Five Key Priorities to End Fossil Fuel Subsidies in Canada

Canada has repeatedly pledged to phase out subsidies for the fossil fuel industry, going back to G7 and G20 commitments in 2009 and reiterated several times since then. Canada’s G7 Presidency is a pivotal opportunity to push the G7 to deliver on its commitment. 

While some progress has been made, including policies to end “inefficient” fossil fuel subsidies and stop financing overseas fossil fuel projects, significant gaps remain. Canada continues to commit billions of public dollars to fossil fuels through subsidies such as direct transfers and tax breaks, as well as public financing mechanisms, such as loans, insurance, and bonds. 

The full extent of this funding is unclear due to the lack of transparency. Canada committed to publishing an inventory of its direct and indirect fossil fuel subsidies by December 2024 but failed to deliver. Without a comprehensive and regularly updated inventory of measures, it remains unclear how the “inefficient” subsidies policy is being applied and which—if any—fossil fuel subsidies have actually been phased out. After nearly 18 months since this policy was put in place, transparent reporting is key to ensuring its credibility.  

In a promising move in 2023, Canada joined its international peers in the Coalition on Phasing Out Fossil Fuel Incentives Including Subsidies and the High Ambition Coalition, which are shifting away from the qualifying term “inefficient” and instead focusing on eliminating all fossil fuel subsidies. To align with these efforts and be a leader in fossil fuel subsidy reform as the G7 president in 2025, Canada must work quickly to end the vast majority of its fossil fuel subsidies, allowing only narrow exemptions for exceptional circumstances, such as providing support for remote communities that rely on diesel.  

Here are five areas that must be prioritized to ensure transparency, reform existing fossil fuel subsidies and guarantee no further public funds flow as subsidies to fossil fuels.

Top Five Subsidy Reform Priorities 

1. Major Tax Credits and Reductions From Established Benchmarks 

One way that governments subsidize the fossil fuel industry is by offering tax credits and reductions from normally established benchmarks that reduce public revenue. For example, if most sectors pay a tax rate of 15%, and sector Y pays a tax rate of only 5%, sector Y receives a 10% tax subsidy. Or, if a certain sector receives a disproportionate amount of the benefit of a certain tax reduction, that would be a subsidy. In the government’s own framework, it defines “disproportionate benefit” as “more than 10% of the Measure's expenditures or foregone revenues is received by the Fossil Fuel Sector; or the Fossil Fuel Sector is specifically targeted to benefit from the Measure.” 

While Canada has made important progress in phasing out some tax benefits for the fossil fuel industry, significant tax reductions still exist that must be addressed. These include: 

• Canadian Exploration Expense Deductions (CEE)—This provision allows mining, oil, and gas companies to deduct costs incurred while exploring for resources in Canada. These expenses include activities to determine the presence, location, size, or quality of mineral deposits, petroleum, or natural gas.  
• Accelerated Investment Incentive—This measure lets companies quickly deduct the cost of newly acquired capital assets. While it applies across all sectors, it includes a special first-year benefit for faster deductions on Canadian development expenses (CDE) and Canadian oil and gas property expenses (COGPE), with a phase-out period from 2024 to 2028. 
• Foreign Resource Expense Deductions (FRE)—This provision allows Canadian mining companies to deduct costs related to exploration and development activities conducted outside of Canada. 
• Carbon Capture, Utilization, and Storage (CCUS) investment tax credit—This tax credit applies to capital investments in eligible CCUS projects made since January 2022. While the credit is not exclusive to the fossil fuel sector, the majority of CCUS projects in Canada are tied to fossil fuel operations.  
• Steel tariff exemption for liquefied natural gas (LNG)—In 2019, the government announced an exemption on tariffs for imported steel used in the LNG industry in British Columbia.  
• Tariff exemption for mobile offshore drilling units—Tariffs on these units, used for offshore oil and gas exploration and development, were first exempted in 2004. In 2014, the tariffs were permanently eliminated, costing the government an estimated CAD 13 million annually. 
• Capital cost allowance (CCA)—Most mining and oil and gas companies’ capital assets qualify for a 25% depreciation rate on a declining basis.  Whether this constitutes a subsidy depends on the capital costs in the fossil fuel sector compared to those in other sectors and if more benefit is received by the fossil fuel sector due to higher capital costs. 

Currently, a lack of transparency prevents us from knowing the full value of these subsidies and how, if at all, the “inefficient” subsidies policy framework is being applied to them. However, the Parliamentary Budget Officer estimates that four tax exemptions—CEEs, CDEs, COGPEs, and FREs—resulted in CAD 1.8 billion in foregone revenue in 2021 alone.  

Canadians for Tax Fairness also found that the oil and gas sector receives a disproportionate amount of CCAs. The oil and gas sector had an excess CCA rate of 36% from 2010 to 2022, meaning that the allowed tax deduction was in excess of the actual depreciation. Comparatively, the excess rate for non-fossil fuel sectors was close to zero.  More transparent reporting is needed on these tax measures, including on the portion of the benefit that is received by the fossil fuel industry compared to other industries.  

2. Trans Mountain Pipeline Expansion and Operations 

The Trans Mountain Pipeline expansion (TMX) is perhaps the biggest commitment of the current federal government when it comes to public spending on the fossil fuel industry. In a vacuum of interest from the private sector, the government bought the pipeline in 2018, and construction costs have since more than quadrupled from initial expectations.   

With oil companies currently paying lower tolls than would be required to recover the capital costs over the expected lifespan of the project, the government is operating the pipeline at a loss. To recover the full cost of the project, companies should be paying CAD 25.53 per barrel of oil shipped, but instead are currently paying only CAD 11.37 per barrel. Continuing to give the industry this discount would result in a subsidy of up to CAD 18.8 billion. 

Since the pipeline became operational in May 2024, there has already been an estimated CAD 1.2–1.3 billion subsidy from discounted tolls on TMX; that’s over CAD 5 million per day. IISD’s recent report by Professor Tom Gunton proposes a production levy on western oil shipments to recover this subsidy and ensure the industry pays the full cost of the project. 

3. Carbon Capture and Storage 

The federal government has committed over CAD 9 billion to carbon capture and storage by 2030, the vast majority of which would be used by the fossil fuel sector. This support is primarily through the carbon capture and storage (CCS) investment tax credit, which covers 50%+ of the capital costs of new projects. The Parliamentary Budget Officer estimates this credit will cost taxpayers CAD 491 million in the 2024–2025 fiscal year. 

The federal CCS tax credit can be stacked with provincial subsidies such as Alberta’s Carbon Capture Incentive Program, which provides an additional 12% grant on capital expenditures for CCS. Despite these heavy subsidies covering over 60% of upfront CCS costs, the industry is advocating for additional support. Oilsands companies of the Pathways Alliance are seeking public funds to cover 75% of the cost of their CCS network. 

In addition to this generous tax credit for CCS, the federal government continues to provide more support. The Canada Growth Fund, which is mandated to invest public funds and attract private capital to build a low-carbon economy, has put a disproportionate amount of support behind CCS, with its CEO stating, “Canada is the best place in the world to build a CCS industry.” In just over a year since its first investment, Canada Growth Fund has put CAD 200 million into Entropy CCS (which could lead to a 20% ownership stake in the company), CAD 500 million in Strathcona Resources oilsands CCS (which could increase up to CAD 1 billion), and CAD 100 million in Svante Technologies CCS, in addition to a potential 40% ownership stake in a waste-to-energy project with CCS. The Canada Growth Fund has also proposed funding support for the Pathways Alliance CCS network. 

The government needs to stop subsidizing carbon capture and storage in the fossil fuel sector—it is not a net-zero solution, and investing public funds in this technology comes with huge opportunity costs. Instead of investing CAD 10 billion in CCS, the government could have funded energy-efficient housing, renewable energy expansion, clean drinking water, and other critical infrastructure gaps for Indigenous communities across Canada. 

4. LNG  

There is also significant federal support for expanding LNG export infrastructure in western Canada, including through subsidies for the substantial amount of electricity required to electrify LNG infrastructure. Internal government documents show that the British Columbia (BC) government has asked the federal government for CAD 1.5 billion to build the transmission infrastructure required to transport electricity to northern LNG sites. This would primarily serve LNG Canada, a project that received CAD 275 million of direct investments from the federal government in 2019, in addition to an estimated CAD 1 billion in steel tariff exemptions.  

Though the Minister of Natural Resources has suggested the federal government is “not interested” in funding LNG projects, the government’s fossil fuel subsidies policy does leave the door open for subsidies to LNG under the pretense that LNG exports could displace more carbon-intensive fuels abroad. However, IISD research has shown these sorts of international carbon credits are not credible and should not provide a basis for permitting or subsidizing LNG exports. 

The federal government is also supporting LNG expansion through public financing, such as the recent financing of CAD 100 million–200 million for the Coastal Gaslink Pipeline and CAD 400 million–500 million for Cedar LNG. These loans are not covered under Canada’s subsidy policy but must be tackled under Canada’s forthcoming policy to end domestic public finance for fossil fuels.

5. Low-Carbon Funds and Incentives 

The federal government has committed substantial investments and subsidies to advance decarbonization and grow the low-carbon industries Canada needs. It is crucial to ensure that these funds flow to the workers, communities, and institutions that need them—not to the fossil fuel industry. 

Additionally, while it is essential to reform existing subsidies, the overall elimination of fossil fuel subsidies requires the government to ensure that any future financial support for decarbonization, clean technologies, economic reconciliation, and low-carbon infrastructure does not go to fossil fuel companies or companies solely supporting the fossil fuel sector.  The reform and elimination of current subsidies have to go along with the assurance that new subsidies will not be created in their place. This includes funds such as the Strategic Innovation Fund, the Low Carbon Economy Fund, the Canada Growth Fund, the Canada Innovation Corporation, and the Energy Innovation Program, as well as new investment tax credits for clean electricity, clean technology, clean hydrogen, and clean technology manufacturing. 

There has been an increase in subsidies for the fossil fuel industry to support decarbonization. However, any funds invested in the fossil fuel sector, even for reducing emissions or methane leakage, ultimately save companies money or enhance operations and thus contribute to profits. These subsidies also carry significant opportunity costs, diverting limited public funds away from critical investments in renewable energy, electrification, and energy efficiency needed for the transition to a cleaner economy. 

Provinces Have a Role to Play 

Alongside these federal supports, many provinces also subsidize the production or consumption of fossil fuels and have a key role to play in redirecting those resources toward solutions. The Organisation for Economic Co-operation and Development estimates that Canadian provinces and territories provided CAD 4.6 billion in fossil fuel subsidies in 2023. Provincial subsidies include support for infrastructure related to fossil fuel extraction, transportation, and export, such as the estimated CAD 5.4 billion provided by the BC government to LNG Canada through various tax breaks and hydro rate reductions. They also include governments shouldering the burden of cleaning up fossil fuel industry liabilities, such as Alberta’s subsidies to oil and gas companies to clean up abandoned oil and gas wells.  

As well, there is an increasing trend of cutting provincial gasoline taxes, thus incentivizing the use of more fuel, with governments in Ontario, Manitoba, and Alberta enacting such measures in recent years, and the Saskatchewan opposition party proposing to do the same. The Ontario gas tax and fuel tax rate cuts are expected to cost CAD 620 million this fiscal year, while the Manitoba fuel tax cut was estimated to cost CAD 340 million annually prior to being removed in January 2025. Various fuel tax exemptions in Alberta cost an estimated CAD 295 million in 2024. Manitoba has also recently announced a freeze on natural gas rates for 2025, while BC has a tax exemption on residential energy from natural gas and fuel oil that costs around CAD 130 million per year. Saskatchewan has implemented a carbon tax exemption on natural gas, foregoing tens of millions in revenue, which the government vowed to extend in its recent throne speech. It is critical to acknowledge that many Canadians are struggling with increased energy, food, and other product and service costs in times of high inflation, but the default measure to reduce pressure should not be to reduce costs for polluting fuels. There are other avenues to provide support for consumers that are not tied to reducing the cost of fossil fuels that drive climate change. 

There has been some provincial progress, such as BC’s recent decision to exclude oil and gas expenditures from its mining exploration tax credit. However, much more needs to be done. During the compounding affordability and climate crises, governments should focus on directly supporting people rather than subsidizing fossil fuel consumption.  

Canada Needs to Comply With Its International Commitments 

To fully eliminate fossil fuel subsidies, Canada must start by publishing a comprehensive inventory of all financial supports to the sector—whether or not they are labelled as "efficient"—and update it regularly. This should include clear timelines for phasing out existing supports, such as those highlighted above. Canada should also move beyond qualifying terms and address all forms of financial support to the fossil fuel industry. 

This should go hand-in-hand with tackling domestic public finance for fossil fuels from Canadian crown corporations, amounting to at least CAD 7.6 billion to CAD 13.5 billion annually in recent years. Moreover, Canada can support a wider shift in financial flows to drive the energy transition, such as through strong, sustainable finance regulations for the private sector and encouraging pension funds to align their portfolios with credible net-zero scenarios.  

Creating the existing policy framework to tackle fossil fuel supports is a good start but much more work is needed to finish the job.