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Why Subsidies Matter

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My attention turned to perverse subsides recently for a number of reasons (see here).
Subsidies are obviously a bad thing, especially if they promote more of something we are spending cash to reduce. In Canada when one thinks of fossil fuel subsidies, one thinks oil and gas. Pembina has done a lot of work on oil and gas subsidies, resulting in a Green Budget Coalition recommendation (see a short summary here).

Pembina estimates direct tax expenditures on the oil and gas sector by the feds to be about $1.4 billion annually (here). But this is likely decreasing due to the federal government’s repeal of the oil sands development expenditures valued at about $300 million annually (see here).

So, say $1.1 to $1.4 billion annually rolling forward in time.

Is this a big number? Initially, I thought not given that oil and gas GDP was about $76 billion in 2005, so the tax subsidy was about 1.8% of annual GDP. But then I looked at emissions. Oil and gas emissions were about 130 MT in 2005. This means that the effective subsidy is equivalent to a carbon price of $11/tonne. This caught my eye. Enough so that I thought it worth modeling what it could mean for emissions.

The best way to model the subsidy is to reduce production costs by the rate of the effective subsidy to production, and not as a carbon price. But, just for fun, and because it is easier, I simply put a carbon price of $11/tonne into the sector and modeled the results (in CIMS). Essentially the policy case would be: what happens if we drop subsidies to the sector and price emissions the equivalent value?

In this policy case, national GHG emissions from oil and gas drop significantly in time, from a BAU of about 214 MT in 2020 to 179MT. Over the long-term, emissions drop by 2050 from 230MT to 169 MT. See chart below. These are significant reductions.

So, it is great to be proven wrong and it seems there is scope to look at this subsidy issue a lot closer. Indeed, $11/tonne is a crazy number, and put in context with the federal government’s Technology Fund safety valve price of $15 to $22, it seems the Feds are pricing emissions even less than we thought.
oilsubsidy.JPG

Written by Dave Sawyer

November 13th, 2008 at 4:15 pm