Phasing out fossil fuel subsidies & re-orienting public finance

It has been more than eleven years since Canada first committed to phase out inefficient fossil fuel subsidies under the G20. Since then, the subsidy file has shifted substantially. International leaders and experts, such as the Executive Director of the International Energy Agency (IEA) and the Secretary- General of the UN, have stressed that net-zero is not possible without removal of fossil fuel subsidies and an end to public finance for fossil fuels. Both are critical to ensure a climate-safe future, avoid undermining positive climate policies, and free up capital to transition to a low-carbon economy. Full progress on this file will require collaboration and work with the provinces and territories to address fossil fuel subsidies at the subnational level.

About 50,500 jobs in the Canadian oil and gas industry have been lost since 2014 and the industry is no longer a stable source of employment, pointing to an urgent need to support workers through economic diversification and just transition [see recommendation on Just Transition, later in this document], from which subsidies hold us back. Subsidies that may appear to have environmental or social benefits can still distort the market, prolong fossil fuel production, worsen pollution, and create significant opportunity costs (including for just transition)—which is why it is critical that the government transparently assess subsidies against robust economic, social and environmental criteria.

Despite progress on phasing out several tax measures, Canada remains the slowest to phase out overall support for fossil fuels among G20 OECD countries. Canada’s progress on the G20 subsidy peer review with Argentina is significantly behind schedule and approaching the three year mark; past peer reviews have taken 12-18 months. The Department of Finance has not yet provided details on which tax measures are being assessed and ECCC has not yet provided an update on the results from the 2019 consultations on non-tax subsidies.

 

Subsidy levels

In the context of the pandemic, federal fossil fuel subsidies jumped threefold from $600 million in 2019 to $1.9 billion in 2020, not including tax provisions, subsidies for the Trans Mountain project, or credit support such as through Export Development Canada (EDC). While the largest of these measures (for well clean-up) had links to environmental and employment benefits, the government must ensure future clean-up costs are borne by industry in order to respect the polluter pays principle and not lock taxpayers into covering costly future liabilities.

 

Public finance

A recently released report and scenario from the IEA demonstrates that if we are to achieve net-zero, no new investments can be provided for fossil fuels starting this year. Currently, Canada is the second largest provider of public finance to oil and gas in the G20. From 2016-2020, EDC provided an average of $13.3 billion in financial support to oil and gas companies each year. EDC’s updated 2021 climate government-backed change policy seeks a 40% decrease of its exposure to the most carbon-intensive sectors by 2023. There is significant concern about the lack of exclusionary policies for fossil fuel investments, particularly given EDC’s history in financing the industry domestically.

 

Potential for emerging subsidies

Lastly, as the government rolls out its national hydrogen strategy, decisions about Canada’s future role in the emerging hydrogen economy must be made. The oil and gas sector continues to push for governments to invest in fossil fuel derived hydrogen as a way to search for a new market for their products as the world transitions away from oil. So- called “blue” hydrogen is not free of carbon emissions and relies on carbon capture and storage (CCS) technology, which is still immature and prohibitively expensive. Emphasis on blue hydrogen delays the urgent transition to renewable (green) hydrogen. The urgency of the climate crisis and the need for rapid emissions reductions means new government investments must be focused on carbon-free energy systems. It is critical that newly announced funding measures, such as the $1.5 billion for the Low Carbon and Zero- Emissions Fuels fund, prioritize renewable hydrogen, to remain competitive in global markets and avoid lock-in of emissions-producing assets.

In Budget 2021, the government also introduced a tax credit for capital invested in CCS, to come into effect in 2022. At minimum, under the new tax credit, we support an approach that ensures no credit is given for enhanced oil recovery projects. It is crucial that the tax credit for CCS does not incentivize fossil fuel production by lowering its production cost.

 

Recommendations:

  1. Commit to not introducing any new subsidies for fossil fuels, which includes ensuring that financial support for hydrogen is prioritized for renewable (green), not fossil fuel- based (blue or grey) hydrogen. [FIN, NRCan, ISED, ECCC]
  2. Phase out fossil fuel subsidies on an ambitious timeline with robust definitions:
    1. Complete a transparent G20 peer review with Argentina, using internationally agreed upon definitions and robust criteria for “efficiency” that align with Canada’s climate commitments. If completing the review is delayed due to the partner country, Canada should publish the results of its self-review by fall 2021. [FIN, ECCC]
    2. Develop and publish a roadmap in 2021-22 to exceed Canada’s commitment to phase out inefficient fossil fuel subsidies by 2025. [FIN, ECCC]
    3. Release clear, detailed information on amounts of all federal fossil fuel subsidies
      on an annual basis. Provide transparent and detailed data on COVID-19 support provided to fossil fuel producers, including that from federal credit agencies. [FIN]
  3. Re-orient public finance, particularly from Export Development Canada [FIN, GAC]:
    1. End Export Development Canada’s support for fossil fuels in the short term (including through the Canada Account) by developing robust exclusionary policies;
    2. Align EDC’s entire portfolio with Canada’s climate commitments and a 1.5 degree scenario. Substantially improve EDC’s target for reducing carbon-intensive investments;
    3. Create robust targets for climate-focused investments in order to support the transition to clean energy; and
    4. Increase transparency on transactions, including COVID-19 related spending, conditions applied, and GHG emissions associated with investments.

 

Contacts

Vanessa Corkal – vcorkal@iisd.ca
Marc-André Viau – maviau@equiterre.org