On the IISD's misleading calculations of Canadian fossil fuel subsidies

There are few topics that raise the ire of activists more than the idea of subsidies for oil and gas companies. Listen to an activist talk and you will invariably hear a comment about oil and gas subsidies and how they should be used to fund schools, hospitals, or universities. The problem is when you look more deeply into the sourcing, these “subsidies” end up being nothing of the sort.

The thing I have noticed while researching these “reports” is how much they remind me of Lewis Carroll’s Into the Looking Glass. In these reports up is down, left is right and when they use a word it means just what I choose it to mean—neither more nor less“. As I showed in a previous article: About that questionable IMF survey claiming $5.3 trillion in “subsidies” for fossil fuels, the IMF subsidy report was only able to create large numbers for subsidies by redefining economic externalities (things like congestion and auto accidents) as subsidies.

This week I was introduced to a newer study on subsidies. This one is by the International Institute for Sustainable Development (IISD), Global Subsidies Initiative. The IISD is a think-tank dedicated to “championing solutions to our planet’s greatest sustainability challenges.” They combine important research on topics like the Experimental Lakes with outright activism like their oil and gas subsidies work (which I will discuss herein).

Before I go further I want to make this clear. The IISD produces important work. Unfortunately, in the case of oil and gas subsidies, they appear to have been captured by their partners in the project (Natural Resources Defense Council, the Overseas Development Institute and Oil Change International). The result is a series of studies that redefines subsidies and in some cases appear to simply make them up holus bolus.

For Canadian subsidies I direct reader to their report Unpacking Canada’s Fossil Fuel Subsidies: Their size, impacts and why they must go here is the list of subsidies they identified:

Subsidy nameWho gives it?Who gets it?How much is it worth?*
Flow-through shares**CanadaOil and gas companiesCAD 265 million
Direct spending & budgetary transfers***CanadaOil and gas companiesCAD 112 million
Crown royalty reductionsAlbertaOil and gas companiesCAD 1.162 billion
Tax exemptions for certain fuels & uses in industryAlbertaIndustryCAD 298 million
Royalty reductions, including deep drilling and infrastructure creditsBritish ColumbiaOil and gas companiesCAD 631 million
Reduced tax for aviation fuelOntarioAviation IndustryCAD 292 million
Tax exemption for coloured fuels used in agricultureOntarioAgricultural industryCAD 248 million
Fuel tax exemptions and reductions QuebecIndustry and other consumersCAD 301 million

Now something important to understand when looking at the numbers (and associated references) above. The numbers, as presented, mostly do not appear in the documents cited. In most scientific reporting when you see a number and it is reported to come from a previous document, you can go to that previous document, search for that number, and find it.

In these documents when the IISD cites a number it represents more of a feeling the authors have than an actual source. Search for $112 million in “Direct spending & budgetary transfers” in the that report and the search brings up zero hits. Rather the $112 million apparently represents a combination of numbers from that document but readers are not actually provided an explanation as to how the $112 million value was generated. You just have to trust that the number can be re-constructed using some variation of the figures from the cited report.

Now let’s look at some of the identified “subsidies”

Flow-Through Shares

In the report the IISD identifies a $265 million subsidy to oil and gas companies from flow-through shares (FTSs). Many will ask: what is a flow-through share? As Kevin Libin explains them:

The idea behind flow-through shares is that weak, often young companies without enough profits against which to write off their considerable expenses can pass those expenses off to shareholders, who can deduct them from their own income taxes.

This means the only way to generate a FTS is for the the company to not generate profits. This eliminates almost all of the oil companies since they are mostly profitable companies and therefore don’t have expenses to pass off to shareholders as losses; rather they are generating dividends for their shareholders.

As for that $265 million figure it is from Finance Canada and as the IISD points out:

Flow-through shares are available to investors in the oil and gas, mining and renewable energy sectors. The data provided by Finance Canada does not disaggregate the tax expenditures related to flow-through shares by sectors.

What does this mean? It means that the $265 million is for the entire natural resources sector not just oil and gas. This means that the $265 million includes renewable energy and mining projects as well as fossil fuel projects. Only a fraction of that $265 million ends up coming from fossil fuel producers. Instead it is almost certainly made up mostly of junior mining companies that are generating big loses looking for new ore bodies.

To state it directly, the claim that the $265 million represents a subsidy to oil and gas companies is 100% false. There are no two ways around it. Based on the composition of the natural resources sector, and the profitability of the various companies that comprise the sector, it is likely that oil and gas companies only get a tiny percentage of that total. What is clear is that $265 million is absolutely not the correct number and represents a massive over-statement of the fossil fuel “subsidy”.

I do not have the time or the enthusiasm to go through the royalty arguments, because, as I discussed them previously. Instead I want to concentrate on another imaginary “subsidy”.

Differing tax treatment for various fuel types

In the table the IISD identifies $1.139 billion in “subsidies” based on tax “reductions” or “exemptions” for fuels used in agriculture, aviation and rail. None of these represent “subsidies” in any real sense, moreover, most represent completely imaginary numbers that have emerged, holus bolus, from the imaginations of the report authors.

What the authors have done is create a mental construct and then used that construct to create magical “subsidies”. The construct is that all fuel taxes should be the same irrespective of why the tax was enacted and therefore any tax lower than the highest available tax is a “subsidy”.

As described in the Alberta report

The Alberta government offers hundreds of millions of dollars per year in tax exemptions and deductions for fossil fuels used in agriculture and industry, including marked fuel for off-road use, locomotive fuel, aviation fuel and propane. These subsidies encourage the continued use of these carbon-emitting fuels while disincentivizing alternatives.

Just because the Alberta government has decided to tax unleaded automotive gasoline at one rate does not mean that their not charging farmers that tax for food production on their farms is a subsidy. Gasoline taxes go into general revenues that are used to help build and maintain roads. Gasoline tax rates are also derived to generate specific policy objectives (like reducing the use of automobiles or to help pay for transit). Neither are relevant for on-farm uses.

Farmers running their combines aren’t using roads so why should their gasoline be taxed for that purpose? The generation of our food supplies represents an essential service and so taxing agricultural fuels to discourage their use also makes no sense. While I don’t want to go into detail on this, I would also point out that reduced taxes for marine fuels meet that same test. Fishing fleets don’t use public roads and they are necessary to feed our country. To expect them to pay the same tax rate as unleaded automotive fuel is simply ridiculous.

Now consider the reduced taxes for rail. Rail transport is a lifeline for our national economy. Trains run on rails paid for and maintained by the rail companies. To insist that rail companies pay the same tax as cars is also specious.

Let’s consider an exaggerated analogy. Some governments charge extra taxes on sugary drinks while not charging those taxes on insulin. Does that mean the government is subsidizing insulin because it isn’t charging the same level of tax on insulin as they do on sugary drinks? Rail is like insulin for our national economy, we can’t live without it. So to expect our governments to tax rail fuel at the same level as unleaded automotive fuels does not make sense.

Finally let’s look at aviation. Our airports are run and maintained by airport authorities and their maintenance and improvements are funded by fees on flights. The government has chosen not to charge aviation fuel with the same taxes as automotive fuel. That is not a subsidy, it is just a recognition that the flying public will pay their taxes through a different tax tool.

Looking at the $1.139 billion in subsidies reported by the IISD in reduced fuel taxes two things become clear:

  1. The suggestion that all fuel types should be taxed at the same rate as unleaded automotive fuel is simply not supportable by any reasonable examination of the facts.
  2. Calling the difference between the rate charged for unleaded automotive fuel and that charged for farm, marine, rail or aviation use a “subsidy” is simply not tenable.

Put simply, the claim that this imaginary $1.139 billion represents a subsidy is not supportable.

Conclusion

The IISD has so much credibility on important topics that when it produces reports like these it leaves me stunned. No serious scholar can look at that $265 million dollar value for flow through shares for “investors in the oil and gas, mining and renewable energy sectors” and declare it entirely as “subsidies for oil and gas companies” and not shake their heads. Similarly, deciding that all fuel uses should be taxed at the same rate as unleaded automotive fuel and declaring the difference a “subsidy” has no basis in any serious analysis.

The saddest part is that having heard dozens of activists cite these numbers in the recent past, I have yet to read a cogent reply from government, academia or industry. Where are the analysts who are supposed to be studying this topic? Why am I not reading their analyses instead of being left to produce my own?

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5 Responses to On the IISD's misleading calculations of Canadian fossil fuel subsidies

  1. Allan Young says:

    Good job and Thank you!

    Liked by 1 person

  2. Andrew Roman says:

    Great article. The only other one similar to this is by Ross McKitrick on his web site, looking at several different estimates of subsidies to the fossil fuel industry.

    The reason for these grossly inflated subsidy estimates has to be to make the subsidies to solar and wind generation look better by purporting to show that fossil fuels are massively subsidized, thereby harming the deployment of these renewables.

    Liked by 2 people

  3. Chris Morris says:

    Agreeing with the others, this is a good article. Unfortunately, people won’t ever look behind the sensationalist headlines (which is what the promotors want) so it becomes received wisdom that will be quoted as secondary or tertiary sources for future articles. That it is falsehoods built on a bed of sand is irrelevant.

    Like

  4. DMacKenzie says:

    Great job Blair….I think one of the problems is that the subsidy claims are so outrageous that the average knowledgeable person doesn’t want a debate with loose cannon.

    Like

  5. Aaron Cosbey says:

    Good article. (Disclosure: I do work for IISD, institutional author of the study you critique, though not for that program, and I didn’t write this report.)

    If we accept your arguments on flow-through shares (on which if there were proper transparency we wouldn’t be arguing, because we’d know the share taken by fossil fuels) and fuel tax differentials, we’re still left with just under 2 billion in subsidies. Most of them are royalty reductions, which you note you’ve argued elsewhere against defining as subsidies. I’ve read McKenzie and Mintz’s arguments on those and don’t find them persuasive. Could you point me to your reasoning? Can’t find it on your site.

    Like

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