When it comes to fossil fuel subsidies, Canada is not the problem

Soaring fossil fuel prices this month forced European governments to announce emergency aid packages to help consumers and industries cope with surging electricity bills, with many analysts predicting a winter of discontent as energy shortages send prices even higher.

The aid already unveiled or being planned will stall global efforts to eliminate fossil fuel subsidies that the Group of 20 countries committed to undertaking in 2009. But they demonstrate the extent to which the global economy remains dependent on cheap and abundant coal, oil and natural gas. Even modest increases in fossil fuel prices continue to wreak havoc on the economies of developed and developing countries alike, since renewables remain unable to pick up the slack.

Governments around the world continue to subsidize the consumption of fossil fuels to keep their economies on an even keel and their citizens from rising up in protest. Attempts to increase taxes on fossil fuels are met with resistance. France’s “yellow vests” movement emerged in 2018 in response to a proposed carbon-tax increase by President Emmanuel Macron’s government. The measure was quickly scrapped.

Meanwhile, oil-rich countries such as Iran, Saudi Arabia and Russia provide massive fossil fuel subsidies to keep domestic gasoline and electricity prices low. So do oil and coal importers such as India. Such measures are seen as necessary to maintaining the social peace and providing citizens with a basic necessity.

Explicit subsidies for fossil fuel consumption and production fell to US$450-billion globally in 2020, as market prices plummeted during the first wave of the pandemic. That sum does not include US$5.5-trillion in implicit subsidies, or the amount the International Monetary Fund estimates fossil fuel prices would have needed to rise in 2020 to cover the environmental cost of their consumption.

Explicit subsidies were expected to return to their prepandemic level of about US$600-billion even before the supply shocks of recent weeks sent prices soaring in Europe. But the longer market prices remain high, the more governments will need to fork out to help consumers and businesses cover their energy costs.

Subsidizing the consumption of fossil fuels goes against the goal of reducing greenhouse gas emissions. But it remains a political and economic imperative in most countries. And it is not about to end any time soon. Energy consumption will soar as more and more people in the developing world move out of poverty. Renewables alone cannot meet this demand.

Fossil fuel subsidies were a big issue in Canada’s recent election campaign, with the Liberals, New Democrats and Greens all promising to end public support for the oil and gas industry. But the debate here entirely ignored the global context.

Canada is not a major culprit when it comes to subsidizing fossil fuel consumption. The federal carbon tax, which is on track to reach $170 a tonne by 2030, and provincial and federal gas taxes, which account for more than a third of the price at the pump, serve to discourage consumption here.

Environmentalists and politicians have hence zeroed in on subsidies available to producers of fossil fuels in Canada.

“Government spending should not go towards lending a significant helping hand to companies intent on driving us toward disaster,” Environmental Defence said in an April report that pegged federal support for the oil and gas industry at $18-billion in 2020.

However, almost three-quarters of the amount, or $13.5-billion, involved loans and insurance provided to oil and gas producers on commercial terms by Export Development Canada, including a $500-million loan to TC Energy’s Coastal GasLink pipeline. Another $1.7-billion is related to a federal program aimed at closing orphaned oil and gas wells. And hundreds of millions more is aimed at promoting cleaner technologies.

It turns out very little federal support involves direct “subsidies” aimed at increasing fossil fuel production. And whatever the sum, it is a pittance compared with the hundreds of billions of dollars state-owned oil companies in Saudi Arabia, Mexico and other countries that have invested to boost production in the past few years.

Even so, Prime Minister Justin Trudeau’s re-elected government has promised to eliminate fossil fuel subsidies here by 2023. It has also vowed to “develop a plan” to phase out financing for the oil and gas sector from Crown corporations such as EDC.

Such promises may sound bold, but they miss the point. Their realization would not make much of a difference in Canada’s overall carbon footprint, much less make a dent in global greenhouse gas emissions.

Worse still, a blanket ban on subsidies for the oil and gas sector could have the perverse effect of causing emissions to rise if it includes cutting incentives to invest in technology aimed at reducing the carbon intensity of oil sands crude. Forcing EDC to cease financing liquefied natural gas projects could similarly hinder global efforts to cut coal consumption, which has been rising because of gas shortages.

Groups such as Environmental Defence do not appear to be interested in such nuances. But these are the kinds of unintended consequences the Liberals must seek to avoid as they move to make good on their campaign promises.

“Global demand for natural gas and oil is growing and will make up over 50 per cent of all energy supply by 2040,” the Canadian Association of Petroleum Producers said in a statement congratulating Mr. Trudeau on his election win. “Every molecule of natural gas and barrel of oil not produced in Canada will be produced by other nations that do not share Canadian environmental or human rights standards.”

It is easy to demonize Canada’s oil and gas industry. But doing so does not necessarily help the planet. In some cases, it may even hurt it.

Editor’s note: The amount of implicit fossil fuel subsidies has been corrected in the online version of this story.

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