Canada puts a lid on fossil fuel subsidies but exceptions throw a lifeline to oil & gas industry

The efforts to get rid of fossil fuel subsidies have gained momentum over the past few years, as these are perceived to be roadblocks in the transition to clean energy sources. The Canadian government has now set its cap on making good on its climate commitment to phase out inefficient fossil fuel subsidies. However, every rule has its exceptions, thus, Canada’s plan to pull the plug on this comes with a list of exceptions, which are seen as a way for the oil and gas industry to keep on thriving in a low-carbon economy.

While releasing the Inefficient Fossil Fuel Subsidies Government of Canada Self Review Assessment Framework and the Inefficient Fossil Fuel Subsidies Government of Canada Guidelines, which were jointly developed by Environment and Climate Change Canada and the Department of Finance Canada, the country outlines that these support the decarbonisation of its oil and gas sector and support a strong future for workers in the industry while making real progress to fight climate change.

As Canada’s commitment to eliminating inefficient fossil fuel subsidies signals both greater support for clean technology as well as emission reductions across the economy from traditional sectors, the country reiterates its commitment to investing in “a strong, sustainable economic future that will deliver good, middle‑class jobs, clean air, and energy security for generations to come.”

Furthermore, Canada claims that eliminating inefficient fossil fuel subsidies and redoubling its focus on clean energy is a key step in building its net-zero economy by 2050 and supporting good-paying jobs for Canadians over the coming decades.

According to Canada, the assessment framework builds on the 2021 Glasgow statement to end new direct public support for the international unabated fossil fuel energy sector, thus, putting the assessment framework and guidelines into force will ensure any government supports for the sector will not delay the transition to renewables in compliance with the goals of the Paris Agreement to limit warming to 1.5 °C, and account for the availability of credible alternative energy sources.

Steven Guilbeault, Canada’s Minister of Environment and Climate Change, commented: “The government of Canada is committed to supporting energy innovation and environmental improvements to ensure that Canadians, communities and businesses can thrive in a net-zero world with a reliable, affordable supply of clean power.

“By eliminating inefficient fossil fuel subsidies, we are encouraging smart and efficient government investment decisions that can increase Canada’s competitiveness in a decarbonising global economy, while avoiding creation of stranded assets. Phasing out fossil fuel subsidies in Canada will ensure government programmes and spending support an energy sector that is aligned with our ambitious climate goals.”

Canada claims that its assessment framework is the first transparently published methodology worldwide, which will be used to determine which tax and non-tax measures constitute an inefficient fossil fuel subsidy. Therefore, subsidies will be considered inefficient unless they meet one or more of the six criteria that the country has put together. This entails enabling significant net greenhouse gas emissions reductions in Canada or internationally in alignment with article 6 of the Paris Agreement; supporting clean energy, clean technology, or renewable energy; and providing essential energy service to a remote community.

Additionally, it encompasses the provision of short-term support for emergency response; supports Indigenous economic participation in fossil fuel activities; and supports abated production processes, such as carbon capture, utilisation, and storage (CCUS), or projects that have a credible plan to achieve net-zero emissions by 2030. These guidelines became effective on 24 July 2023 and apply to all federal departments and agencies.

Chrystia Freeland, Canada’s Deputy Prime Minister and Minister of Finance, remarked: “With the $120 billion clean economy plan detailed in our 2023 budget, our government is building Canada’s clean economy and creating great careers for workers across Canada. Investing in building a thriving, clean economy is essential to helping us achieve our climate goals, bringing investment to our communities, and ensuring Canada remains competitive as the global economy moves at speed towards net-zero.”

Since Canada is also committed to phasing out public financing of the fossil fuel sector beyond the scope of this fossil fuel subsidies commitment, the government’s work intents to identify current public financing by 2024 and announce by fall 2024 the implementation plan to phase out public financing of the fossil fuel sector.

“Canada is the only G20 country to phase out inefficient fossil fuel subsidies ahead of the 2025 deadline. We are the first country to release a rigorous analytical guide that both fulfils our commitment and transparently supports action. By eliminating inefficient fossil fuel subsidies, the government of Canada is enabling greater support for clean technology, clean growth, and accelerated efforts to decarbonise important Canadian industries, including the oil and gas sector, which continues to play an important role in the Canadian economy,” underscored the government.

Climate change and environmental activists have welcomed the measures announced by the Canadian government to put an end to the public subsidies that have been helping the fossil fuel industry. For Équiterre, Canada is being exemplary in its management of public funds by reducing its direct and indirect investments in fossil fuel projects, as investments in such projects are “increasingly risky and irresponsible,” especially at a time when Canada is experiencing extreme weather events fueled by climate change, the consequences of which continue to rise.

Marc-André Viau, Équiterre’s Director of Government Relations, stated: “The new guidelines on inefficient subsidies are an important first step to transition the oil and gas sector to clean and renewable energy. These kinds of government measures must help to propel the creation of new sustainable employment opportunities, particularly in communities where a great number of jobs are currently linked to fossil fuel development.”

However, Équiterre is concerned about the exemptions granted in the announcement, particularly for the development of marginal technological solutions such as carbon capture utilisation and storage (CCUS) and hydrogen, which lock in future fossil fuel use. Viau underlines that there is still work to be done as long as some forms of fossil fuel subsidies remain.

“These are exit strategies on which the fossil fuel industry is banking heavily to maintain the status quo for their production. Taxpayers’ money should not be used to prop them up. We will continue to pressure the government on the importance of not financially compensating the industry for its failures, and on the importance of ensuring that environmental obligations are respected,” added Viau.