It has been thirteen years since Canada first committed, under the G20, to phase out inefficient fossil fuel subsidies. Since then, the subsidy file has shifted substantially. International leaders and experts, such as the Executive Director of the International Energy Agency 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.
Despite advancing the timeline of its commitment to phase out fossil fuel subsidies from 2025 to 2023, 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 four-year mark; peer reviews from other countries have been completed in 12-18 months. The Department of Finance has not yet provided details on which tax measures are being assessed and ECCC has yet to provide an update on the results from the 2019 consultations on non-tax subsidies.
Some fossil fuel subsidies may appear to have environmental or social benefits, but these are far outweighed by the costs from distorting the market, prolonging fossil fuel production, worsening pollution, and opportunity cost in relation to a just transition. Transparency and accessible information around subsidies is critical.
Subsidy and public finance levels
In 2021, federal fossil fuel subsidies and supports talled at least $8.6 billion, including direct transfers and foregone tax revenues as well as public financing, as through Export Development Canada.
In Budget 2022, the government introduced an investment tax credit for carbon capture, utilization, and storage (CCUS) while failing to advance promised tax credits for renewable technologies. The Green Budget Coalition considers that the costs of reducing emissions in oil and gas production and other high-emitting industries should be borne by industry in line with the polluter pays principle. This CCUS tax credit incentivizes fossil fuel production and thus slows the transition to non-polluting energies. When the investment tax credit is combined with other incentives for CCUS, it risks providing windfall earnings to these projects.
At COP26 in Glasgow, Canada joined a historic commitment to end international fossil fuel finance and redirect that support toward clean energy by the end of 2022. Yet new research shows that Canada had the greatest public finance for fossil fuels from 2018-2020, providing an average of $11 billion per year, and is poorly ranked in its progress on meeting the Glasgow commitment on public finance. Thus, Canada needs to move quickly this year to deliver on this commitment by ending all international fossil fuel finance, alongside domestic public financing, and reorienting those funds towards clean technologies.
Potential for emerging subsidies
Lastly, as the government rolls out its national hydrogen strategy, decisions about Canada’s future role in the emerging hydrogen market must be made. Oil and gas interests see investments in fossil fuel-derived hydrogen as a way to search for a new market for their products as the world transitions away from oil. Fossil fuel-based (including “blue”) hydrogen is not free of carbon emissions and relies on expensive carbon capture and storage (CCS) technology. Subsidies should be directed instead towards 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 prioritise renewable hydrogen to remain competitive in global markets and avoid lock-in of emissions-producing assets.
For nearly two decades, the Green Budget Coalition has been calling for fossil fuel subsidy reform, and this is the fifth consecutive year that we have been calling for timely action to phase out fossil fuel subsidies in line with Canada’s international commitments. The recommendations are reiterated here with renewed urgency given the timelines of the government’s commitments and the escalating climate crisis:
- Commit to not introducing any new subsidies or fossil fuels. [FIN, NRCan, ISED, ECCC]
- Phase out fossil fuel subsidies by 2023 with robust definitions:
- Complete a transparent G20 peer review with Argentina, using the internationally agreed upon World Trade Organization (WTO) definition, including public finance elements, and robust criteria for “efficiency”, as outlined in a recent IISD and Equiterre brief. [FIN, ECCC]
- Publish the results of Canada’s long overdue self-review by fall 2022. [FIN, ECCC]
- Act upon the self-review and peer-review results by 2023 to eliminate fossil fuel subsidies that do not meet the efficiency criteria. [FIN, ECCC]
- Release clear, detailed information on amounts of all federal fossil fuel subsidies and supports (updated annually), based on the WTO definition. [FIN]
- Redirect current subsidies and supports from fossil fuels to clean technologies such as investment tax credits and public finance for green technology including renewable hydrogen, batteries, and energy storage.
- Re-orient public finance, particularly from Export Development Canada [FIN, GAC]:
- End Export Development Canada’s support for fossil fuels in the short term (including through the Canada Account) by implementing robust exclusionary policies that include indirect support;
- Align EDC’s entire portfolio with Canada’s climate commitments and a 1.5°C degree scenario. Substantially improve EDC’s target for reducing carbon-intensive investments and develop concrete plans for reducing these investments in order to support the transition to clean energy;
- Adopt strict definitions of “limited and clearly defined exceptions” and “unabated” that ensure against fossil fuel lock-in, including for gas;
- Increase transparency on transactions, conditions applied, and GHG emissions associated with investments; and
- Work with the other Glasgow Statement signatories to encourage other countries to join this initiative and to cement their joint commitments into international policy processes including at the major multilateral development banks, in the G7, G20, and the OECD. Collaborate with low- and middle- income signatories to ensure that Canada’s implementation efforts respond to their transition needs.
See also Advancing a zero-emissions electricity grid based on renewables, earlier in this document.