Canada shows the way: Restrict oil and gas subsidies


Environment and Climate Minister Steven Guilbeault has unveiled detailed plans to phase out “inefficient” oil and gas subsidies, based on guidelines released this morning that take effect immediately and are meant to fulfill a 14-year-old pledge by G20 countries.

“The simple reality is that it’s no longer free to pollute in Canada,” Guilbeault told media Monday morning. “We are bending the curve on Canada’s fight on pollution.”

With the World Bank, the World Trade Organization, and environmental groups all in agreement, he added, “getting rid of inefficient fossil fuel subsidies is now a common sense bottom line.”

“getting rid of inefficient fossil fuel subsidies is now a common sense bottom line.”

In background briefings, officials said the announcement makes Canada the first of the world’s wealthiest countries to publish a detailed implementation plan for a pledge that was first announced at the G20 leaders’ summit in Pittsburgh in 2009.

But the new federal guidelines may still leave the door open to prop up liquefied natural gas (LNG) exports with international carbon credits, Indigenous fossil fuel projects with federal dollars, and fossil fuel installations that “abate” a small share of their emissions by capturing carbon from their operations.

A government official, speaking on background, said government programs that could be affected by the guidelines control about C$1 billion in public money, The Canadian Press reports.

The announcement is meant to deliver on the 2023 subsidy phaseout deadline contained in Prime Minister Justin Trudeau’s December, 2021 mandate letters to Guilbeault and Finance Minister Chrystia Freeland. Officials cast it as one major part of a process that also includes a phaseout of public financing for domestic fossil fuel projects through Crown agencies like Export Development Canada. Those guidelines are due to be released in 2024.

In 2020, a blistering analysis showed Canada leading the G20 countries in per capita public financing to oil and gas. In a release Monday, Oil Change International placed the total at $50 billion since 2019.

Today’s guidelines detail the process and definitions behind the oil and gas subsidy phaseout. After years of behind-the-scenes development, negotiation, and (no doubt intense) industry lobbying, they lay out a two-step definition of a fossil fuel subsidy, then list six exemption criteria that might qualify a future fossil fuel project for federal largesse. The definition covers initiatives that support fossil fuel consumption or activities, and funding that disproportionately benefits the fossil fuel sector.

In Monday’s briefing, officials said they could attach no dollar figure to the financial flows that will be eliminated under the new framework. The policy won’t affect money that has already gone out the door or commitments that have already been signed, there is no published calculation of the future subsidies that will now be foregone, and the documents provide no cost figures for 129 non-tax measures that could be shifted as a result of today’s announcement.

Under the new framework, oil and gas companies will still be eligible for general purpose subsidies that are available to all companies in all sectors of the economy. There was no indication that officials had considered exclusions from those supports for any industry that accounts for 25% or more of the country’s emissions (oil and gas stood at 28% in the country’s latest greenhouse gas inventory), or whose emissions are still rising while many others are beginning to fall (oil and gas led the country with a 6.2% increase in 2021, the Canadian Climate Institute reported in February).

The announcement also connects to an international initiative under which Canada and Argentina launched a peer review of each other’s fossil fuel subsidies in 2018. That work was meant to conclude by 2020. Now, it’s being taken up by a multilateral panel that is expected to report in 2024 if all goes well. If the panel’s work is delayed, as international processes often are, officials said there will be no impact on Canada’s timeline.

A government source pointed to a provision for regular reviews of the subsidy policy as an important opportunity to ratchet up restrictions over time. They also noted the due diligence aspects of a framework that must now be implemented by all federal departments and agencies in line with the targets in the 2015 Paris climate agreement.

The announcement has no impact on provincial subsidies last calculated at a minimum of $2.5 billion in 2020/21 and another $1.5 billion for the first nine months of 2021/22. But there’s some hope among officials that curtailing federal subsidies could trigger a “race to the top” that encourages provinces to adapt the approach to their own circumstances.

In his statement Monday, Guilbeault described the announcement as “one of those inflection points” in the response to the climate emergency. Successful climate action can pave the way for more action, he said, and sound environmental and economic decisions can shape subsequent investments.

The Fine Print on Carbon Credits

The definitions in the federal document take a fairly expansive view of “inefficient” subsidies that “encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources, and undermine efforts to deal with the threat of climate change,” as the G20 defined the term in 2009. It includes a half-dozen exceptions, including subsidies that support clean or renewable energy development by fossil fuel companies, provide essential energy to remote communities, or respond to short-term emergencies.

The document also holds out the possibility of subsidies for carbon trading deals under Article 6 of the Paris agreement, and for Indigenous participation in fossil fuel projects.

Canadian LNG producers have long had their eye on Article 6, a deeply contentious, nine-paragraph section of the Paris deal meant to support international carbon trading as a way to drive down emissions. The article took a full six years to finalize after the wider agreement was adopted, with international negotiators expressing grave concern about the risk of greenwashing and human rights violations, particularly for Indigenous and other local communities in the world’s poorest countries.

Through those years of debate, Canada’s gas industry maintained its product should receive valuable credits under Article 6 if it could be used to offset coal-fired electricity generation in Asia.

But as far back as 2019, it was not certain that LNG exports would replace coal, rather than being used side by side and delaying clean energy alternatives. Even if an Asian customer could generate international carbon credits by using Canadian gas and shutting down coal, there was no guarantee that country would then sell the credit to Canada.

And there was no prospect at all that a formal, process-driven text like Article 6—or the Paris agreement as a whole—would get granular enough to factor in the impact of the climate-busting methane released by the fracking fields in Alberta or northeastern British Columbia that fed the exports.

On his way to COP 25 negotiations in Madrid in 2019, then-environment and climate minister Jonathan Wilkinson said Canadian LNG was “a long way from fitting into” an international carbon trading regime. “I think we’ve got to be very careful about the LNG argument,” he told the Globe and Mail.

Speaking on background Monday, an official said the odds of any oil or gas project taking advantage of the Article 6 provision were “relatively remote”. With detailed rules for international carbon trading still under development, he said the exception was built into the subsidy policy to allow for case-by-case decisions in the future.

A Trans Mountain Pipeline Bailout?

The Indigenous participation exception, meanwhile, is meant to be “unapologetically supportive” of protecting existing subsidies to communities, rather than precluding them from investing in the fossil fuel sector if they choose to. But officials said the aim is to protect existing funding flows to Nations, not to make all projects with Indigenous participation eligible for federal support.

There was no specific information Monday on whether the guidelines would allow continuing federal funding for several oil and gas megaprojects now under discussion, from Indigenous-led LNG developments in B.C. to a long-touted buyout of the financially precarious Trans Mountain pipeline. If the subsidy exemption did apply to Trans Mountain, it could breathe new life into negotiations that were going nowhere fast earlier this year.

“Indigenous ownership of the Trans Mountain pipeline system is still on the table, with federal officials holding in-person talks with prospective ownership groups as recently as February,” the Globe wrote in late March. But the process was lagging, with one financial advisor saying the government had never come forward with a “concrete proposal” to Indigenous communities.

“Uncertainty over how a deal would be structured—as well as the soaring costs—has resulted in fatigue, with some First Nations essentially dropping out of a process they see as stalled,” the Globe said.

Meanwhile, the cost of completing the project had skyrocketed from Houston-based Kinder Morgan’s original projection of $7.4 billion to a more recent estimate of about $31 billion. After that massive an investment, “no way the pipeline is going to recover costs,” Morningstar analyst Stephen Ellis told Bloomberg News in March.

“the likely prospect of being saddled with a stranded asset,”

Those numbers left any Indigenous investor with the prospect of losing money on the deal and facing “the likely prospect of being saddled with a stranded asset,” independent economist Robyn Allan, a former president and CEO of the Insurance Corporation of British Columbia, told The Energy Mix at the time.

Carbon Capture Backed by Carbon Offsets?

Today’s plan also allows subsidies for fossil fuel projects equipped with abatement technologies like carbon capture and storage (CCS), or with a credible plan to bring their emissions to net-zero by 2030. Given the persistent technical problems still facing CCS, that may not be likely. But in the background briefing, an official said a project could qualify with a plan to be fully abated to the extent that technology permits, then secure high-quality carbon offsets to address the remaining emissions.

As The Energy Mix went to virtual press Monday evening, it was not clear what share of a qualifying project’s emissions could be addressed through offsets, or for how long into the future. Nor was there any information on how a subsidy decision would factor in the downstream or “Scope 3” emissions that account for 80% of the carbon in a barrel of oil and cannot be captured by fossil companies, since they only enter the atmosphere after the product is extracted, shipped, and used as directed.

The Pathways Alliance has maintained that its six member companies, which account for 95% of Canada’s oil sands emissions and plan to rely on carbon capture to bend that curve, would not be able to comply with a 2030 emissions cap before 2035 at the earliest. And the companies have steadfastly refused to invest their own mind-bending profits in the carbon capture solutions they say they want without further federal subsidies that Guilbeault has already ruled out.

The carve-out for CCS drew a positive response from the Alberta oilpatch.

The announcement “says supporting carbon capture, supporting other measures to reduce the greenhouse gas intensity of [fossil] energy production going forward, will not be considered an inefficient fossil fuel subsidy,” Richard Masson, chair of the World Petroleum Council in Canada and executive fellow at the University of Calgary’s fossil-friendly School of Public Policy, told CBC. “That’s important because we need to have enough clarity about our policies that companies invest billions of dollars really soon if we’re going to meet any of our national emissions targets.”

But Calgary Chamber of Commerce President and CEO Deborah Yedlin said the announcement could add to what the industry likes to call its “confusion” over federal policies, and “[strand] private investment in decarbonization due to uncertainty,” CBC writes. While Yedlin welcomed Ottawa’s support for CCS, “it needs to be backed up with concrete measures, whether it’s permitting, time frames, application processes, the tax credit clarification.… those are the pieces that we still need to find.”

The Canadian Association of Petroleum Producers, which ridiculously claims its members receive no fossil fuel subsidies at all, urged the federal government to “move swiftly to provide Canadian oil and natural gas producers with policy and regulatory certainty to expand the deployment of emissions-reductions technologies.”

But one veteran analyst said any subsidies to help fossil companies decarbonize their operations will only help the industry extract and sell more oil and gas in the midst of a mounting, global climate emergency.

“If we give them money to make it cheaper to reduce their pollution, they’ve got more money to do other things, like explore more or charge less for their product and sell more of it,”

“If we give them money to make it cheaper to reduce their pollution, they’ve got more money to do other things, like explore more or charge less for their product and sell more of it,” University of British Columbia political scientist Kathryn Harrison told the Toronto Star.

Shutting the Door on ‘New Handouts’

The announcement received a largely positive response from climate analysts and campaigners who’ve been working and waiting for this announcement for years, and noted they’re still waiting to close the door on public financing of domestic fossil fuel projects.

“If applied with integrity, these new rules for government spending will effectively shut the door on the creation of new handouts of public money to  the companies most responsible for the climate disasters being experienced today—and free up billions for climate solutions,” said Julia Levin, associate director, national climate at Environmental Defence Canada, who was in Montreal Monday for Guilbeault’s announcement.

In a release, Levin pointed to “problematic loopholes” for natural gas (also known as fossil gas) and “dangerous distractions” like CCS. However, “to justify new fossil fuel subsidies, federal departments must prove that any new spending doesn’t hinder the transition to renewable energy and aligns with a pathway consistent with limiting global heating to 1.5°C. This would rule out any spending on new oil, gas, or coal projects.”

That makes the announcement a “strong global precedent” as other countries “grapple with eliminating their own fossil fuel subsidies,” she said.

a “strong global precedent” as other countries “grapple with eliminating their own fossil fuel subsidies,”

“This is a significant step forward and sets a strong example for Canada’s G20 peers,” agreed Laura Cameron, policy advisor at the Winnipeg-based International Institute for Sustainable Development. “But gaps in the framework mean public money could continue to flow toward carbon capture and storage for oil and gas production at a time when the country must swiftly move to renewable energy. With these gaps closed, Canada can ensure public funds are advancing climate solutions.”

Claire O’Manique, public finance analyst at Oil Change International, said any move to stop funding fossil fuels is “welcome and urgently needed”. But she added it’s “disappointing to only mention drafting a plan to end public domestic fossil fuel finance by the end of 2024, rather than taking concrete steps now.”

The delay, O’Manique said, “will leave over $13 billion a year in government support flowing to climate-wrecking oil and gas projects” through Export Development Canada.

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