In a heated election year, it is a sobering truth that the oil & gas industry has become a fashionable target for various commentators. In this context, few issues are likely to generate as much passion as that of oil & gas subsidies, often derided by critics as “corporate welfare.”
A fairly recent IMF report on energy subsidies globally serves as the basis for the aforementioned $34 billion figure. This figure is predicated on a rather broad and idiosyncratic definition of energy subsidies that includes oil & gas taxation below an “efficient level,” i.e. that level sufficient to internalize a host of externalities associated with oil & gas activities, ranging from environmental stress and up to mundane traffic congestion.
A breakdown of this definition of “subsidies” depends also on a breakdown of its component parts, and that is where problems arise. Take “externalities” as an example. What falls under externalities? If environmental pollution, what type and what quantities of pollutants qualify? If traffic congestion or road accidents, what level of traffic congestion and what degree of road accidents qualify? Only fatal road accidents or everything up to and including relatively harmless fender benders?
What should be obvious by now is that whatever “subsidies” is defined as depends in part on the ideological inclinations of the one doing the defining. When an argument depends on a very broad and vague definition of a key term, and when the parameters of those key terms depend on value judgments and policy choices, the claim to a term rooted in objective criteria is diminished, no matter what academic window dressing is applied. There is no “science supports my view” argument to be convincingly made here.
Since the definition of an everyday word can be broadened to the point where a user can apply it to whatever they find objectionable, that user can basically manufacture whatever problem they desire. The left-leaning Pembina Institute pegs federal oil & gas subsidies between $4 billion and $18 billion. That range alone should illustrate the power that imprecise terminology has to impose societal costs.
Among the policies critics deem undesirable as “subsidies” are specially-tailored tax structures for the oil & gas industry. This refers to the CDE, CEE, and flow-through share programs. The former two basically work to alter the timing of tax and royalty burdens for operators in recognition of the fact that oil & gas projects are high risk, capital intensive, and subject to potentially long and uncertain payout periods. The latter program allows companies to transfer exploration and development expense tax deductions to shareowners, making the company more attractive to risk-conscious investors. Put simply, these tax innovations are there in recognition of the fact that the oil & gas industry may see a substantial lag between investment expenditures and taxable returns. What these “subsidies” do is create future revenue that might not exist but for these specialized tax structures.
The cost of these programs is attractive. The Canadian oil & gas industry has contributed roughly $18 billion annually in tax and royalty revenue to provincial and federal coffers over recent years. For perspective, the Pembina institute pegs the 2008 value of the combined CDE and CEE programs at only $711 million.
That said, when industry detractors use the word “subsidies” in the context of a heated election, they do not mean to engage society at large in a discussion on the finer points of what that word encompasses. They certainly do not want to spin it to the public that their targets also include policies that promote domestic economic development, job creation, and higher government revenues. What critics want to communicate is the image of corporate welfare – superfluous government handouts to already profitable corporate entities – while obscuring the fact that many of these so-called “subsidies” are rather inexpensive revenue generators where both sides win.
Of course, critics are welcome to argue that there are other noneconomic considerations at play, but they should be open about the true costs of their own policy preferences. If critics want a greener future, they should level with the electorate and admit that this will come at a great cost in terms of economic competitiveness, job creation, social displacement, and government revenue. Attacking fossil fuels will not suddenly result in a painless transition to there desired future. Given that perceptions matter more than facts and given the understandable pressures of electoral politics, asking for more intellectual honesty is probably asking for too much.