Identifying Inefficient Fossil Fuel Subsidies in Canada

Ending government subsidies for fossil fuels and aligning financial flows with the Paris Agreement targets is imperative to addressing the worsening climate crisis. The most recent report from the Intergovernmental Panel on Climate Change (IPCC) paints a stark picture of the narrowing window for action to transition to low-carbon economies and for high-emitting countries like Canada to take responsibility for leading the way. Canada first committed to phasing out “inefficient fossil fuel subsidies” in 2009 alongside its G20 peers and has consistently reiterated this commitment, most recently in the 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP 26) Glasgow Climate Pact and in the federal 2022 Emissions Reduction Plan. In the mandate letters given to ministers last year, the Canadian government has brought forward the commitment to eliminate fossil fuel subsidies from 2025 to 2023, alongside a commitment to phase out all other public financing for fossil fuels, indicating increased public and global pressure to align federal economic support with climate commitments. Canada has also committed to phasing out international public financing for fossil fuels this year  and coal-fired power by the end of this decade. These commitments to shift financial support by way of subsidies and public financing should be acted on in tandem in order to enable a swift and streamlined transition. While some progress has been made over the past decade in phasing out fossil fuel subsidies in Canada, there is a long way to go, considering that federal subsidies for which data is available totaled at least CAD 1.91 billion in 2020 (not including public finance- and tax-related subsidies for which there is no data). Combined provincial subsidies are even greater; for example, the main fossil fuel-producing provinces of Alberta, British Columbia, Saskatchewan, and Newfoundland and Labrador together subsidized at least CAD 2.5 billion in the 2020/2021 fiscal year, and Quebec provided an average of CAD 300 million annually in fuel tax relief from 2011 to 2016.

A barrier to fully meeting the phase-out commitment is the lack of a shared definition internationally and within the Canadian government. The original G20 commitment describes inefficient fossil fuel subsidies as those that “encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change” (G20, 2009). However, as noted in a recent international review, there are no universally endorsed definitions for the three main elements of the commitment (i.e., what constitutes a fossil fuel subsidy; what makes a subsidy inefficient; and what is considered wasteful consumption). Thus far, some countries have considered all fossil fuel subsidies to be inefficient (e.g., Italy, Peru), while others exclude industry support measures (e.g., Germany) and tax exemptions or reductions in support of consumption (e.g., Mexico), citing reasons such as retaining industry competitiveness and avoiding carbon leakage to countries with less stringent regulations. The United Kingdom Climate Change Committee, for its part, considers that no fossil fuel subsidies should be classed as “efficient” in the United Kingdom. Canada’s peer review with Argentina, where each country reviews the other’s fossil fuel subsidies, is ongoing and far behind schedule. The matter of defining fossil fuel subsidies and inefficiency in the Canadian context is central to achieving a meaningful outcome in this process. To the former point, defining fossil fuel subsidies has been the subject of a wealth of investigation and discussion, and we reiterate our recommendation for Canada to adopt the World Trade Organization definition, which is widely used by inventory processes around the world as well as in the UN Environment Program’s recent advice to states on measuring and reporting subsidies.

This definition includes financial benefits provided to businesses or industries, including direct transfers, foregone revenue, transfer of risk, and provision of goods and services. The matter of determining inefficiency in the Canadian context, on the other hand, has received less attention and is the focus of this brief.