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

  Warning: Subsidies are highly

addictive. There are harmful to

you, your wallet and your

economic ideals. Users of

subsidies can expect severe

withdrawal as the fiscal cliff

threatens the uplift. Proceed with

caution.

 

Why we care, Minding the Gap Carbon Tax; 4; 2%

Cap and Trade; 26; 12%

Tradeable Per-formance Stan-dards; 43; 19%

Performance Standards; 12; 5%

Other (RPS and Subsidies); 10; 4%

LULUCF Accounting; 25; 11%

Proposed Tradeable Performance Stan-

dards (Oil and Gas); 32; 14%

Proposed Per-formance Stan-

dards (EITE); 25; 11%

Gap to -17% below 2005 in 2020, 48,

21%

223 to 607 Mt in 2020

105 Mt to target

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, 2012The 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-Play1. 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-Play1. 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. Government provides direct transfer of funds

• Grants and loans, equity infusions 2. Government revenue is foregone or not collected

• Tax expenditures such as capital allowances 3. Government provides goods or services at below their economic value

• Royalties and royalty reductions, programmes4. 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 production2. Quantify the value transfer between producers and

government3. 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 20131. 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)