Canada will soon end 'inefficient' fossil fuel subsidies. But what does that mean?

Canada has for years forked over billions of dollars in subsidies to oil and gas companies an approach that critics say flies in the face of the country's climate goals, and impinges on efforts to turn toward renewable energy sources.

Now, the federal government is preparing to release a new policy that will put an end to "inefficient fossil fuel subsidies," a commitment Canada made more than a decade ago.

A spokesperson for Environment Minister Steven Guilbeault said the new policy will be released in July.

But the strength of that commitment, environmental groups say, will hinge on how exactly the terms "inefficient" and "subsidy" are defined.

Julia Levin, associate director of national climate for the advocacy group Environmental Defence, said Canada has an opportunity to become a global leader in reducing fossil fuel subsidies if it's done right.

"If it's a strong assessment framework, it sets a great precedent. It kind of cements a bit of climate leadership for Canada," she said in an interview.

"If it's weak, it sets an incredibly dangerous precedent."

Where is Canada at with fossil fuel subsidies?

Canada has routinely ranked near or at the top of the developed world when it comes to subsidies for oil and gas, according to environmental groups.

G20 countries, including Canada, committed to eliminating such subsidies in 2009, but did not give a firm timeline of when it would happen or what that commitment would include.

The Liberals later committed to a 2025 target and, in the last election campaign, moved that up to 2023.

The long-anticipated policy comes as the oil and gas industry racks up record profits.

The five largest companies in Canada's oilsands made about $35 billion in profits in 2022.

The parliamentary committee on environment released a report last week laying out recommendations for the phase out of subsidies and public financing.

The report included 21 recommendations, the first of which was for the government to "continue taking steps to eliminate subsidies and applicable public financing" by the end of the year, while at the same time giving "careful attention to and mitigation of any potential social and economic impacts."

Another recommendation was to ensure that any existing subsidy "facilitates the transition toward a low-carbon future" and is consistent with the country's climate goals.

While non-binding, the federal government must table a response to the report and advocates are hopeful it will put additional pressure on them to act. The NDP also issued a statement last week calling on Guilbeault to eliminate subsidies.

"Canadians are increasingly concerned about the devastating impacts of wildfires, flooding and extreme weather events on their communities, their homes and their livelihoods. They want bold action to tackle the climate crisis," said Laurel Collins, the party's environment and climate change critic.

In a statement, a spokesperson for Environment and Climate Change Canada said the details of the policy will be provided at the time of the announcement and noted that it "has already made progress on phasing out tax measures that are inefficient subsidies."

What exactly is a fossil fuel subsidy?

There's no agreed upon definition in Canada of what a fossil fuel subsidy includes which is why determining how much the government doles out remains a source of heated debate.

Environmental Defence recently calculated that the federal government provided more than $20 billion in loans and financial support to oil and gas companies in 2022.

The list includes:

• $12 billion in loans and financial support for the TransMountain pipeline.
• $500 million in loans to the Coastal GasLink Pipeline.
• $300 million to help withdecarbonization projects.
• $78 million to help the oil and gas sector grow and reduce its greenhouse gas emissions.
• $20 million to help oil and gas companies reduce their methane emissions.

The Canadian Association of Petroleum Producers (CAPP), on the other hand, has maintained that the oil and gas industry is not subsidized at all.

In a brief submitted last year to the parliamentary committee, CAPP argued that tax breaks it gets are part of thetax system, "therefore not subsidies."

Last month, more than 100 environment and civil society groups wrote an open letter to Prime Minister Justin Trudeau calling for a "robust" definition of the term subsidy.

The signatories, which include Environmental Defence, want the government to follow the lead of the World Trade Organization, which says a subsidy is, simply put, a "financial contribution" that "confers a benefit." Under that definition, a subsidy would include everything from direct transfers to foregone revenue to loan guarantees.

When is a subsidy efficient?

There is also no agreed definition for what constitutes an "efficient" or "inefficient" subsidy.

The G20 statement from 2009 did say that inefficient fossil fuel subsidies "encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change."

Levin and other advocates say subsidies should only be considered "efficient" and therefore an acceptable form of government funding if they align with Canada's Paris agreement goals.

That means subsidies shouldn't support new or updated fossil fuel infrastructure, or delay the transition to renewables, according to signatories of the letter to Trudeau last month.

The parliamentary report released last week doesn't give a clear recommendation on how to define the term.

But it calls on the government to adopt a "broad, internationally recognized definition of a fossil fuel subsidy" and a "definition of 'inefficient,' in the context of fossil fuel subsidies."

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Public financing included?

In its memo to the parliamentary committee, CAPP argued that eliminating all public financing for oil and gas would "work against government commitments to meet their targets and obligations under the Paris Agreement given that government funding helps improve industry emissions performance."

But Bronwen Tucker, who tracks public financing of oil and gas companies at the advocacy group Oil Change International, is hopeful the new policy will include all forms of public financing (such as government loans or loan guarantees) in order to ensure fossil fuel projects don't get an advantage over renewable sources of energy.

Canada put an end to international public financing of oil and gas companies last year, something Tucker said was a good first step in cutting back on government support of the industry.

She said tax breaks and more direct support for oil and gas have also been scaled back, but that support shows up in other ways, such as clean up for orphaned wells and carbon capture storage.

"For the public, it can sound actually exciting or often is branded as a climate solution, where what we see in practice is that money goes to a fossil fuel company that frees up money elsewhere in their budget and in their expenses," she said.

"It's still a handout and it's just letting them off for the costs of cleanup that they should be able to cover themselves."