The Subsidy game
Canada is a relatively significant contributor to the international shameful game of government subsidies to oil companies.
Let’s take a look at what these costly things are all about and what efforts are underway to try to get rid of them.
WHAT IS A SUBSIDY
A subsidy is a financial benefit given to an individual, business, or institution by government. There are direct subsidies in the form of cash or direct transfers and also indirect subsidies in the form of tax breaks, cheaper use of infrastructure (pipelines), water or favourable royalties or reductions in other charges.
Sometimes these are in the interest of the public. They can promote a social good or an economic policy. Famously, wine was subsidized in Canada so that costs were (artificially) lower for the customer until they were competitive in the marketplace.
Sometimes subsidies to industry can cause a stir. During the 1990s Canada got in trouble under NAFTA for softwood subsidies (our stumping fees were too low) that gave an unfair advantage to Canadian lumber. That had to get fixed according to the international tribunal. There were penalties.
Subsidies are an area of lively discussion in policy circles because, in the extreme, these are costly, create distortions in the market economy, reduce competition, stifle innovation and introduce unfair benefits for some companies over others.
WHAT ARE FOSSIL FUEL SUBSIDIES?
Fossil Fuel subsidies are direct and indirect financial benefits from governments to oil and gas companies.
These fossil fuel subsidies include direct payments and benefits to oil and gas consumers. These could be in the form of a tax break for heating oil or gasoline at the pump. A specific Canadian example is the coloured gas program for farmers in Canada.
You might ask… why the hell does the oil and gas sector need subsidies when they have record billion-dollar profits (according to The Guardian and Statista[1]).
The subsidies can take many forms. There are a body of direct cash benefits paid to companies to the tune of hundreds of millions from the federal and provincial levels. There are also a host of indirect subsidies such as foregone revenues from low royalty charges (less than other countries), reduced charges for land, transport of fuels through pipelines or overly favourable rights to use water.
In countries like Canada these indirect subsidies play a bigger financial role that direct subsidies.
WHY ARE THEY A PROBLEM?
Subsidies can be a big problem because they take substantial government funding away from other priorities such as housing, education, health and debt payments.
In the case of fossil fuel subsidies, these represent a significant unfair wealth transfer away from taxpayers toward highly profitable oil companies.
These also are a major problem for the climate change agenda. This is not only because of the market distortions (that give oil and gas companies an unfair price advantage) but also because it sets back investment progress in much-needed new technologies. They distort the global market and give a false lower price for carbon-based fuels and put alternatives at a market disadvantage.
Imagine if governments insisted on giving Blockbuster locations big rent reductions and put a heavy tax on streaming services; you’d be reading this on VHS.
By the way… there is consternation on all sides of the political spectrum on this topic of subsidies. Conservative commentators point out that subsidies increase taxes, add to debt and distort the marketplace. We all probably want to see way more transparency in government about where public funds go and you might not be all that on board with big corporations getting free hand-outs (like, when they already have huge profits). A lot of liberal and left leaning commentators advocate for government funds to go to other priorities like education or health or to help address the housing crisis.
So, on all these points there is some interesting work going on internationally.
SUBSIDIES INTERNATIONALLY
Economists at the World Economic Forum and even the OECD are working to define the size of global subsidies and develop an inventory of the different ways that governments provide supports to oil and gas companies.
Globally, when taking environmental costs into account, it is estimated that global fossil fuel subsidies are in the area of $5.9 trillion annually. A lot more on the extent of subsidies and individual country analysis can be found at the OECD Inventory of Support Measures for Fossil Fuels.[2]
These different ways take the form of direct cash, cost reduced or free use of public infrastructure, tax breaks, overly favourable royalty arrangement, allowances for aggressive asset depreciation (to reduce payable taxes), subsidies at the pump for consumers. It also includes rich innovation grants that exclusively get taken up by oil and gas companies (things like carbon sequestration projects).
One of the features of the phenomenon of subsidies is a lack of transparency and this has introduced complexity in estimating the extent of subsidies.
Umm… ironically, this lack of transparency is evident here in Canada where we, otherwise, have relatively strong financial reporting on Provincial and municipal expenditures.
SUBSIDY REFORM
Since 2009, the Group of 20 advanced and emerging market economies called for a phase out of inefficient fossil fuel subsidies in all countries. This was reaffirmed again in 2012.
At COP26 in 2021, 197 countries agreed to accelerate efforts to phase-out inefficient fossil fuel subsidies.
In the context of reform, there’s furious work going on to standardize definitions and accounting of subsidies.
The UN Environment Programme (UNEP) established its official guidance for reporting fossil fuel
subsidies outlining a method that agrees with advice from leading institutions and experts and international authorities.
For the business minded among us… this focus on internationally recognized standards is a solid essential step forward. We have trade agreements, accounting principles, ISO standards, international transactions that rely on internationally agreed-to definitions just like this.
There is a recognition that any plan to address these subsidies will have to have some key “ingredients”.
· A comprehensive energy sector reform plan
· Communication on the size of subsidies and how they affect the government’s budget;
· Fossil fuel price increases that are phased-in over time;
· Improving efficiency in state-owned enterprises to reduce producer subsidies;
· Measures to protect the poor through targeted cash or near-cash transfers
· Institutional reforms that depoliticize energy pricing
IN CANADA
AND… speaking of research and definitions, there’s some good work being done on Canada’s situation with fossil fuel subsidies information.
Based on available data, Institute for Sustainable Development is able to estimate that total annual fossil fuel subsidies across Canada were approximately $4.8 billion per year. These take the form of foregone tax revenue and direct transfers. This estimate is highly conservative because it does not include some provincial measures or most federal tax deductions or other mechanisms where there was a lack of data. It also does NOT include externalities such as costly impacts to the environment.
WAIT… Not done yet…. Another recent estimate found that subsidies actually increased with the recovery from COVID!
Canadian governments to provide support for the extraction sector through targeted favourable royalty deals and research and development (R&D) spending.
The Levin and Gass study[3] listed 12 types of non-tax subsidies and ten tax-related subsidies that the federal and provincial governments use to support the oil and gas sector. They also listed nine other financial supports where specific financial estimates were not available.
It’s a big amount of money with a relatively complex set of mechanisms that help oil and gas companies.
In the category of reckless hyperbole… are we hearing that us taxpayers are using a lot of money to help highly profitable oil companies burn the world? What are we doing about this?
BABY STEPS
To be fair, Canada is taking baby steps. Well… terribly inadequate, weak, slippery baby steps.
The two most significant steps relate to international commitments and some more study.
Canada signed on to the subsidy reform commitments to reduce subsidies by 2025.
Canada also agreed to work with the sister country – Argentina – to look for ways to do a better job of identifying the indirect subsidies. Ummm, I wonder how that’s going?
Well, the auditor had some things to say. In the two AG reports (2015, 2017 and 2019) the Auditor General criticized the federal government for a lack of transparency and being too slow in addressing the HUGE waste.
The auditor noted that the “assessments did not consider the economic, social or environmental sustainability of subsidizing the fossil fuel sector.” The auditor said Canada still had not even defined what an inefficient fossil fuel subsidy was or how much these cost. Also, that there was no plan in place to meet the commitments Canada made about phasing out inefficient subsidies by 2025.
BARRIERS TO REFORM
Among the key barriers to progress with eliminating Fossil Fuel subsidies in Canada, the top items are transparency and agreement.
There is a significant lack of transparency about the financial value and the structure of fossil fuel subsidies. We saw that the international research and standards communities are working on this. We can just hope that Canada will play catch up when approaches for better transparency are developed.
On the matter of agreement, this is tough given the sloppy machinations of provincial, territorial and federal roles in environmental regulations, pipelines and transportation rules. It all really presses up against the public’s trust in public institutions and their ability to come together to find the right way forward. There will have to be a resolve held by multiple political parties and across multiple levels of government.
So we end this off with noticing the HUGE advantages in front of us when we get better at agreements and transparency here in Canada.
THE SUBSIDY GAME
Well… that looks like a bit of a mess then doesn’t it:
There are non-binding international agreements; non aligned levels of government; industry leaders duck and weave; consumers want cheaper gas.
Business-minded people who want better government transparency, market discipline and fiscal caution may remain frustrated.
The good analysis on this is in the links below. You’ll see there’s tons of stuff to remind your elected leaders about; get involved with the research and definitions work.
Remember to help make it normal to talk about climate change. Time for the subsidies to go!
LINKS:
https://www.theguardian.com/business/2022/may/13/oil-gas-producers-first-quarter-2022-profits
https://www.statista.com/statistics/1326419/quarterly-net-profit-of-leading-world-oil-companies/
https://www.iisd.org/system/files/publications/canada-fossil-fuel-subsidies-2020-en.pdf
https://www.oag-bvg.gc.ca/internet/English/esd_fs_e_43320.html
[1] https://www.theguardian.com/business/2022/may/13/oil-gas-producers-first-quarter-2022-profits
https://www.statista.com/statistics/1326419/quarterly-net-profit-of-leading-world-oil-companies/
[2] https://www.oecd-ilibrary.org/sites/5a3efe65-en/1/3/10/index.html?itemId=/content/publication/5a3efe65-en&_csp_=2ffa7a733148fec42dccf926d7619e1c&itemIGO=oecd&itemContentType=book
[3] https://www.jstor.org/stable/pdf/resrep29184.4.pdf?refreqid=excelsior%3A28ed7cfafa1bead6a142f351422dc450&ab_segments=&origin=&acceptTC=1
