Exploding myths about energy subsidies in Canada

Despite claims by some that ‘oil is dead’ and that the sector is heavily subsidized, the evidence suggests otherwise

By Mark Milke
and Lennie Kaplan
Canadian Energy Centre

In the ongoing debate over whether Canada’s oil and natural gas industry will or should survive, one argument often advanced is the notion that oil and gas activity in Canada survives only due to massive subsidies from taxpayers.

The debate has been fuelled recently by comments from the Green Party’s Elizabeth May and Bloc Quebecois Leader Yves-François Blanchet that “oil is dead”

Mark Milke
Mark Milke

It will take years for recent announcements – the $1.7 billion federal subsidy directed at orphan and inactive well cleanups, and the federal government’s liquidity package for multiple sectors – to filter down into data that can be tracked.

In the meantime, to get to clarity on claims that the energy sector received multiple billions of dollars annually for years, let’s deep-dive and dissect them.

A 2010 study from a Winnipeg think-tank claimed that $2.8 billion in subsidies flowed to the sector annually.

Even more eye-popping, in 2014, a Vancouver reporter asserted that a 2013 International Monetary Fund (IMF) study found that subsidies to Canadian oil and gas were worth $34 billion, while the worldwide figure was $5.6 trillion.

Lennie Kaplan
Lennie Kaplan

There are multiple problems with these claims.

The $34-billion estimate of subsidies in Canada was substantially arrived at by arguing that “uncollected taxes” existed due to externalities such as “impacts like traffic accidents, carbon emissions, air pollution and road congestion.”

In other words, your fender-bender can be blamed on the existence of the oil and gas industry and costs attributed to the same.

In response to the 2010 study, economists Jack Mintz and Kenneth McKenzie noted in 2011 that measuring fossil fuel subsidies was a “tricky art.” They took specific issue with the study methodology that informed subsequent work, including at the IMF. They argued that multiple flaws were at the heart of such estimates.

Among others, the 2010 study included methodology that used a subsidy definition designed for a different purpose; inappropriately added tax expenditures (i.e., targeted measures to selected industries to reduce taxes and royalties) without accounting for critical interactions; wasn’t based on an underlying optimizing economic model that emphasizes the impact of taxes, royalties and subsidies on investment at the margin; and wasn’t based on an economically meaningful benchmark.

The McKenzie-Mintz study concluded that tax and royalty policies were not a significant source of subsidization for oil and gas.

In 2014, in response to the 2010 and 2014 estimates, the Montreal Economic Institute found that energy sector subsidies amounted to just $71 million and that those were being phased out. As the Montreal think-tank noted, the larger numbers are arrived at in part by counting up “billions of dollars [that] simply do not exist” – the presumed subsidy value of a car accident – and in other instances, by counting deferred taxes as subsidies.

In 2017, University of Guelph economist Ross McKitrick also analyzed energy subsidies, including the $5.6-trillion IMF estimate. McKitrick noted similar questionable assumptions and also that much of the estimate was composed of “uncollected externalities.”

McKitrick concluded the use of indirect or notional concepts led to such dramatically higher numbers, but become “meaningless and potentially misleading.”

We reviewed Statistics Canada data on subsidies to industries and Canada. We found $1.9 billion in subsidies to oil and gas between 2010 and 2016. But we also found $12.6 billion in subsidies to the motion picture sector during the same years, as well as $12.8 billion to crop production and $27.8 billion to public transit.

(A caveat: The Statistics Canada data includes tax expenditures, which adds to the difficulty of getting to subsidy definitions as cash payments only. In addition, limitations in the data preclude estimates of capital subsidies or pre-2010 payments. Think of the $13.7 billion in taxpayer subsidies to the automotive sector during the 2008-09 financial crisis.)

When considering competing claims of which sectors are the most subsidized – this may soon be an Olympic sport for economists to measure given government activity this year – consider a significant subsidy pointed to by the Ontario Auditor General in 2015: The global adjustment fees on Ontarians’ power bills is a subsidy to utility and energy companies. The Auditor General characterized them as “excess payments to generators over the market price for electricity.”

The Auditor General said those subsidies were worth $37 billion between 2006 and 2014. Those payments were made not for the development of oil and gas assets, but for shutting down coal-fired electricity and for multiple Ontario green energy projects.

By any estimate, that would appear to make Ontario’s experiment in renewable energy the most subsidized energy activity in the country.

Those who claim oil is dead – and do so by claiming Canadian oil and gas companies were massively subsidized with billions of dollars annually – are wrong on the facts and about the sector.

Mark Milke is executive director of research and Lennie Kaplan is chief research analyst at the Canadian Energy Centre, an Alberta government corporation funded in part by taxes paid by industry on carbon emissions. They are authors of Analyzing claims about oil and gas subsidies.

© Troy Media


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