An aerial photo of an industrial plant with smoke billowing into the air from towers.

Ending Canada’s Support for Fossil Fuels: Tracking Progress and Charting Next Steps

Canada has committed to ending subsidies and public financing for fossil fuels at home and abroad and has taken some important steps along the path. Our experts set out the journey so far, and how it can improve.

By Bernard Soubry, Laura Cameron on January 15, 2024

One crucial step to speed up the worldwide energy transition is reallocating public financial support from fossil fuels to renewable energy sources. The Intergovernmental Panel on Climate Change warned that government support for the fossil fuel industry financially is “severely misaligned” with the goals of the Paris Agreement. Canada has made promises to stop putting public funds into fossil fuels, but what progress has been made? And how can it improve? 

Funding Fossil Fuels: How far has Canada come? 

Canada has committed to ending subsidies and public financing for fossil fuels at home and abroad and has taken some important steps along the path. In 2021, it signed on to the Clean Energy Transition Partnership, which commits countries to ceasing to provide new direct public support for the international unabated fossil fuel energy sector by the end of 2022 and prioritizing support for clean energy. In 2022, Canada became one of the first countries to make good on this commitment by publishing a policy to stop providing public finance for fossil fuel projects abroad. More recently, the country committed to ending domestic public finance for fossil fuels, pledging to publish a plan by fall 2024. And in July 2023, 14 years after its original commitment, Canada published its long-awaited assessment framework for inefficient fossil fuel subsidies.  

These are all essential steps to moving money away from fossil fuels. But the details of these policies, how they are implemented, and how they are enforced will make or break Canada’s commitments. Let’s take a closer look. 

Plugging the Holes in the Frameworks 

Canada’s policies on international public finance and fossil fuel subsidies have some notable strengths. The subsidies policy includes a strong definition aligned with the World Trade Organization’s. Moreover, the policy requires fossil fuel projects that would receive support to prove a lack of renewable energy alternatives and include an assessment of the risk of stranded assets. 

But the policies also include loopholes that could jeopardize their effectiveness—and Canada’s reputation as a climate leader. These loopholes include the following: 

  • Natural gas. The international public finance policy allows support for the production of natural gas-fired power in some circumstances, which is incompatible with Paris Agreement targets. Any support allowed in an emergency should be clearly defined and time-bound, ensuring no future lock-in of fossil fuel infrastructure.  

  • Carbon capture, utilization, and storage (CCUS). The policies allow support for CCUS technologies in the fossil fuel and power generation sectors. CCUS is expensive, energy intensive, slow to implement, and unproven at scale, making it an inefficient use of public funds. Funding CCUS in the fossil fuel sector violates the polluter-pays principle: those responsible should be financially liable for cleaning up their pollution. 

  • Lack of accountability. The policies lack details on implementation and enforcement, as well as sufficient transparency to be held accountable. It is essential to have guidelines for how the policies will be put in place across departments and who will keep the government accountable for its promises. For example, Canada has not yet published a list of tax and non-tax subsidies identified in its self-review—and publicly disclosing subsidies is a critical first step to ensuring accountability.

To fulfill its own commitment, Canada needs to publish a policy to end domestic public finance for fossil fuels immediately. 

The biggest hole in Canada’s current policies is domestic public finance for fossil fuels. Most of Canada’s financing for fossil fuels comes from within its own borders: Export Development Canada, the national export credit agency, has provided over CAD 88 billion to the oil and gas sector since 2016, including CAD 19 billion in 2022.

Ending Fossil Fuel Financing at Home 

What does the roadmap to ending domestic public financing for fossil fuels in Canada look like? We have three recommendations. 

First, it should close the loopholes in existing policies. Any policy framework should ensure that the government does not enable financing for infrastructure that would lock in fossil fuel use far into the future. Investments in natural gas and unproven, expensive technologies such as CCUS only entrench carbon-intensive infrastructure. 

Second, it should reproduce the strengths of international public financing policy. Canada’s policy for international public financing of fossil fuels is already robust in its scope and requirements for due diligence. A policy for ending domestic public finance of fossil fuels should:  

  • align with the goal of the Paris Agreement to hold the increase in global average temperature to 1.5°C above pre-industrial levels, 

  • exclude the financing of “abated” fossil fuel production, 

  • rigorously assess and manage risks of stranded assets and carbon lock-in, and 

  • require proof that support for fossil fuels will not hinder the transition to renewables where developing renewables would be possible. 

Most importantly, the policy should outline how recovered funding will be redirected to clean energy. Canada’s policies should not only include robust conditions for phasing out financing for fossil fuels. They should also provide details on how the money will be redirected toward renewable energy projects.

Experts estimate that Canada’s public clean electricity support needs to be scaled up nearly tenfold from its current level to be on track with a 1.5°C-aligned scenario.

Canada is already a first mover internationally in ending the financing of fossil fuels, but fully aligning financial incentives with climate policy requires closing the gap in domestic public finance and eliminating loopholes in its existing policies.  

Insight details