Why subsidize the search for oil and gas that we can never burn if we want to limit the damage from climate change?
That’s the question asked in a report from an environmental think-tank, which says Canada is one of the most generous countries in the G20 towards energy exploration.
“There’s been virtual consensus among the scientific community that we have significantly more proven reserves than we can afford to burn and put into the atmosphere if we’re going to meet the international goal for climate change,” said Stephen Kretzmann, director of Oil Change International, which co-authored the report released Tuesday with the Overseas Development Institute.
“The idea that we are spending, in the G20, $88 billion every year to find more reserves is kind of crazy.”
An industry spokesman said exploration is not subsidized.
“Oil and gas has unique economics to it that necessitate certain treatment so that it has a competitive foothold in the global economy,” said Ben Brunnen, manager of fiscal and economic policy for the Canadian Association of Petroleum Producers. “I think this report is inaccurate.”
Scientists suggest that about two-thirds of the world’s current reserves of fossil fuels must remain in the ground if increasing temperatures are to be held at 2 Celsius, beyond which consequences are expected to be dire. Yet energy exploration continues, often encouraged by public policy.
The Oil Change think-tank used data from the Organization for Economic Co-operation and Development to calculate the sum total of economic assistance to energy exploration in the world’s 20 largest industrial economies. That help comes in the form of direct payments, various kinds of exploration tax breaks, favourable financing deals and the activities of state-owned companies.
In Canada, the report says, the three largest subsidies to energy companies come from the ability of both companies and certain types of shareholders to deduct exploration expenses.
As well, oilsands development has been greatly spurred by rules that allow companies to speed up depreciation, which means they can deduct their capital spending more quickly.
Using subsidy definitions from the World Trade Organization, the think-tank calculated the total value of those breaks — not including additional subsidies offered by provinces — at $928 million a year.
That means every Canadian subsidizes energy exploration by $26 a year. Only Australia, where subsidies reach up to $153, is more generous among G20 countries on a per capita basis.
United Kingdom subsidies are up to about $18 per capita; Russia spends about $17; the United States spends $16.
The report says the annual value of state subsidies for exploration is about twice the $37-billion cash energy companies put up themselves.
“This suggests that their exploration activities are highly dependent on public support,” the report says.
Brunnen questioned the report’s methods and its conclusions.
Some of the measures that it considers energy industry subsidies are in fact available to all businesses, Brunnen said. As well, the oilsands depreciation break — now being phased out — doesn’t increase the amount of money a company can claim, it just allows a firm to claim it sooner.
“These aren’t subsidies so much as a deferral of tax payments.”
The nature of the industry means exploration expense tax breaks are needed, said Brunnen.
“Exploration and development require at least 10 years of activity prior to seeing some positive production. Because of that, there has to be a structure in place, tax-wise, that offsets those high costs, so that companies will take the time to invest in a relatively high-risk, competitive global market.”
Kretzmann pointed out that G20 countries promised five years ago to phase out “inefficient” subsidies to the energy industry.
“This is the most inefficient fossil fuel subsidy you can imagine,” he said. “They’re actually subsidizing stuff that we’ll never be able to burn.”
The subsidies take up resources that could be spent elsewhere, from health care to developing renewable energy, he said.
Brunnen said exploration activities are needed even for proven reserves. Those reserves need to be well studied before they can be exploited, all of which is considered exploration.
“We support all forms of energy development and we’re going to need all forms of energy development in our mix,” he said.