A pipeline runs beside a forest on Vancouver Island, Canada
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Unpacking Canada’s Fossil Fuel Subsidies

Their size, impacts and why they must go

Fossil fuel subsidies hold us back and incentivize pollution. How much do Canada's governments subsidize fossils and why does it matter?
By Vanessa Corkal, Philip Gass on December 11, 2020

Oil, gas, and coal are multi-billion-dollar industries, yet every year fossil fuel companies get billions in tax breaks and handouts that increase their profits even further. In a world that’s shifting to clean energy, Canada could get left behind if these subsidies don’t change. Fossil fuel subsidies also work against other climate change actions, incentivizing the very pollution we’re trying to stop. Canada committed to phasing out inefficient fossil fuel subsidies 11 years ago—but even after over a decade, there are still large subsidies to fossil fuel production. With COVID-19 stimulus spending, since spring 2020, fossil fuel subsidies have been going up.

Taxes and subsidies are a complicated topic, so we created this web page to explain federal and provincial subsidies in Canada. We’ll cut through the jargon, so you can understand what’s really happening, debate it, and propose solutions for Canadians and Canada’s economy.

What are fossil fuel subsidies?

A subsidy is a financial benefit that the government gives, usually to a specific business, group, or industry. There are debates about the difference between “subsidy” and the broader term “support,” but that’s a pretty good plain English definition. (It’s also roughly how the World Trade Organization defines the term—and their definition is globally accepted.) This financial benefit most commonly comes as a direct handout of cash or a tax break. Either way, it’s more money in the pocket of whoever receives the subsidy. Fossil fuel subsidies go to fossil fuel producers or consumers—whether it’s for extracting oil, shipping gas through a pipeline, or burning fossil fuels for energy.

How much does Canada give out in fossil fuel subsidies?

It’s difficult to know, because federal and provincial governments haven’t transparently reported how much they really provide in fossil fuel subsidies. From what we do know, it’s at least CAD 4.8 billion per year. That includes measures like special tax deductions and direct cash transfers that governments provide to fossil fuel companies. You can find a list of some of the largest subsidies below. Examples of federal subsidies include research and development support programs and tax breaks like flow-through shares, which incentivize oil, gas, and mining exploration. Examples of provincial subsidies include crown royalty reductions in Alberta valued at an average of CAD 1.16 billion and deep drilling and infrastructure credits in British Columbia valued at CAD 350 million in 2019. Some measures have recently been announced as part of COVID-19 support packages, for example, the federal government’s unconditional transfer of CAD 320 million to Newfoundland and Labrador’s offshore oil sector and Alberta’s CAD 750 million from the Technology Innovation and Emissions Reduction (TIER) fund for the oil and gas sector to reduce emissions.

Map outlining the figures that Canada gives out in fossil fuel subsidies

What do fossil fuel subsidies cost me?

Canada’s subsidies represent a lot of money. Let’s put it in perspective.

Wouldn’t you rather this money be spent on issues that matter to Canadians?

Graphic outlining what Canada's subsidies could be paying for instead

So subsidies are expensive and they cost me money. Is that why they are a problem?

Yes, but it gets worse. Fossil fuel subsidies also undermine the other climate change actions that Canada is taking. For example, the federal government recently introduced carbon pricing across Canada. By making carbon pollution more expensive, carbon pricing encourages us to pollute less. Just like Canada’s past success in stopping acid rain, putting a price on carbon pollution is a key part of the global fight against climate change. But through money and tax breaks, fossil fuel subsidies increase the same pollution that we’re trying to lower. Rather than making pollution expensive, they make it cheaper. This is like raising taxes on cigarettes to discourage smoking while also giving tobacco companies tax breaks so they can make more cigarettes and profits.

To make matters worse, fossil fuel subsidies disadvantage clean energy because they make it cheaper to produce or burn fossil energy. When fossil fuels are artificially cheap, investing in renewable energy becomes less attractive. In the long run, subsidies distort the market, pushing investment toward sectors that might not have otherwise be viable. If even a small portion of subsidy savings were swapped to support renewable energy or energy efficiency, we could make a faster shift to an economically stable, climate-safe future. That sounds like a pretty good alternative compared to getting locked into dangerous climate change and unhealthy pollution!

Figure that outlines the transfer of subsidies toward sustainable energy

Is the government doing anything about this?

In short: despite commitments for reform, progress is slow. At the provincial level, there have been very few efforts to reform subsidies. At the federal level, Canada committed to phasing out “inefficient” fossil fuel subsidies way back in 2009, as part of the G20. There is a commitment to phase them out by 2025. Despite committing to phasing out coal, Canada still hasn’t taken all the necessary steps to live up to these promises and has added new subsidies in the wake of COVID-19. In a recent scorecard ranking G20 countries’ support to fossil fuels (including subsidies and other policies like public finance), Canada ranked last among 11 OECD countries on progress in ending support to fossil fuels.

As part of its G20 commitment, the federal government is doing what’s called a “peer review” with Argentina. Through this process, Canada is evaluating “inefficient” federal fossil fuel subsidies. Overall, the process isn’t entirely clear and is well behind schedule. Where other reviews took 12–18 months, Canada and Argentina are well beyond the two-year mark. We also don’t know which subsidies will or won’t be considered “inefficient” or even which subsidies will be reviewed. IISD is following the peer review process and will keep our readers updated as it progresses.

The good news is that the federal government has begun reforming certain tax deductions that act as subsidies to fossil fuel companies. But with 2025 right around the corner, we still have a lot of work to do—and fast.

What should Canada do?

To start, the federal and provincial governments should stop introducing new subsidies for fossil fuel companies. We also shouldn’t be extending the lifespan of any existing subsidies that are scheduled to expire. As we build back from COVID-19, the risk of new subsidies has increased. That’s why it’s important that all recovery measures announced by federal and provincial governments have clear conditions and standards to align spending with climate change goals. Second, governments should be upfront with Canadians about how much money they spend on fossil fuel subsidies each year. This means increasing transparency and measuring subsidies using globally agreed-upon definitions and methodologies.

What are common misconceptions on subsidies?

There are a number of misconceptions about subsidies that seek to exclude certain types, argue for estimation methods that minimize their size, or mislead on the goals of fossil fuel subsidy reform. These efforts to push policy-makers away from international guidelines and best practices have delayed fossil fuel subsidy reform in Canada. Here, we clarify some common misconceptions about fossil fuel subsidies in Canada:

  • Misconception: Money to reduces greenhouse gas emissions is not a subsidy. Grants and direct spending that have environmental benefits are not subsidies.

    Correction: Ultimately, these help fossil fuel industries compete and lower their cost of business, so they are correctly classified as subsidies. There can be a significant opportunity cost when government directs money to this type of subsidy rather than other clean energy or emission-reduction options. Grants and direct spending clearly fall within the World Trade Organization’s definition of subsidies.
  • Misconception: Tax expenditures and royalty relief are not subsidies. Allowing companies to undervalue their assets for tax purposes just levels the playing field for capital-intensive industries.

    Correction: Tax expenditures and royalty relief have the same impact as grants. They reduce government revenue while lowering the cost of producing fossil fuels, giving them an unfair advantage when we need to be rapidly transitioning to renewables. They also clearly fall within the World Trade Organization definition of subsidies as “government revenue forgone or not collected.” They are included in internationally recognized subsidy methodologies.
  • Misconception: Canada has already reformed all of its “inefficient” fossil fuel subsidies.

    Correction: Canada has reformed only a handful of tax measures and argues that those that remain are either not subsidies (see above) or are not inefficient. But Canada hasn’t given a robust definition of “inefficient,” making it difficult to hold them to their own commitment. In 2019, the Office of the Auditor General found that Canada’s assessment of inefficient subsidies for fossil fuels was incomplete and didn’t take into account the environmental or social costs of subsidies.
  • Misconception: All subsidies are inherently bad.

    Correction: When properly applied, subsidies can support the low-carbon transition and avoid bankruptcies and unemployment risks. For example, careful government spending can support worker transitions from fossil fuels to clean energy while encouraging a shift away from the production and consumption of fossil fuels.
  • Misconception: Removing fossil fuel subsidies means advocating for job losses and energy insecurity.

    Correction: Fossil fuel subsidy reform can be done in a way that supports job creation and enhances energy security, setting Canada up to thrive in a low-carbon economy. For example, ensuring affordable energy access in remote and northern communities in Canada is an absolute necessity. Historically, some fossil fuel subsidies have enabled this. However, we need research to show that, if a subsidy must stay or be put in place: (i) it is the only viable option, (ii) it is clearly linked to employment and energy security, and (iii) there is a plan over time to transition away from the subsidy. IISD supports developing alternative policies that encourage clean energy options while maintaining affordable access.

To learn more, you can check out our report on applying best practices for fossil fuel subsidy measurement in Canada.

Can you tell me more about these subsidies?

Here are some of the largest current subsidies in Canada.

Subsidy name Who gives it? Who gets it? How much is it worth?*
LNG Canada investment Canada LNG Canada $275 million
Direct spending & budgetary transfers** Canada Oil and gas companies $318 million
Crown royalty reductions Alberta Oil and gas companies $1.136 billion
Tax exemptions for certain fuels & uses in industry Alberta Industry $287 million
Royalty reductions, including deep drilling and infrastructure credits British Columbia Oil and gas companies $631 million
Reduced tax for aviation fuel†† Ontario Aviation Industry $273.5 million
Tax exemption for coloured fuels used in agriculture Ontario Agricultural industry $275 million
Fuel tax exemptions and reductions  Quebec Industry and other consumers $303.5 million

* The exact amount changes from year to year, so unless otherwise listed, this is a yearly average based on OECD estimates from the period 2016–2019, with specific data used for all years available and averaged. During periods of higher oil prices, royalty payments will also tend to be higher. 
**From fiscal year 2019/20. For a full breakdown, see our most recent federal subsidy report.
†   From fiscal year 2018/19, as listed in British Columbia’s Public Accounts.
†† Data from Ontario’s Taxation Transparency Reports. 

The IISD Global Subsidies Initiative has produced a wealth of information on subsidies to fossil fuels globally and in Canada.

You can learn more from this detailed report, which gives a breakdown of fossil fuel subsidies by Canada’s federal government to early 2020. 

If you’re curious about provincial and territorial subsidies, you can check out reports we’ve done on British Columbia, Alberta, Ontario, Quebec, and Nunavut.

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