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Fossil fuel incumbents and the case for green subsidies

If it is to transition to a green economy, Canada must end the continued subsidization of fossil fuels. These subsidies come at the expense of the public purse and favour the development of carbon-intensive energy options over cleaner, low-carbon options such as wind, solar and biomass more deserving of public funds.

major international study recently concluded that globally, governments spend over $600 billion per year in direct and indirect subsidies to the fossil fuel industries. The IMF estimates that Canada itself spends 1.5% of GDP on energy subsidies each year, of which two-thirds is spent on the oil and gas sector. The oil industry in Alberta, Saskatchewan and offshore Newfoundland and Labrador alone receives over $2.8 billion in subsidies, of which approximately $1.3 billion is provided by the federal government. Seventy percent of subsidies go to one province —Alberta — primarily to reduce costs for oil sands exploration and extraction.

By comparison with other OECD countries, Canada ranks fourth highest in fossil fuel subsidy expenditure, behind only the U.S., Australia and New Zealand. Facing international pressure for subsidy elimination, both federal and provincial governments have begun to phase out some subsidies, for example the accelerated capital costs allowance. But at the same time, new subsidies have been introduced to support oil sands expansion.

The subsidies come in many forms: reducing capital expenditures through accelerated write-offs, allowing tax credits for exploration expenditures, providing grants for new extraction technologies, or reducing royalty payments or allowances.

They are typically used to incentivise high-risk activities (e.g. developing deepwater offshore oil resources) or to assist development of innovative technologies. But whereas countries such as Norway have gradually reduced such subsidies as their oil industry matured, at the same time maintaining one of the highest royalty rates in the world, Canada has allowed its subsidies to remain at a relatively high level while many provinces have actually decreased royalties on oil company profits.

There is a clear need to eliminate fossil fuel subsidies. But this is only the first step. A second step is to develop comparable subsidies and incentive programs for renewable energy and energy efficiency, to stimulate development of innovative green technologies.

subsidy involves preferential treatment of one sector or technology over another, usually involving a direct expenditure or foregone revenue. In this sense, Ontario’s feed-in tariff (FIT) and Nova Scotia’s renewable energy portfolio standards are not subsidies, but rather market incentives, a clarification that has been accepted by the International Energy Agency. Tax credits of the kind given to fossil fuel industries, on the other hand, are clearly subsidies.

Market incentives are usually much more flexible than subsidies: for example, feed-in tariffs can be adjusted downwards annually as technology costs come down. But subsidies can also be reduced or eliminated as an industry matures. That this has not happened in the fossil fuel industries is an indication that subsidies are being misused to favour one form of energy resource over another.

There are relatively few examples of true subsidies for green technologies or industries in Canada at the federal level. There is an accelerated capital cost allowance (ACCA), which in addition to covering fossil fuel technologies, also covers “investments that produce heat for use in an industrial process or electricity by using fossil fuel efficiently or by using renewable energy sources”; and there is a tax benefit enabling use of flow-through shares, by which expenses incurred during the development and start-up of renewable energy and energy conservation projects can be fully deducted or financed. Current federal policy, however, is to gradually phase out ACCA for all energy forms.

Several federal subsidy programs that supported clean energy investments have actually been discontinued by the Harper government. The popular ecoENERGY program that provided grants to homeowners towards energy efficient retrofits was discontinued in 2011, and the EcoEnergy for Renewable Power program that provided per kWh supplements for wind energy systems was ended in 2013.

Clean energy subsidies are crucial if producers of low-carbon technologies and energy are to compete in a nascent market and offer consumers a fair choice of energy sources.  Rather than simply restore old programmes, we need to develop new green subsidies and market incentives: e.g. increasing innovation-incentive grants to research institutions, universities and manufacturers in the green technology field through Sustainable Technology Development Canada; expanding use of green technologies and green power in government buildings; providing innovative financing for low-carbon solutions; and introducing green subsidies for low-income families.

What we are short on is not ideas of how to transition to a green economy, but the political will to make it happen.

Geoff Stiles is founder of Carbon Impact Consulting.