November 23, 2018

By William Scott and Stewart Elgie

The recent Fall Economic Statement (FES) included investments to boost innovation and clean growth in Canada through incentives to adopt clean technology equipment, modernize the regulatory framework, and invest in clean innovation. In his speech, the Minister of Finance highlighted the opportunity for Canada to lead in a global clean growth economy, which represents a $26 trillion global opportunity over the next 12 years, as part of an ambitious plan to increase Canadian business exports by 50% by 2022.

The FES acts on many of the recommendations from the federal Economic Sector Strategy Tables. Three of its key highlights in terms of clean growth and innovation are summarized below, alongside Smart Prosperity Institute analysis looking at what measures need to follow to fully implement the Strategy Tables’ proposals for boosting both economic competitiveness and environmental performance.

Incentives for Investment in Clean Energy and Manufacturing Equipment

• The FES increased the eligible write-off for investments in clean energy and manufacturing equipment to 100% in the first year. This is a two-prong opportunity for Canada: first, to bring down business-related taxes to support competitiveness and promote investment in light of recent tax changes in the US; and second, to do so in a targeted way that helps advance Canada’s clean growth, climate and innovation agendas.
• It also announced an Accelerated Investment Incentive that will increase the capital cost allowance for all types of capital equipment in all sectors “up to 3 times the current first-year amount”, but not the full 100% (which is just for the above-noted types of equipment).

Comment: The targeted 100% accelerated capital cost allowance (ACCA) is a much-needed incentive that will substantially boost Canadian business investment in clean energy technology and reduce emissions. The measure covers 19 specific clean energy technologies that currently get 30-50% ACCA. There is an opportunity to further encourage the adoption of clean technologies across all sectors of the economy by extending the scope of this incentive to include other types of clean technology, such as for water, waste, and air pollution, as recommended by the Economic Strategy Tables (Resources and Clean Tech).

The Resource Sector Strategy Table also recommended a separate Investor tax credit, to spur investment in small, growing clean tech companies (that do not benefit directly from the ACCA). This would draw in much-needed private capital to finance Canada’s emerging cleantech firms that are poised for growth and leverage the significant public investment of over $2 billion in clean tech innovation in Budget 2017.

Regulatory Innovation

Following the recommendations of the Economic Sector Strategy Tables, the FES included new initiatives to modernize the regulatory framework to encourage innovation and competitiveness. Specifically, it announced:

• A new Centre for Regulatory Innovation to act as a convenor to help connect businesses with regulators and manage a roster of regulatory sandboxes to support innovation and competitiveness while maintaining environmental and health standards ($11.4 million over four years, plus $3.2 million per year thereafter).
• Strengthening the capacity of federal departments to incorporate economic and competitiveness considerations when designing and implementing regulations ($10 million over 3 years).
• An External Advisory Committee on Regulatory Competitiveness of business leaders, academics and consumer representatives to provide independent advice on barriers to competiveness, identify opportunities to modernize regulations, and identify priority areas for the Centre for Regulatory Innovation.

Comment: These initiatives are positive and very important. However, clarification is needed to ensure they fully align with the Economic Strategy Tables’ recommendations. In particular, the Resources and Clean Tech tables recommended that regulatory reform should achieve better economic and better environmental outcomes.  Lessening the regulatory burden on business by reducing time uncertainty, cost and duplication is a key element to boost competitiveness. However, it is critical to do so in a manner that includes world-class stringency, flexibility and predictability of environmental rules to spur clean performance and innovation.

Past efforts at regulatory reform have failed, in part, because they were seen as being only about improving competiveness, without achieving other public benefits related to health and the environment.  To avoid this trap, the Economic Tables proposed regulatory reform as a win-win opportunity, to advance both “clean” and “growth” objectives. It is important that the FES’s regulatory modernization initiatives are clearly targeted to achieve this dual mandate of improving both economic and environmental outcomes, by spurring clean innovation.

Innovation funding

Building on the success of investments in clean innovation from previous budgets (see our 2017 and 2018 summaries) that helped Canada jump up to #4 on the 2017 Global Cleantech Innovation Index, the Fall Economic update added to those investments with:

• An additional $50 million investment in the Venture Capital Catalyst Initiative (which received $400M in Budget 2017) to increase cleantech venture capital investment.
• An additional $800 million over five years to the Strategic Innovation Fund, which will support innovative investments across the country in all economic sectors - with $100 million targeted to the forest sector.

The Minister of Finance also announced the creation of an Advisory Council on Climate Action focussed on addressing climate change and clean growth in the transportation and buildings sectors. The FES provided projections of the recently announced Climate Action Incentive payments, which will return carbon pricing revenues to Canadians in provinces where the federal backstop is applied.

On the whole, by incentivizing the adoption of clean technology equipment, modernizing the regulatory framework, and investing in clean innovation, the Fall Economic Statement of 2018 promises to boost clean growth and innovation in Canada – helping to generate jobs and reduce emissions.

It is a strong step in the right direction, and implements many of the recommendations from the Economic Sector Strategy Tables. Building on the FES, further measures will be required to fully act on those recommendations – to spur clean technology investment across all economic sectors, help young firms grow, and ensure that regulatory reform boosts both economic and environmental performance, to build a stronger, cleaner Canadian economy.