Question Period Note: Inefficient Fossil Fuel Subsidies

Inefficient Fossil Fuel Subsidies

• Inefficient fossil fuel subsidies slow down our transition to a net-zero carbon economy.
• Along with our G20 partners, we have committed to phase out inefficient fossil fuel subsidies. [We have now accelerated the deadline for this important work from 2025 to 2023.]
• We have already phased out or rationalized eight tax preferences and we are continuing to review measures in our tax system. [We have also committed to eliminating flow through shares for oil, gas and coal projects.] Work is continuing on reviewing additional tax and non-tax measures.
• Canada has committed to undertaking a peer review through the G20 process. The peer review process will increase transparency on Canada’s actions to fulfill the G20 commitment to climate action.

• In 2009, G20 Leaders made a commitment 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 in June 2016, Canada, the United States and Mexico committed to phasing out inefficient fossil fuel subsidies by 2025 and called on other members of the G20 to do the same. Most recently, in June 2021, G7 Leaders reaffirmed their commitment to phase out inefficient fossil fuel subsidies by 2025, and called on all countries to join them. The 2021 Liberal Platform included a commitment to “accelerate our G20 commitment to eliminate fossil fuel subsidies from 2025 to 2023.”
• As with other G20 commitments, this commitment applies only at the federal level.
• In 2015, the Minister of Finance and the Minister of Environment and Climate Change were tasked with fulfilling Canada’s G20 commitment. Finance Canada is leading the work with respect to tax measures; Environment and Climate Change Canada (ECCC) is coordinating a review of federal non-tax measures.
• In June 2018, it was 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. Finance Canada is leading the peer review process. 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 her 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. The term “inefficient” fossil fuel subsidies also lacks a commonly-accepted definition and was not defined in any of the four pairs of G20 peer reviews completed to date. ECCC and Finance Canada are working to finalize an assessment framework that will define these terms in the Canadian context.

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)
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