The Cost of Fossil Fuel Subsidies

Canada’s $3B+ annual giveaway could be put to better use.

In yesterday’s post, I challenged the federal Liberal government to make good on its promise to eliminate fossil fuel subsidies in the medium term, consistent with Canada’s G7 commitment. These subsidies won’t go away overnight. Medium-term elimination requires short-term progress. Hundreds of millions of dollars could be freed up for current priorities.

This joint IISD/ODI/OCI report compiles publicly available information on fossil fuel production subsidies in Canada.
This joint IISD/ODI/OCI report compiles publicly available information on fossil fuel production subsidies in Canada.

Fossil fuel subsidies in Canada are delivered to producers in the forms of tax breaks and royalty reductions. Subsidies are considered “costly and distortive” by the Organisation for Economic Co-operation and Development (OECD), of which Canada is a member. In particular, OECD says

“Fossil-fuel subsidies generate inefficiencies in the production and use of energy economy-wide. This can affect the allocation of resources across industries, including by directing long-term capital investment toward sectors that produce fossil fuels or use them intensively, at the expense of cleaner forms of energy and other economic activities more generally. In doing so, these subsidies accentuate the risk that long-lived capital assets end up locking in the polluting technologies for years or decades.”

In short, subsidies hide the true cost of fossil fuels and are damaging to the economy.

How much do Canadians subsidize fossil fuels? According to the OECD (here) and International Institute for Sustainable Development (IISD; here) it is in the neighbourhood of $3B to $3.5B CAD annually. IISD also pegs the level of public financing for fossil fuels to be at least $2.9B per year. If external costs are factored in, then the price tag balloons to $34B per year according to the International Monetary Fund (IMF).

Both OECD and IISD give spreadsheets identifying the subsidy programs. The “Canadian Development Expense” gives oil and gas companies roughly $1B/year in tax deductions for development expenses, including accelerated depreciation. The lion’s share of public financing is distributed by Export Development Canada. Provinces get in on the act too: Alberta provides relief on royalties and production taxes to the tune of $600M annually.

Subsidizing fossil fuels to keep them competitive during the global transition to zero-carbon energy sources makes little sense. As a colleague put it to me once, “We might as well be investing in whale oil”. The federal government should recognize this and level the playing field. If the federal government is to (finally) make good on its climate commitments, then how our financial resources are allocated is a crucial consideration.