Federal government outlines $83B in clean economy tax credits in bid to compete with U.S. incentives

OTTAWA -

Serious money is heading for Canadian industries looking to reduce emissions after the federal government unveiled its answer to the U.S. Inflation Reduction Act.

The spending commitments announced in Tuesday's federal budget include tax credits for investments in clean electricity, clean-tech manufacturing, and hydrogen that together are expected to cost some $55 billion through to the 2034-35 fiscal year.

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Total tax incentives amount to almost $83 billion over that timeframe when the carbon capture and storage and clean-tech investments credits announced last year are factored in, both of which saw minor boosts this round.

The government says the funding is necessary to boost clean economy spending from some $15 billion a year to the $100 billion a year needed. The spending is also needed to not fall behind as other countries roll out subsidies, most notably with the US$369 billion contained in the landmark U.S. legislation passed last year.

"In what is the most significant economic transformation since the Industrial Revolution, our friends and partners around the world, chief among them the United States, are investing heavily to build clean economies," said Deputy Prime Minister Chrystia Freeland as she introduced the budget.

Tax credits are the backbone of the effort because they are stable and efficient way to roll out government support, while leaving decision-making with the expertise of the private sector, said a senior government official in the budget lockup.

Clean electricity is the biggest focus of the credits, costing $6.3 billion over the first four years starting in 2024, and $25.7 billion through to the 2034-35 year. Notably, provincial utilities and Indigenous-owned corporations will be eligible for the credits.

The spending is meant to help spur both more generation, as well as a better-connected east-west grid to meet the expected doubling of electricity demand by 2050.

The clean electricity package is where the government has likely done enough to meet its goals, said Michael Bernstein, executive director of Clean Prosperity.

Other funding areas however, including the $11.1 billion in credits for manufacturing and $12.4 billion for carbon capture through to 2034, likely aren't enough to close the gap with what the U.S. is offering, he said.

"It really is one of those situations where your competitor has stepped up and said we are going to be providing an almost unthinkable amount of money."

Canada has opted for construction-focused project support, while the U.S. IRA covers operational costs with payments based on production volumes. It's like Canada is offering a single large cup of soda, whereas the U.S. is offering endless kiddy-cup sized refills, meaning Canada needs to offer a pretty big cup to compete, said Bernstein.

Since it's not covering operations, Canada needs to move quickly on offering the carbon pricing backstop that it's promised to develop in the budget, he said.

The so-called contracts for difference would provide certainty to industry on future carbon pricing and credits, but so far they're still in consultation, as are several other key policies.

"What surprised me was how many things are still left to be determined," said Rachel Samson, vice-president of research at the Institute for Research on Public Policy.

Along with the contacts for difference, she noted that details are scarce about how the $15 billion Canada Growth Fund will be spent.

The government announced in the budget that the fund will be administered independently by the Public Sector Pension Investment Board, with money starting to flow in the first half of the year, but didn't provide guidance on priority areas.

Samson said it was good the government isn't trying to direct the money itself, but worried that pension fund managers are too cautious to put the money in the bold projects needed.

"We need projects that are more on the cutting-edge, that are riskier."

The government also pushed down the road any commitments on biofuels such as sustainable jet fuels, which surprised Samson as Canada is currently exporting the raw wood pellet feedstock and knows companies have projects ready to go.

The budget was also notable for what wasn't in it for the oil and gas industry. While it did tweak last year's carbon capture incentives, it didn't go as far as some were pushing for, while the emissions cut-off for hydrogen production will likely exclude most carbon-capture based hydrogen projects.

"Oil and gas did not get a lot of what I think it wanted in this," said Samson.

The lack of funding comes as climate advocacy groups have pushed against support for both programs as wasteful projects that don't achieve the emission cuts needed in the near term, while also pushing against support for an industry that has reported record profits.

The government has also framed the budget as one of fiscal restraint that it hopes will allow private capital to do much of the heavy lifting to keep Canada in the running.

"Canada must either meet this historic moment, this remarkable opportunity before us, or we will be left behind as the world's democracies build the clean economy of the 21st century," said Freeland.

This report by The Canadian Press was first published March 28, 2023.