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Oil industry subsidies: Limited amounts in an ocean of government support

Montreal, Wednesday, May 14, 2014 – Many activist groups, and even certain political actors, maintain that the Canadian oil industry is heavily subsidized. The Montreal Economic Institute (MEI) looked into the matter and carried out a rigorous examination of the studies on which this notion is based. In a new Economic Note published today, the MEI concludes that the subsidies in question are far from being as generous as these studies claim, and moreover that the largest of the subsidy programs will disappear between now and January 1st, 2016.

The same groups also say that the amounts granted have the effect of encouraging the consumption of fossil fuels, and undermine the development of renewable energy. Yet consumption subsidies, which are found in other countries, do not exist in Canada. On the contrary, governments levy taxes on these energy sources, representing around 31% of the pump price.

“Many programs condemned as being subsidies are in fact merely a particular tax treatment for an industry faced with a specific economic reality, common to the natural resources sector as a whole. There are some actual subsidies, but they are very limited,” says Youri Chassin, author of the study.

Just like the mining industry, the oil industry requires large amounts of start-up capital for its high-risk undertakings. The period between initial investment and commercial production lasts a number of years. Certain government programs allow companies to reduce the taxes they have to pay in the short term and defer them until later in the production cycle. This is not a subsidy, but rather a common sense measure whose purpose is to ensure the neutrality of the tax system between different industries.

“We did find, over the course of our analysis, two tax expenditure programs that can be considered subsidies. However, both of them are in the process of being eliminated, and their upcoming abolition means that of the $211 million of subsidies that exist right now, approximately $71 million will remain as of 2016. Of this amount, $39 million is for the Hibernia project in Newfoundland. Of the remaining $32 million, $29 million is devoted to R&D and $3 million is for industrial development programs,” explains Mr. Chassin.

Contrary to renewable energy production, which could not survive without government help, the industry that develops oil and gas resources has paid on average $18 billion a year in taxes and royalties to different governments across Canada. “When you look a little closer, it’s clear that the Canadian oil industry is not a net beneficiary of governmental largesse, but on the contrary, that it contributes far more than it receives, no matter how you slice it,” concludes Michel Kelly-Gagnon, President and CEO of the MEI.

The Economic Note entitled “Is the Canadian Oil Industry Subsidized?” was prepared by Youri Chassin, economist and research director at the Montreal Economic Institute. This publication is available on our website.

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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.

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Interview requests: Mariam Diaby, Communications Director, Montreal Economic Institute / Tel.: 514-273-0969 ext. 2231 / Cell.: 514-668-3063 / Email: mdiaby@iedm.org

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