Unpacking Canada’s Fossil Fuel Subsidies

Their size, impacts and why they must go

Introduction

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 10 years ago—but even after a decade there are still large subsidies to fossil fuel production. Taxes and subsidies are a complicated topic, so we created this website 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.

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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.) This financial benefit can be 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.

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How much does Canada give out in fossil fuel subsidies?

It’s difficult to know, because federal and provincial governments haven’t come clean about how much they really spend on fossil fuel subsidies. From what we do know, it’s in the billions of dollars. That includes measures like special tax deductions and direct cash that governments hand to fossil fuel companies. You can find a list of some of the largest subsidies below. Examples of federal subsidies include tax breaks like flow-through shares, which incentivize oil, gas and mining exploration, and research and development support programs, like those provided by Natural Resources Canada. 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 an average of CAD 247 million from 2015 to 2018.

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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?

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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 undo 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. 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!

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Is the government doing anything about this?

In short: a lot of talk, and some action, but not yet enough. At the provincial level, there have been very few efforts to reform subsidies. At the federal level, Canada committed to phase out “inefficient” fossil fuel subsidies way back in 2009, as part of the G20. Later, they said they’d phase them out by 2025. Canada still hasn’t taken the necessary steps to live up to these promises. The good news is that the federal government changed some of its tax policies over the past few years, which lowered some of the subsidies that fossil fuel companies can claim. They also pledged to phase out coal power by 2030. With 2025 right around the corner, we still have a lot of work to do—and fast. 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. To inform the peer review, they even opened a public consultation on Canada’s non-tax subsidies. But overall, the process isn’t entirely clear, and we 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.

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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. Second, governments should be up front with Canadians about how much money they spend on fossil fuel subsidies each year. Third, Canada should announce when it will end existing fossil fuel subsidies, to keep our G20 promise.

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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?*
Flow-through shares** Canada Oil and gas companies CAD 265 million
Direct spending & budgetary transfers*** Canada Oil and gas companies CAD 112 million
Crown royalty reductions Alberta Oil and gas companies CAD 1.162 billion
Tax exemptions for certain fuels & uses in industry Alberta Industry CAD 298 million
Royalty reductions, including deep drilling and infrastructure credits British Columbia Oil and gas companies CAD 631 million
Reduced tax for aviation fuel Ontario Aviation Industry CAD 292 million
Tax exemption for coloured fuels used in agriculture Ontario Agricultural industry CAD 248 million
Fuel tax exemptions and reductions Quebec Industry and other consumers CAD 301 million

* The exact amount changes from year to year, so unless otherwise listed, this is a yearly average based on estimates from the period 2015–2018 with specific data used for all years available and averaged. During periods of higher oil prices, royalty payments will also tend to be higher.

** Flow-through shares are available to investors in the oil and gas, mining and renewable energy sectors. The data provided by Finance Canada does not disaggregate the tax expenditures related to flow-through shares by sectors.

***From fiscal year 2017–2018. For a full breakdown, see our most recent federal subsidy report.

†   From fiscal year 2018–2019, as listed in British Columbia’s Public Accounts.

‡ This amount is from fiscal year 2016–2017.

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 full breakdown of fossil fuel subsidies by Canada’s federal government to 2018

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

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