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Policy
| 05/26/17

Ottawa stalling on fossil subsidies holding back clean energy

TCE

The auditor general of Canada has accused the federal government of dragging its heels over its promised phase-out of subsidies for oil and gas companies, expressing frustration that the finance ministry would not release key documents.

During his spring release of audits last week, auditor general Michael Ferguson said that Ottawa does not have a strategy for achieving its goal of eliminating fossil fuel subsidies by 2025. The Liberal Party made the promise a centrepiece of its 2015 election campaign and Prime Minister Justin Trudeau reiterated the commitment alongside his US and Mexican counterparts during a ‘Three Amigos’ summit in 2016. However, the federal government has since tweaked the promise, describing it as a plan to phase out “inefficient” fossil fuel subsidies.

Ferguson’s report says that the government does not have a clear definition of what counts as an inefficient subsidy and also lacks a detailed timeline for their elimination. In particular, the auditor found that the government lacks a plan to alter rules around ‘flow-through shares’, which allow firms to pass on tax deductions to investors. Environment and Climate Change Canada, the government department responsible for battling global warming, also does not have a good sense of what non-tax measures that could also count as subsidies, according to the report.

His office’s assessment of the subject was further hampered by a refusal to hand over key documents.

The government had claimed it was unable to pass along what had been requested due to the need to maintain cabinet confidence, but upon the release of the auditor general’s report, the finance ministry issued fresh orders to give his office new access to budget information.

Finance minister Bill Morneau added that the government remains “on track” to keep its 2025 commitment, and that reform of flow-through shares is the last “remaining federal tax expenditure potentially relevant to the G20 commitment.” Amongst other efforts, the oil and gas portions of the Atlantic Investment Tax Credit are due to end in 2017.

Environment and Climate Change Canada for its part put out a plan in February to begin to identify non-tax subsidies.

G20 governments have all agreed to phase out fossil fuel subsidies “over the medium term”.

The government-funded International Institute for Sustainable Development in 2016 assessed the extent of Canadian fossil fuel tax and non-tax subsidies to be $3.3 billion annually.

The organisation says that these subsidies work to undermine the pricing of carbon, either through a carbon tax or through emissions trading, that exists now in most provinces.

“It’s like raising taxes on cigarettes to discourage smoking, while also giving tobacco companies a tax break so they can make more cigarettes,” they argue.

In 2013, the International Energy Agency (IEA) estimated that global subsidies for fossil fuels amounted to US$548 billion, while subsidies for renewable energy amounted to US$121 billion.

However, the bulk of such subsidies occur in the developing world, where they operate primarily as subsidies to consumers to reduce energy poverty, and so will be the most difficult to phase out without harming the most economically disadvantaged. In the developed world, fossil fuel subsidies are largely offered to producers, so in principle should be much more achievable without negative social consequences.

Canadian federal examples include the Canadian Development Expense and the Canadian Exploration Expense. There are provincial subsidy programmes as well, including Alberta’s Crown Royalty Reductions and British Columbia’s and the Deep Drilling Credit. Alberta Premier Rachel Notley last year said that the latter would not be altered in the near term due to the oil and gas industry’s economic woes in the province.​

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Canada's auditor general and the finance ministry tussle over fossil fuel subsidies

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