Ottawa doled out at least $1.9 billion in subsidies to the Canadian fossil fuel industry in 2020, a more than 200 per cent increase over the previous year, according to a climate-focused think tank.
The International Institute for Sustainable Development (IISD) said in a report released Thursday that most of the money came through two measures announced in response to the COVID-19 pandemic: funding for orphan and abandoned wells, and a direct transfer to support Newfoundland’s offshore oil industry.
Canada’s oil and gas sector has been among the hardest hit by the economic fallout of COVID-19. Global demand from transportation fuel has been drastically reduced for nearly a year under various stay-at-home orders aimed at halting the spread of the virus.
The result has been mass layoffs and spending cuts by major producers on the heels of years of weak oil prices and stalled pipeline development. At the same time, the industry faces mounting pressure from investors and governments eager to reign in emissions and limit climate-related risk.
Business leaders and analysts in the oil and gas sector have complained for months that the direct federal aid rolled out in response to the virus has fallen short. The IISD report’s authors argue that while the funding has environmental and employment benefits, it ultimately conflicts with the Liberal government’s climate agenda, which includes carbon pricing policies and hitting net-zero emissions by 2050.
Combining carbon pricing and fossil fuel subsidies is like trying to bail water out of a leaky boat.Vanessa Corkal, policy analyst, IISD
“As fossil fuel subsidies incent the same consumption and production of fossil fuels that carbon pricing aims to reduce, combining carbon pricing and fossil fuel subsidies is like trying to bail water out of a leaky boat,” lead author Vanessa Corkal wrote in the report. “Ultimately, fossil fuel subsidies are not consistent with net-zero commitments.”
The IISD said direct transfers include investments for infrastructure or technology in the fossil fuel sector, including those with emission reductions or other environmental benefits, and transfers with environmental benefits are considered subsidies under the World Trade Organization definition.
The think tank acknowledges that the pandemic has made for an unusual year of government spending. It notes that direct spending on fossil fuels under non-COVID-19-related federal initiatives appears to have declined to $90 million in 2020, from $600 million in 2019.
“It is difficult to determine if this is due to concerted measures to reduce subsidies, a lag in reporting, or reduced industrial activity during the pandemic,” Corkal and her fellow authors wrote. “It is possible all three of these factors influence this decline.”
They add that the $1.9 billion figure is also “incomplete,” lacking sufficient data on COVID-19-related programs such as the Emissions Reduction Fund, and liquidity support provided by Export Development Canada and the Business Development Bank of Canada. The report also omits subsidies from the provinces and territories.
The Winnipeg-based think tank’s recommendations include a call for Ottawa to clearly account for all federal fossil fuel subsidies, and create a roadmap to achieve its commitment to phase out inefficient fossil fuel subsidies by 2025.
While the elimination of such support would deepen the rift between the Trudeau government and many in the oil patch, the move would bring Canada closer in line with U.S. President Joe Biden’s administration. In January, Biden ordered “federal agencies to eliminate fossil fuel subsidies as consistent with applicable law.”
Trudeau and Biden appear to be well-aligned on climate policy, aside from the cancellation of the Keystone XL pipeline expansion. On Wednesday, Bloomberg News reported that Canada and the U.S. are working on joint environmental plans that could include singling out countries with weaker climate laws.
The Canadian Association of Petroleum Producers (CAPP) disagrees with IISD's assessment of Ottawa subsidies. The industry group claims to represent companies producing about 80 per cent of Canada’s natural gas and oil.
"Groups like the IISD will often take aspects of tax measures and royalty programs, tools that generate revenue to governments, and mischaracterize those aspects as subsidies which creates confusion with their complexity," CAPP spokesperson Jay Averill said in an emailed statement.
"IISD report classifies tax treatments as subsidies and other initiatives that no reasonable person would consider a subsidy, such as stimulus spending on bridge replacements and highway improvement investments by governments. (Oil and gas) production in Canada is subject to royalties, which are charged by the provinces who own the resource, and taxes from every level of government. These are the opposite of a subsidy and are significant drivers of income for municipalities, provinces and the federal government."
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
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