The Canada Climate Law Initiative (CCLI) has launched a new report called Fossil Fuel Subsidies in Canada: Governance Implications in the Net-Zero Transition. The report discusses important considerations for corporate and investment fiduciaries, who must mitigate their risk exposure given changing policies towards fossil fuel subsidies. Canada ranks highly among the developed countries that have provided subsidies to the fossil fuel industry; the report also describes the impacts that various entities in Canada have had on sustaining fossil fuels through these annual subsidies.
Companies, pension funds, other corporate and investment fiduciaries, and governments face climate-related risks, including those arising from persisting fossil fuel subsidies. Companies and investors often rationalize these risks in terms of financial materiality for their business, but they are now also acknowledging them as systemic risks.
This report offers several ideas that will enhance transparency, enable stakeholder evaluation, promote policy targets, address vulnerabilities, and limit exposure to litigation, so that markets can appropriately respond to the risks associated with changing policies towards fossil fuel subsidies. Written by Temitope Tunbi Onifade, affiliated research scholar at CCLI and Vanier scholar at the University of British Columbia, the report highlights the climate risks of business and investment related to fossil fuel subsidies in Canada as well as the governance implications, including government transparency, climate policy effectiveness, and climate justice for vulnerable Canadians.
The report also recommends actions that companies, pension funds, fiduciaries and governments should take to deal with these implications in Canada’s transition to net-zero economy.
Canada Pledges to Reduce Fossil Fuels, But Still Dishes Out Plenty of Annual Subsidies
The Government of Canada signed the COP26 Statement on International Public Support for the Clean Energy Transition, committing to prioritize the clean energy transition and end new direct public support for the international unabated fossil fuel energy sector by the end of 2022. Part of that commitment was to encourage further governments, their official export credit agencies, and public finance institutions to implement similar commitments into COP27 and beyond.
Canada also was a signatory to the Glasgow Climate Pact to accelerate the phaseout of inefficient fossil fuel subsidies. Among other statements, the Pact reaffirmed the long-term global goal to hold the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change.
Continuing annual subsidies in various forms to the fossil fuel industry seems contradictory to the COP26 Statement and the Glasgow Climate Pact, though, doesn’t it?
Canada’s ministers insist they are working together to phase out inefficient fossil fuel subsidies that encourage wasteful consumption by 2023.
Canada has also committed to net-zero greenhouse gas (GHG) emissions targets by 2050, and it will be critically important that Canadian governments and private sector align their strategies with net-zero targets. To have the desired impact to mitigate carbon dioxide and convert to zero emissions, the private sector will need to digest and manage fossil fuel subsidy risk; that means turning risks into opportunities within the broader context of low-carbon governance.
Temitope Tunbi Onifade, author of the report, says:
“Subsidies are not unique to fossil fuels. They have helped new and small businesses to be competitive in industries dominated by giant corporations, reduced production and supply costs that would otherwise pass to low-income consumers and communities, and served as a way to redistribute wealth in places that depend on coal, oil and gas, agriculture, fisheries, forestry, and other resources. However, the times have changed. This report says we should consider those changes to decide where government subsidies should go and how to deal with emerging challenges. Learning recent subsidy policies and their impacts discussed in this report should help business leaders know how to be proactive, give investors an idea where to direct their money, and nudge governments to close governance gaps.”
It is clear that the government, market, and civil society bear the costs of fossil fuel subsidies.
- Government sources constitute the largest, most obvious state source of fossil fuel subsidies, seemingly higher than markets and externalities.
- Backed by government regulation, market sources are also another significant state source, presumably more than externalities.
- Accruing to various stakeholders in society, externalities appear to be the least important source. However, since not all externalities are known or costed, learning more about them may reveal that they are actually larger than government and market sources.
Using these 3 broad, widely recognized social spaces — government, market, and civil society — as a lens, it becomes clear that fossil fuel subsidy externalities arise from and have differential impacts in a fossil fuel governance triangle.
- Governments enable them by allowing regulatory capture.
- Market actors, especially fossil fuel producers and consumers, externalize the costs of fossil fuel subsidies. Industry acquires an inappropriate amount of control over regulatory choices and uses it for the benefit of its members and then supports them through direct transfers and revenue forgone.
- Civil society, especially vulnerable groups such as BIPOC and low-income people, who likely benefit the least from fossil fuel subsidies, disproportionately bear the social costs of emissions, for instance the impacts of continued emissions on human health,192 water, land, and infrastructures, and the diversion of substantial amounts from government budgets that would otherwise enhance adaptation to climate impacts and address other pressing challenges.
The Canada Climate Law Initiative (CCLI) is Canada’s climate governance knowledge mobilization and policy hub. Using academic rigor and active partnerships, they bring together knowledge, leading practice, and trusted insights to advise Canadian businesses and governments on how to respond to today’s urgent climate risks and opportunities through effective climate governance. CCLI is led by 3 principal investigators, Dr. Janis Sarra and Dr. Carol Liao from the Peter A. Allard School of Law, University of British Columbia, and Professor Cynthia Williams from the Osgoode Hall Law School, York University.
CCLI acknowledges that the UBC Point Grey campus is situated on the traditional, ancestral, and unceded territory of the xʷməθkʷəy̓əm (Musqueam).
The author of this article acknowledges that the Indian River Lagoon area where they live is situated on lands originally inhabited by the Ais people, who were surrounded by bountiful food in the environment and were enslaved by European usurpers.