Canada: Navigating To A Sustainable Energy Future: "Inefficient" Fossil Fuel Subsidies – McMillan LLP

This bulletin is part of our “Navigating to a Sustainable
Energy Future” series which looks at legal and business issues
relating to the rapidly-changing energy sector in Canada, including
with respect to emissions reductions, transitioning to renewable
energy, attracting investment, energy security and geopolitics, and
job creation and economic growth.

On July 24, 2023, the Government of Canada released the
Inefficient Fossil Fuel Subsidies Government of Canada
1 and the associated Inefficient
Fossil Fuel Subsidies Government of Canada Self-Review Assessment
2 (collectively, the Guidelines), which
form part of the Canadian Government’s climate plan and targets
to achieve the commitments set forth in the Paris Agreement,
including building Canada’s net-zero economy by 2050.

The Guidelines represent the Government of Canada’s strategy
to satisfy the commitment to “phase out and rationalize over
the medium-term inefficient fossil fuel subsidies while providing
targeted support for the poorest” made by the G20 countries in
2009 as part of the G20’s commitment to launch a framework to
“generate strong, sustainable and balanced global growth”
to the transition from crisis to recovery in 2009.3
4 Canada is the first of the G20 countries to adopt a
strategy to satisfy the commitment to phase out government support
in the fossil fuel sector. 5 The Guidelines came into
effect on July 24, 2023.

As stated by the Canadian Government: “Inefficient fossil
fuel subsidies encourage wasteful consumption, reduce our energy
security, impede investment in clean energy sources and undermine
efforts to deal with the threat of climate change.” In sum,
any subsidy supporting the fossil fuel industry will be
characterized as inefficient, subject to limited exceptions,
including subsidies that support clean technology, clean growth and
accelerate efforts to decarbonize Canadian industries.

Scope of the Guidelines

The Guidelines apply to federal tax and non-tax measures in the
fossil fuel sector, defined as federal programs and expenditure
consisting of: (i) expenditure programs (such as grants,
contributions and transfers), (ii) intramural R&D, (iii) tariff
and duty reliefs (excluding those tariffs and duty where the
Government has a standard way that it treats all businesses and
industries), and (iv) tax expenditure that supports fossil fuel
consumption or that can be claimed by the fossil fuel sector and
that represent alternatives to expenditure programs (i.e., tax
credits, accelerated capital cost allowances, flow-through shares).
It is important to recognize that the Guidelines do not apply to
provincial or territorial tax or non-tax measures.

The “fossil fuel sector” is broadly defined in the
Guidelines to include those firms whose business primarily involves
activities related to fossil fuel production (i.e., exploration,
extraction, and processing including refining) and fossil fuel use
(i.e., storage, transportation, sale), in addition to those firms
that produce electricity and/or heat from fossil fuel. The
Guidelines define “fossil fuels” as non-renewable
resources formed from biomass in the geological past (e.g., coal,
natural gas, crude oil, bitumen), and any secondary product
manufactured from those natural resources (e.g., pentanes, butane,
propane, gasoline, diesel fuel).

Process to Identify and Avoid Inefficient Fossil Fuel

  • The Guidelines establish the process by which the Federal
    Government seeks to:

  • Avoid creating new measures that would be considered to be
    “inefficient fuel subsidies”, by establishing a process
    by which federal ministers are to assess whether a new initiative
    to be considered by Cabinet would constitute an “inefficient
    fossil fuel subsidy”, subject to the identified exceptions
    (and should undertake efforts to refine such initiative to avoid
    the creation of an “inefficient fossil fuel

Ensure existing fossil fuel support from federal departments and
agencies no longer supports measures in the fossil fuel sector,
unless the measures align with the identified exceptions. Fossil
fuel support is defined to include transfers (e.g., grants,
contributions) to another party or expenditures on intramural
R&D that occurs within a measure and confers a benefit to the
fossil fuel sector, or supports fossil fuel consumption.

What is an “Inefficient” Fossil Fuel Subsidy?

All federal tax and non-tax measures are to be considered under
the Guidelines, which provides that a measure will be an
“inefficient fossil fuel subsidy” if such measure is a
subsidy6 that supports the fossil fuel sector by:

  • supporting fossil fuel consumption, which refers to industrial,
    commercial, public sector, and individual consumers of fossil fuel,
    being those subsidies that reduce the price paid by final consumers
    in the purchase of a fossil fuel; or

  • solely supporting a fossil fuel activity, being those
    activities directly related to fossil fuel production (i.e.,
    exploration, extraction and processing), or fossil fuel use (i.e.,
    storage, transportation, sale and production of electricity and/or
    heat); or

  • providing a disproportionate benefit to the fossil fuel sector,
    which is broadly defined to include businesses primarily involved
    in activities related to fossil fuels production (i.e.,
    exploration, extraction, and processing including refining) and
    fossil fuels use (i.e., storage, transportation, sale), and those
    firms that produce electricity and/or heat from fossil fuels.

Notwithstanding this classification, the Canadian Government
recognizes the benefits of fossil fuel subsidies that support (i)
clean technology, clean growth and accelerated efforts to
decarbonize processes and projects, (ii) Indigenous economic
participation in fossil fuel activities, and also (iii) energy
security. In particular, fossil fuel subsidiary are not
characterized as “inefficient” fossil fuel subsidies
under the Guidelines if they satisfy any one or more of the
following six criteria:

  1. enable significant net greenhouse gas (GHG) emission reductions
    in Canada or internationally in alignment with Article 6 of the
    Paris Agreement;

  2. support clean energy7, clean technology8
    or renewable energy;9

  3. provide an essential energy service10 to a remote

  4. provide short-term support for emergency

  5. support Indigenous economic participation13 in
    fossil fuel activities; and

  6. support abated14 production processes, or projects
    that have a credible plan to achieve net-zero emissions by 2030,
    such as carbon capture and storage (CCS)/carbon capture,
    utilization and storage (CCUS) or equivalent technologies (but does
    not include carbon capture for the purposes of enhanced oil

While the Government of Canada has defined what it considers an
“inefficient fossil fuel subsidy”, being a fossil fuel
subsidy that does not satisfy any of the six above-noted criteria,
implementing the Guidelines presents many challenges, including
challenges to the specific identification of such subsidies.

It is important to recognize that there is no consistent
definition or approach as to what constitutes a subsidy, what makes
a subsidy inefficient, and what is a considered wasteful subsidy;
not even among the G20, the World Trade Organization (WTO), the
Organisation for Economic Co-operation and Development (OECD), the
International Energy Agency (IEA) or the International Monetary
Fund (IMF). 15 16 For example, Canada’s
neighbor and largest trading partner, the United States, has not
adopted a uniform policy, but rather by Executive Order, President
Biden has mandated the reduction of oil and gas subsidies (which
are not defined), which mandate is being implemented on a piecemeal
basis, and which was arguably undermined by the call by President
Biden in 2022 for increased gas production to meet consumer demand
in response to the energy crisis triggered in part by Russia’s
invasion of Ukraine. 17

General Observations: The Need for a Transparent and Effective
Regulatory Framework

Policies regarding subsidies to the fossil fuel sector,
including those that relate simply to the production of any fossil
fuel, are complex, for many reasons, including: the need for energy
security, especially in light of forecast demand significantly
outstripping supply of energy from renewable sources and also
geopolitical challenges (including Russia’s invasion of
Ukraine); ESG considerations in respect of the supply of energy;
the impact of emissions from and waste related to fossil fuels on
the environment; challenges to quantify and define subsidies; and
the need to spur technological innovation to transition to a green
economy, among others.18

Leadership by Canadian Oil and Gas Industry

Oil and gas companies headquartered or operating in Canada have
independently undertaken significant initiatives for many years to
reduce GHG emissions from production to achieve net-zero emissions
by 2050. This leadership has been recognized by the Canadian
Government, which stated: “The oil and gas sector is one of
the leading investors in clean technology and innovation in Canada,
making an estimated 58% of all energy research and development
investments (averaging about $1B/year) over the decade to 2019. Oil
and gas companies such as Shell Canada, Whitecap Resources, Wolf
Midstream, Enhance Energy, and Northwest Redwater Partnership are
leaders in carbon capture, utilization and storage (CCUS)”,
and recognizing that “Many Canadian oil and gas companies have
already set net-zero-emissions targets and have developed
decarbonization plans. This includes the Pathways Alliance,
comprised of Canadian Natural Resources, Cenovus Conoco Phillips
Canada, Imperial Oil, MEG Energy and Suncor Energy – which
collectively account for 95% of Canada’s oil sands production.
To achieve net-zero by 2050, this Initiative proposes a $75 billion
investment to deploy a combination of clean electrification,
operational efficiencies, emerging technologies such as
low-emission hydrogen and carbon capture, small modular nuclear
reactors), and offsets to eliminate 68 Metric tonnes (Mt) from oil
sands operations.”19

Predictable and Competitive Framework Needed

Such oil and gas and other green initiatives are expected to
require greater investment to reach full potential –
including in the form of subsidies – in order to reach policy
goals, support a low carbon economy and develop new sub-sectors and
job growth. Accordingly, a predictable and competitive regulatory
framework with a clear purpose, developed through an understanding
of the oil and gas industry and with a degree of cooperation with
oil and gas participants and other governments, is necessary to
spur investment in decarbonisation technologies and enable the
Canadian oil and gas industry to achieve Canada’s net zero
emissions commitments. The lack of international consistency and
coordination and overall approach between governments will create
uncertainty, impact the flow of investments to finance projects and
technology (to both the fossil fuel sector but also the renewable
energy sector), impact the competitiveness of projects, and distort
various markets, all of which may be detrimental to both Canadian
fossil fuel producers (many of whom are driving clean energy
technological advances) and consumers if the Guidelines are not
implemented in recognition of such international pressures.

This need for a supportive regulatory framework is becoming even
more important in light of the long lead time needed to implement
decarbonisation projects and also the recent U.S. and other
governments’ adoption of policies to facilitate the transition
to a clean energy economy through funding, programs and incentives,
including for example, the U.S. Inflation Reduction Act
implemented in 2022 (IRA), which provides a “simple”
structure that has lead to clear incentives for industry. As noted
by Petronas CEO Tengku Muhammad Taufik: “The IRA will have the
effect of really attracting capital back to the U.S. for the
reasons and the results that it sort of needs.”

The adoption of the Guidelines is part of Canada’s strategy
to satisfy its 2009 G20 commitment to phase out
“inefficient” fossil fuel subsidies. However, additional
clarity and predictability are required to provide a more tangible
understanding of the applicability of the Guidelines to current
federal tax and non-tax measures – and other relevant
government policies (such as caps on emissions and initiatives
announced in recent federal budgets) – to allow businesses to
make those investments necessary to decarbonize the Canadian fossil
fuel sector and remain competitive. Failing to do so will
jeopardize the potential leadership role of Canada in this new
economy while ensuring energy security.


1. See Inefficient Fossil Fuel Subsidies Government of
Canada – Guidelines –

2. See Inefficient Fossil Fuel Subsidies Government of
Canada – Self-Review Assessment Framework –

3. See: Online.

4. The G20 commitment is part of an international trend
targeting “inefficient fossil fuel subsidies encourage
wasteful consumption, disadvantage renewable energy, and depress
investment in energy efficiency, and that effectively addressing
fossil fuel subsidies will deliver trade, economic, social and
environmental benefits as well as release government funds to
support a green and climate-resilient COVID-19 recovery” (See
the World Trade Organization (WTO) Fossil Fuel Subsidies
Ministerial Statement issued in December 2021 signed by 45 WTO
members, at WTO | 2021 News items – New initiatives seek
to put environment at heart of trade discussions

5. Note that the Guidelines do not apply to (i) direct
public support for operations in the fossil fuel sector (which are
assessed under Canada’s Glasgow Statement Guidelines) or (ii)
public financing support for operations within the fossil fuel
sector, which the Government will assess under a separate process
to be determined. Canada is also committed to phasing out public
financing of the fossil fuel sector. This refers to financing
beyond the scope of today’s fossil fuel subsidies commitment.
The Government’s work will identify current public financing by
2024 and announce by fall 2024 the implementation plan to phase out
public financing of the fossil fuel sector.

6. The term “subsidiary” is defined by
reference to accepted definition in the World Trade
Organization’s (WTO) as set out in Article 1.1 of the Agreement
on Subsidies and Countervailing Measures: “[A] subsidy
shall be deemed to exist if: a.(1) there is a financial
contribution by a government or any public body within the
territory of a Member (referred to in this Agreement as
“government”), i.e. where: a government practice involves
a direct transfer of funds (e.g. grants, loans, and equity
infusion), potential direct transfers of funds or liabilities (e.g.
loan guarantees); ii. government revenue that is otherwise due is
foregone or not collected (e.g. fiscal incentives such as tax
credits; iii. a government provides goods or services other than
general infrastructure, or purchases goods; iv. a government makes
payments to a funding mechanism, or entrusts or directs a private
body to carry out one or more of the type of functions illustrated
in (i) to (iii) above which would normally be vested in the
government and the practice, in no real sense, differs from
practices normally followed by governments; or b. (2) there is any
form of income or price support in the sense of Article XVI of GATT
1994; and c. a benefit is thereby conferred

7. Clean energy is energy produced without the release of

8. Clean technology is any process, product or service
that reduces negative environmental impacts relative to prevailing

9. Renewable energy is energy derived from natural
processes that are replenished at a rate that is equal to or faster
than the rate at which they are consumed.

10. Essential energy services are those energy services
used for electricity, transportation, or space or water

11. A remote community is a community that is a) not
currently connected to the North American electrical grid nor to
the piped natural gas network; and, b) a permanent or long-term
(five years or more) settlement with at least 10

12. An emergency response is a response to a public
health, humanitarian, or economic crisis.

13. Indigenous economic participation refers to measures
that promote increased Indigenous economic participation in
projects and firms, which should ensure that the main beneficiary
of the funding or measure are Indigenous peoples.

14. Abated refers to effective (leading to significant
elimination of emissions), operational carbon capture and storage
(CCS)/carbon capture, utilization and storage (CCUS) or equivalent

15. See for example, Organisation for Economic
Co-operation and Development & International Energy Agency
(2021) “Update on recent progress in reform of inefficient
fossil-fuel subsidies that encourage wasteful consumption
2021” available here; and International Energy Agency. (2021)
“Net zero by 2050: A roadmap for the global energy
sector.” available here.

16. See International Institute for Sustainable
Development “Fossil Fuel Subsidies: Types, measurement,
impacts and reform efforts”, available here.

17. See The Brookings Institution, “Reforming global
fossil fuel subsidies: how the United States can restart
international cooperation” at: Reforming global fossil fuel subsidies: How the
United States can restart international cooperation |

18. This is especially the case with the new Guidelines,
as Canada is the first of the G20 countries to adopt the policy to
phase out inefficient fossil fuel subsidies, meaning Canada will
need to be prepared to respond to any unintended consequences of
such these Guidelines.

19. See the Government of Canada’s “Option to
cap and cut oil and gas sector greenhouse gas emissions to achieve
2030 goals and net-zero by 2050 – discussion document”
dated August 3, 2022, available here.

20. See Reuters, “CERAWEEK-Inflation Reduction Act
will bring capital to the US – Petronas CEO on March 6,
2023”, available here.

The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.

© McMillan LLP 2021

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