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 accelerated the deadline for this important work from 2025 to 2023.
• We have already phased-out or rationalized eight tax preferences, in addition to eliminating flow through shares for oil, gas and coal projects this year, as announced in Budget 2022. Work is continuing on reviewing additional tax and non-tax measures.
• Canada has committed to undertake 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 December 2022, Canada delivered on its commitment from COP26 in Glasgow to end new, direct public financing for international unabated fossil fuel investments and projects.
• Canada has also committed to develop a plan to phase out domestic public financing of the fossil fuel sector.

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 in June 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. 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 mandate letters committed 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 partner 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 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. To date, the two departments have agreed on a proposed definition of “fossil fuel subsidy” which is based on the World Trade Organization definition of “subsidy”, which notes that any financial contribution or income or price support that confers a benefit can be considered a subsidy.

The term “inefficient” fossil fuel subsidies also lacks a commonly-accepted definition and was not defined in the any of the four pairs of G20 peer reviews completed to date. The measures identified as inefficient fossil fuels subsidies in these reviews have primarily been tax measures. International organizations (e.g., Organisation for Economic Cooperation and Development, United Nations Environment Programme, International Institute for Sustainable Development) have not defined inefficiency and have acknowledged that countries should define the term in accordance with their national circumstances. ECCC and Finance Canada’s work to define the term “inefficient” is taking into account the text from the Leaders' statement and other Canada-specific considerations (e.g. alignment with Canada’s climate objectives) in assessing whether or not each form of government spending that goes towards the fossil fuel sector is inefficient.

Actions Taken to Date
Important progress has been made and nine tax preferences supporting the fossil fuel sector have been, or are in the process of being, phased out or rationalized, including most recently:
• Rationalizing the tax treatment of expenses for successful oil and gas exploratory drilling (announced in Budget 2017);
• Phasing out a tax preference that allows small oil and gas companies to reclassify certain development expenses as more favorably treated exploration expenses (announced in Budget 2017); and
• Phase-out of flow-through shares for oil, gas, and coal activities (announced in Budget 2022; to be completed in 2023).
Next Steps
Finance Canada and ECCC are working to finalize an assessment framework that would identify federal tax and non-tax measures that are inefficient fossil fuel subsidies. Once the framework is confirmed, officials will work with other federal departments to finalize the non-tax assessment. 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.

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