October 20th, 2020

Exploding energy subsidy myths


By Lethbridge Herald Opinon on May 21, 2020.

Mark Milke and Lennie Kaplan

CANADIAN ENERGY CENTRE

In the ongoing debate over whether Canada’s oil and natural gas industry will or should survive, one argument often advanced is the notion that oil and gas activity in Canada survives only due to massive subsidies from taxpayers.

The debate has been fuelled recently by comments from the Green Party’s Elizabeth May and Bloc Quebecois Leader Yves-Franois Blanchet that “oil is dead.”

It will take years for recent announcements – the $1.7-billion federal subsidy directed at orphan and inactive well cleanups, and the federal government’s liquidity package for multiple sectors – to filter down into data that can be tracked.

In the meantime, to get to clarity on claims that the energy sector received multiple billions of dollars annually for years, let’s deep-dive and dissect them.

A 2010 study from a Winnipeg think-tank claimed that $2.8 billion in subsidies flowed to the sector annually. Even more eye-popping, in 2014, a Vancouver reporter asserted that a 2013 International Monetary Fund (IMF) study found that subsidies to Canadian oil and gas were worth $34 billion, while the worldwide figure was $5.6 trillion.

There are multiple problems with these claims.

The $34-billion estimate of subsidies in Canada was substantially arrived at by arguing that “uncollected taxes” existed due to externalities such as “impacts like traffic accidents, carbon emissions, air pollution and road congestion.”

In other words, your fender-bender can be blamed on the existence of the oil and gas industry and costs attributed to the same.

In response to the 2010 study, economists Jack Mintz and Kenneth McKenzie noted in 2011 that measuring fossil-fuel subsidies was a “tricky art.” They took specific issue with the study methodology that informed subsequent work, including at the IMF. They argued that multiple flaws were at the heart of such estimates.

Among others, the 2010 study included methodology that used a subsidy definition designed for a different purpose; inappropriately added tax expenditures (i.e., targeted measures to selected industries to reduce taxes and royalties) without accounting for critical interactions; wasn’t based on an underlying optimizing economic model that emphasizes the impact of taxes, royalties and subsidies on investment at the margin; and wasn’t based on an economically meaningful benchmark.

The McKenzie-Mintz study concluded that tax and royalty policies were not a significant source of subsidization for oil and gas.

In 2014, in response to the 2010 and 2014 estimates, the Montreal Economic Institute found that energy sector subsidies amounted to just $71 million and that those were being phased out. As the Montreal think-tank noted, the larger numbers are arrived at in part by counting up “billions of dollars [that] simply do not exist” – the presumed subsidy value of a car accident – and in other instances, by counting deferred taxes as subsidies.

In 2017, University of Guelph economist Ross McKitrick also analyzed energy subsidies, including the $5.6-trillion IMF estimate. McKitrick noted similar questionable assumptions and also that much of the estimate was composed of “uncollected externalities.”

McKitrick concluded the use of indirect or notional concepts led to such dramatically higher numbers, but become “meaningless and potentially misleading.”

We reviewed Statistics Canada data on subsidies to industries and Canada. We found $1.9 billion in subsidies to oil and gas between 2010 and 2016. But we also found $12.6 billion in subsidies to the motion picture sector during the same years, as well as $12.8 billion to crop production and $27.8 billion to public transit.

(A caveat: The Statistics Canada data includes tax expenditures, which adds to the difficulty of getting to subsidy definitions as cash payments only. In addition, limitations in the data preclude estimates of capital subsidies or pre-2010 payments. Think of the $13.7 billion in taxpayer subsidies to the automotive sector during the 2008-09 financial crisis.)

When considering competing claims of which sectors are the most subsidized – this may soon be an Olympic sport for economists to measure given government activity this year – consider a significant subsidy pointed to by the Ontario Auditor General in 2015: The global adjustment fees on Ontarians’ power bills is a subsidy to utility and energy companies. The Auditor General characterized them as “excess payments to generators over the market price for electricity.”

The Auditor General said those subsidies were worth $37 billion between 2006 and 2014. Those payments were made not for the development of oil and gas assets, but for shutting down coal-fired electricity and for multiple Ontario green energy projects.

By any estimate, that would appear to make Ontario’s experiment in renewable energy the most subsidized energy activity in the country.

Those who claim oil is dead – and do so by claiming Canadian oil and gas companies were massively subsidized with billions of dollars annually – are wrong on the facts and about the sector.

Mark Milke is executive director of research and Lennie Kaplan is chief research analyst at the Canadian Energy Centre, an Alberta government corporation funded in part by taxes paid by industry on carbon emissions. They are authors of “Analyzing claims about oil and gas subsidies.” Distributed by Troy Media.

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Steve Bottrell

How much did the CEC pay you to run this article? I hope it was a huge amount. This is reprehensible propaganda distributed by the always hilarious Troy Media. Home of such gems as – It all adds up: First a pandemic, then a ‘magic’ solution – https://troymedia.com/world/it-all-adds-up-first-a-pandemic-then-a-magic-solution/
I like how the CEC says its an Alberta government corporation funded in part by taxes paid by industry on carbon emissions. Instead of what it is, a UCP corporation funded by Alberta taxpayers.

Resolute

Interesting to see some discussion on the progressive negatism on everything oil. Heaven knows the oil industry cares squat about the greenie movement. People are told it is supposedly trying to kill oil/gas/fuel electricity sources, but is actually requiring more o/g/c electricity to be built because renewables are inherently intermittent thus requiring new equal or greater backup power for new installs. So-called environmentalism is just a mislead into the desert of nonsense. But anyway, at least someone is talking, unlike SB in his above post asking for suppression of others, rather than open discussion. Let everybody have their say SB – China is not running the Lethbridge Herald yet!

Steve Bottrell

Some interesting Gish Gallop there. Along with some projection and hacky conservative talking points. Keep the faith buddy…

biff

good to hear from you again, s.b. thanks for the link and for an honest entry.
with regard to the link, we can all breathe easier knowing that conspiracy theory can come from either end of the spectrum. (mind you, that term does too much to dismiss and undermine the fact that the masses are consistently subject to heavy handedness by madmen driven by greed and power). however, what is utterly unacceptable is the control of thought and opinion that are the likes of youtube, facebook, and ever too increasingly, search engines.

Fescue

Like biff, I think S.B. is correct to assess the source and their motivations. In this case the CEC (aka taxpayer funded public relations firm for foreign oil companies)

The people inclined to believe every conspiracy theory that trots by could learn from this.

Resolute: intermittent energy sources do not need ‘as much or more’ back up fossil fuel power – regions are running stable grids with over 30% renewables with no more backup than the coal power being replaced. And this is improving with new control technologies.

Seth Anthony

Fescue said;

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regions are running stable grids with over 30% renewables with no more backup than the coal power being replaced
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Can you have possibly been more vague?

What is a region? A country, a small city? Someone’s backyard?

Over 30%? 100% is “over” 30%. Why isn’t it 100%?

What Renewables? Is it Solar? Wind? Geothermal? Hydro? Mouse on a wheel?

Coal power replaced? What was the output of the plant? What is the backup?

Where is this occurring? Why isn’t it being done everywhere?

Fescue

Hi Seth. When I say region, I mean a ‘grid’. Most grids include electricity generation that serves a demand, like Alberta. Though Alberta has ties to BC, Saskatchewan and Montana grids, the main grid serves this region. Now, a region may be a country, a group of countries, or only part of a country – it depends on a lot of factors.

Unlike the critics of renewables, I am not tilting at windmills regarding eliminating fossil fuels with a 100% renewable grid. I’m far more pragmatic, and believe that we should continue to add low-emission electricity to the grid as fast as we can. Generally, the growth of electricity demand has outstripped the growth of renewables, so there is little fear of destabilizing the grid anytime soon. We should be more fearful of the consequences of our growing and wasteful demand.

To date, for those countries who have aggressively added renewables to the grid, there has been no additional backup required with levels of 30% on average, and 100% renewables for brief periods.

To understand this, you have to understand that electricity produced must match the demand. There are electricity plants using coal or combined-cycle natural gas that are difficult and inefficient to ramp up and down to match demand (which can vary up and down wildly on any given day). As a result, there is lower-efficiency natural gas turbines that track demand. If they do not, we get a brownout or blackout. In other words, there is already a lot of generation that is designed to track swings of demand. Adding intermittent generation, like solar and wind (which are quite predictable from an AESO operator’s point of view) complicates the control of the grid, but only in the dispatching of backup generation – the same back-up generation that we already have.

In sum, the argument that renewable generation has to have ‘additional’ back-up is completely incorrect. Ask yourself how much ‘additional’ backup generation has been installed for renewables in Alberta. The answer is ‘zero’. How much has Denmark or Germany added? Again: ‘zero’. This is not to say that there is not back-up generation (natural gas), only that it already exists and is not ‘additional’ to renewables.

In time, with improvements in control and more renewable energy added to the grid, coal will be replaced. Then, base-load natural gas. But we have a long way to go before we should be arguing about a 100% renewable grid.

And, Seth, this is happening everywhere. No matter how much headwind the critics put up, economics will dictate this. The rate of change, however, depends on the rate of replacing old capital investments in coal generation plants and infrastructure and political will to mitigate the impacts of climate change.

Seth Anthony

Thanks for the thorough reply Fescue. You said:

The argument that renewable generation has to have ‘additional’ back-up is completely incorrect. Ask yourself how much ‘additional’ backup generation has been installed for renewables in Alberta. The answer is ‘zero’. How much has Denmark or Germany added? Again: ‘zero’. This is not to say that there is not back-up generation (natural gas), only that it already exists and is not ‘additional’ to renewables.
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Agreed.

The backup generation argument from that perspective doesn’t make sense, However, that isn’t the perspective the critics pursue. The critics argument is referring to the intermittency of solar / wind, and due to that, its inherent reliance on fossil fuels. Which of course is true, but it’s a very poor argument against solar and wind.

We need to move away from fossil fuels, but it has to be done intelligently. Just one example of not doing it intelligently, is virtue signaling, vote buying politicians who believe the BS and misleading numbers from solar and wind salespeople. Another example is educating the people at anti fossil fuels, pro renewable rallies. Have you ever seen them being interviewed by people who actually know a little something about energy? I have, and it’s rather disappointing. Suffice to say that most of them are laughably ignorant on the matter of energy production.

One more thing. Harness the infinite power of the atom.

Fescue

To which I would mainly agree – particularly the criticism against the many avenues of misinformation.

Seth Anthony

It’s not the misinformation that annoys me the most, as misinformation seems to be an unavoidable given. What I find most annoying is the people who blindly believe things because some sort of “authority” figure told them so. It may be arduous, but the first step in wisdom is to question everything.