A Carbon Price is Good,
But a Zero Carbon Price is
a Better Start
Fossil-Fuel Subsidies in the
Canadian Oil and Gas Sector
David Sawyer | dave@enviroeconomics.ca
Why we care, Minding the Gap
Carbon Tax, 4, 2%
Cap and Trade,
26, 12%
Gap to -17%
below 2005 in
2020, 48, 21%
Proposed
Performance
Standards (EITE),
25, 11%
223 to
607 Mt
in 2020
105 Mt
to target
Tradeable
Performance
Standards, 43,
19%
Performance
Standards, 12, 5%
Proposed
Tradeable
Performance
Standards (Oil
and Gas), 32, 14%
Other (RPS and
Subsidies), 10, 5%
LULUCF
Accounting, 25,
11%
The Carbon Policy Merit Order
1. Remove regulatory barriers
–
Often favor incumbents
2. Remove perverse incentives
–
Distort activity levels and counter policy
3. Price carbon
–
Signal carbon has value, managed as an input
4. Complementary regulations
–
Buildings, cars & fugitives, go where prices don’t go
5. RD&D
– Broad-based policy to avoid crowding out, then targeted
CDN Fossil Fuel Subsidy State-of-Play
CESD, 2012
The government has a broad range of programs that provide support
to the fossil fuel sector. That support can be grouped into two main
types:
– Direct spending through various programs;
– Fax expenditures under the Income Tax Act, which represent the
majority of financial support.
For some tax expenditures, such as the ACCA for mining and CEE, the
Department was unable to provide an estimate of the costs.
Fossil Fuel Subsidy State-of-Play
1. CESD Report capped ~10 years of activity
•
Analytical work
•
•
•
•
•
•
2004-2007, Pembina and CESD
2009-10 GSI Canada Case Study provincial & federal programs
Analytical responses from Mintz: “there are no subsidies”
Memorial University paper refutes Mintz conclusions
SP now moving into the space
Politicization
•
•
•
•
CBC goes after Mintz
Election 2011, $1.4 billion prominent in NDP Platform
NDP continues to hammer in the house
CPC not touting progress made on the file
Fossil Fuel Subsidy State-of-Play
1. Interests aligned, Reform by Finance Canada
•
•
Enhance the neutrality of the tax system, further rationalize
inefficient fossil fuel subsidies
– 2007, ACCA oil sands phased out by 2015, $300 million p.a.
– Budgets 2011, 2012 remove small programs, totally with
ACCA $400 million annually
GBC Feature Recommendation for years
2. Move to mining, including coal
•
•
Budget 2012, Atlantic Investment Tax Credit for mining and
Corporate Mineral Exploration and Development Tax Credit
Budge 2013, pre-production mining expenses aligned (CEE to CDE)
& ACCA phased out ala oil sands ($100 million when implemented)
Thinking about Subsidies…
• Ongoing conjecture about the level and impact of subsidy to the fossil fuel
extraction industry.
• Conjecture exists in large part because of the divergent perspectives on
subsidy definition.
• Two competing definitional extremes:
• Environmental View: polluter pay tinged with ability to pay
• Development View: investment in the competitive position of industry
Its All a Subsidy
• Environmental view treats any benefit to the sector as a subsidy,
regardless of whether or not it is otherwise available to other sectors.
• Taxes are low or not collected,
• Royalty payments are below the value of the oil in the ground,
• Externalities & EG&S provided for free,
• Prices misrepresent the societal cost of a barrel extracted, with activity
levels higher leading to significant if not catastrophic environmental
damages.
Subsidy, what Subsidy?
• A development view is where competitiveness is maintained through
keeping taxes and royalty payments low to keep investment and activity
levels high.
• Under this view there are no subsidies, only responses to market pressures.
• Incentives and programmes make the sector more competitive relative to
other jurisdictions thereby attracting investment.
A more balanced view (WTO)
Identifies benefits that are otherwise not available,
1.
2.
3.
4.
Government provides direct transfer of funds
• Grants and loans, equity infusions
Government revenue is foregone or not collected
• Tax expenditures such as capital allowances
Government provides goods or services at below their economic
value
• Royalties and royalty reductions, programmes
Government provides income or price support
• Consumer price supports
Canadian Case Study
• Reveal subsidies to the upstream oil sector in Alberta,
Saskatchewan and Newfoundland and Labrador, and by the
federal government.
• Three core questions,
1. Identify subsidy policies for oil production
2. Quantify the value transfer between producers and
government
3. Evaluate the environmental and economic and outcomes of
these subsidies
Overview of Findings
• Seek to increase activity, reduce the costs of exploration,
drilling and development with tax breaks & royalty reductions.
• Remaining federal government focus tax expenditures on
exploration and development primarily.
• Alberta’s 12 programmes provide both tax breaks and royalty
reductions to drilling activity, with an annual value of $1.6 billion
in 2009. Royalties are forecast to be $6 Billion
• Saskatchewan is supporting exploration and development,
primarily in conventional oil through 15 targeted programmes to
increase drilling activity and well output.
• Newfoundland and Labrador has six targeted programs worth at
least $30 million annually.
–
GBC Recommendations 2013
1.
Enable Canadian Exploration Expenses (CEE) only for unsuccessful
exploration
• Deduct 100% of exploration expenses from income tax each year
• Reclassified rate to apply to unsuccessful exploration expenses
• Some expenses are legitimate search costs (i.e. R&D)
• 2007 to 2012, dry wells not producing averaged 10% of all wells.
• Saving could be $240 million year
2.
Don’t renew the Mineral Exploration Tax Credit (METC) for flow-through
shares (mining)
• Complements flow-through shares, enabling individuals who invest in
flow-through shares to claim an amount equal to 15% of specified
mineral exploration expenses incurred
• $100 million per renewal (over 2 years)