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Renewable energy production and conventional energy subsidies

Petition: No. 58

Issue(s): Climate change, governance, and natural resources

Petitioner(s): One Sky—The Canadian Institute of Sustainable Living

Date Received: 21 October 2002

Status: Completed

Summary: The petitioner is concerned that federal government subsidies within the energy sector discourage research into new renewable energy sources and, therefore, inhibit sustainable development. The petitioner suggested that the federal government should remove government subsidies for fossil fuels and nuclear energy to strengthen Canada's renewable energy sector. The petitioner also requested information about current federal initiatives that develop and promote new renewable energy sources. This petition follows the 2002 World Summit on Sustainable Development, held in Johannesburg, South Africa.

Federal Departments Responsible for Reply: Environment Canada, Finance Canada - Department of, Industry Canada, Natural Resources Canada

Petition

Office of the Auditor General of Canada
Commissioner of the Environment and Sustainable Development
Attention: Petitions
240 Sparks St.
Ottawa, Ontario
K1A 0G6

October 8, 2002


Dear Johanne Gélinas,

I am submitting a petition under the Auditor General Act on behalf of the organization One Sky—The Canadian Institute of Sustainable Living. As a follow-up to the World Summit on Sustainable Development, I would like to address the issue of perverse subsidies and renewable energy in Canada.

Enclosed is the petition document. I suggest that you submit the petition to the following ministries: Natural Resources Canada, Environment Canada, Industry Canada and Finance Canada.

Thank you for your assistance related to this matter. If you require any further information, please do not hesitate to contact me at 250-877-6030 or nikki@onesky.ca.


Sincerely,

[Original signed by Nikki Skuce]

Nikki Skuce
Communications Coordinator
One Sky - The Canadian Institute of Sustainable Living
[Box 3352
Smithers BC
Canada V0J 2N0]


One Sky Petition to the Office of the Auditor General of Canada

1. Background Information:

At the World Summit on Sustainable Development held in Johannesburg from August 26th - September 4th, energy was one of the most contentious issues. Specifically, differences were great amongst nations with regards to setting a target for new renewable energy (defined as modern biomass, solar, wind, small-scale hydro, geothermal and marine), and for reducing perverse and harmful energy subsidies. These contentious issues are not new. In fact, the G8 Renewables Task Force produced a report recommending the phasing-out of G8 governmental subsidies for fossil fuels and nuclear energy, while increasing R&D for renewable energy in order to create a level playing field for the market to function properly (http://www.renewabletaskforce.org/). Canada and the U.S. rejected these recommendations at the Genoa G8 meeting in 2001. At the WSSD, Canada was again obstructionist in agreeing to targets for either new renewables or the elimination of perverse subsidies.

Conventional energy use and production contribute to some of the following problems: global warming resulting from the build-up of greenhouse gases such as carbon dioxide (CO2) and methane; damage to forests, biodiversity and property caused by acid rain or dust soot and ash as a result of incomplete combustion; biodiversity loss from resource extraction; declining water quality, resulting from mine drainage and run-off, oil spills and acid deposition, fallout and sludges; health problems, in particular respiratory diseases, from inhaling air pollutants such as sulphur dioxide (S02), nitrogen oxides (NOx) and particulate matter; safety risks primarily associated with nuclear energy and waste; land use conflicts from coal mining and hydro energy; dust and soot problems from coal transport. For these reasons, renewable energy offers a healthier, more environmentally friendly choice to conventional energy and can be a mechanism to satisfy reductions in GHGs as set out in the Kyoto Protocol.

Perverse subsidies can result in the following: a diversion of government funds from better options for fiscal support, such as health and education; a reduction in market incentives to invest in renewables and become more efficient; a few benefiting at the expense of the many (mostly poor); payments to the polluter (instead of polluter pays); and greater environmental degradation (http://www.iisd.org/pdf/economics_perverse_subs_chap09_02.pdf). In other words, perverse subsidies inhibit sustainable development.

In Canada, between 1970 and 1999, direct federal spending on fossil fuel based energy was $40.4 billion, and federal support for Canada's nuclear industry exceeded $16.6 billion over the past five decades (http://www.julianreed.parl.gc.ca, p4). Canada's national report for the WSSD (Sustainable Development: A Canadian Perspective) says that while Canada has stopped subsidizing energy mega-projects, "it still provides ... financial support to the nuclear industry ($156 million to the nuclear industry in 2000)" (http://www.wssd.gc.ca/canada_at_wssd/canadian_perspective_e.cfm, p. 78-79). As noted, "wastes from nuclear energy production raise long-term disposal issues yet to be resolved." In addition, "… the percentage of federal government energy research and development spending dedicated to renewable energy in Canada is lower than most other industrialized countries, except Japan. In 2000-2001 it accounted for less than 5% of such funding, standing at $12.9 million of a total expenditure of $230.2 million." (From Financial Incentives and Subsidies for Renewable Energy in Canada and the United States, Lynne Myers, 8 March 2002). A study conducted by the research branch of the Library of Parliament in 1995, "concluded that the oil and gas industry in Canada received tax expenditures of almost $6 billion, primarily through tax deductions" (From de Moor, APG. Subsidies and Sustainable Development: key issues and reform strategies, viewed on October 6, 2002 at: (http://www.ecouncil.ac.cr/rio/focus/report/english/subsidies/chap3.htm).

Mostly due to the United States, a few Arab nations (most notably Saudi Arabia and Iran) and Canada, the language in the WSSD Plan of Implementation did not result in setting targets for renewable energy and the phasing out of harmful subsidies. While Canada would be challenged in meeting targets, it is a viable, cleaner and more sustainable alternative to what currently exists.

2. Petition request

In the end, the agreement in the World Summit on Sustainable Development (WSSD) Plan of Implementation with regards to perverse and harmful subsidies reads as follows (and is available at: (http://www.johannesburgsummit.org/html/documents/summit_docs/2309_planfinal.doc):

19. (p) Policies to reduce market distortions would promote energy systems compatible with sustainable development through the use of improved market signals and by removing market distortions, including restructuring taxation and phasing out harmful subsidies, where they exist, to reflect their environmental impacts, with such policies taking fully into account the specific needs and conditions of developing countries with the aim of minimizing the possible adverse impacts on their development;

(q) Take action, where appropriate, to phase out subsidies in this area that inhibit sustainable development, taking fully into account the specific conditions and different levels of development of individual countries and considering their adverse effect, particularly on developing countries;

One Sky would like information on what policies and strategies are being used and/or are planned to reduce perverse and harmful subsidies with regards to energy in Canada. How will the government act on the above promises made in Johannesburg at the WSSD?

In addition, we would like to know what role new renewable energy will play in the implementation of the Kyoto Protocol. We strongly recommend that Canada sets a national target for new renewable energy (such as 10% of national energy supply from new renewables by 2012). While we recognize that the federal government has been focusing on energy efficiency and commend them for their actions, we also recognize the need to operate on both fronts—energy efficiency and conservation coupled with a substitution of cleaner, renewable energy sources away from fossil fuels and nuclear.

We would also like to know if the Liberal government will implement the recommendations from MP Julian Reed's report "Unlimited Potential: Capitalizing on Canada's Untapped Renewable Energy Resources" (http://www.julianreed.parl.gc.ca/RTF/other/Final_Report_Formatted.pdf); and whether it will accept the recommendations from the G8 Renewables Task Force report of July 2001 (http://www.renewabletaskforce.org/pdf/G8_report.pdf), specifically with regards to the phasing-out of governmental subsidies for fossil fuels and nuclear energy. One of the objectives of the federal energy policy is that Canada's energy production and consumption are environmentally responsible. The recommendations in the above two documents are good initial starting points for reducing perverse subsidies and adopting a more level-playing field to strengthen the new renewables energy sector in Canada.

I look forward to your responses.


Sincerely,

[Original signed by Nikki Skuce]

Nikki Skuce
One Sky - The Canadian Institute of Sustainable Living
[Box 3352
Smithers, BC V0J 2N0]
Tel: 250-877-6030
E-mail: info@onesky.ca


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Joint Response: Environment Canada, Finance Canada - Department of, Industry Canada, Natural Resources Canada

March 3, 2003

Ms. Nikki Skuce
c/o One Sky - The Canadian Institute
of Sustainable Living
Box 3352
Smithers, British Columbia
V0J 2N0

Dear Ms. Skuce:

Thank you for your petition dated October 8, 2002, addressed to Ms Gélinas, Commissioner of Environmental and Sustainable Development. In your petition, which has been presented under a process outlined in Section 22 of the Auditor General Act, you suggested that Natural Resources Canada, Environment Canada, Industry Canada and Finance Canada review and respond to your petition which argues for the elimination of "perverse" energy subsidies and a greater role for renewable energy in Canada following the World Summit on Sustainable Development in Johannesburg

I am pleased to provide you with a response prepared in collaboration with my colleagues, the Ministers of Industry, Environment and Finance. The joint response is contained in the attached document.

We appreciate being made aware of the views submitted by One Sky—The Canadian Institute of Sustainable Living on these matters and recognize that they make an important contribution to the ongoing public dialogue on renewable energy's role in Canada and the appropriate fiscal policy framework for sustainable development.


Yours truly,

[Original signed by Herb Dhaliwal, Minister of Natural Resources Canada]

Herb Dhaliwal


Government Response to Petition # 58

The following responds to Environmental Petition #58 which your organization, One Sky—The Canadian Institute for Sustainable Living, submitted to the Commissioner of the Environment and Sustainable Development pursuant to section 22 of the Auditor General Act.

Perverse subsidies to the non-renewable energy sector

At issue is whether federal government fiscal policies favour the non-renewable (i.e. fossil fuel and nuclear) energy sector to the detriment of the evolution and growth of the renewable energy sector. The petition calls for the federal government to eliminate "perverse subsidies" given to non-renewable energy while increasing support for renewable energy in order to level the playing field between the two sectors. The petition requests information on what federal policies and strategies are being used or contemplated to reduce subsidies to the non-renewable sector.

The energy sector is an important part of the Canadian economy in terms of its contribution to growth and employment, particularly in regional economies. A key element in the federal government's approach to this and other sectors of the economy is to provide a policy framework that will facilitate an efficient allocation of economic resources across the different industries. This policy approach is aimed at promoting economic growth and employment by ensuring generally consistent treatment across different industries.

The fact is that most direct program subsidies to the fossil fuel supply industries (upstream oil & gas and coal) have been reduced if not eliminated in recent years. Since the mid-1990's, direct financial support has fallen sharply, reflecting the decision to no longer provide funding for petroleum mega-projects and, subsequently, to privatise the coal mining operations of the Cape Breton Development Corporation. Subsidies to nuclear energy have also declined substantially and now largely support the safe operation of existing CANDU reactors and research into reactor-based medical isotopes. The government has redirected much of its spending towards finding cost-effective ways to expand the use of renewable energy and energy efficiency technologies in order to curb Canada's greenhouse gas (GHG) emissions.

On the tax side, the direction of policy change since the early to mid 1990s has been toward improving the relative treatment of the renewable energy sector, driven by concerns that these types of investments were not treated as favourably in the tax system as non-renewable energy investments:

  • The 1994 Budget introduced the capital cost allowance (CCA) Class 43.1, which provides accelerated tax depreciation for certain energy efficiency and renewable energy equipment. Class 43.1 allows a tax depreciation rate of 30 percent per annum on a declining balance basis. The 1996 Budget relaxed the Specified Energy Property rules for Class 43.1 projects and the 1997 Budget lowered the eligibility threshold for photovoltaic systems. Eligibility rules for blast furnace gas and small hydroelectric projects were relaxed in the 2001 Budget.

  • The 1996 Budget also allowed flow through share financing to be used for certain costs incurred by projects otherwise eligible for Class 43.1. Qualifying expenditures under the Canadian Renewable and Conservation Expense (CRCE) can be fully written off and the associated tax deductions renounced to investors under flow through share agreements. CRCE applies to the intangible expenditures incurred at the pre-production stage of projects eligible for Class 43.1. Since the 1997 Budget, expenditures on test wind turbines (the first turbine installed at the site of a proposed wind farm for the purpose of testing the level of production) have also been eligible for CRCE.

  • In July 2002, the government announced improvements to the definition of test wind turbines as well as extended the one-year 'look back' rule to CRCE costs. Prior to this change the 'look back' rule only applied to certain exploration costs for non-renewable resources.

  • Over this same period the eligibility rules for flow through shares issued by the oil and gas sector were tightened. Budget 2003 proposes changes to resource taxation to be phased in over a period of five years. Fully implemented, it will provide that firms in the resource sector will be subject to the same statutory rate of corporate income tax as firms in other sectors, and that they will be able to deduct actual costs of production, including provincial and other Crown royalties and mining taxes. This will result in more consistent tax treatment, both across resource projects and between the resource sector and other sectors.

Analyses indicate that the tax treatment of non-renewable and renewable energy investments is not significantly biassed in favour of one sector. The Level Playing Field study published by Natural Resources Canada and Finance Canada in 1996 calculated the extent of support that the tax system provided to non-renewable energy vis-à-vis renewable energy and energy efficiency investments as a proportion of capital costs. It found that the level of tax support for most energy investments was not large and fell within a relatively narrow range of 5 percent to 20 percent of capital costs.

Moreover, there was no clear ranking in favour of non-renewable or renewable energy investments within this range of outcomes. Conventional oil and gas investments were found to receive levels of support at the bottom end of this range and below those for renewable energy projects. Large oil and gas projects, including oil sands projects, were at the upper end of this range. In the case of ethanol, the exemption from the motor fuel excise tax was found to contribute significantly to a level of support well in excess of 100 percent of capital costs. A copy of the study is available on the internet at http://www.nrcan.gc.ca/es/ep/efd/lpf-toc.html.

These conclusions were generally confirmed in Chapter 3 of the 2000 Report of the Commissioner of the Environment and Sustainable Development, which contains a review of federal government support for energy investments (http://www.oag-bvg.gc.ca/domino/reports.nsf/html/c003ce.html). The stated objective of this review was to provide Parliament with comprehensive information on the support provided by government for energy investments, particularly through the tax system, and to determine whether this support favours the non-renewable energy sector. It was concluded that with few exceptions, federal government support for energy investments does not particularly favour the non-renewable sector over the renewable sector. From a tax perspective, the exceptions were investments in oil sands and coal.

A study subsequently released as a working paper by the Department of Finance in 2001 (http://www.fin.gc.ca/wp/2001-17e.html) estimated that the income tax expenditures associated with oil sands projects over the next 34 years will be in the order of $820 million in present value terms. This represents less than 5 percent of the capital that will be invested in these projects.

The role of renewable energy in implementing the Kyoto Protocol

The petition also asks what role emerging renewable energy will play in the implementation of the Kyoto Protocol. The petition urges the federal government to set a national target for renewable energy, such as emerging renewables accounting for 10 percent of domestic energy supply by 2012.

It is important to note that Canada is already a world leader in the production and use of renewable energy. About 16.5 percent of Canada's primary energy supply is from renewable sources, mostly hydroelectricity and biomass waste, compared to an average of 6 percent among countries of the Organization for Economic Development (OECD).

The federal government has been concerned with climate change for a number of years and has implemented many policies and programs to address this issue. In 2000, the federal government released its Action Plan 2000 on Climate Change (http://www.climatechange.gc.ca/english/whats_new/pdf/gofcdaplan_eng2.pdf). This was complemented by measures announced in Budget 2000 and Budget 2001. These measures are intended to bring Canada closer to its Kyoto commitment and represent a total investment of $1.5 billion.

Renewable energy initiatives are expected to figure prominently in meeting Canada's GHG emissions reduction target. Several climate change initiatives pertain directly to developing markets for emerging renewable energy sources. To date, the federal government has committed $350 million to emerging renewable energy initiatives:

  • extension until March 31, 2004, of the Renewable Energy Deployment Initiative (REDI), a program to stimulate demand for renewable energy systems for space and water heating and cooling ($12 million over three years);
  • pilot renewable electricity purchasing projects for federal government facilities in Saskatchewan and Prince Edward Island ($15 million over ten years);
  • 20 percent renewable electricity purchase commitment for federal facilities ($30 million over five years);
  • financial incentive to electricity distributors for marketing costs of emerging renewable energy to residential and small business customers ($25 million over five years);
  • installing on-site generation at government facilities, such as solar photovoltaic systems ($1.2 million over three years);
  • interconnection guidelines for small power systems ($350,000 over three years);
  • enhanced promotion of renewable energy solutions to the industrial sector under the Renewable Energy Deployment Initiative (REDI) ($2 million over five years);
  • Wind Power Production Incentive, a financial incentive payable to producers of wind electricity ($260 million over fifteen years); and,
  • improving business tax incentives for renewable energy and energy efficiency ($5 million per year).

In addition to these measures, renewable energy stakeholders are eligible for other funding under broad climate change programs such as the Green Municipal Funds ($250 million) and Sustainable Development Technology Canada ($100 million).

The Government of Canada welcomes the recommendations from Mr. Julian Reed's (M.P for Halton) report entitled Unlimited Potential: Capitalizing on Canada's Untapped Renewable Energy Resources. The work of Mr. Reed's Working Group is extremely valuable and offers an excellent basis for moving forward on enhancing renewable energy's contribution to Canada's overall energy mix.

The Climate Change Plan

On November 21, 2002, the Government of Canada released its Climate Change Plan for Canada B Achieving our Commitments Together. This Plan strikes the balance needed to enable our economy to flourish even as we reduce our greenhouse gas emissions. Moreover, it advances these goals without placing an unreasonable burden on any region of the country and assists Canadian industry to make the successful transition to a less carbon-intensive global economy. A copy of the Plan is available at http://www.climatechange.gc.ca/.

The Plan aims to create the necessary conditions to fully realize the untapped renewable energy potential and promote an innovative energy sector. The Plan sets the target of at least 10 percent of new electricity generating capacity in Canada to come from emerging renewable sources by 2010. This could be achieved in a number of ways, including expanded production incentives, renewable energy portfolio standards in provinces, increased efforts to develop market demand, as well as the stimulus provided by the proposed system to achieve emission reductions from large emitters.

Consumers can play a role by asking their utilities to supply them with emerging renewable energy. Utilities in five provinces currently offer emerging renewable power options and three more are considering doing so. The higher price charged helps support the development of additional emerging renewable power.

Other measures of interest to renewable energy stakeholders include a commitment to expand current incentive programs for greenhouse gas emission reductions in buildings and consideration of national targets for ethanol and bio-diesel.

Concluding remarks

There has been a steady improvement in the relative level of federal government support for the renewable energy sector since the early 1990s. Recent analyses indicate that there is no significant bias in the level of government support for the non-renewable energy sector relative to the renewable energy sector. The 2000 Report of the Commissioner of the Environment and Sustainable Development identified market factors, rather than government induced distortions, as the key constraint to higher levels of investment in renewable energy projects, as indicated in the following quote.

"Investments with higher rates of return, established markets and good track records are the ones that attract investors. Most investors we surveyed find that many renewable energy investments do not currently have these features. As well, the payback period is often too long for investments in renewable energy and energy efficiency to make them the preferred choice."

Notwithstanding these challenges, the Government of Canada remains committed to further expanding the use of renewable energy to achieve its climate change and sustainable development objectives.