Green Budget Coalition

Advance Canada towards a sustainable resource future by canceling the “Super flow-through-share” program for mining exploration in Canada, and the 10% corporate mineral exploration and development tax credit, and eliminating the 100% accelerated capital cost allowance (ACCA) for mining.

This is the next important step towards fully amending federal fiscal policies related to natural resources (including taxes, royalties, fees, charges and subsidies) to ensure that these resources’ resulting prices accurately reflect their true value , today and in the future, as well as the full costs to the environment and society caused by their production.

Tax Expenditure Implications

Annual savings for the Government of Canada could be over $70 million annually, including approximately:

These funds could be much better directed to improving Environment Canada’s capacity to analyze the ecological, social and cultural costs of existing and proposed mineral developments, and to strengthening Natural Resources Canada’s metals recycling program. Further progress towards fair fiscal treatment of natural resources would generate greater revenues.

Benefits for Canadians

Background and Rationale

The Vision

To achieve sustainability, we must reduce current resource consumption to a level that allows future generations to enjoy a similarly high quality of life. We are currently over-consuming and inefficiently utilizing our non-renewable natural resources because their prices are very low and discount future needs. In order to fix this deficiency and shift resource consumption to a level harmonious with long-term sustainability, the federal government must progressively pursue the achievement of the following vision:

The net impact of federal fiscal policies related to natural resources (including taxes, royalties, fees, charges and subsidies) ensures that these resources’ respective prices accurately reflect their true current and future value, as well as the full costs to the environment and society caused by their production.

The achievement of this vision will ensure that fair prices are charged for the use of natural resources, and that more environmentally beneficial alternatives compete with non-renewable resources on an increasingly level playing field.

This vision itself, however, is only one component of fully integrating the life-cycle impacts of goods and services into their market prices. These impacts include the resources consumed, waste created, pollution emitted, and environmental benefits resulting from their development, production, transportation, sale, use, and disposal.

The Path Forward

The next step towards achieving this important objective is to eliminate unmerited support programs for resource-intensive and environmentally damaging activities, including oil and gas extraction, mining and nuclear energy.

Governments in Canada and elsewhere provide financial support to the producers and/or consumers of particular goods/services/technologies. The financial support can be conferred in a number of ways, including direct grants to producers or consumers, tax credits, accelerated depreciation rates, tax rebates, and research and development support.

In many cases, such support programs are desirable. The Canadian government, for example, subsidizes health care and education to ensure universal access to these vital social services. Likewise, the government provides support for environmental purposes, such as support for renewable energy technologies (e.g., the ecoENERGY program ) and financial incentives to increase energy efficiency in businesses, households and vehicles (e.g., the ecoAUTO program ). Government support for environmental goods and services can result in technological improvements, accelerate cost reductions necessary for new and innovative energy technologies to compete with conventional and more environmentally damaging energy options, and improve environmental conditions. At the end of the day, these programs can protect and improve the environment and save taxpayers money by reducing health costs and the need for environmental protection and remediation. Unfortunately, however, not all support programs result in such societal benefits. From an environmental perspective, there are beneficial programs, which are good for the environment, and harmful programs, which lead to increased environmental damage.

Support programs targeted at goods and activities associated with high environmental damages are not socially beneficial. These programs cause market distortions that contribute to excessive consumption of non-renewable resources, foster pollution, waste, and inefficiency, and discourage conservation. In addition, they restrict the development of more environmentally friendly substitutes, and they perpetuate the status quo in production processes by making it cheaper to continue with existing technologies and methods than to adopt new technologies. They also divert limited financial resources away from other, competing social purposes. At the end of the day, these initiatives result in more environmental damage than would occur without the government support, and may actually penalize citizens twice. First, citizens cover the cost of the government support, whether in the form of financial payments or forgone tax revenues. Second, citizens incur the direct and indirect costs associated with the environmental damage.

Mining exploration impacts include the loss of other economic opportunities (subsistence hunting, fishing, tourism), environmental restoration expenses, increased health care costs, as well as the time and social capital rural communities and First Nations must direct to dealing with mineral staking rushes in their jurisdictions. Furthermore, due to the lack of government resources to monitor and prevent irresponsible mineral exploration, fuel barrels and core samples (some radioactive) are left-behind, rough roads are built without permission, waterways and groundwater are damaged, noise and dust disturb the calving grounds of ungulates, and rivers and streams are contaminated with fuel spills and dust.

According to the OECD, “incentives for natural resource development and use [in Canada] raise sustainability concerns.” This is partly due to the continuation of support programs for environmentally damaging and resource intensive sectors, including support for the oil and gas, nuclear energy and mining sectors. All of these sectors are associated with high environmental impacts and liability and all receive support from the federal government, largely through tax concessions. Indeed, evidence indicates that significant federal and provincial support is increasing the probability of excessive resource use and environmental degradation. This includes:

Note that the most expensive subsidy to nuclear energy is the risk assumed by the government, and by Canadians for centuries to come, of a major, potentially catastrophic, accident and of storing nuclear waste for a time period far beyond our individual lifetimes.

The OECD Environmental Strategy for the First Decade of the 21st Century, published in 2001, was adopted by all OECD Environment Ministers, including Canada’s. This strategy, among other things, calls for governments to create incentives for emission reductions through technological and social innovations, giving priority to market-based instruments such as subsidy removal, green tax reform and tradable emission permits and quotas. The OECD recently called for a “[s]ystematic review of environmentally harmful subsidies in sectors such as transportation and energy.” Reviewing and eliminating government support for environmentally damaging activities is a critical component of meeting Canada’s commitment to the OECD’s Environmental Strategy for the First Decade of the 21st Century.

Metals recycling can generate substantial benefits in resource efficiency and pollution reduction. The energy savings realized from producing metals from secondary sources versus primary sources include: zinc, 60%; steel, 74%; lead, 76%; copper, 85%; and aluminum, 95%. The reductions in pollution reduction, which can be immense, include:

The Green Budget Coalition commended the federal government for its actions in Budget 2007 to start the process of removing support programs for the oil and gas sector by phasing out the 100% accelerated capital costs allowance (ACCA) for oil sands. The government now needs to continue to eliminate harmful support to the oil and gas, nuclear and mining sectors.

Immediate Action:

Following on the elimination of the ACCA for oil sands, the next specific steps towards a sustainable resource future for Canada are to cancel both the “Super flow-through-share” program for mining exploration in Canada and the 10% corporate mineral exploration and development tax credit, and to eliminate the 100% ACCA for mining.

Mining exploration in Canada has caused substantial damage to Canada’s fragile ecosystems and is creating serious conflicts with affected First Nations and other communities. In addition, it has interfered with the realization of other more sustainable economic opportunities, such as subsistence hunting, trapping and fishing, tourism, agriculture and commercial fisheries. It is rare that a mineable deposit is found.

Despite the conflicts generated by mineral staking rushes and the impact of irresponsible mineral exploration on the landscape, the federal government continues to provide excessive subsidies to investors in mining exploration. These federal subsidies exacerbate environmental problems by financing exploration that would not otherwise be commercially viable.

‘Super’ Flow-through-share Program for Mining
The ‘super’ flow-through-share program, a tax incentive for “grassroots” mineral exploration, was introduced in October 2000 as a temporary measure to help moderate the effect of a global downturn in mineral exploration in the 1990s. The original three-year program has been extended five times since its inception, each time for additional one-year periods. The original reasons for introducing the program – a downturn in commodity prices – are no longer valid, and legitimate exploration is adequately stimulated by high commodity prices. The program enables mining companies to allocate a portion of their exploration losses to investors to use as a loss on their tax returns, and provides a 15% tax credit to investors.

The super flow-through-share program enriches speculative investors by reducing the after-tax cost of a $1000 investment in exploration in Canada to as little as $284 in Quebec, and $382 in BC, depending on the corresponding provincial tax credits. No other industry enjoys this benefit.

This 15% investment tax credit that enhances flow-through shares for mineral exploration is not available to other users of flow-through shares. It thus squeezes out investments in renewable energy flow-through shares that would support better environmental effects, and encourages mineral exploration that the marketplace would not otherwise support.

The federal 10% corporate mineral exploration and development tax credit enables certain mineral exploration companies to receive a 10% credit for an investment in a mineral exploration project on previously undeveloped land. The 10% corporate mineral exploration and development tax credit was institutionalized in 2004 through Bill C-48.

This tax credit for “Greenfield” exploration incents mineral exploration on virgin lands. It is both unnecessary – as companies would undertake this exploration without a subsidy – and destructive, as it encourages irresponsible exploration companies to undertake prospecting activities in areas that the market would consider to be too risky.

With the generous 100% ACCA in place, a mining company only pays federal income tax on the income from a mining operation once it has written off all of the eligible capital costs. These tax rules make mining projects much more attractive than they would otherwise be. For comparison, conventional oil and natural gas qualify for a 25% capital cost allowance. The 100% ACCA for mining provides an incentive that over stimulates the pace of capital investment and development.

It is important to note that most provinces also have their own flow-through share programs and tax incentives for mines in remote areas in addition to the federal programs.

Evaluating These Mining Tax Concessions

The benefits of tax concessions such as those described above are usually evaluated on the basis of: the amount of money raised; increases in exploration gross expenditures; the discovery of new mineral deposits; development spending; and mineral production. However, such analyses ignore important costs, such as the effects of mining exploration on ecosystems, the loss of services provided by nature, the foregone economic opportunity costs, and costs to the First Nations and other local communities.

Increased commodity prices in recent years have provided an unprecedented stimulus to mineral exploration in Canada. There is no doubt that this has resulted in increases in all the indicators currently used to evaluate the flow-through share program and other such tax concessions for mining. However, the unmeasured costs to communities and eco-systems have also been rising.

Alternative and Complementary Policies

Achieving resource sustainability will require the elimination of further support programs for the nuclear energy and oil and gas sectors, including the rationalization of the Canadian Exploration and Development Expenses with the expenses allowed to other industries.

True value should depend substantially on the alternative value if the resource was not extracted or produced at that time. This value would thus be much greater for limited resources such as oil and gas, whose extraction, production and consumption prevents future use, than for solar and wind power whose production has a nominal impact on available resource supplies.

Finance Canada (March 19, 2007): Budget Plan 2007, p. 244. The net cost of the one-year extension to March 31,2008 was estimated at $75 million over the next two fiscal years, including projections for a revenue reduction of $105 million in 2007-08, and a revenue increase of $30 million in 2008-09.

Finance Canada (2006): 2006 Tax Expenditures and Evaluations report, p. 28. http://www.fin.gc.ca/taxexp/2006/taxexp2006_e.pdf.

The cost of the mining ACCA is currently under investigation. For further information, contact Amy Taylor at amyt@pembina.org.

http://www.ecoaction.gc.ca/ecoenergy-ecoenergie/index-eng.cfm

http://www.ecoaction.gc.ca/ecotransport/ecoauto-eng.cfm

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

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

Myers, Norman and Jennifer Kent. 2001. Perverse Subsidies: How Tax Dollars Can Undercut the Environment and the Economy. Connecticut: Island Press.

Von Moltke, Anja, Colin McKee and Trevor Morgan. 2004. Energy Subsidies: Lessons Learned in Assessing their Impact and Designing Policy Reforms. United Kingdom: United Nations Environment Programme and Greenleaf Publishing.

Note that, in some cases, citizens may also benefit from the subsidy, for example, through associated employment opportunities.

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

OECD, 2000. Economic Survey of Canada. Paris, France: OECD.

Winfield et al., 2002. Looking Beneath the Surface: An Assessment of the Value of Public Support for the Metal Mining Industry in Canada. Calgary, Alberta: the Pembina Institute.

Note that this estimate does not account for a number of recent changes to the tax treatment of the oil and gas sector (deductibility of royalties, elimination of resource allowance and phase out of earned depletion) which are unlikely to have had a significant impact on the total support provided by government to this sector. Also note that this estimate does not include support to the oil sands sector through the accelerated capital cost allowance.

Taylor et al., 2005. Government Spending on Canada’s Oil and Gas Industry: Undermining Canada’s Kyoto Commitment. Calgary, Alberta: the Pembina Institute.

Receiver General of Canada, 2006: Public Accounts of Canada 2006, Volume II- Details of Expenses and Revenues, Summary Tables 1.7. http://www.pwgsc.gc.ca/recgen/pdf/v2pa06-e.pdf. This figure includes $159 million for Atomic Energy of Canada Limited, and $76 million for the Canadian Nuclear Safety Commission.

OECD. 2001. OECD Environmental Strategy for the First Decade of the 21st Century. Adopted by OECD Environment Ministers. Paris, France: OECD.

OECD. 2004. Environmental Performance Review: Canada. Paris, France: OECD.

Fothergill, Jay. Scrap Mining: An Overview of Mineral Recycling in Canada, the Canary Research Institute, October 2004

Prospectors and Developers Association brochure, Focused Flow Through Shares, 2007.

Preserving Minerals for the Future:Ending Counterproductive Support Programs

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