March 31, 2022

By: Derek Eaton, Anik Islam, John McNally and Mike Moffatt

This post is part 3 in a series of blogs on Investment Tax Credits being released in the lead up to Budget 2022. Click here for post 1 and here for post 2.

 

As per the Finance Minister’s mandate letter, Canada plans to make different clean technologies (cleantech) eligible for Investment Tax Credits (ImTCs). This leads to the question: which cleantech should be eligible for ImTCs? To determine that, there is a need to understand existing processes for selecting cleantech and develop suitable criteria to target both market-ready and emerging cleantech. Both of these will facilitate proper design of ImTCs in line with the five design principles mentioned in the previous blog post.

 

Challenges with the current process

Existing tax instruments such as Accelerated Capital Cost Allowance (ACCA) lists technologies through the Class 43.1/43.2 and Class 54 and 55 list of depreciable property. The same process could also be used for ImTCs as it is advantageous from an administrative and implementation perspective. However, if the same process were to be used, it would be beneficial to address two fundamental drawbacks within the ACCA listing process. First, the current listing process for ACCA misses out on a wide range of cleantech that need to be eligible for tax credits. Second, this list is updated annually on an ad-hoc basis through regulation, which slows down the support required for other market-ready cleantech. The listing process for ImTCs needs to overcome both these problems to be effective and efficient. In particular, the list needs to be updated on a regular basis. Moreover, to select and update cleantech, it is necessary to develop clear and appropriate eligibility criteria. Improper eligibility mechanisms might entrench a few technologies and result in both economic inefficiency and diminished effectiveness in reducing greenhouse gas emissions.

Amongst other things, the eligibility criteria may include the following the three factors:

1) compatibility with a net-zero pathway: tax credits should support cleantech that will be a part of the net-zero energy system that Canada will be building between 2030 and 2050; 

2) cost competitiveness compared to incumbent technologies: the tax credit needs to support cleantech that has a higher cost (lower cost competitiveness) compared to existing alternatives. They need to be phased-out as cleantech reaches competitiveness; and

3) leveraging Canadian industrial strategy opportunities: tax credits need to incentivize cleantech which can present itself as a strategic economic opportunity for Canada in building its competitive advantage in a net-zero world. To do that, there needs to be an assessment of national advantages (resource-wise or technological), potential for innovation and scale and size of markets (whether mass or niche markets). These aspects are analyzed in the recent report Canada’s Future in a Net Zero World, by SPI with partners the Transition Accelerator and PICS. 

 

Matching eligibility criteria with the existing list

To start off, it is useful to look at the existing list of technologies under ACCA’s Class 43.1/43.2, Class 54 and 55. Based on Statistics Canada’s Environmental Goods and Services classification, tax incentives go towards:

  • renewable and non-emitting energy generation (solar, wind, geothermal, wave, tidal, and waste-to-energy);
  • biofuel and bioproduct (biomass to biofuel conversion);
  • energy storage (batteries, pumped hydro, compressed air storage, flywheels);
  • energy efficiency (heat recovery, ground source heat pumps, district energy systems);
  • transportation (motor and passenger vehicles, electric charging equipment); and
  • material, manufacturing & industry, mainly for hydrogen (electrolysers for green hydrogen, hydrogen refueling).

The federal government may provide ImTCs for adoption of some of these listed technologies. Renewable and non-emitting energy generation, energy storage and hydrogen are already eligible. Others such as biofuel and bioproduct, energy efficiency and transport cleantech should be considered and included. They are compatible with a net-zero energy system that Canada wants to develop by 2050. Incentivizing some of these technologies would enable broad sectoral decarbonization, especially in the building and transport sectors. These two accounted for one-third (around 33.8 percent) of Canada’s total greenhouse gas emissions in 2019. Moreover, these technologies are not cost competitive compared to the incumbent technologies (e.g. natural gas run boilers, combustion engine vehicles, etc.).

 

Incorporating other technologies

The federal government will also need to include cleantech which is not in the existing list, as mentioned before. In terms of the three criteria, medium-and heavy-duty zero emission vehicles (MHDZEVs) are a prime example. As Canada transitions to net-zero emissions by 2050, the country will need to use electric or hydrogen fuel-cell powered school buses, municipal vehicles, delivery vehicles, trucks, forklifts and others. MHDZEV will not only reduce greenhouse gas emissions but also provide Canada with a strategic economic opportunity.

As the Canada’s Future in a Net Zero World report highlights, MHDZEV can be a top economic opportunity in the future net-zero world. Canada has advantages in terms of existing mineral resources (lithium, nickel, power generated from non-emitting sources), innovation and technical expertise in automotive production (through firms such as Lion Electric and New Flyer) and close proximity to the large North American markets. The federal government, along with external stakeholders, need to consider other technologies across different sectors which fit these criteria to develop and secure Canada’s competitive advantage in the global zero emissions vehicle value chain.

In summary, Canada needs to consider existing processes and determine eligibility criteria when targeting cleantech for ImTCs. Amongst other things, three factors: compatibility with a net-zero energy system; cost competitiveness with incumbent technologies; and potential to leverage Canadian industrial strategy opportunities, should be considered when deciding which cleantech gets ImTCs. 

Mike Moffatt

Senior Director, Policy and Innovation

John McNally

Senior Research Associate

Derek Eaton

Director of Public Policy Research and Outreach

Anik Islam

Research Associate