About Non-Renewable Resource Subsidies

Tim Platnich

January 10, 2025

It is often reported in the media, in pejorative terms, that non-renewable energy producers in Canada are subsidized by taxpayer dollars.

Are these reports factually accurate? If there are subsidies, are they bad policy?

What is a subsidy? There are multiple definitions of 'subsidies' in the literature. Some are applicable to the issue at hand. Others are not.

At a basic level, a government subsidy involves the granting of some benefit to a group that is not otherwise available to others. So what 'benefits' does a government have to offer by way of subsidies? Well, there are tax breaks. There are government loans. There are government guarantees of loans. There are government grants. There are government revenue guarantees.

A more controversial type of government benefit is the construction or provision of government infrastructure. Is the building of public highways a subsidy of the trucking industry?

Once something can be rightfully called a subsidy, the next question is whether the subsidy is good policy. Public highways are generally considered good policy even if the provision thereof may benefit the trucking industry. Typically, where a 'subsidy' benefits the taxpayers or citizens generally, and not specifically one group, the so called 'subsidy' is not a subsidy at all.

Another type of 'benefit' certain provincial governments in Canada may bestow is the benefit of oil and gas extraction licenses. Under the Canadian Constitution, the Provinces own their natural resouces which include oil and gas reserves. As owner of these reserves, a particular Province can decide what to do with the natural resources. It can choose to leave the oil and gas in the ground - like Quebec. Or, it can choose to have the resources extracted. This is a policy decision. Another policy decision is whether to extract the resources directly though a government agency or body, or to use third parties to extract the resources for the government.

In Alberta, the Alberta government has chosen the third party route. Rights to explore for oil and gas in defined areas are auctioned. The mineral rights associated with these areas are further licensed. Revenue is received by the Alberta government for these licenses. If exploration results in production, the Alberta government receives royalties as set out in legislation and accompanying regulations. Revenue from the sale of oil and gas, less expenses and royalties, belongs to the licensee oil and gas companies. This is the manner chosen by the Alberta government to exploit its oil and gas reserves. The oil and gas companies are compensated for taking the risk of exploration and for for the costs of extraction, transportation and, if applicable, refinement of the oil and gas. It is a profitable business for the oil and gas companies and they are taxed on their profits generally in accordance with the income tax rates applicable to all companies operating in Alberta. Alberta and federal income taxes are payable. In addition, oil and gas companies are required to pay a myriad of other Alberta and federal taxes including, for example, the federal Petroleum and Gas Revenue Tax.

Regarding the issue of subsidies, let's start with royalties. Are royalties generally a 'subsidy'? Royalties are paid by oil and gas companies, so how could they be considered a subsidy? Oh, if the royalty rates are not 'market value' , due to discounts, or otherwise, is the difference between the lower rate and the market rate a subsidy? Who sets the market rate? Is there a royalty market in Canada that sets the market rate? Seems like a nebulous argument. As the owner of the oil and gas there would be no reason why a Provincial government would not seek the highest royalties available. If the royalty rate is too high, there will be no oil and gas companies willing to undertake the risks and costs associated with oil and gas exploration.

Remember, provinces like Alberta are paying oil and gas companies to explore for and extract the resources. What doesn't go to the province goes to the oil and gas companies as compensation for their involvement.

Let's look at it in another context. If the government requests tenders for the construction of a certain piece of highway; accepts a tender; gets the highway built; and pays the contractor; has the government given the contractor a subsidy?

In the 2022-2023 Alberta government fiscal year, Alberta collected over $25 Billion in royalties. In 2023-2024 the royalties were over $18 Billion. This is all to the benefit, presumably, of taxpayers. Where is the subsidy?

Nationally, in 2022, oil and gas companies were estimated to have poured $48 Billion into government coffers. This in addition to an estimated $9 Billion in federal income taxes representing 13% of the federal government's total corporate income tax forecast. [see here]

See also: here

In the same time period, the Alberta government in each fiscal year, invested $438 million for infrastructure and research related to carbon carbon capture. Let's assume this investment in infrastructure was a subsidy. $438 million, compared to $25 Billion seems like a good return.

In the 2022-2023 fiscal year, the Alberta government collected about $2 Billion in income tax from oil and gas companies. $438 Million still seems like a good investment.

Now the argument will be that $438 Million is still too much given the profits of the oil and gas industry. Oddly, we wouldn't look at the issue that way in assessing highway infrastructure versus the profits of trucking companies.

There is an argument that royalties could be considered a tax on income - see "The Tricky Art of Measuring Fossil Fuel Subsidies: A Critique of Existing Studies".

When including royalties as part of the marginal effective tax, in 2011, oil companies in Alberta were taxed 29.9% for conventional oil and gas; and 23.4% for oil sands compared with the rate taxed to the non-resource sector of 16%. [see "The Tricky Art ..." referred to above.

Along this same line, let's compare 'subsidies' across industries. Between 2010 and 2016, federal, provincial and local subsidies to 'oil and gas extraction and support activities' averaged $.271 Billion ($271 Million) annually. This compares to $1.8 Billion for the 'motion picture and video industry'. Hmmm, I wonder which industry paid more royalties and taxes?

This all brings us back to the real issue. Given concerns about climate change, should Canada be extracting any oil and gas resources? If your answer to this question is categorically 'no', you will necessarily conclude that any subsidies, even royalties, are bad policy. On the other hand, if you are less concerned about climate change, and more concerned about good economic management of provincial and national resources and their respective economies, you will likely agree that a small amount of subsidies in return for huge economic payoffs are good business for the country.

A note should be made about the federal government's purchase of the Trans Mountain Pipeline. In 2018, the Government of Canada entered into an agreement with Kinder Morgan Canada Inc. whereby the Government of Canada would purchase the shares and units of all the entities that own and operate the existing pipeline for $4.5 Billion. At that point, the pipeline was only partially completed. The final price tag for the completed pipeline in 2024 is estimated to be $34.5 Billion. [see here]

Was this a subsidy? Yes. It remains to be seen whether it will remain a subsidy as the federal government intends to sell the pipeline and may recover its investment. The interesting question is why this subsidy was required. Regulatory approval for the construction of the pipeline became so mired in red-tape and uncertainty, that Kinder Morgan was prepared to abandon the project. As the federal government by this point had quashed any other possibility of pipelines to move Alberta (and. BC) production to tide-water, it had no choice but to undertake the project to avoid a constitutional crises with Alberta and British Columbia. [see here]