The federal budget provides an estimated $80 billion for clean technologies but doesn’t shift support offered to oil and gas.
By Mitchell Beer
An array of new tax credits for clean energy development and a pledge to secure Canada’s place in a global green economy are at the centre of this year’s federal budget, released Tuesday afternoon by Deputy Prime Minister and Finance Minister Chrystia Freeland, with an estimated $80 billion in multi-year funding for mostly clean energy technologies.
In what may be a first for a federal budget in Canada, the document includes an RBC Economics chart that shows electricity from solar and wind costing less than natural gas. “As electricity becomes the main source of energy, daily and seasonal demand peaks will become more pronounced. Canada will need to invest heavily in renewable generation,” the budget says.
The 270-page document lays out eight priorities for the shift to a clean economy: electrification, clean energy, clean manufacturing, emissions reduction, critical minerals, infrastructure, electric vehicles and batteries, and major projects. It introduces three tiers of strategic financing to draw private sector investment to those areas: an “anchor regime” of investment tax credits; low-cost strategic financing through the Canada Infrastructure Bank and the Canada Growth Fund; and targeted investments to meet specific sectoral needs or support projects of “national economic significance.”
Globe and Mail columnist Adam Radwanski says the government’s approach represents a risky bet on private markets that may not deliver financial support equivalent to the Biden administration’s August, 2022 Inflation Reduction Act (IRA). While the U.S. funding directly subsidizes clean energy production, Canada’s investment tax credits focus on the up-front capital cost of getting new production capacity in place, while using the Canada Growth Fund to take some of the risk out of private sector investment.
“If the government has put [the new incentives] in place properly, Canada will be able to compete with the U.S. If not, Ottawa will be forced either to watch cleantech investment head elsewhere or step back into the direct subsidy game from which it is trying to at least partly extricate itself,” Radwanski writes.
“Freeland’s bet is that, with existing Canadian advantages in attracting cleantech investment, such as a national carbon price, Ottawa doesn’t need to fully match what the U.S. is doing on tax credits,” he adds. “But whether it’s come close enough in that regard won’t really be clear until the credits are in place and business decisions are being made accordingly.”
The budget also lays out a series of work force measures, requiring employers that receive federal tax credits to pay prevailing wages based on union rates and set aside at least 10% of tradesperson hours for apprentices. For companies that fall short of those markers, the 15% clean technology and hydrogen tax credits will fall to 5%.
The document mentions future plans to fund biomass energy and introduce carbon contracts for difference, a form of legal agreement that makes the impacts of carbon pricing more predictable and can also protect the budget’s cleantech investments from being overturned by a future government. It also commits Ottawa to disclose the cost of federal subsidies to Volkswagen’s recently-announced battery gigafactory in St. Thomas, Ontario once the deal has been finalized.
“This massive battery manufacturing facility will represent a significant portion of the North American battery manufacturing sector,” the budget document states. “It will cement Canada’s place in the North American and global battery value chains, and create good middle class jobs for Canadians, both at the facility itself and across Canada’s battery and critical minerals sectors.”
The budget mandates the Public Sector Pension Investment Board (PSP Investments) to manage the Canada Growth Fund, while adding two seats for trade union representatives to its board.
It includes funding streams for nuclear power generation through the investment tax credits for clean electricity and cleantech manufacturing.
‘Opportunity of a lifetime’
In her speech to the House of Commons Tuesday afternoon, Freeland framed the 2023 budget as part of “the most significant economic transformation since the Industrial Revolution,” in which Canada’s major trading partners are investing heavily in the clean economy and net-zero industries. At the same time, Russia’s war in Ukraine and the impacts of the pandemic “have cruelly revealed to the world’s democracies the risks of economic reliance on dictatorships,” prompting countries to “friendshore their economies and build their critical supply chains.”
Those two shifts combined “represent the most significant opportunity for Canadian workers in the lifetime of anyone here today,” Freeland said.
But the budget also casts the global shift toward energy transition technologies as a challenge.
After the U.S. IRA poured US$369 billion into mostly clean energy transition technologies, “the sheer scale of U.S. incentives will undermine Canada’s ability to attract the investments” without swift action, the budget document states. “If Canada does not keep pace, we will be left behind. If we are left behind, it will mean less investment in our communities, and fewer jobs for an entire generation of Canadians.”
It adds: “We will not be left behind.”
Gas plants and carbon capture: details to follow
The budget contains no acknowledgement of the $10 billion the fossil fuel industry had demanded to help pay for the carbon capture technologies it sees as its ticket to future oil and gas extraction. In mid-October, the Pathways Alliance, whose six members account for 95% of Canadian oil sands production, announced a $24.1-billion investment in a carbon capture hub in Alberta and a series of other emission reduction projects, but made it conditional on federal support—despite record industry profits, and on top of the $7.1 billion tax credit that Freeland had already sent their way in her 2022 budget.
“Obviously, we would love to see that tax credit explicitly exclude CCUS the oil and gas sector, but I do want to give the government credit where due,” said Vanessa Corkal, senior policy advisor at the Winnipeg-based International Institute for Sustainable Development. With program details still to be announced, “industry will be pushing hard for specific handouts for carbon capture, but I’m happy to see that there aren’t specific measures in this budget.”
The words “oil sands” do not show up in the budget document, but it does apply the clean electricity tax credit to “abated natural gas-fired electricity generation,” opening a door to carbon capture based on an emissions intensity threshold meant to keep any investment in line with the federal government’s 2035 deadline for a net-zero grid. Corkal said carbon capture projects might qualify for finance through the Canada Growth Fund, and Dale Beugin, executive vice president of the Canadian Climate Institute, said carbon contracts for difference could also become a funding pathway for CCUS.
In an analysis posted last week, Beugin said contracts for difference could make it easier for carbon capture projects to generate emission reduction credits that they could sell for cash.
The sliding scale in the hydrogen tax credit could also encourage “blue” hydrogen projects that use CCUS to capture emissions from natural gas, despite expert analysis showing that the technique produces more emissions than just burning the gas. The tax credit ranges from 40% for hydrogen projects that produce less than 750 grams of emissions per kilogram of hydrogen, down to 15% for installations that generate two to four kilos of carbon dioxide or equivalent per kilo of hydrogen.
The hydrogen tax credit continues to shut out projects that would use captured carbon to squeeze more oil out of the ground through a process called enhanced oil recovery (EOR). The fossil fuel lobby had tried and apparently failed to challenge that exclusion in the months leading up to the budget.
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