be profitable, citing studies that estimate the average break-even price for existing Canadian oil prices at US$40, and US$58 for projects under development.
The second section summarizes federal subsidy policies. It reports that policies exist primarily to incentivize the fossil fuel industry to extract oil, gas and coal, or to make this extraction less greenhouse gas (GHG)-intensive. While some subsidies support innovation in the oil and gas industry, from enhanced extraction processes to reducing GHG emissions at the extraction site, the authors note that these are still ultimately fiscal supports for the oil and gas industry provided through public revenues. Similarly, tax provisions that are specific to the oil, gas and mining sectors, ultimately translate into lower a lower income tax for oil and gas industry.
The figure for subsidies in 2016-2018 is significantly lower compared to 2015. The briefing note attributes this decline to three reasons: federal progress on subsidy reform; the impact of oil price fluctuations on the value of deductions; and how companies use tax deductions. The authors note, however, that the estimate does not include the potential subsidies that will be necessary to complete the expansion of Kinder Morgan’s Trans Mountain Pipeline after the Federal Government purchased the project.
The authors underline the need for a review of tax provisions considering the current understanding of externalities. They explain that by making fossil fuel extraction and production financially attractive, subsidies undermine the competitiveness of renewable energy alternatives and their attractiveness to investors thus tipping the scales in favour of the energy sources that drive climate change.
The final section addresses the need to consider the implications of a transition towards renewable energy for workers employed in the fossil fuel sector. The Canadian government has responded to the need for a “just transition” with the launch of a task force aimed to provide knowledge, options, and recommendations on how support workers and communities that will be affected by the phase out of coal-fired electricity. The authors argue that the same economic dynamics that cause the phase-out of coal-fired electricity will ultimately drive the decline of the oil and gas sector. IISD argues it is imperative that those in these declining energy sectors are part of the planning.
The briefing note was developed in in collaboration with Oil Change International, équiterre, environmental defence, and the Climate Action Network in Canada. [Publication: Public Cash for Oil and Gas: Mapping federal fiscal support for fossil fuels] [IISD Global Subsidies Initiative]