Canada’s Fossil Fuel Subsidy Framework Is a Big Step Forward, but Gaps Must Be Closed to Align With Climate Commitments

July 24, 2023

Fourteen years since Canada first committed to phasing out inefficient fossil fuel subsidies alongside its G20 peers, the federal government has released its framework for identifying which measures will be included. This is a long-awaited landmark on the country’s road to eliminating support for fossil fuels. The framework marks significant and welcome progress, but it still leaves gaps that must be closed to align with Canada’s climate targets and international commitments.  

Along with the policy, the government also announced a timeline for a plan to end domestic public financing for fossil fuels in 2024, which is an essential next step given that a majority of Canada’s financial support for fossil fuels is through public financing. IISD applauds this progress and encourages the government to publish the plan this year, followed by a policy for ending domestic public financing for fossil fuels next year. Last year’s international public finance policy provides a strong baseline for this work. 

A key strength of the subsidies policy, and something IISD has for several years called for, is that it adopts a definition of fossil fuel subsidies aligned with the World Trade Organization’s definition, including direct transfers, foregone revenue, transfer of risk, and provision of goods and services. Canada is also one of the first countries to develop a detailed definition of inefficiency that provides transparency on this term that is often undefined. This gives clear direction on how subsidies will be classified going forward, which is critical for achieving phase-out.  

However, this definition of inefficiency still allows for continued support for “abated” fossil fuel production for projects that include emissions reduction measures, such as carbon capture and storage in the oil and gas sector and fossil-derived hydrogen. Our research has found that government support for decarbonization in the oil and gas sector is expensive and inefficient and that the use of carbon capture and storage in the sector is not a net-zero solution. The policy also includes several other exemptions that could allow for continued fossil fuel support. 

In applying this framework, the government must ensure that these exemptions are reformed over time, and the conditions are applied with integrity in line with Canada’s climate commitments such that all fossil fuel subsidies are eliminated. For transparency, a full inventory of subsidy measures identified and a rationale for any exempted should be published this year. There should also be clear, standardized mechanisms for enforcement and accountability of the policy implementation across departments. 

“This is a significant step forward and sets a strong example for Canada’s G20 peers,” says Laura Cameron, Policy Advisor with IISD. “But gaps in the framework mean public money could continue to flow toward oil and gas production at a time when the country must swiftly move to renewable energy. With these gaps closed, Canada can ensure public funds are advancing climate solutions.” 

Statement details