What Is A Subsidy?

Last week, Canada’s Environment and Climate Change Minister, Steven Guilbeault, held a press conference to announce the end of what he called "fossil fuel subsidies".

We got a quick initial analysis to you about the government’s plan straight away, while also planning to get you a more detailed analysis as soon as possible.

So, as promised, our team has been hard at work since the announcement, going through all the nitty gritty minutia of the government’s proposal, and here’s what we’ve uncovered.

Essentially, it’s a complete mess, for three reasons:

1. The government hasn’t provided a clear definition of what they mean by a “subsidy”.
2. Rather than announcing which specific subsidies will be removed and what will still be allowed, the government announced a vague and convoluted system that will be used to review each subsidy one by one.
3. What was said in the press conference contradicts what’s in the government’s official documents and what’s being said in private.

So, first, what exactly is a subsidy?

Well, in theory, a subsidy is a payment of your tax dollars to a private company by the government, done either directly via a cash payment or indirectly through some kind of discount.

(It’s important to note that we’re opposed to these kinds of payments to private companies by governments, because they tend to lead towards governments picking winners and losers, instead of a free market where companies compete based on merit.)

But, unfortunately, this isn’t the definition the federal government is planning to use.

Instead, the government has imagineered its own unique definition made up of a mixture of other definitions, with their own ideas thrown in too.

Because not knowing what the government means by a “subsidy” won’t cause any problems when trying to eliminate “subsidies”, right…

In part, this problem stems from the fact that Canada is the first country to even attempt to do something like this.

That’s despite the fact that the eradication of fossil fuel subsidies is part of an international agreement the Canadian government made years ago, along with the other G20 nations.

To be fair, there’s a decent chance that no one else who signed the agreement ever intended to implement it in the first place.

So, no one bothered to take the time to actually figure out how it would work, or… you know… figure out what would count as a “subsidy”.

It’s like one of those classic political statements where it sounds good in theory, so it will play well on TV, but everyone knows that it won’t work in practice, so they only say it to get good coverage on TV, and then forget about it entirely.

Except, then along comes Justin Trudeau and says he actually wants to do it, leaving everyone scrambling around trying to figure out how to do something that everyone already knows can’t be done.

Oops.

And so, off the government went, trying to reinvent the wheel.

Now, it’s true that economists use the word subsidy in a number of different ways depending on the situation, but no economist of any stripe would recognize what they’re proposing now.

Tristin Hopper at the National Post said it best:

“But even the most cursory look into what actually constitutes a ‘fossil fuel subsidy’ reveals it to be one of the more abused terms in Canadian politics. A diesel bus being converted to run on natural gas? A research program to stop oil spills? An environmental activist being arrested for blocking a road? All of these have, at one time or another, been tallied up as an ‘oil and gas subsidy.’”

In other words, it’s all about politics, not economics.

We shouldn’t let the politicians off the hook that easily though, because this issue with the definition of a subsidy isn’t new.

In fact, the radical environmental movement has been deliberately working to change the definition of a subsidy for years, in order to take advantage of a situation just like this.

To provide a more concrete example, let’s take a look at a report from University of Calgary economists Kenneth J. McKenzie and Jack Mintz, published all the way back in 2011. 

The report was titled “The Tricky Art of Measuring Fossil Fuel Subsidies”, and in the report McKenzie and Mintz critique an earlier report by the “Global Subsidies Initiative” (GSI) of the “International Institute for Sustainable Development” that claimed Canadian oil and gas companies were receiving $2.84 billion per year in fossil fuel subsidies from various levels of government.

The problem, as was revealed by McKenzie and Mintz, is that this calculation includes $1.536 billion from “tax expenditures” and $840 million from “royalty relief” which, if you think about it for even just a second, aren’t really subsidies to the oil and gas industry.

Why?

Well, yes, tax expenditures meet the World Trade Organization’s technical definition of a “subsidy”.

And yes, Project Confederation would prefer to get rid of these programs and lower taxes instead.

But this can hardly be considered a subsidy to the energy industry specifically, when these tax expenditures are widely available to every single industry across the entire Canadian economy.

That’s not a subsidy for a specific industry, such as oil and gas, that’s just a bad tax policy!

With regards to royalty relief, it’s the opposite.

Yes, a program where energy companies get “relief” from royalty payments during the early development of a project is technically a program that is mostly specific to just one industry - the energy industry.

But it’s really not reasonable to call this a “subsidy”.

The energy companies aren’t paying less to the government; they’re just paying less at the start and then paying even more later on.

It’s certainly helpful for the companies because it helps them get going at the start when they have no revenue coming in, but is it technically a “subsidy”?

Here’s another way to look at it, that makes the logical flaw obvious.

According to the environmental activists’ definition of a subsidy, energy companies are being subsidized when they get royalty relief early on in a project, and then not getting subsidized later on when they pay higher rates.

But, what if a new government changed the energy royalty system so that companies paid the lower rate forever?

Putting aside whether this would be a good policy or a bad policy, common sense would tell us that this is an even bigger “subsidy”, right?

But, according to the environmentalists’ definition of a subsidy, this would actually make the subsidy disappear.

Because now, instead of getting a “discount” on their royalty payments, these new businesses are paying the “full” royalty payments the whole time (albeit at the lower rate forever), which means no “subsidy”.

There are other technical issues with the way the GSI report discusses subsidies, but those go beyond what we can fit in this explainer.

Suffice to say, the environmentalists' definition of a subsidy is inconsistent with the traditional meaning of a subsidy, where the government provides cash or similar to businesses to give them a competitive advantage.

The environmentalists’ definition is basically them deciding what they personally think a business *should* be paying, researching what they’re actually paying, and then writing a report calling the difference a “subsidy”.

By that definition, if the environmentalists believe that a farmer should be paying a 60% tax rate and they’re only paying 40%, then the farmer is receiving a 20% subsidy.

That’s nuts.

The government’s attempt to resolve this issue hasn’t helped, though.

Last week’s announcement was broken into two major policy documents, a “Self-Review Assessment Framework” and “Guidelines.” 

According to the government, the two pieces “support the decarbonization of Canada’s oil and gas sector and support a strong future for workers in the industry while making real progress to fight climate change.”

The “Guidelines” outline the scope and application of the eradication of all fossil fuel subsidies, which are then broken down into two categories - one that orders all government ministers to refrain from creating new subsidy measures and another that outlines the framework for the elimination of all subsidies.

The stated purpose of the “Self-Review Assessment Framework” is to outline the process of assessing the inefficiencies of federal government expenditure programs such as grants, contributions, research and development projects, or tax expenditures in the context of Canada’s G20 commitments.

In other words, in announcing that the government would be ending fossil fuel subsidies, the government didn’t actually announce the end of any fossil fuel subsidies.

Instead, Ottawa will be examining 129 tax and non-tax measures using this “self-review framework”, and then later making a decision on which to eliminate.

The framework also provides a series of “exemptions” to the policy.

Surprise, surprise, the exemptions allow the government to continue providing subsidies to their favoured “green” energy companies.

That’s right, once again we see proof that this move isn’t some principled stance against “subsidy” programs that are poor public policy.

The federal government just wants to change *who* gets the subsidies, to make sure that more of your tax dollars are going to their political friends, as opposed to their political enemies.

In summary, which subsidies will be allowed, and which won’t, will be an entirely arbitrary decision made by political actors, making decisions based on what’s politically beneficial to them.

But then, perhaps it was inevitable that these decisions would be made arbitrarily when the government can’t even provide an objective definition of what they mean by a subsidy.

The most frustrating part of the whole thing might be the many contradictions between what was said during the government’s press conference, what’s being said in private, and what’s actually being published publicly.

You see, depending on how you interpret what’s being said (or more importantly, how the government plans to interpret what’s been said), the announcement could be little more than a mirage, or it could be utterly devastating for the entirety of the resource sector - particularly in western Canada.

The technical documents set out a very broad scope of what could be restricted, with exemptions for green energy, but almost no exemptions outside of that.

Depending on how you read some of the language, the government could be planning to remove the energy industry’s ability to benefit from even the most basic of tax expenditures - things that literally every other business in the country, from a mom-and-pop store in Victoria to an auto factory in Ontario, have access to.

And, when asked whether the elimination would make a “dent” in the amount of subsidies provided to the energy industry, Guilbeault was strident:

“We’re not making a dent, we’re putting an end to it… That’s what the transition looks like. You phase out one thing that you don’t want, and you phase in something that you do want.”

But, then later in the same press conference, Guilbeault seemed to indicate that the government would be using a much more technical, narrow definition of a subsidy.

The government’s partners, the NDP, even went so far as to criticize the Liberals for not going far enough, while an anonymous government official, quoted in the Toronto Star, suggested that a “preliminary” analysis shows that the framework would impact just $1 billion in direct government subsidies.

So, who knows?

Either way, the framework gives Ottawa enough wiggle room to move forward with the more radical definition of subsidies promoted by the more radical wing of the federal government should they decide to.

And, as we indicated last week, with Guilbeault’s background, we know which side of this debate he’s on philosophically.

So, does Guilbeault just not understand his own law?

Are they still fighting within the Liberal party about how far to go?

Maybe he’s just lying - downplaying the impact in order to make sure the law passes?

Maybe it’s all of the above?

If you’ve made it all the way down to this part of our explainer, you’ve probably realized by now that we will need much more detail about exactly how this policy will play out in order to understand the full potential scope of the impacts.

If the government uses the environmentalist activists' definition of what a subsidy is, then this policy has the potential to be preposterous and incredibly damaging to the energy industry.

If the government uses a more narrow definition of subsidy, then it could even end up being a positive thing, though we should point out that, in that case, not much will really change at all given there are so few "real" subsidies to begin with.

Maybe it’ll be somewhere in between - doing only a bit of economic damage in the short run, but further complicating the tax code and creating other problems in the long run?

To know for sure, we’ll need to keep a close eye on all the many announcements, details, consultations, studies, and regulations the government is planning to conduct as part of their “review” of these subsidies.

Luckily, that’s exactly what our team is planning to do, and we’re definitely up to the task.

But, this really is a David vs. Goliath task.

There are literally thousands of different radical left-wing environmental groups trying to rewrite how our society works, from the ground up, and they all have deep pockets.

(Well, they have your pockets!).

To take just one example - the “International Institute for Sustainable Development” that released the report we mentioned earlier in this email.

The IISD is one of the “independent” think tanks that have been pushing this narrative for years.

On their website, they boast of having over 250 staff, all working full-time on their cause.

And how do they pay for all of this, you might wonder?

Well, they force you to pay for it of course.

The “International Institute for Sustainable Development” is funded by your taxes, thanks to a whole series of government "funders".

The Government of Canada gives them your money.

The Governments of Alberta, Saskatchewan, and Manitoba give them more of your money.

The City of Edmonton, the City of Calgary, and many more, all give them even more of your money.

Meanwhile, we’re a tiny team, working off only donations given voluntarily by those who support us.

So, if you’d like to support our continued work on this and other important issues, please consider doing so.

You can sign up to be a monthly supporter of Project Confederation here, or make a one-off contribution here.

And be sure to let us know if you have any questions about this email, or anything else we’re working on.

Regards,

The Project Confederation Team