The Final Countdown: How Canada can end fossil fuel subsidies this year

The conversation on ending fossil fuel subsidies in Canada has been hanging like a dark cloud over the country, with years of pledges failing to lead to concrete action. But the skies may finally clear in the coming months with the release of Canada's long-awaited subsidies framework and policy.

The government first promised to scrap fossil fuel subsidies nearly 15 years ago, and the federal Minister of Environment and Climate Change has been instructed to act on this commitment in the 2015, 2019, and 2021 mandate letters. Meanwhile, ambition to curb greenhouse gas emissions—and thus the country's reliance on fossil fuels—has been escalating in Canada as its global peers make moves to rapidly scale up renewable energy.

However, the reality is that Canada still gives billions in tax breaks, grants, financing, and other supports to the oil and gas industry every year—totalling over CAD 20 billion in 2022—and a significant portion of these are subsidies.

More recently, the government set a deadline for this year, 2023, to finally end fossil fuel subsidies for good, with Steven Guilbeault, the current Minister of Environment and Climate Change, confirming that “not delivering is simply not an option.” Guilbeault then reinforced this pledge in December, saying that his government would move on this in the first half of the year.

But nearly 6 months into 2023, we are still waiting for action. The government must move quickly and decisively to make good on this long-standing promise to keep pace with Canada’s international peers and give Canadians something to be proud of.

What exactly will that look like? There are two elements the government must get right to keep its promise: clearly defining fossil fuel subsidies and developing policy for phasing them out.

What Are (Inefficient) Fossil Fuel Subsidies?

Canada's original commitment, alongside its G20 partners in 2009, was to end “inefficient fossil fuel subsidies.” The Canadian government is looking at this definition in two pieces: (1) what is a fossil fuel subsidy and (2) what is considered “inefficient.”

The World Trade Organization's (WTO's) definition of subsidies, which is part of international trade law, is widely used around the world, including in the recommendations to measure fossil fuel subsidies by the United Nations Environment Programme. This encompasses financial contributions that yield benefits to businesses or industries (in this case, fossil fuel companies)—including, but not limited to, direct transfers, foregone revenue, transfer of risk, and provision of goods and services. If established definitions are sidestepped without strong attempts to maximize ambition and capture all relevant measures, key subsidies might be missed—which would defeat the very purpose of the government's commitment and risk our credibility internationally.

On the matter of inefficiency, the government should adopt strong criteria that do not leave any loopholes for fossil fuel support to slip through. IISD has proposed four criteria that all energy subsidies should align with to be considered efficient: supporting a sustainable economy, creating good long-term jobs, aligning with Canada's climate commitments, and getting the best value for public dollars spent. Subsidies that do not align with these criteria should be labelled “inefficient” and phased out under the forthcoming policy.

If the government adopts robust criteria like these, it would be very unlikely that any fossil fuel subsidy would be considered efficient. In fact, the government of Italy and the United Kingdom's Climate Change Committee have already noted that all fossil fuel subsidies are inefficient, while the United States, China, and Indonesia have indicated intentions to end fossil fuel production subsidies because they can lead to wasteful consumption.

What Should Canada's Policy to Stop Fossil Fuel Subsidies Look Like?

To its credit, last year Canada set a strong precedent by issuing policy guidelines to stop providing public financing for fossil fuel projects internationally, thus helping Canada follow through with its COP 26 promise to end such public support by the end of 2022. 

This policy can serve as a good model for Canada's work on fossil fuel subsidies at home. To be eligible for public financing, the policy guidelines require international projects to be aligned with 1.5°C scenarios, include a robust assessment of the risk of stranded assets, and prove a lack of renewable energy alternatives. This leaves very little room to continue financial support for fossil fuel projects. However, the policy guidelines still allow support for natural gas-fired power plants and “abated” fossil fuel production that relies on carbon capture and storage, a technology that has not proven effective at reducing emissions in the oil and gas sector and remains prohibitively expensive. 

Canada's approach to ending domestic fossil fuel subsidies should mirror the strengths of its international public finance policy, while making sure to close the loopholes. It should also require greater transparency and reporting so that implementation can be tracked and accounted for. 

Which Fossil Fuel Subsidies Does Canada Need to End?

The criteria and policies government develops should both end existing support for fossil fuel production and make sure that no new subsidies are created. This includes ending long-standing tax breaks for oil and gas companies, like the Canadian Development Expense, as well as non-tax subsidies. Lists of these measures have been gathered through subsidy inventories, though some are not even known to the public due to a lack of reporting.

A strong policy would also ensure that public funds like the Net Zero Accelerator Initiative and the Canada Growth Fund, as well as the recently announced investment tax credits for electricity and carbon capture, exclude fossil fuel support and prioritize investments in renewables, energy efficiency, and decarbonizing hard-to-abate industries. If the money in these funds flows to oil and gas companies, Canada risks breaking its long-standing international subsidies commitment and missing out on opportunities from fully embracing the shift to a cleaner economy.

Next Up: Tackling domestic public finance for fossil fuels

In addition to tax breaks and grants, the government also supports fossil fuels by financing projects on Canadian soil, such as pipelines and liquefied natural gas export facilities, taking on the risk of these projects and often offering better terms of financing than those available commercially. The federal government has promised to end this support, just as it did with projects abroad, but has not yet offered any specifics. It is critical that the government follows through on its pledge, given that even more public finance is directed to fossil fuels domestically than internationally—at least CAD 4.3 billion annually between 2019–2021.

The best course of action would be for the government to tackle domestic public financing for fossil fuels hand-in-hand with subsidies, eliminating both this year. This is especially important since domestic finance and subsidies have elements in common. In a year of high inflation and restricted government spending, this would free up funds in future budgets for investments in strategic, low-carbon sectors to power the transition, diversify the economy, and provide good green jobs for Canadians.

If Canada were to bring a strong policy for ending domestic fossil fuel subsidies and public financing to the G20 Summit this year, it would send an important signal to its peers and international forums like the WTO, that Canada is serious about aligning public spending with its climate commitments. After having demonstrated leadership by recently ratifying the WTO's Fisheries Subsidies Agreement, Canada has another opportunity to prove its sustainability credentials by aligning its financial support with sustainability goals and eliminating its support to fossil fuels.