Corporate subsidies dominate Budget 2023’s climate spending

The federal government is banking on tax breaks for companies — to the tune of more than $80 billion — to usher Canada into a low-carbon economy, Tuesday’s budget announcements show.

The suite of federal investment tax credits targets clean electricity, hydrogen, carbon capture, critical mineral extraction and manufacturing of clean technology related to electric vehicles, nuclear and energy storage. Of the $80.8 billion earmarked for tax credits over the next 11 years, $56.5 billion are new commitments or increases to previous announcements, representing a 232 per cent leap from the previous year.

The clean electricity tax credit, estimated to cost $25.7 billion from 2024 to 2035, is the biggest of the bunch. It will cover 15 per cent of eligible investments in non-emitting electricity generation (like wind, solar, hydro, nuclear and more), transmission equipment and electricity storage (like batteries and hydroelectric storage). Natural gas power plants outfitted with carbon capture technology will also be eligible for this tax credit, even though, as the Institute for Energy Economics and Financial Analysis shows, CCUS technology has failed to deliver on its promised results for 50 years and by definition does not tackle the majority of emissions when the gas is ultimately burned.

Budget 2023 is an attempt to reconcile an economy struggling with inflation with significant spending on core issues like health care and addressing climate change. On the climate file, a senior official with Finance Canada estimated $100 billion annually was needed, indicating a growing awareness of the sheer scale of the crisis.

If $100 billion per year is what’s needed, Canada is still failing to mobilize capital at the scale or pace required to avert catastrophic warming, according to the best available climate science. The government’s new spending averages to a little more than $8 billion annually, though it does aim to attract private capital through that spending, too. Together, Budget 2023 is expected to represent between $15 billion and $20 billion per year being spent on climate action from public and private sources, a senior official said.

“Today, and in the years to come, 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 Deputy Prime Minister and Finance Minister Chrystia Freeland.

The federal government is “going to build a clean electrical grid that connects Canadians from coast-to-coast-to-coast” and make Canada a reliable supplier of clean energy, critical minerals and electric vehicles, she said.

Capital investment is the key to success here, a senior government official told media in the budget day lockup in Ottawa. “We cannot regulate our way to a clean economy. That just won’t work.”

The senior official called the tax breaks the “workhorse” of the government’s plan to get to a net-zero economy. That’s because they leverage private sector investment by making the public shoulder some of the cost.

The tax credits were designed so “decision-making remains in the market,” saying “that’s where it should be because that’s where the expertise is,” he added.

Senior researcher with the Canadian Centre for Policy Alternatives Hadrian Mertins-Kirkwood told Canada’s National Observer the department is taking an ideological approach that creates risk for the public without the benefits.

“It is true and fair to say that capital often lies with the private sector and that we’ve been struggling to get the money, but saying the expertise lies with the private sector is different,” said Mertins-Kirkwood. “That’s saying the government is not capable of managing these clean investments and that we have to depend on private managers to do it.

“Maybe they lack expertise, maybe they don’t have the people they need. But, to me, the answer would be, ‘Let’s get that expertise,’ not ‘Let’s farm out these massive, massive spending programs,’” he added.

There’s an important difference between tax credits costing the public $80 billion and $80 billion worth of direct investments, Mertins-Kirkwood explained. By not taking an equity position in these companies they’re financing, the federal government subsidizes private sector profits by taking on some of the risk.

There’s “absolutely” a case to be made that investment tax credits can help provide certainty and encourage private sector investment, Mertins-Kirkwood said. Nonetheless, he believes the benefits of having a public stake outweigh the risks because it creates opportunities for the government to take a more active role in bringing emissions down at the pace and scale required.

Freeland said Tuesday the country was full steam ahead on major projects. “We’re going to build big things here in Canada,” she said. “From a Volkswagen battery plant in Ontario, to the Galaxy Lithium mine in Quebec, to the Trans Mountain expansion (TMX) in Alberta, to the Atlantic Loop, to the LNG terminal in Kitimat, B.C.”

Mertins-Kirkwood noted the TMX example, whose cost has skyrocketed to $30.9 billion, and called it “one of the great ironies” of Ottawa suggesting the private sector should lead the energy transition.

TMX “is an example of direct public investment in what some would argue is critical infrastructure,” he said. When Kinder Morgan threatened to abandon TMX, the federal government stepped in and bought the project, not because it was the best financial investment, but because it deemed TMX necessary, said Mertins-Kirkwood.

“We’d like to see more of that approach taken when it comes to climate,” he said. “There are a lot of great cases to be made for that sort of investment on that sort of scale that aren’t fossil fuel pipelines.”

Despite the UN’s Intergovernmental Panel on Climate Change recently issuing a “final warning” for the decade that urges countries to rapidly phase out fossil fuels, there are pledges littered throughout Budget 2023 that fly in the face of climate science. There’s $7 million earmarked for “Future Arctic Offshore Oil and
 Gas Development,” as well as carving out room in the “clean electricity” and “clean” hydrogen tax credits for electricity or hydrogen made with natural gas as long as a fraction of the emissions is captured by carbon capture technologies. The science is clear: fossil fuels must be quickly phased out, not made cleaner and produced indefinitely.

Other investment tax credits on the way

Alongside the $25.7-billion clean electricity tax credit, set to take effect next year, Finance Canada proposed several other investment tax credits.

Among them, is a tax credit for clean technology manufacturing. Finance Canada notes that Canada will be left behind unless it aligns with the United States, which is pumping a tremendous amount of money into clean technology. To help align the countries, the department is proposing approximately $11.1 billion over 11 years to help incentivize critical mineral mining and processing, zero-emission vehicle manufacturing, creation of nuclear energy equipment and battery production.

Finance Canada is further expanding its contentious carbon capture tax credit by an additional $520 million, bringing the total cost to the public to an expected $18.1 billion over the coming decade. The increase is related to expanding eligibility, perhaps most notably with British Columbia now being able to access a tax credit for geological CO2 storage.

Budget 2023 also includes a new $17.7-billion tax credit for “clean” hydrogen spread over 11 years. Because hydrogen can be produced using renewable energy, like solar and wind, as well as fossil fuels like natural gas, how “clean” the hydrogen is varies significantly depending on how it’s made. The tax credit is designed to reward cleaner hydrogen by increasing the amount of public dollars available depending on the full life cycle carbon emissions of the fuel. Hydrogen made with wind or solar could receive a 40 per cent tax credit, whereas hydrogen produced using natural gas and carbon capture is expected to receive a 15 to 25 per cent tax credit depending on how well the carbon capture works.

Finance Canada is also disclosing about $1.3 billion worth of new costs related to slashing corporate tax rates for zero-emission technology companies. The department had cut corporate income taxes by half two years ago to incentivize new investment, with an eye toward phasing it out by 2032, and is now proposing to extend that lower tax rate to 2035 to give companies a longer runway to develop technologies.

In the 2022 fall economic statement, the federal government announced a clean technology investment tax credit to help businesses adopt clean technology by refunding them up to 30 per cent of their project costs. Tuesday’s budget proposes to expand eligibility requirements to include geothermal energy while making it clear projects that also produce oil, gas or other fossil fuels would not be eligible.