Budget 2022: More building blocks for a clean industrial transition

April 8, 2022

Budget 2022 recognizes the critical importance of addressing climate and transition challenges in economic strategy by taking “significant and transformative steps to put our economy on the path to reach net-zero by 2050.” This appears in chapter 2 of the budget, coming only after housing, which has jumped to the top of the list this year in terms of priorities.

The budget suggests that the government wants to reinvigorate the country's growth agenda to help drive the transition, and importantly, is listening to some of the right signals. In general, Budget 2022 isn’t so much about new spending for the transition, but reorganizing and looking for smarter ways to fund support to the transition. This is one important conclusion of our report on Canada’s Future in a Net-Zero World. In this vein, two initiatives stand out in the budget.

First, the government proposes to create an innovation and investment agency with $1 billion over five years. The Finnish agency TEKES (now part of Business Finland) is mentioned as a possible inspiration in Budget 2022. Leading innovation scholar, Dan Breznitz, has proposed this model for Canada as preferable to the idea of CARPA (a Canadian version of the U.S. Defense Advanced Research Project Agency). The agency will be “operationally independent”, following a key learning of modern industrial strategy.

The success of this new agency in supporting a clean transformation of the Canadian economy will depend very much on the details of its governance and operations. An evaluation last year of Business Finland programs in cleantech and biotech (disclosure: this was led by one of us) highlighted the challenges in ensuring alignment between the agency's activities and government strategies. This challenge will be compounded in Canada’s federal-provincial-territorial landscape. Sufficient internal capacity and expertise was also identified as an issue in the case of Business Finland, and Budget 2022 hasn’t clarified what the new agency’s operating budget will be.

Second, Budget 2022 proposes to create a Canada Growth Fund. The fund will invest through a range of instruments, including “debt, equity, guarantees and specialized contract” with an initial capitalization of $15 billion over five years. The stated aim is to crowd-in private capital on a 3-1 basis. This could also include investments by Canada’s pension funds, an important source of patient capital.

Also operating at “arms-length” from the government, this public investment vehicle will focus on investing in low-carbon technologies and opportunities in transforming Canada’s existing industries, including a specific mention of transformation of natural resource sectors. This suggests a strategic focus on many of the areas we proposed. Indeed, the fund appears to deliver on a key recommendation made in 2020 by the Industry Strategy Council, chaired by Monique Leroux.

As we argued, based on the work of Breznitz and others, the independence of these funds is crucial to creating the kinds of robust public-private collaboration necessary to make good investments over the course of the energy transition.

These two new initiatives constitute new funding commitments, though it’s not clear yet what other relevant areas may see previous commitments reduced. At the same time, Budget 2022 also modestly extends funding for the SuperClusters, now renamed the Global Innovation Clusters, with $750 million over five years. In addition, there are some specific spending commitments to further support the development of small modular reactors, $120 million over five years.

There are additional elements for the clean transition. Budget 2022 allocates $3.8 billion to support an industrial strategy for Canada’s critical minerals. This delivers on a key provision in the ISED and NRCAN mandate letters: to build a battery industry and innovation ecosystem here in Canada.

A new program will provide $547.5 million over four years to support businesses to launch a new purchase incentive program for medium- and heavy-duty ZEVs. This provides demand pull for a homegrown industry that has a real opportunity to fuel job growth and business expenditure on research and development.

There is also a promise of tax credits for CCUS and importantly, other areas of cleantech, that should drive investment in the transition. Sustainable agriculture, heat pumps, and other industries also receive a boost.

Finally, there are also funds for supply chains, transportation corridors, and clean electricity projects, including extending the role of the Canada Infrastructure Bank, which provide the structural, enabling conditions for industrial transition. If we are to seize Canada’s opportunities in the energy transition, we need to translate these investments into extending Canada’s ESG advantage.

When you put all this together, Budget 2022 provides the building blocks for the industrial strategy Canada needs in order to drive industrial transition for net-zero and seize opportunities in global supply chains.

Creative coordination is key

The success of the new Canadian Innovation and Investment Agency and the Canada Growth Fund in supporting Canada’s needed industrial transformation will in large part be determined by the specific details of their setup and operation. A critical issue is how their priorities and activities will be coordinated and engagement secured from other stakeholders, in particular the private sector, innovators and entrepreneurs.

Coherence and alignment with priorities at different levels of government will not be automatic either. Budget 2022 proposes to establish a permanent Council of Economic Advisors, to provide “expert advice and provide policy options for harnessing new opportunities”. Seemingly in parallel, the Sustainable Finance Action Council will develop “strategies for aligning private sector capital with the transition to net-zero”.

There appear to be plenty of ingredients for success, but the government needs to think carefully about the best recipe that ensures that all these initiatives pull in the same direction, and are informed by but not beholden to either business nor political whims. There is also a need to focus investment in priority areas so that funds are not spread too thin.

Our recent report contains a number of proposals on how to do this. We can get started today by co-creating sectoral roadmaps for critical minerals, medium and heavy duty vehicles, clean electricity, green transportation corridors, mass timber, value-added agriculture, and more. Then, once these roadmaps are in deployment, we can start to tie them together into a broader national strategy that is experimental and adaptive, but still building coherence across sectors.

The new Canadian Innovation and Investment Agency should be involved in these exercises. So too should the proposed strategies for net-zero to be developed under the Sustainable Finance Action Council with the Canadian Climate Institute.

In short, the kind of roadmaps we propose in Canada’s Future in a Net-Zero World could be a meeting place and coordination device for these new elements.

For more SPI response to Budget 2022, check out: