Ending subsidies is not that hard! – Canada shows how.

The IMF Fossil Fuel Subsidies Data: 2023 Update has thrown up some interesting results. They show that subsidies have increased dramatically in just 2 years, from 2020 to 2022. These were the years of COVID and the start of the war in Ukraine, both of which had dramatic effects on energy supplies and prices. 

Globally, fossil fuel subsidies rose 35%, from $5.2 trillion in 2020 to $7 trillion in 2022. “Explicit subsidies (undercharging for supply costs) account for 18 percent of the total while implicit subsidies (undercharging for environmental costs and forgone consumption taxes) account for 82 percent.”

Remarkably, per capita subsidies went down in only two countries – Russia by 18% and Canada by 41%. China’s subsidies remained steady, and Australia’s increased by 5%.  All other countries increased by between 1.2% and 340%!

Graph made from IMF’s 2023 data

So why is Canada such an outlier? It is very likely that Canada’s price on carbon pollution is a significant factor. The Pan Canadian Approach to Pricing Carbon Pollution, or ‘Federal Backstop’ has now reached $65/tonne and is heading for $170/tonne by 2030. It prices fossil fuel pollution and returns all the revenue to households, as a “climate dividend”.

This is a direct price on pollution, more direct than the emissions trading schemes which are much more common in other countries and much more direct than Australia’s safeguard mechanism. This pricing approach is the most effective way to bring down implicit subsidies as it includes the costs of environmental and health damage caused by fossil fuels. Canada’s price on pollution is steadily reducing the subsidies which up till now have enabled fossil fuels to pollute for free. This will help redirect financial flows from the fossil fuel economy to the clean energy economy.

Australia’s emissions are still rising. And as the health, climate and environmental costs continue to rise, so do the implicit subsidies, which in turn, give incentive for more fossil fuel pollution. By following Canada’s lead and pricing pollution, Australia can break this cycle, phase out the subsidies and assist fossil fuel producers to phase out and reinvest.

This also helps reduce the politically difficult process of banning new fossil fuel projects. A predictably rising price makes most new projects unviable and unlikely to get funding.  And by returning the revenue to housholds as a climate dividend, Australia can replicate Canada’s achievement of a resilient price on pollution that survives repeated populist attack.