March 4, 2020

By Mike Moffatt

How can Budget 2020 help build a stronger, cleaner economy? This month SPI draws on the latest research to highlight four good bets for how Budget 2020 can launch us in the right direction. See all four bets here.

The federal government has a big opportunity to accelerate the development and adoption of low-carbon technologies in 2020. Here’s how they could do it...

The opportunity is a massive one; the Smart Prosperity Growing Clean report forecasts that the demand for low-carbon products will double through 2030. In Budget 2020, I’ll be looking for policies that help Canadians take advantage of this pent-up demand for low-carbon solutions. But before we try to predict which policies the government might adopt, first we need to understand the opportunity.

What is a low-carbon technology?

The report defines low-carbon technology as follows:

“Environmental and Clean Technology is defined as any process, product, or service that reduces environmental impacts. For the purpose of this analysis, we similarly define low-carbon technologies to ensure GHG reductions, with mapping to the Government of Canada’s Environmental and Clean Technology Products Economic Account.”

We can break the set of low-carbon technologies into five types:

1. Renewable Fuels
2. Low-Carbon Vehicles
3. Building Efficiency and Electrification
4. Industrial Decarbonization
5. Decarbonized Electricity

How do we know investment in these technologies will double?

The short answer: through economic modelling. Here’s the long answer, from the report:

“Economy-wide economic and energy modelling is used to stimulate a future where Canada scales-up climate and energy policy (current and developing) to achieve the 2030 target of a 30% reduction in GHG emissions compared to 2005 levels. In our scenario, the stringency of climate and energy policy is ratcheted-up to achieve total Canadian GHGs of 543 Mt in 2030. The remaining mitigation commitment (i.e. to reach 512 Mt) is met through 31 Mt of carbon credits from Quebec’s cap-and-trade market linked with California, as well as other internationally transferred mitigation outcomes.

In the analysis, we track private sector investment in fixed-non-residential capital and household capital expenditures to estimate investment, closely following the national accounting approach to estimating investment. Therefore, the estimates can be broadly compared against published statistical agency investment data. The Navius Research g-Tech model underpins the analysis.”

Which low-carbon technologies will experience the highest levels of investment?

Of our five types of low-carbon technologies, the report forecasts that decarbonized electricity will experience over half of the cumulative investment dollars between 2020 and 2030:

If this investment in low-carbon technologies is going to happen anyway, why do we even need additional public policy?

While the report forecasts an increase in demand for these products, public policy (beyond carbon pricing) can play a role in accelerating investment. There are several reasons the federal government may adopt policies in Budget 2020 to accelerate this investment, including:

1. The projection in the report assumes increasing stringency of existing policies, for Canada to hit our GHG targets. Some of those policies to increase stringency could appear in Budget 2020.
2. The projection assumes that 31 Mt of carbon credits will be purchased in 2030, at a cost of billions of dollars. By using policy, we can further reduce Canada’s greenhouse gas footprint, which shrinks (or eliminates) the number of credits that need to be purchased.
3. Canada may want to exceed our greenhouse gas target, to provide a ‘cushion’ for unforeseen events.
4. Policies to accelerate the adoption of cleantech in Canada creates markets for domestic firms, which can help our companies create products that can be exported all over the world.

What are the possible federal policy responses to accelerate investment? What could we see in Budget 2020?

There are a basket of possible tools at the federal government’s disposal. Five broad themes of policy that appear promising include:

1. Increased research and development dollars for cleantech.
2. Enhanced access to capital for cleantech firms, which could include investor tax credits and flow-through shares.
3. Reducing regulatory barriers that prevent the development or adoption of low-carbon technologies.
4. Enhanced regulation requiring the adoption of cleaner technologies.
5. Incentives for the adoption of low-carbon technologies, such as the accelerated capital cost allowance.

As for what the federal government will actually do, the first place to look is in trial balloons. Earlier this month, the Prime Minister suggested that write-offs are coming for off-road electric cars, an incentive for the adoption of low-carbon technologies. The other place to look is the Liberal election platform, which promised halving the corporate income tax rate for manufacturers of zero-emissions technologies. This helps cleantech start-ups and scale-ups attract capital, as investors will be able to retain a larger portion of profits in the future. Hopefully, we will see additional policies that touch on the rest of our five themes!