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Canada’s Green Economy Transition: Major Steps in Budget 2023

(Minister of Finance Chrystia Freeland unveiling Budget 2023 in Parliament)

The race to build a net-zero clean economy is on for Canada. With Budget 2023, Canada is looking to provide billions in subsidies and tax credits for businesses to transition their energy generation, manufacturing, and investments toward clean technologies. 

With Canada’s strong educated workforce, its vibrant energy sector, and strong manufacturing capabilities in the economic hubs of Ontario and Quebec. Coupled with Canada’s strong social programs such as Medicare, strong social safety nets and benefits, universal child care, a world-class education system, and a regulative approach to lowering emissions; the country is looking to take advantage of its unique qualities s to compete with the US and Europe.

Canada’s federal government is spearheading its movements toward lowering emissions, modernizing its electricity grid, and ensuring the country divulges into a more sustainable path for the future. Budget 2023 lays out numerous policies and programs put in place to achieve this future.

Private Investment So far

As for the work so far, the federal government has been able to secure various projects that will help reduce the country’s emissions over the long term. This includes the following: 

- $1 billion in federal funding companies such as Honda, General Motors, and Stellantis to invest in their existing plants for EV and hybrid vehicle production.

- $1.5 billion for Umicore to produce essential components of EV batteries.

- $222 million to support initiatives from Rio Tinto Fer to increase the production of critical minerals, cut emissions, and help build clean tech supply chains.

- Volkswagen building its first overseas battery manufacturing gigafactory in Ontario.

- In collaboration with Ontario, the federal government will support the Oneida Energy storage project, which will be the “largest electricity battery storage project in Canada.”

At the heart of Canadian business investment is the role of government. In Canada, governments play a big role in securing big-ticket private investment. In many cases, governments will use private investments they’ve secured as part of their list of political achievements in office. As a result, the private sector is in part an extension of the public sector’s influence.

And indeed, the massive role of the public sector in private affairs in Canada is warranted because of the behemoth that is the USA. Canadian industry experts have described the United States as a private investment “black hole” with 51 miniature “black holes” competing with one another. Canada’s economic influence in North America (and by extension, the world) is often seen as an afterthought option. But when considering Canada’s uniqueness such as its highly educated workforce, high-quality universities, good social safety nets, a universal healthcare system, a diversified economy, a plethora of natural resources, and a stable political system; not to mention a population that is not hostile towards environmentalism, Canada definitely punches above its weight.

In addition to attracting private investment, federal and provincial governments will look to collaborate with one another to provide adequate public subsidies and tax breaks for cleantech companies that want to set up businesses. Provinces will also indirectly compete with each other by offering their own sets of tax credits, subsidies, and general policies for private investment. For example, Ontario unveiled in its latest provincial budget that it would introduce a 10% refundable corporate income tax credit on Canadian companies investing in machinery, equipment, and buildings for use in manufacturing or processing in the province.

Both federal and provincial governments are looking to attract manufacturing and clean technologies. In tandem, this should create a patchwork of competitive policies across the country to attract a diverse range of private investment.

Government-Based Policy

To pay testament to the government’s role in both private and public investment alike. The federal government, since 2015, has pledged to lower emissions and transition Canada’s economy to net-zero emissions by 2050. As part of this commitment, the federal government has developed and invested in 4 primary components:

(1) Carbon Price Scheme

“A federal carbon pricing system that puts a price on pollution per tonne emitted and rebates Canadians more money than they pay through the price mechanism.”

(2) Private Sector Project Funding

The federal government is looking to allocate $15 billion for the Canada Growth Fund towards “projects and companies that will lower the country’s emissions.”

- Allocating $35 billion within the Canada Infrastructure Bank to “attract private capital to major infrastructure projects and help build more infrastructure across the country.”

- “$8 billion for the Net Zero Accelerator to make large-scale investments in clean technologies.”

- “$1.5 billion for the Clean Fuels Fund to encourage investment in the production of clean fuels, including clean hydrogen and biofuels.”

(3) Hard Infrastructure

- Invest in Canada Plan allocates $180 billion over 12 years for core infrastructure investments in public transit, trading ports, broadband networks, energy systems, and social services.

- Of that, $33.5 billion in the ‘Invest in Canada Plan’ supports new investments in “public transit, green infrastructure; community-based infrastructure, and rural and northern communities support.”

- $4.2 billion for the Low Carbon Economy Fund to “support the installation of emission-reducing technologies for provinces and territories, businesses, Indigenous communities, and other organizations.”

(4) Supply Chain Strategy

- $4.7 billion for the National Trade Corridors Fund for investments in “ports, roads, railways, and airports”

- $3.9 billion to make zero-emission vehicles more affordable for Canadians and Canadian businesses, and to build new charging stations across Canada

- $3.8 billion for Canada's Critical Minerals Strategy, which will support the critical minerals that are the bedrock of clean and digital technologies;

Note that all of these policies have already been put in place by the government since 2015. Budget 2023 seeks to reinforce these commitments by building on top of the foundation laid out over the past 8 years through more targeted investments in the clean technology sector. 

This movement has recently been catapulted by the United States’ Inflation Reduction Act (IRA) which saw over $369 billion worth of support for industries to transition to a clean economy. Over the course of 10 years, private sector economists predict the IRA could mobilize $1.7 trillion USD of private and public investments in the US clean economy. For Canada, Budget 2023 allocates about $56 billion worth of tax breaks for a total of $80 billion incentive package for the clean transition. 

As expressed by Minister Freeland, there is a sense of urgency to quickly provide support to this sector as otherwise, Canada may lose out on key economic opportunities the world is transitioning towards. However, Canada’s legislation differs from the US in that it primarily focuses on tax credits rather than subsidies. In other words, Canada is looking to ensure results for eligibility on government initiatives rather than the US’ strategy of pre-hawk subsidization. 

A Made-In-Canada Clean Electricity Grid

For the federal government, they would like to standardize cheap to build and affordable to consume clean electricity. Fortunately for Canada, 83% of the country’s electricity is produced from non-emitting sources such as hydro, wind, solar, and nuclear. At a time when the cost of renewable energy generation sources has plummeted to below conventional means such as coal. Canada has ample opportunity to increase its share of renewable electricity production through the expansion of its already relatively clean grid.

According to Budget 2023, Canada must increase its electricity capacity by 2.2 to 3.4 times to meet the future doubling of demand for electricity. Electricity generation requirements are projected to be 1.6 to 2.1 times current levels.

Capacity refers to how much electricity can be produced at any one time while generation refers to the amount of electricity that is actually produced over a period of time. 

For Canada, it is crucial that this demand increase in electricity capacity and generation are met with renewable energy rather than non-renewables. As otherwise, it’ll be more difficult for the country to offset its emissions reduction strategy with non-renewables. Budget 2023 also recognizes that interprovincial transmission of electricity is done more effectively so as to integrate Canada’s divided provincial electricity generation methods. For example, provinces such as Manitoba with 90% hydro electricity generation will seek to benefit from providing clean power to less clean provincial grids such as Saskatchewan or Ontario. 

Investment Tax Credit for Clean Electricity

The federal government is looking to implement a 15% refundable tax credit for investments in: 

- Non-emitting electricity generation systems (i.e. wind, solar, nuclear, hydro, etc)

- “Abated natural gas-fired electricity generation (which would be subject to an emissions intensity threshold compatible with a net-zero grid by 2035).”

- “Stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage, and compressed air storage.”

- “Equipment for the transmission of electricity between provinces and territories.”

With this tax credit, both new projects and the refurbishment of existing facilities will be eligible. In order to receive the 15% tax credit, labour requirements need to be met such as wages paid at “prevailing” levels and adequate apprenticeship training levels. Furthermore, the tax credit will also be stringent in ensuring the credit is used to lower electricity bills and commit to achieving a net-zero electricity sector by 2035. 

The government states that the cost of this credit will be “$6.3 billion over four years starting in 2024-25, and an additional $19.4 billion from 2028-29 to 2034-35.” 

Investment Tax Credit for Clean Technology Manufacturing 

This tax credit is primarily concerned with developing manufacturing capabilities in clean tech. Budget 2023 will provide a “refundable tax credit equal to 30% of the cost of investment in new machinery and equipment used to manufacture or process key clean technologies, and extract process, or recycle key critical minerals, including:

- Extraction, processing, or recycling of critical minerals essential for clean technology supply chains, specifically: lithium, cobalt, nickel, graphite, copper, and rare earth elements.

- Manufacturing of renewable or nuclear energy equipment.

- Processing or recycling of nuclear fuels and heavy water.

- Manufacturing of grid-scale electrical energy storage equipment.

- Manufacturing of zero-emission vehicles.

- Manufacturing or processing of certain upstream components and materials for the above activities, such as cathode materials and batteries used in electric vehicles.

According to the Budget, this tax credit will cost approximately $10 billion over the course of 13 years until 2035.

Investment Tax Credit for Clean Hydrogen

In the 2022 Fall Economic Statement, the federal government announced its intention to develop a tax credit for investments in clean hydrogen production. The level of tax credit support will be based on the “lifecycle carbon intensity of hydrogen.” Budget 2023 reveals the following about the tax credit: 

- “The levels of support will vary between 15 and 40 percent of eligible project costs, with the projects that produce the cleanest hydrogen receiving the highest levels of support.”

- “The Clean Hydrogen Investment Tax Credit will also extend a 15 percent tax credit to the equipment needed to convert hydrogen into ammonia, in order to transport the hydrogen. The tax credit will only be available to the extent the ammonia production is associated with the production of clean hydrogen.”

- “Labour requirements will need to be met to receive the maximum tax credit rates. If labour requirements are not met, credit rates will be reduced by ten percentage points. These labour requirements will come into effect on October 1, 2023.”

Clean hydrogen production essentially touts any form of hydrogen production that results in low-emissions byproducts. As a result, clean hydrogen could either be produced through renewable sources which often have near-zero emissions (green hydrogen) or with fossil fuel methods with the intention of carbon capturing any emitting byproducts (blue hydrogen). However, the consequences of utilizing blue hydrogen pose a risk of methane and carbon leakage. 

Reduced Tax Rates for Zero-Emission Technology Manufacturers

Manufacturers in Canada will see reduced corporate tax rates for small businesses (at 4.5%) and 7.5% for all other businesses. This tax credit was already available and is now being extended by 3 years until 2034 and expanded to include “manufacturing of nuclear energy equipment and the processing and recycling of nuclear fuels and heavy water.” 

The cost of the tax credit will be nearly $1.5 billion until 2035. 

Budget 2023 also comes with expanding the Clean Technology Investment Tax Credit and the Carbon Capture, Utilization, and Storage Investment Tax Credit to include more equipment and systems eligible for the tax credit. 

A Clean Electricity Focus for the Canada Infrastructure Bank

Budget 2023 looks to mandate the Canada Infrastructure Bank to invest at least 20 billion to support the “building of major clean electricity and clean growth infrastructure projects.” The government states that this will allow the CIB to be the primary finance tool for developing “clean electricity generation, transmission, and storage projects.”

The government commits to completing projects like the Atlantic Loop by 2030 which will provide a reliable interprovincial transmission grid that will provide clean electricity between the provinces of Quebec, New Brunswick, and Nova Scotia.

The Poilievre Insurance for Carbon Pricing

Officially dubbed as ‘Contracts for Difference’, this budget intends to introduce legislation to backstop any future potential reduction in the carbon price scheme. Essentially, the Canada Growth Fund would ensure that any investment contracts made with companies looking to lower emissions with their technologies are paid out (for the investments) in the advent of a reduction of the carbon price. This way, companies are ensured that their investments in reducing emissions in tech or manufacturing are competitive against those companies who choose not to lower emissions. Companies have an assurance that their investment will not lose competitiveness. Moreover, this also makes it difficult for any future government to reduce or scrap the carbon price scheme as otherwise, the government would be paying billions out of its public tax coffers to companies.

Edited by: Niko

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