Canada
Canada has substantial and diversified fossil-energy resources that allow the energy sector to make a significant contribution to the economy. It is a net exporter of oil, natural gas, and coal, as well as uranium (as the world’s second largest producer) and electricity, chiefly from hydropower sources. Canada has the third-largest proven oil reserves in the world after Saudi Arabia and Venezuela, most of which is in the form of oil sands found in regions within the provinces of Alberta and Saskatchewan. Production from oil sands has grown rapidly in recent years, offsetting a decline in output of conventional oil. Proven natural-gas reserves have risen in the last few years, mainly thanks to the development of shale gas and other unconventional sources of gas (e.g. coal-bed methane). As a result, greenhouse gas emissions in the oil and gas sector are increasing and are the highest of any economic sector in Canada at 28% of total national emissions in 2021. Canada exported nearly 60% of its energy production in 2021, mainly to the United States.
Canadian energy policy generally relies on competitive markets for determining supply, demand, prices, and trade. As a result, the upstream petroleum industry in Canada is highly competitive, with hundreds of firms operating in the country. In the natural-gas sector, the gathering and transmission pipeline network is owned and operated by several private companies. Gas-distribution assets are also typically owned and operated by private companies that have exclusive rights to distribute gas in each regional, provincial or local area. Distribution companies are most often the only retailer in their concession area. In general, the provinces and territories have jurisdictional responsibility for the resources that lie within their boundaries and are therefore responsible for overseeing the industry operating there. The Canada Energy Regulator carries out regulation of the “international and inter-provincial aspects of the oil, gas and electric utility industries”.
Canada’s electricity industry is highly integrated, with the bulk of generation, transmission, and distribution services provided by a few dominant utilities, most of which are Crown corporations owned by provincial governments.
The prices of most energy products sold in Canada are unregulated, although retail oil price controls remain in place in the Atlantic provinces. These provincial controls set a maximum retail price, a minimum price, or both in several provincial zones. Natural-gas and electricity tariffs are regulated in most provinces by a quasi-judicial board or commission on a cost-of-service basis. A federal goods and services tax (GST) or, in participating provinces, harmonised sales tax (HST), is levied on all fuels and energy services. Federal excise taxes are also imposed on motive fuels, namely gasoline, diesel fuel, and aviation fuels used on domestic flights. Heating oil, compressed natural gas (CNG), and automotive liquefied petroleum gas (LPG) are exempt from federal excise taxes. In addition to federal excise taxes, the provinces also levy their own specific taxes on fuels.
With respect to pricing of greenhouse gases, as part of Canada’s plan, provinces and territories have the flexibility to maintain or develop carbon pricing systems that works for their circumstances, provided they meet a federal benchmark. In August 2021, the federal government enacted strengthened standards for 2023 to 2030 and changes to the federal carbon pricing system were announced on 22 November 2022.
To ensure carbon pollution pricing applies throughout Canada, a federal backstop carbon pricing system applies in whole or in part in any province or territory that does not have a pricing system in place that meets the federal benchmark. The federal backstop carbon pollution pricing system has two parts: a charge on fossil fuels (“fuel charge”) and a regulatory system for large industry, known as the output-based pricing system (OBPS). The federal backstop carbon pollution pricing system also applies in jurisdictions that request it.
As of July 2023, the provincial and territorial systems that meet these requirements are in full are: British Columbia (carbon tax, transitioning to provincial OBPS in 2024), Northwest Territories (carbon tax), and Quebec (cap-and-trade). Both parts of the federal system apply in: Manitoba, Nunavut, Prince Edward Island, and Yukon. In Alberta, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Saskatchewan, the federal fuel charge applies to emissions from fossil fuels and a provincial carbon pricing system applies to large industries.
The past years have seen substantial impacts to the energy sector due to COVID-19, ongoing climate change and countries commitments to reducing fossil fuel dependency, and Russia’s invasion of Ukraine. For example, Canadian crude oil production decreased by 4.6% in 2020, the largest annual decline in over twenty years. Government responses to the pandemic and subsequent oil price shock in mid-2020 resulted in several support measures for fossil fuel consumption and production being created or expanded at federal and provincial levels. Canada, in July 2023, has further emphasized their commitment to eliminate inefficient fossil fuel subsidies through two publications Inefficient Fossil Fuel Subsidies Government of Canada Self-Review Assessment Framework and Inefficient Fossil Fuel Subsidies Government of Canada Guidelines. With these, Canada will announce an implementation plan by the end of 2024 for phasing out public funding in the fossil fuel sector.
However, Russia’s invasion of Ukraine and global inflation have impacted energy prices, leading to several provinces establishing further support for fossil fuels to combat increasing prices. In December of 2022, Canada and other G7 countries and Australia imposed a price cap of USD 60 per barrel for crude oil from Russia to limit Russian revenues from oil exports. Canada is a major exporter of oil and gas and was not dependent on Russian imports, yet there has been a global rise in energy prices. Canada has further explored the opportunity of exporting LNG. Yet, as of today does not infrastructure (i.e. port terminals) for overseas export and instead mainly rely on exports through the United States. Creation of LNG exporting facilities is planned for 2024.
Looking at 2022 specifically, there were a few new provincial support measures introduced. These measures are all directed to the consumer side, with efforts to counteract increasing fuel and energy prices that have come about with high levels of inflation, increasing demand for travel post pandemic restrictions, and global supply levels impacted by sanctions on Russia. For example, Alberta and Ontario both had temporary cuts in their fuel tax collection and British Columbia’s public auto insurer provided a one-time rebate to help reduce the impact of increased gas prices. Several new federal and provincial support measures were introduced in 2020-2022, coinciding with the pandemic period. Many were one-time payments, short term tax deferrals, or tax breaks intended to ensure energy affordability and provide support to the private sector. Measures that cancel, delay, or reduce fuel or carbon taxes have also been recorded federally and in some provinces.
Several provinces continue to provide support for the extraction sector through targeted royalty concessions and research and development (R&D) spending, as is the case in Alberta, British Columbia, Saskatchewan, and Newfoundland and Labrador. With taxation in Canada being a shared responsibility between federal and sub-national governments, there are provincial measures that support the consumption of fossil fuels, largely in the transport sector and primary industries through tax concessions, as well as exemptions to federal, provincial, or territorial carbon pricing that have been more recently introduced. Provinces also sometimes support the consumption of energy by low-income households through direct payments.
The fiscal cost of support measures for fossil fuels in Canada was estimated at CAD 5.76 billion in 2022 (Table 1). Sixty-seven per cent (67%) was directed at end user beneficiaries, as opposed to 33% directed to firms. Support was mainly given out in the form of tax expenditures (CAD 4.62 billion) accounting for 80% of the total fiscal cost of support measures. Direct transfers amounted to CAD 1.14 billion.
The fiscal cost of support measures for fossil fuels has increased by 80% since 2017. Since last year, tax expenditures have increased by 67%, from CAD 3.10 billion to CAD 4.62 billion and direct transfers increased by 7%, from CAD 0.96 billion to CAD 1.14 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.