Canada’s Approach to Fossil Fuel Subsidies
At the end of July, the Canadian government released a framework to phase out fossil subsidies. It’s a big step, but major questions remain.
Back in 2009, at the G20 summit in Pittsburgh, the world’s largest economies made a pledge to phase out and rationalize over the medium term inefficient fossil fuel subsidies (FFS), which encourage wasteful consumption, reduce energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change. Despite an ambitious commitment, the progress has been slow: the IMF estimated total global FFS at $5.9 trillion in 2020, or 6.8 per cent of GDP, projected to rise to 7.4 per cent of GDP in 2025 under current policies. In the meantime, the International Institute for Sustainable Development (IISD) put the price tag on Canada’s FFS of at least C$4.9 billion per year in 2020.
At COP26 in 2021, the participants signed the Glasgow Climate Pact, which, among other things, called upon Parties to accelerate efforts to phase out FFS. The Liberal Party of Canada made the elimination of FFS a part of its electoral platform at the end of 2021, and included it in the Supply and Confidence Agreement with the New Democratic Party (NDP) in March 2022.
How the framework will be applied
The government has assumed the definition of a ‘subsidy’ adopted by the World Trade Organization (WTO), which is recognized internationally: a financial contribution by a government or any public body within the territory of a Member, which confers a benefit. An initiative would be considered a fossil fuel subsidy if it disproportionately benefits the fossil fuel sector or supports fossil fuel consumption or solely supports fossil fuel activities. According to the government, the framework will apply to the existing nine tax measures (which are in the process of being phased out) and 129 non-tax measures. However, the federal authorities have not provided the full list of measures that would be affected by the framework. There is also no official total estimate of FFS provided by the Canadian government, which makes it impossible to calculate the ultimate impact of the latest policy.
In the meantime, the government has established six exemptions from the framework, where federal funding or a tax measure would be allowed:
Subsidies that enable significant net GHG emissions reductions in Canada or internationally in line with Article 6 of the Paris Agreement (international carbon trading);
Subsidies that support clean energy, clean technology or renewable energy;
Subsidies that provide an essential energy service to a remote community;
Subsidies that provide short-term support for emergency response;
Subsidies that support Indigenous economic participation in fossil fuel activities; and
Subsidies that support abated production processes, or projects that have credible plan to achieve net-zero emissions by 2030 (carbon capture, utilization and storage (CCUS), but not for the purposes of enhanced oil recovery (EOR)).
The framework is subject to a peer-review process by the G20 members, which is expected to be finalized in 2024. Therefore, it will not be applied immediately and is unlikely to be fully implemented until at least 2025. Still, it is certain that the recently announced policy is not applicable to existing multi-year subsidy agreements, meaning that current financing commitments from the government remain intact.
A commendable move, but uncertainty prevails
The announcement was generally welcomed by the proponents of the FFS phaseout, although critics also raised their voices – not without a reason. Laurel Collins, an MP from the NDP, essentially claimed that the measures are falling short of expectations, while Environmental Defence, Canada’s most prominent advocacy organization, criticized an exemption for CCUS projects. There are other issues that prompt questions regarding the implementation and enforcement of the framework. The government and, particularly, respective ministers, will have the discretion to designate an initiative as a fossil fuel subsidy, which creates uncertainty regarding the decision to finance or not a fossil fuel project. In addition, it is not clear whether provinces will be obligated to follow the federal-level guidelines. According to the IISD, crown royalty reductions in Alberta amounted to C$1.16 billion and deep drilling infrastructure credits in British Columbia reached C$350 million in 2019. While provincial administrations could voluntarily apply the framework, it is also possible that provinces would double down on providing subnational support, especially given somewhat strained relations between the Trudeau cabinet and the United Conservative Party’s (UCP) government in Alberta.
While an exemption for Indigenous economic participation in fossil fuel projects is understandable in terms of reconciliation policy and Liberal Party’s declared support of First Nations’ communities, it could become a loophole for new oil and gas projects. Companies could be tempted to encourage Indigenous communities to obtain a stake in hydrocarbon development to make them eligible for federal tax breaks, loans, or any other form of financial support. Moreover, it is not clear what is meant by a “credible plan to achieve net-zero emissions by 2030”. What is credible? Who is going to decide whether a plan is credible? The framework leaves the door open to multiple interpretations and the government will likely need to make several adjustments to make it more consistent and straightforward. The guidelines provide for such reviews if deemed necessary, and improvements could be made following the completion of the peer-review process in 2024.