March 30, 2023
By: The Delphi Group’s Kristine O’Rielly, Director, Innovation and Cleantech, and Sarah Todgham, Policy Consultant, Climate Change
Prior to this week’s federal budget announcement, Canada had been under increasing pressure to invest in the clean economy. For example, the US Inflation Reduction Act (IRA), announced last August, signalled $369 billion in climate spending. Other jurisdictions, such as the European Union, have already tabled investment plans in response to the Inflation Reduction Act (see: Green Deal Industrial Plan).
The budget outlines Canada’s answer to the Inflation Reduction Act: the “Made in Canada Plan,” which includes over $83 billion in clean economy tax credits and investments. As anticipated, the federal government is using similar approaches to the US, including several tax incentives that support private capital investment in solutions and technologies. The overarching goal is to spur more opportunities in eight priority areas:
We’re breaking down some of these investments to determine what they mean for Canada’s green economy and net-zero future.
Canada is known globally as a clean energy powerhouse, with one of the cleanest electricity grids (~83% from non-emitting sources). However, it is anticipated that Canada will need to double its electricity output by 2050 to meet rising demand, primarily due to the electrification of heavy industry and transportation.
The Clean Electricity Tax Credit is a 15% refundable tax credit applicable to eligible investments in non-emitting electricity generation systems, electricity transmission equipment, stationary energy storage systems, and natural gas-fired abatement systems. The credit will run until 2034 and is expected to cost $25.7 billion.
The budget also focuses the Canada Infrastructure Bank on clean electricity investment through its Clean Power and Green Infrastructure priority areas, with $10 billion being invested in each.
Increased funding for clean electricity projects has also been announced through Natural Resources Canada funding programs. $3 billion has been earmarked over 13 years for the Smart Renewables & Electrification Pathways and Smart Grid programs, as well as new investments to capitalize on offshore wind potential (with a focus on Atlantic Canada).
The federal government has recognized the enormous economic opportunity associated with the net-zero transition. However, they are also aware that the clean investment space is a competitive one, with countries from around the world staking their claim on the clean economy. As such, the federal government has focused on market-based investments that leverage Canada’s key strengths – our highly skilled labour force and our wealth of critical resources needed to power and create the net-zero future. These investments include:
Many of the federal government’s clean investment tax credits have integrated labour requirements in order for businesses to receive the full tax credit amount. These requirements include ensuring that the compensation packages for workers meet labour union standards and a minimum hour requirement for registered apprentices. These requirements are meant to ensure equitable pay and opportunities across Canada’s labour force.
Budget 2023 is renewing Canada’s focus on supply chain resiliency and infrastructure adaptation. Increasingly severe weather events (such as the 2021 BC floods) and recent geopolitical events have led to the need for (1) the establishment of a Transportation Supply Chain Office within Transport Canada, and (2) the development of a long-term roadmap for Canada’s transportation infrastructure. The government also plans to renew the Smart Cities Challenge, which supports resilient infrastructure through innovative projects at regional and local levels.
The budget is investing $108.6 million over the next three years to expand Natural Sciences and Engineering Research Council of Canada’s (NSERC) College and Community Innovation Program, which is designed to help Canadian businesses access expertise and research and development (R&D) facilities through partnerships with Canadian colleges and technical institutes. The budget also includes significant investments in Canada’s forestry and agriculture sectors.
Natural Resources Canada (NRCan) is investing $368.4 million over three years to focus on R&D, data and innovation to advance Canada’s forestry sector and establish Canada as a sustainable forest products leader. Agriculture and Agri-Food Canada is also establishing a Dairy Innovation and Investment Fund, which represents $333 million over 10 years. This is a different approach than what is in the IRA, which focuses largely on forest conservation and resilience and supports clean tech transition in rural communities.
Another marked departure from the IRA are the government’s investments in tools that aim to improve business certainty for companies contributing to Canada’s net-zero targets. One example is Carbon Contracts for Difference (CCfD), which are funded under the Canada Growth Fund. This will allow eligible companies (likely renewable energy companies) to formulate a contract with the federal government to agree upon a fixed price on carbon over a period of time. As the market price for carbon fluctuates, these businesses can rely on a standard price for carbon in their business models. See below for a helpful diagram from McMillan:
Also noted in the Canadian budget was the absence of tax incentives for biofuels and sustainable aviation fuels (SAFs). This may stem from the fact that the federal government has invested significantly to operationalize the Clean Fuel Standard over the past few years and has instead opted to extend tax credits to decarbonization pathways that are less established. This approach varies from our neighbour to the south, with the IRA providing specific tax incentives for biodiesel, including the clean fuel production credit, sustainable aviation fuel credit, biodiesel and renewable diesel credits and extension of the second-generation biofuel incentives through 2024. The most recent Canadian federal budget only references a commitment to further engage industry around biofuels and SAF. Some are arguing this may lead to a potential competitiveness gap between the two countries when it comes to renewable fuels.
The Made-in-Canada Plan leverages previous federal clean technology and energy investments to drive further clean economic growth and transformation. The government is sending strong market signals that a net-zero future is a priority, with a renewed emphasis on clean energy projects, transportation infrastructure upgrades, and natural resource sector decarbonization.
However, for a budget rooted on a “Strong Middle Class, Affordable Economy, and Healthy Future,” it was interesting to see that there was very little included on new investments to support Canadians in obtaining and developing the necessary skills for the transition to a greener economy. Last year’s budget included several investments, which were referenced in the interim Sustainable Jobs Plan last month. It was hoped that budget 2023 would build on those investments and further specify training, upskilling, and job transition programs.
The Made-in-Canada Plan is a great start, but it’s also clear that more strategic investment will be needed to transform our economy and provide certainty to businesses that Canada is a place to invest. It’s estimated that upwards of $140 trillion (yes, trillion!) will need to be invested globally by 2040 for net zero by 2050 to remain a possibility. Canada stands to benefit significantly from this investment opportunity if we can convince the world that we’re a market worth betting on.