Canada Subsidizes the Fossil Fuel Industry by $2.7 Billion Every Year. Where Does That Money Go?

Canada’s fossil fuel industries are the recipients of $2.7 billion US ($3.6 billion CDN)  in handouts each year, despite a promise from all G20 nations, including Canada, to eliminate subsidies in 2009.

About $1.6 billion US of those subsidies came from the federal government with the rest distributed by the provinces, according to a new report from Oil Change International.

The report finds G20 countries spend about $452 billion US each year to prop up their oil, gas and coal industries.

The Liberals promised to “fulfill Canada’s G20 commitment to phase out subsidies for the fossil fuel industry,” in their election platform. The party singled out the Canadian Exploration Expenses tax deduction as too generous to industry, saying the tax break should only kick in if companies are completely unsuccessful in their resource exploration.

“The saving will be redirected to investments in new and clean technologies,” the party platform says.

But the Canadian Exploration Expenses tax deduction isn’t the only place where companies can take advantage of a generous subsidy system.

So were else is the money coming from and going to?

Direct Handouts to Fossil Fuel Industry

The Canadian government has heavily invested in fossil fuel projects, research and development in recent years.

Perhaps most notably, the government poured millions of dollars into the development of carbon capture and storage (CCS) technology.

Between 2011 and 2014, $226 million US was handed over to SaskPower, Saskatchewan’s main energy provider to develop CCS infrastructure at the Boundary Dam coal power plant. SaskPower, owned by the province, invested an additional $1.2 million US into the project over four years.

An additional $18 million US was paid into CCS research at the Saskatchewan Petroleum Technology Research Centre in a joint project funded by Canada, Saskatchewan, the University of Regina and the Saskatchewan Research Council.

Two CCS projects in Alberta received $156 million US from the federal government and an annual supplement of roughly $103 million US from the province for several years.

The development of CCS has been extremely controversial because it is an expensive, risky and unproved technology that, while ostensibly removing carbon from the atmosphere, is also used to facilitate enhanced oil and gas extraction, thereby releasing more carbon into the atmosphere.

B.C. also invested $19 million US directly in oil and gas extraction activities under the banner of  ‘transportation investment’ objectives.

Screenshot from Oil Change International.

Public Finance of Fossil Fuel Activities

The OCI report found Export Development Canada, the country’s main public finance institution, mostly funds projects that involve oil and gas production. The institution, however, doesn’t keep precise records on how much money is provided per transaction (records only provide a range, i.e. $250-$500 million US).

But OCI estimates that the institution provides an average of $2.5 billion US per year to fossil fuel production for companies like TransCanada, Enbridge, Encana, Devon Energy and Chevron.

Fossil Fuel Industry Tax Breaks

One of the main ways the federal and provincial government subsidizes the fossil fuel industry is through major tax breaks.

Canada has no shortage of generous tax deductibles and expenses for industry when it comes to expensive upstream development, which can include high resource exploration and infrastructure costs.

Here are some highlights:

The Canadian Development Expense

Under the Canadian Development Expense, oil and gas companies can claim up to 30 per cent of their field development costs when starting up a new project.

In 2013 oil and gas companies claimed an estimated $981 million US in tax deductions for drilling or completing an oil field or sinking a new mine shaft, according to OCI.

Canadian Exploration Expense

Companies exploring for new resources can claim up to 100 per cent of their expenses for exploratory drilling or seismic testing. This cost the federal government an estimated $159 million US in 2013.

Until January 2015, all pre-production expenses for development of the oilsands were eligible under this tax break, although now operators can only make those claims under the CDE (where they can only recoup 30 per cent, rather than 100 per cent, of their expenses).

Canadian Oil and Gas Property Expense

This tax break, which allows companies to claim a 10 per cent deduction on the cost of purchasing new oil and gas wells, has amounted to $35 million US in subsidies since 2011.

This expense did bring the benefit of reclassifying oilsands property and leases, which were previously eligible for 30 per cent deductions under the Canadian Development Expense. This change is estimated to save Canada $69 million US each year by 2015/2016, according to the report.

Atlantic Investment Tax Credit

This tax credit cost subsidized the oil and gas industry to the tune of $136 million US between 2013 and 2014 by providing tax deductions for developing mature or non-conventional resource fields in Atlantic Canada.

This credit mechanism is currently being phased out but companies can claim past expenses until 2017.

Foreign Tax Breaks

The Foreign Resource Expense and the Foreign Exploration and Development Expense allow Canadian companies to deduct 30 per cent of their overseas exploration costs.

OCI notes a lack of disclosure for deductions claimed under these foreign operations tax brackets means no one knows exactly how much these breaks cost for 2013 or 2014.

Alberta Crown Royalty Reductions

In 2013, companies were spared from paying an estimated $631 million US in taxes and royalties under this provincial subsidy. In 2014, the estimated total was $578 million US.

B.C. Deep Drilling Credit

B.C. gave $260 million US worth of royalty relief to gas developers in 2013 and an additional $238 million US in 2014.

In its primer on Canada, Oil Change International, along with the Overseas Development Institute and International Institute for Sustainable Development, outlines how these tax breaks work in more detail.

Why Stopping Fossil Fuel Subsidies Matters

Global subsidies for the fossil fuel industry are four time the global subsidies for renewable energy.

Clean energy analysts say the lack of tax breaks and subsidies for clean energy is holding the sector (which is still booming, by the way) back from reaching its potential.

Many countries in the developed world have already promised a long or medium-term phase out of fossil fuels as a pathway to lowering their emissions.

This year more than 190 countries are convening in Paris for the UNFCCC COP21 climate talks in the hopes of singing an international climate treaty.

“Axing $1.7 billion US in handouts to fossil fuel producers is a critical step that Canada needs to take towards tackling climate change, and it would be very welcome in the lead-up to major climate talks in Paris next month,” Alex Doukas, co-author of the report for Oil Change International, said.

“This is a unique opportunity for the new Canadian government to hit the ground running at the G20, live up to election promises, and push other G20 leaders to phase out subsidies as they first committed to doing six long years ago,” Doukas added.

“Continuing to fund the fossil fuel industry today is like accelerating towards a wall that we can clearly see,” Stephen Kretzmann, director of Oil Change International, said.

“G20 leaders need to slow down and turn us around before we hit climate disaster.”