The energy industry receives a small fraction of the $34-billion in subsidies it supposedly receives, and even that is vanishing
In a recent opinion piece for The Tyee, freelance writer Mitchell Anderson bemoaned Canada’s “incredible” $34-billion a year in energy subsidies. This figure is indeed not credible, since the IMF study it’s based on sees subsidies where there are none.
The vast bulk of The Tyee’s ludicrous figure falls under the rubric of negative “externalities,” that is, societal costs presumably caused by a particular economic activity. According to the wonks at the IMF, fossil fuels are not sufficiently taxed to make up for externalities like air pollution, carbon emissions, and even traffic congestion and traffic accidents.
The cost of these is evaluated by the IMF with their crystal balls at nearly $20-billion just for transportation fuels like gasoline and diesel. Another $7.3-billion is for un-priced carbon emissions from burning natural gas, and an additional $4.5-billion is for un-priced carbon and sulfur dioxide emissions for the coal industry.
This is silly for a number of reasons. First of all, there are already plenty of taxes on fossil fuels. In 2012, gasoline taxes averaged 31% of the pump price. Federal excise taxes and provincial fuel taxes combined generated revenues of $13.7-billion for the 2012-2013 year. This means each Canadian – man, woman, or child – pays an average of almost $400 a year in taxes related to fuel consumption.
As for the production side, the industry that develops oil and gas resources in this country pays on average $18-billion a year in taxes and royalties to different governments across Canada. Hardly chump change.
More fundamentally, deciding what counts as an externality and how much that externality is worth in dollar terms is a tricky business, and it’s most definitely not the same thing as putting a number on fossil-fuel subsidies. It’s true that if Canadians could not move around by car as easily and affordably as they can now, there would be less traffic congestion, and the air in our cities might be less polluted. But if we all reverted to heating our homes with firewood instead of natural gas, air quality would suffer, and our forests would be stressed as well.
As for traffic jams, in addition to their direct costs in terms of productive hours lost, it’s also true that they’re stressful and that stress is a cause of heart disease. Why not include the additional costs to our health care system in our externality calculation?
These many billions of dollars, Anderson claims, could be put to better use. They could finance the building of hundreds of kilometres of light rail, fix our crumbling roads, or provide cheap daycare to millions of children.
The problem is that these billions of dollars simply do not exist, and trying to extract them from oil, gas, and coal producers (and consumers) would have devastating economic consequences. Production and consumption of these energy products would be discouraged, and with less production, higher tax rates would not be translated directly into the higher tax returns envisaged by would-be interventionists with their rose-coloured glasses. Indeed, economic growth would slow across the board, leading to less tax money in government coffers.
As for the $840-million in producer support to the oil industry (with some going to natural gas and coal producers) that Anderson mentions, this is based on an OECD study that at least has its feet on the ground. But even here, there is much to criticize.
This figure is in line with another, earlier analysis from the Global Subsidies Initiative that I examined in detail in a recent publication. What I found was that even this much smaller number makes subsidies to the oil industry seem far more generous than they actually are.
This is because many of the supposed subsidy programs are actually just a particular tax treatment common to the natural resources sector as a whole, which is faced with a specific economic reality. Given the large amounts of start-up capital involved, the high degree of risk, and the many years that go by between initial investments and (hopefully) profits, companies are allowed to reduce the taxes they have to pay in the short term and defer them until later in the production cycle.
But this is not a subsidy. It’s just a common-sense measure for ensuring the neutrality of the tax system between different industries. And while governments get less revenue initially, they ensure the economic viability of certain projects that would not otherwise see the light of day. This means more tax revenue down the line when these projects are finally carried through and wealth is created.
As for actual subsidy programs, the largest of these are being eliminated, and will be gone within the next two years. This means that of some $211-million of real subsidies that currently exist, just $71-million will remain as of 2016.
Now, $71-million of subsidies is still $71-million too much, in my opinion. But it’s a very small fraction of the subsidies handed out by the federal and provincial governments to various sectors of the economy, which totalled a whopping $15.8-billion in 2009. And it’s a far cry from the tens of billions touted by the IMF and uncritically repeated by The Tyee.
Youri Chassin is economist and research director at the Montreal Economic Institute and author of the recently published “Is the Canadian Oil Industry Subsidized?” The views reflected in this op-ed are his own.