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Follow-up petition on subsidies to the oil and gas industry and on federal efforts to address climate change

Petition

A PETITION TO THE AUDITOR GENERAL OF CANADA
pursuant to s. 21.1 of the Auditor General Act

respecting ongoing federal tax breaks to the oil and gas industry that contradict and undermine government statements and spending on the urgent fight against climate change.

November 14, 2007

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

And to:
Minister of Finance
The Hon. James M. Flaherty
Department of Finance Canada
140 O'Connor Street
Ottawa, Ontario K1A 0G5

And to:
The Hon. John Baird
Minister of the Environment
Les Terrasses de la Chaudière
10 Wellington Street, 28th Floor
Gatineau, Quebec K1A 0H3

Petitioners:
Ecojustice Canada
[personal information withheld at the petitioner's request]
Friends of the Earth 

Represented by:
Albert Koehl
Barrister and Solicitor
Ecojustice Canada (formerly Sierra Legal)
30 St. Patrick St., Suite 900
Toronto, ON.
M5T 3A3
416-533-1231
akoehl@ecojustice.ca

TABLE OF CONTENTS

Petition Summary

This petition seeks answers from the federal government about its continuing multi-billion tax subsidies to hugely profitable Canadian oil and gas corporations even while the scientific evidence about climate change is increasingly alarming and while the government excuses its lack of timely climate action on the basis of the apparently high costs.

We also seek explanations about the contradiction between government statements about the gravity of the climate change problem while continuing to virtually match dollar for dollar tax breaks to the oil and gas industry with spending on climate change programs, including spending announced in the government's March 2007 budget. We estimate that for the 2007-2008 and 2008-2009 fiscal years, the federal government will spend approximately $1.6 billion annually on programs to reduce greenhouse gas (GHG) emissions, while spending about $1.4 billion¹ on industry tax breaks².

And although the government has recognized the need to phase out the Accelerated Capital Cost Allowance (ACCA), a generous subsidy³ for tar sands developments—Canada's single fastest growing source of GHGs—the timelines are so slow that almost all of this subsidy will still be in place at the end of the implementation period for the Kyoto Protocol, the targets for which the government says it cannot meet. As well, for many tar sands projects, the ACCA will not be phased out at all.

In contrast to the slow ACCA phase out, the federal government abruptly eliminated the $500 million EnerGuide for Low Income Households program soon after coming into office in 2006. This program, similar to U.S. programs that have existed for 30 years, would not only have allowed vulnerable residents to significantly improve the energy efficiency of their homes and to reduce energy bills but would also have cut GHG emissions by about 3.4 tonnes per home. Total net savings from this program, if fully implemented, were estimated at about $1 billion.⁴

During the G8 summit of leaders in June 2007 Prime Minister Stephen Harper said that climate change is "perhaps the biggest threat to confront the future of humanity today."⁵ Environment Minister John Baird says that "Canada now has one of the most aggressive plans to tackle greenhouse gases and air pollution in the world."⁶ And in its response to the Kyoto Protocol Implementation Act the government called climate change "one of the most important challenges facing the global community in the 21^st century."⁷

This petition, which follows up on our petition number 158 of October 3, 2005⁸, seeks an explanation from Ministers Flaherty and Baird on government reasoning for continuing tax subsidies to the oil and gas industry in circumstances including:

1. the recognition in public statements by the Prime Minister and senior members of Cabinet of the urgency of the problem of global warming;
2. the recent unequivocal findings of the Intergovernmental Panel on Climate Change (IPCC) about the gravity of global warming;
3. the findings of Sir Nicholas Stern, respecting the negative economic consequences of a failure to act promptly to reduce GHG emissions⁹;
4. the serious and measurable impacts already being experienced by Canada's Inuit and other northern peoples¹⁰; and
5. the abrupt cancellation of the EnerGuide Program for Low Income Households with no phase out period or replacement program despite the evidence that significant energy improvements and GHG emission reductions can be achieved by providing the necessary capital for low income households.¹¹

We estimate that for the next two fiscal years tax subsidies to the oil and gas industry will be about $500 million greater than federal spending on all forms of renewable energy.

Huge subsidies to the oil and gas industry undermine the widely recognized principle of polluter pays, the goal of sustainable development, and notions of fiscal responsibility. Indeed these generous tax breaks to oil and gas corporations that made over $31 billion in profits in 2006 suggest, in the context of dramatic increases in GHG emissions from their activities, that federal leaders have adopted a polluter gets paid policy.

WE PETITION THE COMMISSIONER FOR THE ENVIRONMENT AND SUSTAINABLE DEVELOPMENT TO REQUEST:

The Hon. James M. Flaherty, Minister of Finance and the Hon. John Baird, Minister of the Environment to:

1. Explain why the EnerGuide for Low Income Households program was cut so abruptly while the ACCA phase out has generous time lines—and why the EnerGuide program was not replaced by a similar program, given the obvious benefits to vulnerable families and the potential for significant GHG reductions.
2. Explain why an industry that enjoyed over $31 billion in profits in 2006 and an oil price approaching $100 per barrel is more deserving of public funds than low income households given that the latter would be able to significantly reduce GHG emissions with energy efficiency retrofit supports while the former is responsible for huge increases in GHG emissions.
3. Explain why the ACCA for tar sands projects, which costs the federal government an estimated $300 million per year,¹² is being phased out over many years starting in 2011 and not at all for a significant number of other projects¹³ instead of being eliminated immediately given the obvious contribution of such projects to rising Canadian GHG emissions and the Budget 2007 comment that this "preferential treatment is no longer required."¹⁴
4. Explain how a lax ACCA phase out time line is consistent with the plight of Canada's Inuit and northern communities that are facing changes to their very culture and way of life because of abrupt changes brought on by global warming.
5. Explain if giving tax breaks to the oil and gas industry is a priority on a par with dealing with climate change, described by Prime Minister Harper as "perhaps the biggest threat to confront the future of humanity today."¹⁵
6. Explain why the government of Canada continues to spend almost as much on oil and gas tax breaks (about $1.4 billion in each of the 2007-2008 and 2008-2009 fiscal years based on 1999 investment projections¹⁶) as on climate change programs (about $1.6 billion in these same fiscal years¹⁷) if it views climate change as an urgent problem.
7. Explain why the federal government is spending $500 million more on subsidies to the oil and gas industry in each of the next two fiscal years than it is spending on clean renewable energy despite the fact that reducing greenhouse gas emissions is an international priority.
8. Given that the Government of Canada will spend $2.8 billion subsidizing oil and gas polluters over the next two years, explain if Canada has abandoned the internationally accepted polluter pays principle for a made-in-Canada polluter gets paid principle.
9. Explain how the Government of Canada's pledge to "increase transparency and oversight in government operations"¹⁸ is achieved by the Department of Finance's repeated failure to make the total dollar amount of subsidies to the oil and gas industry available to Canadians in a comprehensible format.
10. State whether the Government of Canada agrees with its own internal January 2007 report that a $50 per tonne carbon tax would increase economic growth by 2020.¹⁹
11. State why other tax subsidies to the oil and gas industry such as the Canadian Exploration Expense, the Canadian Development Expense, and the Canadian Oil and Gas Property Expense are not also being phased out.

A. The urgency of climate change vs. the casual pace of the government response

B. Tax Subsidies to the Oil and Gas Industry

C. Comparing Oil and Gas Tax Subsidies to Climate Change and Kyoto Spending

D. Phase out of the ACCA vs. Elimination of the EnerGuide for Low Income Households program

E. Conclusions

APPENDIX 1: CLIMATE CHANGE SPENDING VS. TAX SUBSIDIES

TABLE 1: Federal climate change spending: 2007-08 and 2008-09,
millions (2007$)⁵⁵

* denotes assumption that funding is to be equally allocated over 4-yr program duration.

TABLE 2: Tax subsidies to oil and gas production, millions (2000$)⁷⁸

Appendix 2: March 2007 Budget - ACCA phase out

Source: http://www.budget.gc.ca/2007/bp/bpa5ae.html#capital Accelerated Capital Cost Allowance for Oil Sands

Currently, most machinery, equipment and structures used to produce income from a mine or an oil sands project, including buildings and community infrastructure related to worker accommodations, are eligible for a capital cost allowance (CCA) rate of 25 per cent under Class 41 of Schedule II to the Income Tax Regulations. This rate also applies to assets owned by a mineral resource owner that are used in the initial processing of ore from the mineral resource or in upgrading of bitumen (the oil sands product) from that mineral resource into synthetic crude oil.

In addition to the regular CCA deduction, an accelerated CCA has been provided since 1972 for assets acquired for use in new mines, including oil sands mines, as well as assets acquired for major mine expansions (i.e. those that increase the capacity of a mine by at least 25 per cent). In 1996, this accelerated CCA was extended to in-situ oil sands projects (which use oil wells rather than mining techniques to extract bitumen) by deeming them to be mines. This change ensured that both types of oil sands projects are accorded the same CCA treatment. The 1996 changes also extended the accelerated CCA to expenditures on eligible assets acquired in a taxation year for use in a mine or oil sands project, to the extent that the cost of those assets exceeds 5 per cent of the gross revenue for the year from the mine or project. (emphasis added)

The accelerated CCA takes the form of an additional allowance that supplements the regular CCA claim. Once an asset is available for use, the taxpayer is entitled to deduct CCA at the regular rate. The additional allowance allows the taxpayer to deduct in computing income for a taxation year up to 100 per cent of the remaining cost of the eligible assets, not exceeding the taxpayer's income for the year from the project (calculated after deducting the regular CCA). This accelerated CCA provides a financial benefit by effectively deferring taxation until the cost of capital assets has been recovered out of project earnings.

This incentive helped to offset some of the risk associated with early investments in the oil sands and contributed to the development of this strategic resource. Over time, however, technological developments and changing economic conditions have led to major investments that have moved the sector to a point where the majority of Canada's oil production will soon come from oil sands. As a result, this preferential treatment is no longer required.

As outlined below under "Accelerated Capital Cost Allowance for Clean Energy Generation", the existing provision that encourages industries including the oil sands to invest in equipment that generates energy more efficiently or by using renewable energy sources will be extended to equipment acquired before 2020 and expanded to cover additional applications. Going forward, the Government commits to identify additional areas where accelerated CCA and other measures can be used to help industries like the oil sands invest in promising new clean energy technologies like carbon capture and storage.

Budget 2007 proposes to phase out the accelerated CCA for oil sands projects-both mining and in-situ. The regular 25-per-cent CCA rate will remain in place.

To the extent that the accelerated CCA for oil sands projects induces incremental oil sands development that could contribute to environmental impacts, such as greenhouse gas emissions, air and water contaminants, water usage, and disturbance of natural habitats and wildlife, these changes could help reduce such incremental impacts.

To provide stability, and in recognition of the long time lines involved in some oil sands projects, the following transitional relief will be provided:

* the accelerated CCA will continue to be available in full for:

• assets acquired before March 19, 2007, and
• assets acquired before 2012 that are part of a project phase on which major construction began before March 19, 2007; and

* for other assets, the additional accelerated allowance will be gradually phased down over the period from 2011 to 2015 (when it will be eliminated), according to the schedule set out below.

Full Accelerated CCA

As noted, the accelerated CCA will continue to be available in full for assets acquired by the taxpayer before March 19, 2007. It will also be available for assets acquired by the taxpayer before 2012 that are required to complete a project phase on which major construction by or on behalf of the taxpayer began before March 19, 2007.

A project phase is either the initial phase of a new project or a discrete expansion of an existing project. A phase refers to the installation of a group of assets which, when brought into use, results in a distinct increase in average daily output. A phase will generally be considered to be complete when the first incremental production related to that phase (other than test operations) comes on stream for a sustained period.

Major construction on a phase will be considered to have begun when physical fabrication or installation has begun on, or the taxpayer has acquired, buildings, structures or machinery and equipment in at least one of the major facilities required to complete that phase of the project. Construction must have been started by either the taxpayer or by a party with whom the taxpayer has a contract in writing (entered into before March 19, 2007) to construct the asset for the taxpayer.

Work preliminary to construction such as obtaining permits or regulatory approvals, conducting feasibility studies or environmental assessments, performing design or engineering work, clearing or excavating land, building roads, or entering into construction contracts will not be considered major construction.

Phase-Out Schedule

For assets that do not qualify for the full retention of the accelerated CCA as outlined above, the availability of the additional allowance will be gradually phased out in respect of claims made over the period from 2011 to 2015. In each year, a taxpayer will be permitted to claim a percentage of the amount of the additional allowance otherwise calculated under the existing rules. The percentage allowed will decline each calendar year, as follows (prorated for off-calendar taxation years):

Year

Allowable Percentage of Additional Allowance

This schedule will generally preserve a higher proportion of the accelerated CCA for projects that are relatively advanced on March 19, 2007.

The amount of the additional allowance will be reduced each year, regardless of whether the binding constraint is the level of project income or the amount of the undepreciated capital cost (UCC). However, any portion of the capital cost that is no longer deductible in a year under the additional allowance as a result of this limitation will result in a higher UCC at the end of the year, which is carried forward to the following year for calculation of both the regular CCA claim and the additional allowance for the following year.

The following is a simplified example illustrating operation of the phase-out.

Example: Accelerated CCA Phase-Out

In 2011, a company has an undepreciated capital cost (UCC) of $100 million for Class 41 assets related to an oil sands project which began major construction after March 19, 2007 and has come into production. The income from the project after regular CCA in each of 2011 and 2012 is $40 million. All figures are rounded.

Existing Rules

Under the existing rules, the company would be able to deduct each year the entire additional allowance, which is the lesser of the undepreciated capital cost of the assets and the income from the project in the year.

Phase-Out Rules

Under the phase-out rules, the company is able to deduct a declining percentage of the additional allowance calculated under the existing rules.

Appendix 3: EnerGuide for Low Income Households

Green Communities Canada Press Release

Ottawa urged to restore popular EnerGuide for Houses programs

11 May 2006

[Note: a version of the EnerGuide for Houses Retrofit Incentive has since been reinstated, but not the Low Income Households program.]

Green Communities Canada is calling on the federal government to reconsider its decision to cancel Canada's money-saving EnerGuide for Houses (EGH) programs.

"The government's cancellation of these popular, effective programs is very bad news for residential energy efficiency in this country," said Clifford Maynes, Executive Director of Green Communities Canada. "The government has a responsibility to keep them in place at least until it has something better to replace them with," he said.

Two major programs have been cancelled. EnerGuide for Houses Retrofit Incentive (EGHRI) provides performance-based grants to homeowners who make energy efficiency investments in their homes. EnerGuide for Low Income Households (EGLIH), a new program launched in 2006, pays the full cost of energy efficiency upgrades for qualifying low-income households. (emphasis added)

"These are exactly the sort of energy efficiency programs we would expect the new government in Ottawa to embrace," Maynes said: "practical, positive, cost-effective, and accountable."

Participants in the EGH Retrofit Incentive save an average of 28 per cent on their energy bills. That's $750 a year—or $18,750 in lifetime savings at current energy prices.

"EnerGuide for Houses has the potential to make Canadians billions of dollars richer," Maynes said.

Besides saving money, EGH also leverages home improvement investments ($5,000-$7,000 per grant) that create hundreds of jobs and business opportunities, and generate tax revenues for government. EGH contributes to our national energy security. And because less energy is consumed, EGH reduces air pollution.

"Canadians care about a healthy environment, and improved home energy efficiency is one way for us all to contribute," Maynes said.

Canada's world-renowned state-of-the-art EnerGuide for Houses program was conceived in the early 90s and launched in 1998 after years of development.

[...]

Maynes said many Canadians are particularly upset by the cancellation of the five-year $500 million EnerGuide for Low-Income Households (EGLIH) program. (emphasis added)

"Low-income households already live close to the edge, and steep increases in energy prices will push many of them over. One very powerful response is to improve efficiency of low-income housing, which reduces energy burden by reducing wasteful energy consumption," Maynes said. "Everybody wins, including the environment."

Maynes noted that the Conservatives under Stephen Harper voted unanimously in favour of increased EGH funding, including the low-income program, as recently as November, 2005.

He called on the government to reconsider eliminating the programs, and to preserve Canada's vital but still emerging home energy efficiency industry.

"If the government wants to improve Canada's home efficiency programs to get more energy-saving results, there are companies and individuals with tremendous expertise who would be happy to work with them to do that. But meanwhile we must take great care not to lose what we have achieved. Let's build on our impressive progress to date to do an even better job in future."

Contact: Clifford Maynes 705 745 7479
cmaynes@greencommunitiescanada.org;
See: www.greencommunitiescanada.org

Fact Sheet
ENERGUIDE FOR LOW INCOME HOUSEHOLDS

11 May 2005 [sic]

The government of Canada has cancelled the five-year $500 million national low-income energy efficiency program, known as EnerGuide for Low-Income Households (EGLIH).

Energy retrofits can save a quarter to a third of energy bills—estimated $500 or more annually for low-income households. Canceling EGLIH will deprive 130,000 low-income Canadian households of the benefits of significantly lower energy bills through reduced consumption.

Total net savings from EGLIH would exceed $1 Billion. In effect, the government has cancelled a program that would make Canadians $1 Billion richer, with much of the benefits going to those who can least afford steep increases in energy prices.

Last November, the Conservatives under Stephen Harper voted unanimously for Bill C-66, which approved five-year funding for EGLIH. Now, just as delivery is getting underway, EGLIH has been cancelled.

No alternative is in place to achieve bill savings in Canada's low-income housing, which is generally older and less efficient than average. Cancellation of EGLIH also means an end to other program co-benefits, including: job creation and business opportunities in completing home energy retrofits, environmental gains, including reduction in emissions of atmospheric pollutants. (Average CO2 reduction per house: 3.4 tonnes/year.)

High energy burden for low-income households

• Rising energy costs are a serious threat. Home energy prices increased almost 60 per cent from 1992 to 2005, with much of the increase occurring since 2000 (see chart below). Home energy prices are generally expected to continue rising. All Canadians are impacted by the increases, but low-income households are hit hardest.
• While the average Canadian household spends 4 per cent of income on energy, households in the lowest income quintile (poorest 20 per cent) spend 13 per cent - a disproportionate, damaging, and growing energy burden. The graph below shows the energy burden for all Canadian households, 1997 and 2003, and the burden for each household income quintile.
• High energy costs hurt low- income Canadians by reducing funds available for food, clothing, and other necessities. High energy costs reduce housing affordability, forcing costly moves and contributing to homelessness. (Agencies that work with low-income households report that high energy costs are the second-leading cause of evictions, after rent; and a Toronto study found that two-thirds of low-income evictions result in homelessness.) Inability to pay energy bills is linked to extremes of hot and cold that are uncomfortable, unhealthy, and sometimes fatal. (emphasis added)

[Graph not reproduced]

• High energy costs in low-income housing also hurt others, including social housing providers and private landlords that include utilities in rent; energy utilities, which face increased collection problems and bad debts; and governments and social agencies struggling to address the basic needs of seniors, single-parent families, the working poor, and other low-income households.

Energy efficiency - a positive response

• Rising energy prices are unavoidable. But the good news is that energy bills can be moderated significantly by implementing cost-effective efficiency measures. Canada's long experience with EnerGuide for Houses demonstrates the feasibility of saving almost a third in space heating costs through measures such as air leakage control, insulation, and high efficiency heating systems. Besides the social benefits, a low-income energy efficiency program captures environmental and energy conservation benefits that would otherwise be lost due to the retrofit barriers in this sector.
• Canada's EGLIH follows the lead of the United States, United Kingdom, and other countries that invest in proven cost-effective building retrofits to achieve long-term reductions in low-income household energy consumption and pollution. The U.S. programs have stood the test of time over three decades, supported by Republican and Democratic administrations, and combined with strong state-level and utility partnerships nation-wide.

Impacts of cancellation

• Cancellation of EGLIH will be a serious blow to a great many organizations, agencies, and businesses that have invested their own resources in good faith to begin delivering the program. This includes provinces and utilities that have planned their own low-income energy efficiency programs piggy-backing on EGLIH.1 An on-again-off-again commitment is no way for the federal government to do business with the people of Canada, and will lead to cynicism among the many partners that are needed to ensure success. The federal government must follow through on its commitments.

1 for example, see Saskatchewan's EGLIH-based low-income programs, Newfoundland and Labrador's $6.9 M EGLIH top-up, a $4.8 M investment by New Brunswick in an EGLIH partnership, and developmental work under way in Nova Scotia.

A change of heart

• In November 2005, Conservatives under Stephen Harper joined other parties in Parliament in unanimously supporting Bill C-66, legislation that included $100 million a year over five years for a new program to improve the energy efficiency of Canada's low-income housing. Now, just as the program is getting under way, we hear that it is cancelled. This change of heart is difficult to understand. EGLIH is exactly the sort of practical, positive, cost-effective energy efficiency program that was endorsed in the party's election platform. EGLIH is about measurable, verifiable results.

Broad support

• A national low-income energy efficiency program is supported by a broad spectrum of interests, including the Federation of Canadian Municipalities and a number of individual municipalities (Calgary, Regina, Toronto, St. John's); Canadian Housing and Renewal Association and a number of housing providers and social organizations; Habitat for Humanity Canada; environmental organizations such as the David Suzuki Foundation; Green Communities Canada and its member organizations; the Low Income Energy Network; and the Canadian Energy Efficiency Alliance, an industry organization. (See next pages for a complete list).

About Green Communities Canada Green Communities Canada is a national association of 40 community organizations that deliver practical, innovative environmental programs and services. Green Communities are leading delivery agents for EnerGuide for Houses, Canada's home energy advice and rating system.

See: www.greencommunitiescanada.org; and www.egh.gca.ca.

[...]

Signatures of Petitioners

Ecojustice Canada (formerly Sierra Legal)
per:

[Original signed by Albert Koehl]

Albert Koehl

[Original signed by the petitioner] 

[name withheld] 

Friends of the Earth
per:

[Original signed by Beatrice Olivastri]

Beatrice Olivastri, CEO

List of Supporting Materials

In addition to the various publications, press releases, and other documents referenced in the footnotes, we have relied on the following:

Boyd, David, 2003: Unnatural Law: Rethinking Canadian Environmental Law and Policy, UBC Press.

Canada Dept. of Finance:

• The Budget Speech 2005, the Hon Ralph Goodale, February 2005, Department of Finance.
• The Budget Plan 2005.
• The Budget Plan 2006.
• The Budget Speech 2007, the Hon. James M. Flaherty, March 2007, Department of Finance.
• The Budget Plan 2007.
• Budget in Brief 2005, http://www.fin.cg.ca/budget05/brief/briefe.htm
• Dept of Finance, Technical Committee on Business Taxation, 2001. http://www.fin.gc.ca/taxsubsidy/brief1 e.html
• Ketchum, Ken, Robert Lavigne, Reg Plummer Oil Sands Tax Expenditures Department of Finance Dept of Finance Working Paper 2001-17

Canadian Association of Petroleum Producers (CAPP) to Alan Tonks, Chair, Standing Committee for the Environment and Sustainable Development, dated March 15, 2005.

Environment Canada. 2005. Project Green—Moving Forward on Climate Change: A Plan for Honouring our Kyoto Commitment http://www.climatechange.gc.ca/kyoto_commitments/report_e.pdf

Flaherty, James M., response to Commissioner of the Environment and Sustainable Development environmental petition no. 158. May 31, 2006. http://www.oag-bvg.gc.ca/domino/petitions.nsf/viewe1.0/EF2D9AAC9909E75F8
52571D9005E0D68

Green Budget Coalition, Recommendations for Budget 2005

Green Budget Coalition, 2007 Federal Budget, Analysis of Environmental Measures. http://www.greenbudget.ca/pdf/Budget_Analysis_2007.pdf

Kyoto Protocol to the United Nations Framework Convention on Climate Change Notice of Intent to regulate greenhouse gas emissions from Large Final Emitters, Canada Gazette, July 16, 2005, v. 139, no. 29 http://canadagazette.gc.ca/partI/2005/20050716/pdf/g1-13929.pdf

OECD, 2004 Environmental Performance Reviews: Canada http://www.oecd.org/document/24/0,2340,en_33873108_
33873277_33838040_1_1_1_1,00.html

OECD's Environmental Strategy for the First Decade of the 21st Century

The Pembina Institute for Appropriate Development. (Taylor, Amy, Matthew Bramley, and Mark Winfield) 2005. Government Spending on Canada's Oil and Gas Industry: Undermining Canada's Kyoto Commitment.

Pigeon, Marc-André, 2003: "Tax Incentives and Expenditures Offered to the Oil Sands Industry", Parliamentary Research Branch.

United Nations Convention on Climate Change, 1992.

Vourc'h, Ann: Encouraging Environmentally Sustainable Growth in Canada. Economics Department OECD. ECO/WKP(2001)16 at 7").

Contact Addresses for Petitioners

[Original signed by Albert Koehl]

Ecojustice Canada
30 St. Patrick St., Suite 900
Toronto, Ontario
M5T 3A3
Attn: Albert Koehl
416-533-1231
akoehl@ecojustice.ca

[Original signed by the petitioner] 

[personal information withheld at the petitioner's request] 

[Original signed by Beatrice Olivastri]

Friends of the Earth
Ms. Beatrice Olivastri, CEO
260 St. Patrick St., Suite 300
Ottawa, Ontario K1N 5K5

Tel. 613-241-0085 ext 26
or toll free 1-888-385-4444
Fax. 613-241-7998
beatrice@foecanada.org

¹ The $1.4 billion figure was not disputed by Minister Baird in his response to our original petition filed on October 3, 2005. The Minister's response is available at: http://www.oag-bvg.gc.ca/domino/petitions.nsf/viewe1.0/EF2D9AAC9909E75F852571D9005E0D68

² See Appendix 1.

³ Finance Minister James Flaherty announced the gradual phase out of the ACCA on March 19, 2007. This subsidy may amount to about $300 million annually according to the Globe and Mail (Federal Budget 2007, Oil sands tax breaks to end - 2010, p. A 17, March 20, 2007, Shawn McCarthy), based on government sources. See also the Green Budget Coalition which also attributes the $300 million figure to a government official. See http://www.greenbudget.ca/pdf/Budget_Analysis_2007.pdf The Green Budget Coalition also suggested that the delayed phase out is itself problematic: "This means that taxpayers will continue to provide unjustified subsidies for the vast majority of the approximately $100 billion in new oil sands capital investments (announced projects) expected over the next decade. In fact, the pending phase-out may serve to accelerate investments in an already overheated sector." The lack of precise figures for government spending on such tax breaks is a problem raised in our initial petition.

⁴ See the Green Communities Fact sheet in Appendix 3.

⁵ National Post, Canada role model for G8 countries: Harper, Andrew Mayeda, CanWest News Service, Monday, June 04, 2007. The full paragraph reads: "BERLIN—Climate change is "perhaps the biggest threat to confront the future of humanity today," Prime Minister Stephen Harper said in a speech here Monday that reached for common ground with the European position ahead of this week's G8 summit."

⁶ See: http://www.ec.gc.ca/default.asp?lang=En&n=714D9AAE-1&news=
4F2292E9-3EFF-48D3-A7E4-CEFA05D70C21

⁷ Environment Canada: A Climate Change Plan for the Purposes of the Kyoto Protocol Implementation Act 2007 at: http://www.ec.gc.ca/doc/ed-es/p_123/CC_Plan_2007_e.pdf

⁸ See Petition # 158 available at: http://www.oag-bvg.gc.ca/domino/petitions.nsf/viewe1.0/473C1F0F18B352BE8525710700609383

⁹ See: http://news.bbc.co.uk/2/hi/business/6096084.stm

¹⁰ See the Arctic Climate Impact Assessment at http://www.acia.uaf.edu/

¹¹ See the Green Communities Fact Sheet in Appendix 3.

¹² See: http://www.theglobeandmail.com/servlet/story/RTGAM.20070319.
wbudgetenergy20/BNStory/budget2007/home

¹³ The March 2007 Budget notes: the accelerated CCA will continue to be available in full for assets acquired by the taxpayer before March 19, 2007. It will also be available for assets acquired by the taxpayer before 2012 that are required to complete a project phase on which major construction by or on behalf of the taxpayer began before March 19, 2007.

¹⁴ See http://www.budget.gc.ca/2007/bp/bpa5ae.html#capital Accelerated Capital Cost Allowance for Oil Sands

¹⁵ National Post, Canada role model for G8 countries: Harper, Andrew Mayeda, CanWest News Service, Monday, June 04, 2007. The full paragraph reads: "BERLIN—Climate change is "perhaps the biggest threat to confront the future of humanity today," Prime Minister Stephen Harper said in a speech here Monday that reached for common ground with the European position ahead of this week's G8 summit."

¹⁶ http://www.pembina.org/pdf/publications/GovtSpendingOnOil
AndGasFullReport.pdf

¹⁷ See Table 1 in Appendix 1.

¹⁸ See the April 11, 2006 Press Release: "Turning a New Leaf - Federal Accountability Act and Action Plan." Available at: http://www.faa-lfi.gc.ca/index_e.asp

¹⁹ "Little damage from carbon tax, report says." Globe and Mail, June 20, 2007. http://www.theglobeandmail.com/servlet/story/RTGAM.20070620.wgreen0620/
BNStory/National/home

²⁰ Environment Canada: National Inventory Report, 1990-2005. http://www.ec.gc.ca/pdb/ghg/inventory_report/2005/
2005summary_e.cfm

²¹ See: http://www.washingtonpost.com/wp-dyn/content/article/2006/10/04/
AR2006100401724.html

²² http://pubs.pembina.org/reports/GovtSpendingOnOilAnd
GasFullReport.pdf

²³ See: http://climate.pembina.org/media-release/1465

²⁴ See: http://www.ipcc.ch/SPM040507.pdf at p. 4

²⁵ See: http://www.millenniumassessment.org/en/Condition.aspx

²⁶ See: http://news.bbc.co.uk/2/hi/business/6096084.stm

²⁷ See: http://news.bbc.co.uk/1/hi/business/6096594.stm

²⁸ Environment News Service, UN Climate Change Impact Report: Poor Will Suffer Most, April 6, 2007.

²⁹ http://www.acia.uaf.edu/

³⁰ See the analysis in our original petition available on the CESD website at: http://www.oag-bvg.gc.ca/domino/petitions.nsf/viewe1.0/
473C1F0F18B352BE8525710700609383

³¹ This amount is in 1996 dollars.

³² Ketchum, Ken, Robert Lavigne, and Reg Plumber, Dept of Finance Working Paper, 2001-17 at p. 15.

³³ The Canadian Energy Research Institute estimated oil sands investment in the next 20 years (2000-2020) at $100 billion. http://www.ceri.ca/#oilseminar See also the Green Budget Coalition at http://www.greenbudget.ca/pdf/Budget_Analysis_2007.pdf

³⁴ See Appendix 1.

³⁵ See Appendix 1.

³⁶ See: http://www.oag-bvg.gc.ca/domino/petitions.nsf/viewe1.0/
EF2D9AAC9909E75F852571D9005E0D68

³⁷ Associated Press article at: http://ap.google.com/article/ALeqM5i5TtajgUpSm
7KY5jf-lCJGHBB-tAD8ST1F480

³⁸ The Daily, Statistics Canada, February 22, 2007 at http://www.statcan.ca/Daily/English/070222/
d070222a.htm

³⁹ See Table 1 in Appendix 1.

⁴⁰ See Table 1 in Appendix 1. The figure is $8.5 billion if we include the ecoEnergy for Biofuels, but we cannot determine that any funds have actually been allocated to this program.

⁴¹ http://www.cbc.ca/canada/story/2007/04/26/emissions-targets.html

⁴² See: http://www.pm.gc.ca/eng/media.asp?id=1681

⁴³ See http://www.budget.gc.ca/2007/bp/bpa5ae.html#capital Accelerated Capital Cost Allowance for Oil Sands

⁴⁴ Ibid.

⁴⁵ Ibid.

⁴⁶ Ibid.

⁴⁷ Ibid.

⁴⁸ Pembina Institute, letter to Prime Minister Harper from Marlo Raynolds, March 28, 2007. See http://pubs.pembina.org/reports/ACCA_Letter%
20to%20Harper_Mar2007.pdf

⁴⁹ Green Communities, Fact sheet May 2006 (see also Appendix 3), http://www.gca.ca/indexcms/downloads/EGH%
20factsheets.pdf

⁵⁰ Green Communities, Press release, March 2006, available at http://www.gca.ca/indexcms/downloads/
EGH%20factsheets.pdf

⁵¹ Green Communities, Fact sheet May 2006 (and Appendix 3), see http://www.gca.ca/indexcms/downloads/EGH%
20factsheets.pdf

⁵² See petition 158: http://www.oag-bvg.gc.ca/domino/petitions.nsf/viewe1.0/
473C1F0F18B352BE8525710700609383

⁵³ http://www.oilsandswatch.org/media-release/1257

⁵⁴ http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20070603/harper_g8_070604?
s_name=&no_ads=

⁵⁵ Compiled from The Budget Plan 2006: Focusing on Priorities; The Budget Plan 2007: Aspire to a Stronger, Safer, Better Canada; public announcements on: Dec. 20, 2006; Jan. 17, 2007; Jan. 22, 2007; March 12, 2007, July 5, 2007 etc; and A Climate Change Plan for the purposes of the Kyoto Plan Implementation Act, August 2007.

⁵⁶ See Budget 2007, Table A5.1, Cost of Proposed Tax Measures, http://www.budget.gc.ca/2007/bp/bpa5ae.html#overview. Or see p. 100 of Budget 2007 in pdf version.

⁵⁷ Funding for 2008-2009 is estimated. (From p. 117 of Budget 2006.)

⁵⁸ Includes $148b for renewable power (wind, low impact hydro etc) and $36m for renewable heat. See http://www.ecoaction.gc.ca/ecoenergy-ecoenergie/heat-chauffage/index-eng.cfm cf. Budget 2007, p. 63.

⁵⁹ See the Feb 2007 NRCan backgrounder. This program gives $220m to ecoEnergy retrofits for houses, small business, and industry, $60m to ecoEnergy for Buildings and Houses, and $20m to ecoEnergy for Industry. http://www.nrcan.gc.ca/media/newsreleases/2007/200704a_e.htm

⁶⁰ Program designed to increase market readiness of clean energy technologies including clean tar sands and clean coal developments. See the Jan 2007 NRCan backgrounder http://www.nrcan.gc.ca/media/newsreleases/2007/200701b_e.htm

⁶¹ There is no data on the costs of this program post 2008-2009. See p. 100 of Budget 2007.

⁶² An arms-length non-profit organization established in 2001 to demonstrate clean technologies.

⁶³ See Agric Canada website at: http://www.agr.gc.ca/index_e.php?s1=prog&s2=cfap-pafc

⁶⁴ See the Agric Canada website at: http://www.agr.gc.ca/sci/abip-piba/index_e.php

⁶⁵ See the Feb 12, 2007 government press release at: http://pm.gc.ca/eng/media.asp?id=1532 The program assists provinces to reduce air contaminants and GHGs.

⁶⁶ Announced on July 5, 2007; part of Renewable Fuels Strategy. Unclear if money has been allocated.

⁶⁷ We include the full amount of program spending even though these amounts may not necessarily be used for programs to reduce GHG emissions. See p. 135, Budget 2007.

⁶⁸ Budget 2007, p. 100.

⁶⁹ The program encourages the buying of energy efficient vehicles. See the Transport Canada site at: http://www.tc.gc.ca/programs/environment/ecotransport/
ecoauto.htm

⁷⁰ See Budget 2007, Table A5.1, Cost of Proposed Tax Measures, http://www.budget.gc.ca/2007/bp/bpa5ae.html#overview (This figure is net of removing the excise tax on heavy vehicles.)

⁷¹ Funding for 2008-2009 is estimated.

⁷² See Budget 2007, Table A5.1, Cost of Proposed Tax Measures, http://www.budget.gc.ca/2007/bp/bpa5ae.html#overview

⁷³ See the PM's announcement of March 2007 at http://pm.gc.ca/includes/send_friend_eMail_print.asp?URL=/eng/media.asp&id=1560&langFlg=e We assume funding was allocated equally over 7 years.

⁷⁴ See the Transport Canada Fact sheet at: http://www.tc.gc.ca/mediaroom/infosheets/ecomobility.htm This program promotes use of public transit and other sustainable transportation.

⁷⁵ See the Transport Canada press release at: http://www.tc.gc.ca/mediaroom/releases/nat/2007/07-gc005e.htm This program includes $21m for the ecoTechnology for Vehicles program (a labelling initiative) and $15m for the ecoEnergy for Personal Vehicles.

⁷⁶ The ecoFreight program includes six specific initiatives including the Marine Shore Power Program and trucking industry programs such as the ecoEnergy for Fleets. See the Transport Canada press release at: http://www.tc.gc.ca/mediaroom/speeches/2007/2007-02-15.htm

⁷⁷ This program is for transit infrastructure and based on population. http://www.fin.gc.ca/FEDPROV/C48e.html

⁷⁸ http://www.pembina.org/pdf/publications/GovtSpendingOnOil
AndGasFullReport.pdf

⁷⁹ Canadian Exploration Expense (CEE); Canadian Development Expense (CDE); and the Canadian Oil and Gas Property Expense (COGPE).

⁸⁰ ED is currently being phased out. See the Pembina report at p. 29.

⁸¹ This value includes only the difference between the resource allowance and the value of royalties ie the resource allowance less what would be collected if royalties were deductible instead of a 25% deduction under the federal resource allowance as proxy for royalty deductions. The resource allowance was designed "to provide some form of deduction in recognition of provincial and other Crown resource levies, while offering an incentive for exploration and development in Canada."

⁸² The Investment Tax Credits (ITCs) category includes expenditure associated with the Atlantic Tax Credit and the Scientific Research and Experimental tax credit.

⁸³ "In 1976, the federal government issued a remission order allowing participants in the Syncrude oil sands project to deduct royalty payments and make full use of the resource allowance. The remission order expired at the end of 2003." See the Pembina report at p. 30. http://www.pembina.org/pdf/publications/GovtSpendingOnOil
AndGasFullReport.pdf

⁸⁴ In 2003 the corporate tax rate was reduced from 28 to 21%—at a rate of 1% per annum ending in 2007—for the oil and gas and mining sectors. The tax rate reduction was given to other corporate sectors in 2001. Thus the Pembina study calculated the difference between what oil and gas would have paid under the reduced rate had it been applied to that sector in 2001. The same budget also included the elimination of the federal capital tax by all sectors.

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Minister's Response: Environment Canada

1 April 2008

Dear Mr. Koehl, [name withheld] and Ms. Olivastri:

I am pleased to provide Environment Canada’s response to your Environmental Petition no. 158‑B, to the Commissioner of the Environment and Sustainable Development, concerning the Government’s efforts to combat climate change as well as issues related to the oil and gas industry. Your petition was received by the Department on December 4, 2007.

Responses to the particular questions in the petition have been divided among the federal government departments best placed to reply, therefore, I am addressing the issues that fall under my department’s mandate.

I appreciate this opportunity to respond to your petition and trust that you will find this information helpful.

Sincerely,

[Original signed by John Baird, Minister of the Environment]

John Baird, P.C., M.P.

Enclosure

c.c.:   The Honourable Chuck Strahl, P.C., M.P.
The Honourable James Flaherty, P.C., M.P.
The Honourable Gary Lunn, P.C., M.P.
Mr. Ronald C. Thompson, Interim Commissioner of the Environment and Sustainable Development

Environment Canada’s response to Environmental Petition no. 158-B

D. Explain how a lax ACCA phase out time line is consistent with the plight of Canada's Inuit and northern communities that are facing changes to their very culture and way of life because of abrupt changes brought on by global warming.

Response

The Government understands that climate change is one of the greatest threats facing Canadians today. That is why in Budget 2007, our Government took a great deal of action on the environment, including an announcement phasing out the ACCA.

Our Government recognizes that the North is already facing the challenges of climate change. That’s why at the United Nations Framework Convention on Climate Change Conference in Bali, Indonesia, in December 2007, our Government announced $86 million to help Canadians, especially Inuit and northern communities adapt to climate change.

In addition, the Minister of the Environment held a roundtable in coordination with Inuit Tapiriit Kanatami (ITK) and its President, Mary Simon, in Iqaluit, Nunavut on February 8, 2008. The Minister heard a range of views from Inuit and Northern leaders about the impacts of climate change, and has demonstrated his willingness to work with them on adaptation and mitigation.

The key elements of the adaptation funding include:

• research to improve climate change scenarios;
• assisting Northerners in assessing key vulnerabilities and opportunities for adaptation;
• addressing climate change and health adaptation in northern/Inuit communities;
• developing a pilot climate and infectious disease alert and response system to protect the health of Canadians from the impacts associated with a changing climate; and
• risk management tools for adaptation and to support the development and implementation of regional programs.

H. Given that the Government of Canada will spend $2.8 billion subsidizing oil and gas polluters over the next two years, explain if Canada has abandoned the internationally accepted polluter pays principle for a made‑in‑Canada polluter gets paid principle.

Response

The Government completely rejects the premise of the petitioners’ question. The reality is that the Government has replaced the “polluter gets paid” principle with the “polluter pays” principle. The fact is that it was the previous government which implemented major subsidies for oil and gas companies through the ACCA, a subsidy which this Government has eliminated.

The Government’s mandatory Turning the Corner plan to reduce the greenhouse gases an absolute 20 percent by 2020 is focused on requiring large final emitters from seventeen major industries including oil sands and dirty coal-fired power plants.

For the first time in Canada’s history, regulations will strictly limit the amount of greenhouse gases and air pollutants.

Unlike previous governments, our Government has sent a clear signal to Canadian industry that they must reduce their emissions now, and to make environmentally friendly decisions that will reduce emissions.

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Minister's Response: Department of Finance Canada

26 March 2008

Mr. Albert Koehl
Barrister and Solicitor
Ecojustice Canada
900-30 St. Patrick Street
Toronto, Ontario
M5T 3A3

[name and information withheld]

Ms. Beatrice Olivastri
Chief Executive Officer
Friends of the Earth
300-260 St. Patrick Street
Ottawa, Ontario
K1N 5K5

Dear Mr. Koehl, [name withheld] and Ms. Olivastri:

Thank you for sending to the Commissioner of the Environment and Sustainable Development the Environmental Petition no. 158-B concerning the oil and gas industry and federal initiatives to address climate change. On December 4, 2007, the Commissioner forwarded a copy of your petition to me.

I am pleased to attach my responses to the points falling under my responsibility.

My colleagues the Minister of the Environment and the Minister of Natural Resources will send you their separate responses.

I appreciate the depth of your analysis and the detailed documentation within your petition. I would like to assure you that Canadians can count on our Government’s support in ensuring that Canada’s economic objectives are properly aligned with environmental issues. As is announced in Advantage Canada, our long-term economic plan, protecting the environment is central to our plan. In it, we committed to creating a cleaner and healthier environment that will improve the quality of life of Canadians, in particular through the responsible development of our natural resources.

Thank you for your views on these important issues.

Sincerely,

[Original signed by James M. Flaherty, Minister of Finance]

James M. Flaherty

Enclosure

cc.   The Honourable John Baird, P.C., M.P.
Minister of the Environment

The Honourable Gary Lunn, P.C., M.P.
Minister of Natural Resources

Ronald C. Thompson
Interim Commissioner of the Environment and Sustainable Development

Environmental Petition 158-B

Response to Points Addressed to the Minister of Finance

C.         Explain why the ACCA for tar sands projects, which costs the federal government an estimated $300 million per year, is being phased out over many years starting in 2011 and not at all for a significant number of other projects instead of being eliminated immediately given the obvious contribution of such projects to rising Canadian GHG emissions and the Budget 2007 comment that this “preferential treatment is no longer required.”

Budget 2007 announced the phase-out of the existing accelerated capital cost allowance (CCA) for general investment in oil sands projects, leaving in place the regular 25% CCA rate for these assets. This will improve fairness and neutrality between the oil sands and other sectors, particularly other oil and gas and renewable energy resources.

To ensure a stable investment climate, the existing accelerated CCA will be grandfathered for oil sands assets acquired before 2012 in project phases that commenced major construction prior to March 19, 2007. For other projects that had not yet begun major construction as of that date, Budget 2007 will allow companies to maintain the ability to claim accelerated CCA until 2010, with the rate being gradually reduced between 2011 and 2015 according to the following schedule:

This transitional regime recognizes that there are long time frames involved in many oil sands projects. Many years are typically involved in planning, obtaining environmental and regulatory approvals, engineering and design, and construction. The transitional rules recognize that decisions and commitments with respect to future asset purchases were already made prior to the Budget on the assumption that accelerated CCA would be available.

The transitional regime also takes into account that with large projects, there is a significant time lag between acquisition of an asset and the time when CCA deductions may be taken. Normally, CCA claims can only be taken once a project starts production and the asset is in use, which may be several years after the date of acquisition. Special rules for multi-year projects, however, effectively allow CCA claims to begin in the third year of construction, even if production has not yet started. These rules, combined with the limitation of accelerated CCA to the level of project income, mean that accelerated CCA typically cannot begin to be claimed until the third year of construction for expansions of existing, profitable projects, and not until production starts for new projects. Because accelerated CCA claims are limited to the income from the project, once CCA claims begin to be taken, it typically still takes a number of years for the assets to be depreciated. The transitional rules take into account that accelerated CCA deductions taken, for example, in 2012 may be in respect of expenses incurred four or five years earlier and that those expenses may have been effectively committed to even earlier.

Recognizing the importance of energy to our economic and environmental objectives, the Government has expanded the scope of incentives for clean energy generation. Budget 2007 extended to equipment acquired before 2020 the existing accelerated CCA under CCA Class 43.2 that encourages industries, including the oil sands, to invest in equipment that generates energy more efficiently or by using renewable energy sources. It also expanded the provision to cover wave and tidal energy, and additional solar energy and waste-to-energy applications. Budget 2008 proposes to further expand the incentive to additional applications involving ground source heat pump and waste-to-energy systems.

E.         Explain if giving tax breaks to the oil and gas industry is a priority on a par with dealing with climate change, described by Prime Minister Harper as “perhaps the biggest threat to confront the future of humanity today.”

Protecting the environment is a priority for the Government. In particular, climate change is a global problem that requires global solutions. The Government is committed to stopping the increase of Canada’s greenhouse gas emissions and drastically reducing them.

It is also important to provide a competitive fiscal environment to ensure that Canada is an attractive place for investment—in oil and gas and other industries—which is essential for our prosperity and standard of living.

Facilitating economic growth is not inconsistent with addressing environmental challenges. Different individual policies are, however, used to achieve an appropriate balance among important objectives.

Advantage Canada, our long-term economic plan, committed to:

• Create a cleaner, healthier environment that improves the quality of life of Canadians.
• Pursue efficient regulation using market-based instruments wherever possible and ensure no sector bears a disproportionate cost.
• Complement regulation with targeted initiatives that are cost-efficient, and lever funding from the private sector and other orders of government.
• Support the development and deployment of new environmental and energy technologies.

The Government has a comprehensive, results-oriented ecoAction plan to clean our air, help address climate change and create a healthier environment. The cornerstone of this plan is the recently released Turning the Corner plan to reduce greenhouse gases and air pollution.

The Government of Canada has set ambitious medium- and long-term goals to reduce greenhouse gas emissions by 20% below 2006 levels by 2020 and 60% to 70% by 2050. Binding national regulations on greenhouse gas emissions across all major industrial sectors will enter into force in 2010. Binding national regulations on air pollutants will enter into force as early as 2012.

The Government will also regulate transportation sources of emissions and consumer and commercial products. The fuel consumption of motor vehicles will be benchmarked against a stringent, dominant North American standard, beginning with the 2011 model year. Energy efficiency standards will be strengthened for consumer and commercial products, with more stringent requirements for 10 regulated products (e.g. dishwashers and dehumidifiers) and new standards for 18 currently unregulated products (commercial clothes washers and commercial boilers).

In addition, the Government has announced its intent to pursue a regulation requiring a 5% average renewable content in Canadian gasoline, such as ethanol, by 2010. It also intends to develop a regulation for diesel fuel and heating oil to contain 2% average renewable content, such as biodiesel, by 2012, once it has been verified that the new blended fuel is safe for our Canadian climate and conditions.

These regulations and standards are supported by ecoENERGY initiatives investing more than $2 billion in renewable energy, energy science and technology and energy efficiency, ecoTRANSPORT initiatives investing more than $4 billion in renewable fuels and a cleaner and more efficient transportation system and ecoAGRICULTURE initiatives investing almost $500 million to assist farmers and rural communities take advantage of new opportunities in the agriculture bioproducts sector. In addition, Budget 2007 provided a $1.5 billion trust fund to help provinces and territories invest in major projects that clean our air and result in real emission reductions.

Budget 2008 includes new measures to strengthen and ensure effective implementation of Canada’s ecoACTION plan by such as actions as:

• providing $66 million over two years to set up the regulatory framework for air emissions;
• providing $250 million for a full-scale commercial demonstration of carbon capture and storage in the coal-fired electricity sector, research on the potential for carbon storage in Nova Scotia and economic and technological issues;
• providing $10 million over two years for scientific research and analysis on biofuels emissions; and
• setting aside up to $500M in support of capital investments to improve public transit.

As set out in Advantage Canada, business investment is critical to out long-term prosperity. It yields innovation and growth, with more jobs and higher wages for Canadian workers. The Government is therefore committed to lowering business taxes, enhancing competition, ensuring that our capital markets are globally competitive and encouraging foreign investment. This will ensure a competitive environment for investment and growth in all sectors, including the oil and gas and renewable and alternative energy sectors.

The response to Environmental Petition 158, previously submitted by the petitioners, discussed some of the considerations underlying the targeted tax provisions applicable to the oil and gas sector.¹ The resource sector is vitally important as a source of income and jobs in many communities in Canada and to the country as a whole. The sector also faces distinct commercial risks, including the uncertainty related to exploration, large capital requirements, and financial vulnerability due to price volatility and cyclicality. At the same time, investment in resource exploration, like investment in research and development, can generate benefits beyond those captured by the firm performing the activity. Many resource producing jurisdictions provide special tax treatment for similar reasons.

There has, nonetheless, been rationalization over time of the targeted tax provisions for the resource sector in response to changing conditions. The earned depletion deduction was phased out in 1990, the Syncrude Remission Order expired in 2003, and the resource allowance was phased out over the 2003-2006 period in favour of a deduction for actual Crown royalties paid. Budget 2007 announced the phase-out of accelerated capital cost allowance (CCA) for oil sands projects.

While the tax system recognizes the particular characteristics of the resource sector, it also has provisions that support environmental objectives, including addressing climate change.

Incentives for investment in clean energy generation equipment are provided through accelerated CCA for equipment under Class 43.2 and flow-through share treatment (parallel to a provision available in the non-renewable resource sector) for project start-up expenses. Eligible technologies include cogeneration, wind turbines, geothermal energy, and small hydro. Budget 2007 enhanced Class 43.2 by extending it to eligible assets acquired before 2020. It also expanded the incentive to include wave and tidal energy equipment and additional applications involving solar heating, photovoltaic and fuel cell power, biogas production, and cogeneration. Budget 2008 proposes to further expand the incentive to additional applications involving ground source heat pump and waste-to-energy systems.

For individuals, the Government introduced a tax credit in Budget 2006 for the cost of public transit to make this option more financially attractive. Improved public transit usage will help both reduce traffic congestion in our urban centers and reduce carbon dioxide and other emissions. Subsequently, Budget 2007 introduced a performance-based rebate program offering up to $2,000 for the purchase of a new fuel-efficient vehicle, and a Green Levy on fuel-inefficient vehicles.

Together, the Government’s environmental and economic policies will help create a healthier environment and more sustainable economic growth.

F.         Explain why the government of Canada continues to spend almost as much on oil and gas tax breaks (about $1.4 billion in each of the 2007–2008 and 2008–2009 fiscal years based on 1999 investment projections) as on climate change programs (about $1.6 billion in these same fiscal years) if it views climate change as an urgent problem.

AND

G.         Explain why the federal government is spending $500 million more on subsidies to the oil and gas industry in each of the next two fiscal years than it is spending on clean renewable energy despite the fact that reducing greenhouse gas emissions is an international priority.

As discussed in the response to Question E, the Government uses different policies to achieve a balance among different objectives. Policies that encourage and facilitate economic growth and development are not inconsistent with policies aimed at protecting the environment.

Further, the Government’s degree of commitment and action on a policy issue cannot be gauged by the fiscal cost of selected measures. For example, the key portions of the Government’s Turning the Corner plan to reduce greenhouse gases and air pollution involve regulatory actions. While the fiscal cost to government of establishing and administering mandatory targets on various industries and activities is modest, the large impact of these measures on the behaviour of firms and individuals cannot be measured by the size of these administrative costs of implementation.

Again, while elements of the Government’s climate change strategy do involve spending programs, like the ecoEnergy suite of programs, the strategy also involves measures like the Green Levy on fuel inefficient vehicles. This type of measure provides an important incentive to purchase more fuel efficient vehicles even though it does not have a net fiscal cost but rather actually raises revenues for the Government.

I.          Explain how the Government of Canada's pledge to "increase transparency and oversight in government operations" is achieved by the Department of Finance’s repeated failure to make the total dollar amount of subsidies to the oil and gas industry available to Canadians in a comprehensible format.

The Government publishes substantial information about its spending programs and tax provisions.

Grants, contributions and other transfer payments are reported every year in the Main Estimates and Supplementary Estimates. The government prepares these reports in support of its request to Parliament for authority to spend public monies. They are tabled in the House of Commons by the President of the Treasury Board and they are available on line at the following address: www.tbs-sct.gc.ca/est-pre/estime.asp

The current and projected value of tax expenditures², including a number of general and specific measures applicable to the oil and gas industry, are reported in the publication Tax Expenditures and Evaluations. This document is published by the Department of Finance on an annual basis, along with the companion document Tax Expenditures: Notes to the Estimates/Projections, which is published on an occasional basis. These publications are available on line at the following address: www.fin.gc.ca/access/taxe.html.

Tax expenditures are calculated on an economy-wide basis. Therefore, for general measures that impact many sectors (like incentives for research and development or the Atlantic Investment Tax Credit), a break-down by industrial sector is not provided.

The following table shows the estimated value of reported tax expenditures applicable to the oil and gas sector (all except the last of which also apply to mining) from 2002 to 2009.

Source: Tax Expenditures and Evaluation 2007, p. 30. Explanation of these items can be found in the document Tax Expenditures: Notes to the Estimates/Projections 2004.

Note:    All figures are reported in millions of dollars.
            “S” means the cost is less than $2.5 million.
            “-“ means the tax measure is not in effect.

As noted in the response to the earlier Environmental Petition no. 158, some of the targeted tax measures for the oil and gas and renewable energy sector take the form of deductions that include an element of acceleration, giving rise to a tax expenditure, for which an annual estimate is not provided because of data limitations. As explained in the 2000 report of the Commissioner of the Environment and Sustainable Development³ :

“Estimating tax expenditures for accelerated write-offs is not an easy task. The provisions are complex, and gathering the appropriate data is difficult. Many of the deductions are discretionary, meaning that the taxpayer can determine how much of the eligible amount is actually claimed in a given year. Furthermore, because accelerated write-offs can result in positive or negative tax expenditures, an annual estimate may not provide an accurate picture of the real cost resulting from the write-offs”.

Given these issues, the Department has supplemented the annual tax expenditure report with periodic special studies. Thus, in 2001 the Department published a working paper on oil sands tax expenditures. The Department will continue to estimate tax expenditures on an annual basis and, where opportunities arise through data and methodological improvements, it will expand the list of tax expenditures that it estimates either annually or through special studies.

J.         State whether the Government of Canada agrees with its own internal January 2007 report that a $50 per tonne carbon tax would increase economic growth by 2020.

The report was commissioned from independent academics by Natural Resources Canada. It does not represent the views of the government of Canada.

The analysis conducted by MKJA used a particular model with particular assumptions about global implementation. The model used by MKJA has very detailed representation of technologies. It evaluates cost by looking at the cost of additional investment to lower emissions.

A more general economic model would also include other economic costs introduced by such a policy, such as the impact of higher prices on other goods, on real wages and employment, and on physical investment in other areas. Examining Tables 7-5 and 7-6 suggests that the full economic costs of the policy are not included in GDP estimates.

However, their model does not include either all of the potential benefits. For example the impact of the policy could be attenuated by the use made of resources raised in levying a price on emissions. A full evaluation of recycling options does not seem to have been included in the analysis.

Furthermore, levying a price on emissions will foster technological changes that are not taken account in their analysis. Benefits of this would offset the costs of efforts to reduce emissions. However, it is less likely that these benefits will wholly offset incremental costs within the immediate future.

K.         State why other tax subsidies to the oil and gas industry such as the Canadian Exploration Expense, the Canadian Development Expense, and the Canadian Oil and Gas Property Expense are not also being phased out.

The provisions listed are categories of business expenses specific to the resource sectors (oil and gas and mining). They encompass the cost of intangible assets relating to exploration for commercially-exploitable resources, developing resource projects and acquisition of resource development rights.

Canadian exploration expense (CEE) is deductible at a rate of 100% in the year incurred. For the oil and gas sector, CEE includes certain intangible costs incurred to determine the existence, location, extent or quality of a crude oil or natural gas reservoir not previously known to exist. Examples include the costs of seismic surveys and of exploration wells seeking previously undiscovered resources.

Canadian development expense (CDE) is deductible at a rate of 30% per year on a declining balance basis. For the oil and gas sector, CDE includes the costs of drilling, converting or completing a development well, building a temporary access road or preparing a site.

Canadian oil and gas property expense (COGPE) is deductible at a rate of 10% per year and includes the costs of acquiring an oil or gas well in Canada, an interest or right to explore, drill, or extract petroleum or natural gas, or a qualifying interest or right in oil or gas production.

The deductions for CEE, CDE and COGPE recognize expenses incurred for the purpose of earning income that would be deductible in a neutral tax system. A deduction for such ordinary business expenses is necessary in order to accurately compute a corporation’s income for income tax purposes.

There may, however, be an element of acceleration in the rate at which these expenses are deducted, which would give rise to a tax expenditure. Indeed, in a neutral tax system, an expense that is capital in nature and contributes to earnings over more than one taxation year is normally required to be depreciated gradually over the useful life of the asset.

In the case of exploration expenses (covered by CEE), the costs of unsuccessful exploration do not contribute to earnings over multiple years. This suggests that an immediate deduction may be neutral. On the other hand, for successful exploration, which leads to discovery of a commercially exploitable resource, the neutral write-off rate would depend on an assessment of the period of time over which the resource would be expected to generate earnings. The same is true of development expenses (like those covered by CDE) to build producing infrastructure or the cost of resource properties (included in COGPE). The assets associated with these expenses could have widely-ranging useful lives.

The current treatment of intangible resource expenses is premised on several characteristics of the industry. First, resources are key economic assets. Resource activity is an important generator of investment, exports and jobs. The tax system also recognizes the risks inherent in the business of resource extraction including uncertainty related to exploration, large capital requirements for development, and financial vulnerability due to price volatility and cyclicality. The special tax treatment of exploration costs recognizes that exploration, like research and development, can create benefits beyond those captured by the firm that incurred the original expenditure. Finally, Canada’s tax system has recognized the need to be internationally competitive, given global competition for investment capital needed for resource development.

The government continues to review the income tax system on an ongoing basis to ensure its appropriateness in light of changing conditions.

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Minister's Response: Natural Resources Canada

17 March 2008

Mr. Albert Koehl
Barrister and Solicitor
Ecojustice Canada
30 St. Patrick Street, Suite 900
Toronto, Ontario
M5T 3A3

Ms. Beatrice Olivastri
CEO, Friends of the Earth
260 St. Patrick Street, Suite 300
Ottawa, Ontario
K1N 5K5

[name and position withheld]

Dear Mr. Koehl, Ms. Olivastri and [name withheld]:

I am pleased to provide the response of Natural Resources Canada to your Environmental Petition no. 158-B, to the Interim Commissioner of the Environment and Sustainable Development, regarding respecting ongoing federal tax breaks to the oil and gas industry that contradict and undermine the government statements and spending on the urgent fight against climate change. Your petition was received in the Department on December 4, 2007.

You will find enclosed responses by Natural Resources Canada to questions that were addressed to my department. I understand that my Colleagues The Honourable John Baird, Minister of the Environment and The Honourable James Michael Flaherty, Minister of Finance will be responding separately to questions that fall under their mandates.

I hope that you will find the information provided by these responses useful.

Yours sincerely,

[Original signed by Gary Lunn, Minister of Natural Resources Canada]

The Honourable Gary Lunn, P.C., M.P.

Attachment

Petition #158-B

Question: Explain why the EnerGuide for Low Income Households program was cut so abruptly while the ACCA phase out has generous time lines—and why the EnerGuide program was not replaced with a similar program, given the obvious benefits to vulnerable families and the potential for significant GHG reductions.

A. The decision to cancel EGHLI was made by the Government of Canada. eco ENERGY Retrofit for Homes replaces EnerGuide for Houses in providing financial support to encourage homeowners to implement energy and emission-saving improvements. It was designed to work in partnership with provinces, territories and utilities. Because of this approach, the program has been successful in expanding coverage, and is now improving access to low income households. In many jurisdictions, collaborative agreements between the federal government and the provinces, which are currently in negotiation, will cover the initial fee for the evaluation for low income households and, in some regions will provide additional funds for the energy retrofits. Most of these agreements are expected to be launched in 2008.

The rationale for the transitional regime associated with the phase-out of accelerated CCA for oil sands is set out in the response to Question C from the Minister of Finance.

Question: Explain why an industry that enjoyed over $31 billion in profits in 2006 and an oil price approaching $100 per barrel is more deserving of public funds than low income households given the latter would be able to significantly reduce GHG emissions with energy efficiency retrofit supports while the former is responsible for huge increases in GHGs.

B. It is not a question of either—or, in both cases funding is provided to increase efficiency, sustainability and reductions in GHGs. The oil industry is making substantial profits and is contributing to the overall economic success of the economy. This in turn provides significant funding to government through taxes as well as economic spinoffs to other sectors and individuals in the economy. However, while fossil fuels will contribute significantly to our economy for many more years there are concerns about environmental implications and much of government's program support in this sector is in the areas of environmental sustainability.

For example, in 2005-06 Natural Resources Canada (NRCan) support to the oil and gas sector was approximately $46 million. Roughly $38 million was the Program of Energy Research & Development (PERD) spending, and funding to CANMET, the science and technology arm of NRCan. In addition, the CO2 Capture and Storage (CCS) Incentive Program provided $6.5 million in funding in 2005-06 to five different pilot projects to demonstrate CCS.

Other federal government departments and agencies such as Sustainable Technology Development Canada, the National Science and Engineering Research Council and the National Research Council, also provide some funding to this sector, primarily in support of research and innovation activities.

As part of the ecoACTION Plan, Natural Resources Canada is making investments of approximately $2 billion in a series of ecoENERGY initiatives to help Canadians use energy more efficiently, boost renewable energy supplies and develop new cleaner technologies.