At a glance
“Assessment of Fossil Fuel Subsidies in Canada: A case study of the Trans Mountain Pipeline,” by Thomas Gunton. International Institute for Sustainable Development (IISD), Sept. 17, 2024.
Canada’s federal government has committed to phasing out public financing for the fossil fuel sector, also known as fossil fuel subsidies, beginning with those deemed inefficient. This report published by the International Institute for Sustainable Development (IISD) argues that Ottawa has left a significant fossil fuel subsidy off that list: the Trans Mountain Pipeline, which the federal government bought from Kinder Morgan in 2018. It is now owned by a federal Crown corporation, although the government intends to sell it. The report argues that the tolls for transporting oil through the pipeline expansion, not yet finalized but based on methodology approved in 2013, are below what a private company would charge because they do not take higher-than-expected capital costs into account. The report argues this would benefit oil producers while failing to cover the full costs of expanding and operating the pipeline. The report concludes that amounts to a fossil fuel subsidy, according to the government’s own assessment framework. The IISD says that same framework would also judge the subsidy to be inefficient and therefore should be eliminated.
Key findings
- Substantial subsidy: The pipeline’s expansion provides a subsidy estimated between $8.7 billion and $18.8 billion due to tolls being set below cost recovery levels.
- Taxpayer impact: The subsidy translates into a cost burden of $581 to $1,255 per Canadian household.
- Outdated estimates: The tolls were set based on long-term contracts Kinder Morgan negotiated with 13 oil companies in 2013 that assumed they would be enough to cover costs plus a return of 12 to 15 per cent. The methodology was approved by the National Energy Board, which was the predecessor to the Canadian Energy Regulator, but the report argues it has not been updated to reflect higher costs.
- Escalating project costs: The total capital costs of the pipeline’s expansion have increased significantly, from $5.4 billion to $34.2 billion.
- Government-owned pipeline: The analysis focuses on tolls, but the report also argues the Canadian government’s ownership of the pipeline through Trans Mountain Corp. (TMC), a wholly-owned subsidiary of Canada Development Investment Corp. (CDEV), may also create fossil fuel subsidies.
- Environmental conflict: The report argues the pipeline subsidy is inconsistent with Canada’s commitment to eliminating inefficient fossil fuel subsidies by 2023.
Bigger picture
Government financial support for fossil fuels, such as coal, oil and natural gas, has come under widespread scrutiny in recent years — and not just in Canada. Multilateral organizations, such as the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD), stress the need for reform due to the subsidies’ distortionary effects on markets and how they hinder climate action. However, G20 countries have been slow to phase out fossil fuel subsidies and they were estimated at US$1 trillion in 2022. These subsidies often prop up industries that contribute to environmental degradation.
Last year, Canada’s federal government released an assessment framework and guidelines for inefficient fossil fuel subsidies, which stems from a pledge it made as part of a G20 agreement in 2009. Using the criteria in that framework, which includes “providing goods or services other than general infrastructure and transfers a benefit by providing transportation services below the marketplace cost,” the IISD report concludes there is a fossil fuel subsidy flowing through the Trans Mountain Pipeline. The report also argues the pipeline meets none of the criteria for an efficient subsidy, including by enabling a significant reduction in greenhouse gas emissions, and thus concludes that it is inefficient.
The Trans Mountain Pipeline moves oil products from Alberta to British Columbia, as well as refineries below the border in Washington State. Kinder Morgan, the previous owner, sought approval in 2013 to build an expansion that would nearly triple capacity to 890,000 barrels per day, but halted construction in 2018 due to financial risks. Canada’s federal government ultimately purchased it for $4.4 billion, with the intent to sell it. The long-delayed expansion, subject to ballooning costs, began operations in May this year.
Challenges and opportunities
Key challenges to addressing the Trans Mountain Pipeline subsidy include:
- Failure of current tolls in covering the full cost of the pipeline’s expansion;
- A significant increase in the project’s capital costs, creating financial strain;
- Subsidies to the oil industry contradicting Canada’s climate commitments;
- Canadian taxpayers bearing the cost of subsidies, adding pressure to public finances;
To address these challenges, the report suggests that:
- Revising toll structures to better reflect the true cost of the pipeline could reduce taxpayer burden;
- Introducing a levy on oil shipments would help recoup the capital and operational costs of the pipeline;
- Providing clearer public disclosure on pipeline finances and toll structures can align policies with climate goals;
- Engaging the private sector to share the pipeline’s financial burden could reduce public expenditure.
In their own words
Burdening Canadian taxpayers with the cost of providing a large subsidy to the oil sector to cover transportation costs is contrary to Canada’s fossil fuel subsidies framework and contrary to basic principles of public equity. It is recommended that the Government of Canada fulfill its commitment to terminate inefficient fossil fuel subsidies by phasing out this subsidy.
“Assessment of Fossil Fuel Subsidies in Canada: A case study of the Trans Mountain Pipeline,” by Thomas Gunton, Aaron Cosbey, Vanessa Corkal, & Philip Gass, International Institute for Sustainable Development (IISD), September 2024.
Final thoughts
Katherine Cuplinskas, a spokeswoman for federal Finance Minister Chrystia Freeland, did not comment directly on whether the tolls amount to a fossil fuel subsidy, but highlighted the economic benefits. “The Trans Mountain Expansion Project will ensure Canada receives fair market value for our resources while maintaining the highest environmental standards,” she wrote in a Sept. 27 statement, adding that the Bank of Canada estimates it will contribute 0.25 per cent to the GDP. “The federal government will launch a divestment process in due course.”
The IISD report notes the federal government has justified its financial support for the Trans Mountain Pipeline by essentially arguing that any fossil fuel subsidies “could be offset by higher returns to Canada from a stronger oil sector.” The report notes there is no public interest rationale among the criteria listed in the fossil fuel subsidy assessment framework. It also presents a cost-benefit analysis that shows the pipeline expansion has a net cost of $23.1 billion, when taking environmental and climate risks into account.
It should be noted that the tolls have not yet been finalized, so the size of the subsidy estimate in the report (already ranging widely from $8.7 billion to $18.8 billion) is not set in stone. The report also points this out in arguing that the fossil fuel subsidies it says stem from underpriced pipeline tolls are not sunk costs. The expansion just opened in May and costs can still be recouped, such as by applying a cost-recovery levy. Another unknown factor: how much the federal government will get when it does sell the pipeline and how that would affect the return. The federal government has committed to publishing its implementation plan for phasing out public financing of the fossil fuel sector this fall, so that may bring more clarity too.
Download the full report originally published by the International Institute for Sustainable Development on Sept. 17, 2024.
