Electricity infrastructure, critical minerals, batteries and EV manufacturing all highlighted in a federal budget that harnesses the power of tax credits to bet big on Canada’s potential as the global “clean supplier of choice”

In the first year out of pandemic emergency measures, Canada’s federal government is proposing to invest heavily in national clean energy and clean tech sectors, as detailed in Budget 2023.

The 373-page, annual fiscal disclosure is a “Made-In-Canada” economic plan that will invest heavily in a clean, next-generation economy. There is over $21 billion in new funding. And Budget 2023 contains multiple tax credits to further attract investments in the manufacturing, energy and tech sectors.

The total planned new tax credit investments come to roughly $55 billion.

“Canada has the potential to become a clean electricity superpower with a cross-Canada electricity grid that is more sustainable, more secure, and more affordable,” reads the Budget, in part.

To seize on that potential the government is utilizing three streams of financial incentives: tax credits, strategic financing and targeted investments.

“While the transition to clean energy is a nation-building project that won’t be complete in one fell swoop, Tuesday’s budget builds on Canada’s pre-existing climate measures while injecting capital into a clean industrial strategy, helping secure our nation’s many competitive advantages,” reads a statement from Mark Zacharias, executive director at Clean Energy Canada.

The IRA effect

One of the looming question marks leading up to Budget 2023 was how Canada would respond to the United States’ 2022 Inflation Reduction Act (IRA).

With over US$369 billion in incentives, the IRA presents a “major challenge” for Canada’s competitiveness in the clean economy sectors.

“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 and the net-zero industries of tomorrow,” said Deputy Prime Minister and Minister of Finance Chrystia Freeland when introducing Budget 2023 to the House of Commons.

“We are going to make Canada the very best place in the world for businesses to invest,” said Freeland. “However, without swift action, the sheer scale of U.S. incentives will undermine Canada’s ability to attract the investments needed to establish Canada as a leader in the growing and highly competitive global clean economy.”

The Liberal government’s “swift action” to counter the IRA comes in the form of roughly $55 billion in new tax credits ($83 billion factoring in credits previously announced that come into effect this year) until 2035.

In addition, the government says it is considering implementing a “reciprocal treatment” condition to access tax credits. This means that foreign companies are only eligible for the equivalent credit as Canadian companies get in their respective countries.

Overall, Budget 2023 is, says Rick Smith, President of the Canadian Climate institute, “a shrewd response to the U.S. Inflation Reduction Act.”

Investing in competitive clean energy, clean tech

The prevailing goal of Budget 2023’s clean energy and clean sector investments is to keep Canada competitive. The Budget notes that global supply chains and alliances are shifting as countries race towards decarbonization.

“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 Freeland.

The centrepiece of its response is the introduction of two new, multi-billion-dollar tax credits.

The first is a 15 per cent Investment Tax Credit for Clean Energy investments. It is estimated to cost $25.7 billion through to 2035.

The credit covers:

• Non-emitting electricity generation systems,
• Abated natural gas-fired electricity generation,
• Stationary electricity storage systems (batteries, pumped hydroelectric storage and
  compressed air storage); and
• Equipment for the transmission of electricity between provinces
  and territories.

Second is the Investment Tax Credit for Clean Technology Manufacturing. It is “a refundable tax credit equal to 30 per cent of the cost of investments in new machinery and equipment used to manufacture or process key clean technologies, and extract, process, or recycle key critical minerals.”

Eligible investments under this tax credit include those for “manufacturing grid-scale electrical energy storage equipment; manufacturing of zero-emission vehicles; and, manufacturing or processing of certain upstream components and materials…such as cathode materials and batteries used in electric vehicles.”

The Budget expects the latter credit to cost $11.1 billion during the same period.

“Market-driven” approach

Because these are tax credit mechanisms, the totals will only be paid out if private sector capital is invested. This approach, states the government in Budget 2023, is “a market-driven approach to emissions reduction.”

In addition, two existing tax credit schemes are expanding.

The Investment Tax Credit for Carbon Capture, Utilization and Storage will now cost $12.4 billion through to 2035. The Clean Hydrogen Investment Tax Credit will cost $12.1 billion during the same period.

Budget 2023 also proposes “at least $20 billion to support the building of major clean electricity and clean growth infrastructure projects.” This funding will come through the Canada Infrastructure Bank.

As well, $3 billion over 13 years (starting in 2023) is proposed to go to Natural Resources Canada to decarbonize grids across the country.

“The unprecedented allocation of funds to build out clean electricity, representing $28 billion over 13 years, is very welcome,” said Julia Langer, CEO of The Atmospheric Fund (TAF), in press comments.

““Overall, this budget is a significant commitment to decarbonizing our electricity system and competing with cleantech manufacturing and industry abroad.”

Canada Growth Fund disbursement plan

Disbursing $15 billion Canada Growth Fund investments through the Public Sector Pension Investment Board (PSP) is an unexpected change.

The Canada Growth Fund was “initially launched [in the government’s 2022 Fall Economic Statement] as a subsidiary of the Canada Development Investment Corporation (CDEV),” reads the Budget. It is an arm’s length public investment vehicle that will help attract private capital to build Canada’s clean economy “by using investment instruments that absorb certain risks in order to encourage private investment in low carbon projects, technologies, businesses, and supply chains.”

The aim of the fund is to offer risk protection to private companies investing in the clean economy. The hope is that it will spur more rapid growth.

By partnering with PSP, reads Budget 2023, the funds will deploy faster; perhaps the first half of 2023.

“Canada has free trade deals with countries that represent two-thirds of global economy,” said Freeland.

“We are going to make Canada a reliable supplier of clean energy to the world, and, from critical minerals to electric vehicles, we are going to ensure that Canadian workers mine, and process, and build, and sell the goods and the resources that our allies need.

To enable the PSP to manage the assets of the Growth Fund, a legislative change must occur. The Budget proposes this happen in Fall 2023.

To read the full Budget 2023 visit here.