The Minister of Environment and Climate Change on Monday announced the release of the Inefficient Fossil Fuel Subsidies Government of Canada Self‑Review Assessment Framework (the Assessment Framework) and the Inefficient Fossil Fuel Subsidies Government of Canada Guidelines (the Guidelines). The Assessment Framework and Guidelines were jointly developed by Environment and Climate Change Canada (ECCC) and the Department of Finance Canada and are intended to support Canada’s 2009 commitment alongside other G20 countries to phase out and rationalize inefficient fossil fuel subsidies over the medium-term while providing targeted support for the poorest. The Assessment Framework also builds on Canada’s commitment under the Statement on International Public Support for the Clean Energy Transition (the Glasgow Statement) in 2021 at COP 26 in Glasgow, to end new direct public support for international unabated fossil fuel, except in limited and clearly defined circumstances that are consistent with the 1.5°C warming limit and the goals of the Paris Agreement. This bulletin briefly summarizes key information and criteria provided in the Assessment Framework and Guidelines.
Assessment Framework. ECCC noted that the Assessment Framework is the “first transparently published methodology worldwide” and that it will be used to determine which tax and non-tax measures constitute an “inefficient fossil fuel subsidy”. The Assessment Framework defines “measures” as including: (i) expenditure programs (i.e., grants, contributions, transfers); (ii) intramural research and development; (iii) tariff and duty reliefs; and (iv) tax expenditures that support 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), and utilizes the World Trade Organization’s definition of “subsidy” as set out in Article 1.1 of the Agreement on Subsidies and Countervailing Measures.
The international carbon markets provisions of Article 6 of the Paris Agreement will have an important role in determining whether fossil fuel subsidies are “inefficient.” Pursuant to the Assessment Framework, subsidies will be considered inefficient unless they meet one or more of the following six criteria:
- Enable significant net greenhouse gas (GHG) emissions reductions in Canada or internationally in alignment with Article 6 of the Paris Agreement (including any GHG reduction occurring outside of Canada caused by an activity inside Canada for which the reduction can be verified through an Internationally Transferred Mitigation Outcome (ITMO) established pursuant to Article 6 of the Paris Agreement).
- Support clean energy, clean technology, or renewable energy.
- Provide essential energy service to a remote community.
- Provide short-term support for emergency response.
- Support Indigenous economic participation in fossil fuel activities.
- Support abated production processes, such as carbon capture, utilization, and storage (CCUS), or projects that have a credible plan to achieve net-zero emissions by 2030.
Guidelines. The Guidelines, effective as of July 24, 2023, apply to (i) the creation of “measures” and (ii) spending decisions within “measures”, and will be updated and periodically reviewed to better reflect new policy developments and enable increased stringency. However, the Guidelines provide that direct public support for operations in the fossil fuel energy sector outside of Canada’s jurisdiction will continue to be assessed separately under the Glasgow Statement Guidelines. The Guidelines support the following two objectives related to the federal government’s G20 commitment:
- avoid creating new “measures” that would be considered “inefficient fossil fuel subsidies” under the Assessment Framework; and
- help ensure all support for the fossil fuel sector that meet the definition of a fossil fuel subsidy, under the Assessment Framework, are aligned with one of the six inefficiency criteria (the same criteria as provided in the Assessment Framework).
Part A of the Guidelines requires ministers who are developing initiatives to undertake a two-step process prior to submitting them to Cabinet and/or funding authorities (e.g., for policy, funding, expenditure or legislative authority). First, the minister must assess whether such an initiative, if created, would (i) support fossil fuel consumption or solely support fossil fuel activities and (ii) whether it would constitute a subsidy. If the initiative is identified as a fossil fuel subsidy, the minister must then determine whether it is an inefficient fossil fuel subsidy using the same six criteria as the Assessment Framework.
Part B of the Guidelines provides that federal departments and agencies responsible for administering non-tax “measures” must not provide “fossil fuel support” from those “measures” unless that “fossil fuel support” meets one or more of the six criteria outlined above. In addition, federal Crown corporations with responsibilities for administering non-tax “measures” are also be expected to align their activities with the criteria.
Next Steps. ECCC indicated that Canada is committed to phasing out public financing of the fossil fuel sector beyond the scope of the Assessment Framework and Guidelines and that the federal government intends to identify current public financing by 2024 and announce a phase-out implementation plan by Q3 2024.