Ottawa gives $20.9-billion over five years in tax credits to stay competitive with U.S. on clean economy spending

The federal government is banking on a suite of new tax credits, a clean electricity grid and the carbon tax to spur the transition to a clean economy and counter vast subsidies rolled out by the United States that risk pulling capital south of the border.

In its budget unveiled Tuesday, Ottawa announced $20.9-billion over five years, the majority of which will go to new investment tax credits for clean electricity, clean hydrogen and clean technology manufacturing. It also expanded eligibility for tax credits for clean technology adoption and carbon capture, utilization and storage (CCUS).

The budget shows Prime Minister Justin Trudeau’s government betting on investment tax credits to compete with incentives rolled out by the Biden administration as part of its US$369-billion Inflation Reduction Act. The spending document also shifts the Trudeau government’s focus from climate change mitigation to the economic incentives required to meet emissions reduction targets.

In her speech to Parliament, Finance Minister Chrystia Freeland said new fiscal measures would ensure Canada’s economy is not left behind during the clean transition, and position the country to benefit from new critical supply chains among allies that cut out unreliable dictatorships.

“We will ensure that Canada seizes the historic opportunity before us,” she said.

The majority of the investment tax credits end in 2034 – lining up with Canada’s goal for a net-zero electricity grid by 2035.

About 83 per cent of Canada’s electricity supply comes from non-emitting sources. To bring that up to 100 per cent within 12 years, the government will implement a 15-per-cent refundable tax credit available to public, private and Indigenous power producers. It can be used to cover large-scale hydrogen and nuclear power projects, some abated natural-gas-fired generation, and equipment for electric transmission between provinces and territories.

The budget estimates the cost of the clean electricity tax credit over the next five years at $6.3-billion. The goal is to encourage electric utilities to build an east-west grid.

On top of that, as promised in the Fall Economic Statement, the budget introduces a clean hydrogen refundable tax credit which will cover between 15 per cent and 40 per cent of eligible project costs. The tax credit is estimated to cost $5.6-billion over five years.

The budget also rolls out a 30-per-cent clean technology manufacturing tax credit aimed at spurring business investment in areas such as the extraction, processing and recycling of critical minerals. It is expected to cost the treasury $4.5-billion over five years.

The clean electricity tax credit is in addition to a previously announced clean technology tax credit that covers 30 per cent of private-sector investments in areas such as wind, solar and small modular nuclear reactors. Eligibility for that program was expanded in this budget and its five-year cost is estimated at $6.7-billion. Companies cannot draw on both tax credits for the same project.

And the budget extends eligibility for the CCUS tax credit, increasing its costs by $516-million over five years to a total of $4.1-billion.

The federal government promised a substantive response to the U.S. Inflation Reduction Act in the budget in large part because of serious concerns in the business community that the Biden administration’s measure would drive investment out of Canada. The American spending also pushes protectionist Buy America policies that Mr. Trudeau’s government is threatening to mirror.

The budget says Canada is considering introducing new tit-for-tat parameters in the tax credits that would only grant foreign companies the equivalent access to tax credits that Canadian companies are eligible for in their respective countries. The move is meant to give Canada leverage as it tries to secure carve-outs from protectionist U.S. policies.

Robert Asselin, a senior vice-president with the Business Council of Canada, told The Globe and Mail that the path charted by Ms. Freeland is “generally good,” in particular the focus on greening the electricity grid.

“It’s foundational to everything else. If we don’t have enough clean electricity, we’ll struggle to decarbonize the economy,” he said, adding that the government got “the big things right.”

He said that investment-based tax credits give the government more predictability for its long-term budgeting and that copying the production tax credits offered by the U.S. would have “blown the bank.”

However, Mr. Asselin said the budget falls short when it comes to incentives to develop new economic sectors. “There’s nothing on research and development, nothing on industrial research,” he said.

Chris Severson-Baker, the executive director of the Pembina Institute, a think tank, agreed that the focus on a cleaner grid is essential to a greener economy. But, he added: “We’re not done.”

“There certainly will be a role for future budgets to keep moving forward to get to net zero by 2050.”

The Pathways Alliance, whose membership covers about 95 per cent of oil sands production, welcomed the expansion of CCUS supports but said it’s still waiting on a better understanding of the government’s intentions for carbon contracts for differences. The contracts, details of which have been promised by Ottawa, would provide a predictable price on carbon pollution and carbon credits, thereby ensuring that businesses can plan long-term investments in decarbonization and clean technologies.

Not yet accounted for amid the billions in new spending announced Tuesday is how much money the federal government paid to convince Volkswagen to build its first overseas electric vehicle battery manufacturing “gigafactory” in Ontario. Government officials told reporters the spending is accounted for within the budget but declined to disclose the cost. A formal announcement is expected in about a month.

 

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