March 28, 2023

By Mike Moffatt

Federal budgets are political documents as much as economic ones, with each year’s budget having a theme. If the theme of last year’s budget was housing, this year’s is cleantech and clean energy, with the government announcing 21 billion dollars in new initiatives over the next five years. These programs are designed to aid the government in their clean growth objectives and ensure Canada remains competitive in response to the U.S. Inflation Reduction Act. Four of these initiatives, ‘An Investment Tax Credit for Clean Electricity,’ ‘Supporting Clean Electricity Projects,’ ‘An Investment Tax Credit for Clean Technology Manufacturing,’ and ‘An Investment Tax Credit for Clean Hydrogen’ account for $17.4 billion, or over 80% of the 21 billion dollar package.

An Investment Tax Credit for Clean Electricity

Budget 2023 introduces a 15 percent tax credit for investments in clean electricity. The tax credit is refundable, allowing start-ups and other pre-profit companies to collect the credit. Eligible technologies and investments include generation technologies such as wind, solar, hydro, wave, tidal, nuclear, and abated natural gas-fired. Stationary energy storage from batteries, compressed air storage, and pumped hydroelectricity are also eligible, along with equipment for electricity transmission between provinces and territories. There are eligibility criteria, most notably that to collect the full credit, companies must ensure that “wages paid are at the prevailing level” and that apprenticeship training opportunities are created. The federal government notes that the push to electrification is going to create the need for additional net-zero generation, storage, and distribution investments and believes that the measure will cost the treasury $6.3 billion from 2024-25 to 2027-28 and an additional $19.4 billion from 2028-29.

Supporting Clean Electricity Projects

As part of a 13-year initiative with an expected cost of $3 billion, the federal government has committed to additional funding for the Smart Renewables and Electrification Pathways program, renewing the Smart Grid program, and creating new investments in offshore wind, particularly in Atlantic Canada.

An Investment Tax Credit for Clean Technology Manufacturing

Budget 2023 commits to eleven years’ worth of investment tax credits, worth an estimated $11.1 billion, to begin on January 1, 2024, and to be eliminated by the end of 2034. These tax credits focus on investments in the manufacturing and processing of clean technologies and the extraction and processing of critical minerals. Like the clean electricity investment tax credit, the credit would be refundable but at 30 rather than 15 percent. The eligible investments include:

• Investments for the extraction, processing, or recycling of critical minerals.
• Manufacturing of renewable or nuclear energy equipment and processing and recycling of nuclear fuels.
• Manufacturing of grid-scale electrical energy storage equipment like batteries, as well as manufacturing of zero-emissions vehicles.
• Manufacturing of “processing of certain upstream components and materials,” such as batteries used in electric vehicles.

Unlike some of the other cleantech measures announced in the budget, no labour standard eligibility provisions are associated with the clean technology manufacturing tax credit.

An Investment Tax Credit for Clean Hydrogen

The clean hydrogen measure is implementing a program announced in last year’s Fall Economic Statement. The clean tax credit is designed to compensate firms for investments in clean hydrogen production. Like the other tax credits above, the tax credit is refundable, and unlike the clean manufacturing tax credit, minimum labour standards are needed to be eligible for the credit. The rate of the credit is proportional to the carbon intensity of the project (in terms of the expected life-cycle emissions), with the cleanest projects (those with an intensity under 0.75 kg) eligible for a 40% credit rate and projects with a carbon intensity of 4 kg and higher being ineligible entirely. The government anticipates the tax credit cost to be $12.1 billion between now and fiscal year 2034-35.

Ultimately, the effectiveness of these measures is determined by industry’s willingness to invest

These measures, and others in Budget 2023, such as expanded eligibility for the Clean Technology Investment Tax Credit and enhancements to the Carbon Capture, Utilization, and Storage Investment Tax Credit, are not direct investments in cleantech but rather create incentives for the private sector to invest. This approach is a shift for the federal government, as past initiatives have relied heavier on direct spending initiatives, such as innovation superclusters. Budget 2023’s relatively hands-off approach has many advantages, as it allows markets, rather than governments, to identify the best investments and prevents governments from spending money without impact. If the private sector does not invest, the government expends no money on these credits. Let’s hope innovators pick up on these signals from the federal government and recognize the opportunity to contribute to Canada’s clean economy.