Canada ends government subsidies for oil and gas, with exceptions

Canada now has a set of guidelines to restrict federal subsidies to the fossil fuel sector, albeit with numerous exceptions.

The long-awaited announcement delivers on the federal government’s promise to end inefficient subsidies to the fossil fuel sector by the end of 2023. In Environment and Climate Change Minister Steven Guilbeault’s words, the framework ensures funding and tax measures from federal departments only go “to projects that decarbonize the sector and result in significant greenhouse gas emission reduction.” He announced the framework Monday morning in Montreal.

The new rules — if applied “with integrity” — should prevent the creation of new handouts of public money to fossil fuel companies most responsible for the climate crisis, said Julia Levin, associate director of national climate for Environmental Defence.

Canada is the first G20 country to present such a framework, which sets a “really important international precedent,” especially with another round of global climate negotiations fast approaching, said Levin.

Burning fossil fuels is one of the main drivers of climate change, so ending public spending that supports the industry is crucial. Ending fossil fuel subsidies frees up those funds to support things like renewable energy and electrification. Clean energy is of paramount importance as the world is under pressure to slash greenhouse gas emissions more than 40 per cent by the end of the decade.

“Moving forward, every subsidy that the government would want to grant to the oil and gas sector would have to go through this filter — any department of the federal government, whether it's finance, international trade, natural resources — to ensure that we do not give federal dollars to support the production of oil and gas or coal,” said Guilbeault. “This is a fundamental shift from what we've done in this country for decades.”

However, the assessment framework is still rife with “problematic loopholes,” Levin said in an interview with Canada’s National Observer.

The most concerning exception, several environmental groups said, is for support for fossil fuel production that uses carbon capture technology or projects that have a “credible plan” to achieve net-zero emissions by 2030.

At a technical briefing before the announcement, a senior government official explained that a “credible” net-zero plan would require carbon capture and storage, and any credits purchased to offset a company’s greenhouse gas emissions must be “high-quality, verified (and) permanent with real emissions reductions.” The official added that a clear implementation plan and assessments of emissions using accepted quantification protocols and transparent, accountable reporting are also part of a credible net-zero plan.

Carbon capture, utilization and storage is the centrepiece of the oil and gas industry’s decarbonization plan, but the technology is widely criticized by environmentalists for its high cost and ability to lock in fossil fuel production. The technology captures emissions created during oil and gas production, but it does not address the majority of oil and gas emissions, which are produced when these products are burned. The Intergovernmental Panel on Climate Change’s 2022 report ranked carbon capture as one of the least effective, most expensive options to tackle emissions.

Currently, the most common use of captured CO2 is enhanced oil recovery: a process where CO2 is injected into depleted oil and gas wells to force more product to the surface. The framework says captured carbon used for enhanced oil recovery is excluded.

One exception critics didn’t argue with is subsidies that provide an “essential energy service” — energy used for electricity, transportation, or space or water heating — to remote communities not connected to the electrical grid or natural gas network.

There are also exceptions for subsidies that support clean energy, clean technology, renewable energy or Indigenous economic participation in fossil fuel activities.

Monday’s announcement lacked specifics on how the new rules will be implemented, monitored and enforced, said Levin.

Environmental groups raised this concern shortly after Canada released guidelines to end international public financing for fossil fuel projects without carbon capture last December. A few months later, Environmental Defence and Oil Change International notified Export Development Canada — the Crown corporation tasked with providing Canadian exporters with financing and other support — that several transactions appeared to violate the government’s policy. EDC included a number of loan guarantees for oil and gas activities that listed the U.S. as the country of transaction.

Jessica Draker, manager of external communications at EDC, told Canada’s National Observer and the environmental groups that it was merely a misclassification. The loan guarantees had in fact been issued to Canadian companies, Draker said, and the mix-up was due to the companies’ primary country of export being the U.S.

In the following months, at least half a dozen more transactions were published with the same “inaccuracies,” although Export Development Canada was not aware of them until Canada’s National Observer inquired about it in mid-July. Draker said those would be corrected in due course and added: “We will also engage with the appropriate business team to verify if system changes are required to prevent this from occurring in the future.”

Levin said this situation illustrates why the federal government needs to spell out exactly what will be done to ensure the small but important details of its promises are fulfilled.

“It can't be only civil society that plays a role in holding the government accountable for meeting its rules,” said Levin. There must be accountability to ensure the federal government uses the assessment framework to prevent any subsidies that would hinder efforts to limit global temperature change to 1.5 degrees or impede the transition to renewable energy, she said.

This should include assigning responsibility for oversight to a federal department, maintaining an ongoing, publicly available inventory of oil and gas subsidies and publishing the analysis used to determine if subsidies align with a future that limits global temperature rise to 1.5 degrees, said Levin.

Today’s announcement is an “important milestone” even though “the lion's share of fossil financing has not yet been addressed,” she added, pointing to the ample domestic public financing doled out to oil and gas companies by Crown corporations, namely Export Development Canada.

The fossil fuel subsidy framework only applies to federal tax measures and departmental spending and programs, not the Crown corporations responsible for the bulk of public financing.

Guilbeault said a framework to address domestic public financing will be in place by 2024 and noted Export Development Canada has reduced its fossil fuel financing by “billions of dollars while increasing by several billions of dollars their support for clean technology for renewable energy.”

Claire O’Manique, public finance analyst at Oil Change International, said it is “disappointing” the federal government only has a plan to draft a plan, rather than taking concrete action now.

“This will leave over $13 billion a year in government support flowing to climate-wrecking oil and gas projects,” O’Manique said in a press release. “These loans and loan guarantees are a form of subsidy that Canada’s little known and seemingly forgotten public export bank, Export Development Canada, uses to prop up domestic fossil fuel companies with public money every year.”

A commonly cited example of domestic public fossil fuel financing is the Trans Mountain expansion project (TMX), which has been propped up by billions of public dollars, including federal loan guarantees totalling $13 billion.

“While we are pleased to see that some taxpayer support for oil and gas companies is being eliminated, we’d like to remind the federal government that there are no ‘efficient’ subsidies for fossil fuels in an era of both record-breaking climate disasters and oil industry profits, and especially not for unproven technologies like carbon capture,” Keith Stewart, senior energy strategist with Greenpeace Canada, said in a press release. Countless other environmental groups raised similar concerns as well as acknowledged the importance of the long-awaited fossil fuel subsidy framework.

In a press release, NDP environment critic Laurel Collins described the subsidy framework as “a half-measure” and pledged to keep pushing for the “immediate elimination” of fossil fuel subsidies the Liberals left out — and the exploration and development expense deductions for oil and gas — as well as a plan to end public financing of the fossil fuel sector by the end of this year.

During the announcement, Guilbeault thanked Collins for her work on fossil fuel subsidies.

These guidelines come as Nova Scotia is grappling with the impacts of historic flooding caused by a storm this weekend, Guilbeault pointed out during the announcement. The province remains under a state of emergency.

Natasha Bulowski / Local Journalism Initiative / Canada’s National Observer