Question Period Note: Inefficient non-tax fossil fuel subsidies

Inefficient non-tax fossil fuel subsidies

• A clean environment and a strong economy go hand in hand. With the G20 partners around the world, the Government of Canada is phasing out inefficient fossil fuel subsidies and have taken one step further by committing to do so by 2025.

• Canada’s efforts to reform fossil fuel subsidies have resulted in the phase-out or rationalization of eight tax expenditures. The Government also continues to review measures in its tax system.

• Canada has partnered with Argentina on a peer review that will help both countries ensure they are on track to phase out inefficient fossil fuel subsidies.

• The Minister of Environment and Climate Change launched consultations with Canadians on the Government’s draft framework to review non-tax measures in March 2019. The results of the consultations will be included in Canada’s peer review with Argentina.

• Phasing out inefficient fossil fuel subsidies is an important step in the transition to a low-carbon economy

In 2009, G20 Leaders committed to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption”, while noting that “inefficient fossil fuel subsidies encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change.” At the North American Leaders’ Summit on June 29, 2016, Canada, the United States and Mexico committed to phase out inefficient fossil fuel subsidies by 2025 and called on other members of the G20 to do the same.

As with other G20 commitments, this commitment is considered to apply only at the federal level.

In 2015, the Minister of Finance and the Minister of Environment and Climate Change Canada (ECCC) were tasked with fulfilling Canada’s G20 commitment. Finance Canada is leading the work with respect to tax measures; ECCC is coordinating a review of federal non-tax measures.

In June 2018, the Minister of Natural Resources along with Argentina’s Energy and Mining Minister announced that Canada and Argentina would be partnering to perform peer reviews to ensure both countries are on track to phase out inefficient fossil fuel subsidies. The peer review requires Canada to produce a self-review report, which will be reviewed by an international review panel. The Department of Finance is leading the peer review process, with ECCC contributing assessments on non-tax measures and context on Canada’s environmental policy landscape. As is convention under the G20 peer review process, Canada’s self-review report, as well as a report from the international review panel, will be made public once the peer review process is complete.

In April 2019, the Commissioner of the Environment and Sustainable Development (CESD) published its performance audit of the work on the review of federal non-tax measures conducted by ECCC. In March 2019, the Minister of Environment and Climate Change launched a public consultation on the Government’s draft framework to review non-tax measures. The consultation invited comments from all Canadians with an interest in Canada’s climate change commitments and policies. At the same time, targeted consultations with key stakeholders were undertaken. The results of the public and targeted consultation will inform Canada’s self-review report as a part of the peer review with Argentina, which will be made public.

DEFINING FOSSIL FUEL SUBSIDIES
While there is no commonly held definition, there has been a general understanding that fossil fuel subsidies encompass price controls, cash subsidies and tax preferences (i.e., concessions from a particular country’s “normal” level of taxation), whether aimed at producers or consumers of fossil fuel. For example, in its recommendations for Budget 2016 on energy subsidy reform, the Green Budget Coalition recommended that the federal government revoke the recently adopted accelerated capital cost allowance for liquefied natural gas projects.

ACTIONS TAKEN TO DATE
Canada has taken substantial action to phase out a number of tax preferences available for the extraction of oil and gas and coal:
– Phase-out of the accelerated capital cost allowance for oil sands (Budget 2007; completed in 2015)
– Reduction in the deduction rates for intangible capital expenses in oil sands projects to align with rates in conventional oil and gas sector (Budget 2011; completed in 2016)
– Phase-out of the Atlantic Investment Tax Credit for investments in the oil and gas and mining sectors (Budget 2012; completed in 2017)
– Reduction in the deduction rate for pre-production intangible mine development expenses to align with rate for the oil and gas sector (Budget 2013; completed in 2018)
– Phase-out of the accelerated capital cost allowance for mining (Budget 2013; to be completed in 2021)
– Allowing the accelerated capital cost allowance for liquefied natural gas facilities to expire as scheduled in 2025 (Budget 2016)
– Rationalize the tax treatment of expenses for successful oil and gas exploratory drilling (Budget 2017; to be completed by 2021)
– Phase out tax preference that allows small oil and gas companies to reclassify certain development expenses as more favorably treated exploration expenses (Budget 2017; to be completed in 2020)

NEXT STEPS
In 2015, the Minister of Finance and Minister of ECCC were tasked with fulfilling the G20 commitment to phase out fossil fuel subsidies over the medium-term. Officials from Finance Canada are reviewing tax measures for any that may be within the scope of the commitment. Officials from ECCC are working to incorporate input received during the consultations into the draft assessment framework for non-tax measures. Once this is complete, ECCC will begin engaging departments to solicit input for the non-tax assessment process. This work will be incorporated into Canada’s self-review report as a part of the peer review with Argentina, which will be made public.

Question Period notes as provided by the Department to the Minister’s Office