Why it's time to end corporate welfare for Canada's fossil fuel industry
Subsidies undermine our economy, add to the tax burden, and hinder innovation
Given our renewed national interest in pipelines and oil sands mines, consider some strange bedfellows: economists who agree with environmentalists that subsidizing the fossil fuel industry is a bad idea.
Eliminating fossil fuel subsidies would obviously help Canada achieve its emissions-reduction targets. What's less obvious is how these subsidies undermine our economy, add to the tax burden, and hinder innovation.
In testimony before the U.S. House Committee on Science, Space and Technology's energy subcommittee in 2015, for example, Mercatus Centre senior research fellow Veronique de Rugy argued all government subsidies to the energy industry — including those that benefit the fossil fuel sector — ought to be abolished.
The Mercatus Centre isn't an environmental organization, it's a libertarian think-tank of free-market fundamentalists. De Rugy's three-part argument is that:
- Government lacks the incentive to manage private investors' funds.
- Subsidies distort investment and economic activity, as they create an unfair advantage.
- Subsidies increase both the incentive to lobby and the power of special-interest groups.
In Canada, consistent subsidy has failed to either provide stability or kick-start major innovation when it comes to fossil fuels.
Exact numbers relating to Canada's total fossil fuel subsidy are difficult to come by, a fact exacerbated by a general governmental aversion to transparency. The industry isn't forthcoming, but the federal and provincial governments aren't insisting on accountability either. It's an unfortunate irony that Canadians in need of public assistance often face more exacting demands on their own accountability than the recipients of corporate welfare.
A report by the Overseas Development Institute (ODI) from 2018 was critical both of Canada's lack of a formal plan to phase out financial support for the oil and gas industries, and the general paucity of published reports detailing the support provided.
The ODI estimates an annual direct subsidy of $4.73 billion US ($6.3 billion Cdn) for 2016, the highest level in the G7 per unit of GDP. Other activities funded by Canadian taxpayers, such as the government purchase of the Trans Mountain Pipeline and work to expand it, add up to billions more.
A post-tax estimate includes direct subsidies, along with what fossil fuels cost in terms of their negative social impact, such as pollution and global warming. An International Monetary Fund (IMF) report places Canada's post-tax subsidy to the fossil fuel industry from private and public sources at an astounding $43 billion US in 2015-16, an amount that would be equivalent to nearly one-fifth of the current federal budget. (On a global scale the IMF post-tax estimate is astronomical: $5.2 trillion US in 2016, or 6.5 per cent of global GDP.)
Environmental and economic impact
It's an interesting point of common ground that both progressive environmentalists and economic libertarians oppose subsidies to the fossil fuel industry.
Globally, oil and gas producers are estimated to have lost $400 billion in market value over the past four years, and analysts running the gamut from Goldman Sachs to Jim Cramer are advising investors to put their money elsewhere.
Unfortunately for market purists and environmentalists alike, the fossil fuel industry in Canada has become so thoroughly politicized that ever-more-generous subsidies are being demanded by companies as the cost of doing business.
Consider the baffling pseudo-debate over Teck Resources' now-withdrawn proposal for the Frontier Mine. Before Teck pulled the plug on the project last week, CEO Don Lindsay had already indicated the cost of a barrel of oil would have to rise by nearly half to make the $20 billion mine profitable. Yet the Trudeau Administration was prepared to green-light the project despite the obvious environmental concerns if it could get Jason Kenney to agree to emissions reductions.
While politicians euphemistically refer to subsidies as "investment" and insist they are facilitating a transition to clean energy, there's scant evidence this is the case. The entire idea of a 'transitional fuel' is absurd: if you burn it for energy, it's adding to the emissions problem. Worse, according to the International Monetary Fund, subsidies encourage excessive consumption.
In a 2019 report, the International Institute for Sustainable Development minced no words: "fossil fuel subsidies are a key barrier to this transition."
Energy companies have one responsibility: increasing shareholder value. How this value is created doesn't fundamentally matter. Energy companies don't have to limit themselves to fossil fuels, but subsidies that prop up struggling fossil fuels-based businesses create barriers to innovation, and to adaptation as markets change.
Inherently inefficient fossil fuel subsidies impede investment in clean energy technologies, ultimately undermining efforts to fight climate change.
Eliminating subsidies forces energy companies to transition to clean energy more quickly: innovative companies will swim while industry dinosaurs will sink. It's cold and hard, but that's the free market for you.
And it's a false dichotomy that Canada must choose between fighting climate change and supporting jobs in Alberta. Both need to happen simultaneously.
Rather than pouring money down the hole of the fossil fuel sector, it could be used to retrain unemployed oil workers and build solar arrays, wind turbines and hydro-electric generating stations, with an aim to providing new jobs in all the regions adversely affected by over-reliance on non-renewable resource extraction.
Though this could also be considered a subsidy, the crucial difference is that renewable energy sources are a sustainable and growing industry, and don't carry the expensive social and ecological burdens of fossil fuels — no heightened mortality rates due to air pollution, no orphan wells in need of clean-up.
Given the severity of the climate crisis and the increasingly untenable relationship between the fossil fuel industry and Canadian society, it's unlikely axing subsidies alone will be enough to bring about fast, meaningful change in the energy sector. After years of fossil fuels subsidies, government intervention is now necessary to quickly build a clean energy production and distribution infrastructure sufficiently large enough to get all of Canada off fossil fuels.
- This column is part of CBC's Opinion section. For more information about this section, please read our FAQ.
- When originally published, this opinion column said, "An International Monetary Fund (IMF) report places Canada's post-tax subsidy to the fossil fuel industry at an astounding $43 billion US in 2015-16, which amounts to nearly one-fifth of the current federal budget." The comparison was being made to help put the size of the post-tax subsidy into perspective for readers, not to infer that this amount was coming solely from the federal budget each year. For clarity, that sentence has been updated to read: "An International Monetary Fund (IMF) report places Canada's post-tax subsidy to the fossil fuel industry from private and public sources at an astounding $43 billion US in 2015-16, an amount that would be equivalent to nearly one-fifth of the current federal budget."Mar 11, 2020 1:33 PM ET