The Climate Elements in Canada’s Budget 2023: Just The Facts
May 10th 2023
On March 27, 2023 the Trudeau Government announced its annual Budget in the House of Commons. The purpose of this article is to provide a purely factual summary of the parts of the Budget that concern climate change policy, directly and indirectly. Generally, a federal budget contains a statement of the government’s plans to spend funds approved by Parliament and to change the tax system over a five-year planning period. It also includes a projection of the expected revenues and expenditures of government over the planning period, but I will not cover that here.
Generally, the government indicated its intention to make large expenditures to support what it considers to be “clean” electricity. [1] Using analysis prepared by the Canadian Climate Institute, the budget projected that Canada’s electricity generation requirements will increase from 2010 to 2050 by at least 60% and at most 110%. The government’s policy objective is that by 2035 all electricity generation requirements will be met by non-hydrocarbon sources.
To achieve this, the government announced a number of direct expenditures and tax measures. The latter include mostly “tax expenditures”, that is, tax credits that either reduce the taxes owed by certain companies or provide those companies without tax liabilities with “refundable credits”, which are direct payments.
The new measures announced in the Budget are set out in the following.
The Canadian Infrastructure Bank
As of March 23, 2023, the Canada Infrastructure Bank has spent $8.6 billion on 37 projects in support of its mandate. In 2022, the Trudeau government expanded the mandate of the bank to include funding private sector projects that accelerate carbon dioxide emissions reduction. In Budget 2023, the government announced that the Canada Infrastructure Bank will spend at least $10 billion through its “Clean Power” priority area, and at least $10 billion through its “Green Infrastructure priority area.
Subsidies to Electricity Projects
Budget 2023 proposes to provide $3 billion over 13 years, starting in 2023-24, to recapitalize funding for the Smart Renewables and Electrification Pathways program and to add transmission projects to its purview; renew the Smart Grid program; and fund Canada’s offshore wind potential, mainly off Nova Scotia and Newfoundland and Labrador.
Subsidies delivered by Science and Economic Development Canada
Budget 2023 proposes an unspecified number of “targeted supports” (i.e. subsidies) to support battery manufacturing and advance the development, application and manufacturing of “clean” technologies.
The Canada Growth Fund
The Canada Growth Fund is a subsidiary of the Canada Development Investment Corporation (CDEV) established in 2022 that has $15 billion to give to certain favored projects. Budget 2023 announced that the government intends to introduce legislation to enable the Public Sector Pension Investment Board (PSP Investments) to manage the assets of the Clean Growth Fund so as to attract more private investment in the “clean” economy. PSP is a federal Crown Corporation that is one of Canada’s largest pension managers with more than $225 billion in assets under management. The Growth Fund will be managed independently from the government.
Investment Tax Credit for Clean Electricity
Budget 2023 proposes to introduce a 15% refundable tax credit for eligible investments in:
This tax credit will be available as of the day for Budget 2024 for projects that did not begin construction before the day of Budget 2023. It will not be available after 2034. The Clean Electricity Tax Credit is expected to cost $6.3 billion over four years starting in 2024-25, and an additional $19.4 billion from 2028-29 to 2034-35.
Investment Tax Credit for Clean Technology Manufacturing
Budget 2023 proposes a refundable tax credit equal to 30% of the cost of investments in new machinery and equipment used to manufacture or process key clean technologies and extract, process, or recycle key critical minerals, including:
Investment Tax Credit for Hydrogen
Budget 2023 announces the details of the Clean Hydrogen Investment Tax Credit with the following key design features:
Reducing the Tax Rates for Zero-Emission Technology Manufacturers
Budget 2021 reduced corporate income tax rates by half for zero-emission technology manufacturers to drive investment and create new jobs. These rates, of 4.5 per cent for small businesses and 7.5 per cent for other businesses, are currently scheduled to expire beginning in 2032, subject to a phase-out starting in 2029.
Budget 2023 proposes to extend the availability of these reduced rates by another three years, such that the reduced tax rates would no longer be in effect for taxation years starting after 2034, subject to a phase-out starting in 2032.
Budget 2023 also proposes to extend eligibility for the reduced rates to include the manufacturing of nuclear energy equipment and the processing and recycling of nuclear fuels and heavy water, effective for taxation years beginning after 2023.
These enhancements of the reduced tax rates are expected to cost $20 million over five years, starting in 2023-24, and an additional $1.3 billion from 2028-29 to 2034-35.
Expanding Eligibility for the Clean Technology Investment Tax Credit
The 2022 Fall Economic Statement announced the details of the Clean Technology Investment Tax Credit, which will provide support to Canadian businesses in adopting clean technology at a 30 per cent refundable rate. In Budget 2023, the federal government is expanding the eligibility for the Clean Technology Investment Tax Credit.
Budget 2023 proposes to expand eligibility for the Clean Technology Investment Tax Credit to include geothermal energy systems that are eligible for capital cost allowance Classes 43.1 and 43.2. The Clean Technology Investment Tax Credit would be available to businesses investing in such property that is acquired and becomes available for use on or after the day of Budget 2023. Projects that will co-produce oil, gas, or other fossil fuels would not be eligible for the Clean Technology Investment Tax Credit.
Budget 2023 also proposes to modify the phase-out of the Clean Technology Investment Tax Credit. Rather than starting the phase-out in 2032, the tax credit would now begin to phase out in 2034 and would not be available after that year. Including geothermal systems in this measure is expected to cost $185 million from 2023-24 to 2027-28. This will bring the total expected cost of the Clean Technology Investment Tax Credit to about $6.9 billion over the same period.
Enhancing the Carbon Capture, Utilization, and Storage Investment Tax Credit
Carbon capture, utilization, and storage (CCUS) is a suite of technologies that captures carbon dioxide (CO2 ) emissions to either store the CO2 or to use in other industrial processes, such as permanent mineralization in concrete. In Budget 2022, the federal government announced design details of the Investment Tax Credit for Carbon Capture, Utilization, and Storage— a tool for reducing emissions in high-emitting sectors. In August 2022, a consultation on draft legislation and additional design features was launched, which provided the Department of Finance with submissions that have informed additional design elements of the investment tax credit.
Budget 2023 proposes that the Investment Tax Credit for Carbon Capture, Utilization, and Storage:
The government intends to apply labour requirements to the Investment Tax Credit for Carbon Capture, Utilization, and Storage. Details will be announced at a later date. These labour requirements will come into effect on October 1, 2023. A full package of legislative proposals will be released for consultation in the coming months. Once legislated, the tax credit will be retroactively available to businesses that have incurred eligible CCUS expenses, starting in 2022.
Canada’s Biofuels Sector
The government thinks that the production of biofuels offers economic opportunities for Canada’s energy sector, as well as for Canada’s agricultural and forestry sectors, which provide essential feedstocks used in these fuels. These include canola, pulping liquor, bio-charcoal, and organic matter in municipal and industrial wastes.
In the months ahead, the federal government will engage with the biofuels industry to “explore opportunities to promote its growth in Canada”. This will include an examination of different support mechanisms that could support the sector in meeting the growing demand.
Contracts for Difference
Perhaps the most unusual announcement in the Budget’s climate-related sections concerned the so-called “contracts for difference”, an “investment tool” of the Canada Growth Fund to support clean growth projects. These contracts backstop the future price of, for example, carbon or hydrogen, providing predictability that helps to de-risk major projects that cut Canada’s emissions.
Contracts for difference, it is claimed, would allow companies to plan ahead, supporting the growth of Canada’s clean economy by making clean projects more cost-effective than (i.e. giving them competitive advantages over) more “polluting” projects.
Building on this, Budget 2023 announces that the government will consult on the development of a broad-based approach to carbon contracts for difference that “aims to make carbon pricing even more predictable, while supporting the investments needed to build a competitive clean economy and help meet Canada’s climate goals.” The Budget states that this would complement contracts for difference already offered by the Canada Growth Fund.
Click the button below to view the 2023 budget plan PDF.
View Plan
Credits to Friends of Science, Robert Lyman
blog.friendsofscience.org
Generally, the government indicated its intention to make large expenditures to support what it considers to be “clean” electricity. [1] Using analysis prepared by the Canadian Climate Institute, the budget projected that Canada’s electricity generation requirements will increase from 2010 to 2050 by at least 60% and at most 110%. The government’s policy objective is that by 2035 all electricity generation requirements will be met by non-hydrocarbon sources.
To achieve this, the government announced a number of direct expenditures and tax measures. The latter include mostly “tax expenditures”, that is, tax credits that either reduce the taxes owed by certain companies or provide those companies without tax liabilities with “refundable credits”, which are direct payments.
The new measures announced in the Budget are set out in the following.
Details of Expenditure Measures
The Canadian Infrastructure Bank
As of March 23, 2023, the Canada Infrastructure Bank has spent $8.6 billion on 37 projects in support of its mandate. In 2022, the Trudeau government expanded the mandate of the bank to include funding private sector projects that accelerate carbon dioxide emissions reduction. In Budget 2023, the government announced that the Canada Infrastructure Bank will spend at least $10 billion through its “Clean Power” priority area, and at least $10 billion through its “Green Infrastructure priority area.
Subsidies to Electricity Projects
Budget 2023 proposes to provide $3 billion over 13 years, starting in 2023-24, to recapitalize funding for the Smart Renewables and Electrification Pathways program and to add transmission projects to its purview; renew the Smart Grid program; and fund Canada’s offshore wind potential, mainly off Nova Scotia and Newfoundland and Labrador.
Subsidies delivered by Science and Economic Development Canada
Budget 2023 proposes an unspecified number of “targeted supports” (i.e. subsidies) to support battery manufacturing and advance the development, application and manufacturing of “clean” technologies.
The Canada Growth Fund
The Canada Growth Fund is a subsidiary of the Canada Development Investment Corporation (CDEV) established in 2022 that has $15 billion to give to certain favored projects. Budget 2023 announced that the government intends to introduce legislation to enable the Public Sector Pension Investment Board (PSP Investments) to manage the assets of the Clean Growth Fund so as to attract more private investment in the “clean” economy. PSP is a federal Crown Corporation that is one of Canada’s largest pension managers with more than $225 billion in assets under management. The Growth Fund will be managed independently from the government.
Details of Tax Measures
Investment Tax Credit for Clean Electricity
Budget 2023 proposes to introduce a 15% refundable tax credit for eligible investments in:
- Non-emitting electricity generation systems: wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal, and nuclear (including large-scale and small nuclear reactors).
- Abated natural gas-fired electricity generation (i.e. projects in which the emissions from the natural gas are offset in some way).
- Stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage, and compressed air storage.
- Equipment for the transmission of electricity between provinces and territories.
This tax credit will be available as of the day for Budget 2024 for projects that did not begin construction before the day of Budget 2023. It will not be available after 2034. The Clean Electricity Tax Credit is expected to cost $6.3 billion over four years starting in 2024-25, and an additional $19.4 billion from 2028-29 to 2034-35.
Investment Tax Credit for Clean Technology Manufacturing
Budget 2023 proposes a refundable tax credit equal to 30% of the cost of investments in new machinery and equipment used to manufacture or process key clean technologies and extract, process, or recycle key critical minerals, including:
- Extraction, processing, or recycling of critical minerals essential for clean technology supply chains, specifically: lithium, cobalt, nickel, graphite, copper, and rare earth elements.
- Manufacturing of renewable or nuclear energy equipment; – Processing or recycling of nuclear fuels and heavy water.
- Manufacturing of grid-scale electrical energy storage equipment.
- Manufacturing of zero-emission vehicles.
- Manufacturing or processing of certain upstream components and materials for the above activities, such as cathode materials and batteries used in electric vehicles.
Investment Tax Credit for Hydrogen
Budget 2023 announces the details of the Clean Hydrogen Investment Tax Credit with the following key design features:
- The levels of support will vary between 15 and 40 per cent of eligible project costs, with the projects that produce the cleanest hydrogen receiving the highest levels of support.
- The Clean Hydrogen Investment Tax Credit will also extend a 15 per cent tax credit to equipment needed to convert hydrogen into ammonia, in order to transport the hydrogen. The tax credit will only be available to the extent the ammonia production is associated with the production of clean hydrogen.
- Labour requirements will need to be met to receive the maximum tax credit rates. If labour requirements are not met, credit rates will be reduced by ten percentage points. These labour requirements will come into effect on October 1, 2023.
Reducing the Tax Rates for Zero-Emission Technology Manufacturers
Budget 2021 reduced corporate income tax rates by half for zero-emission technology manufacturers to drive investment and create new jobs. These rates, of 4.5 per cent for small businesses and 7.5 per cent for other businesses, are currently scheduled to expire beginning in 2032, subject to a phase-out starting in 2029.
Budget 2023 proposes to extend the availability of these reduced rates by another three years, such that the reduced tax rates would no longer be in effect for taxation years starting after 2034, subject to a phase-out starting in 2032.
Budget 2023 also proposes to extend eligibility for the reduced rates to include the manufacturing of nuclear energy equipment and the processing and recycling of nuclear fuels and heavy water, effective for taxation years beginning after 2023.
These enhancements of the reduced tax rates are expected to cost $20 million over five years, starting in 2023-24, and an additional $1.3 billion from 2028-29 to 2034-35.
Expanding Eligibility for the Clean Technology Investment Tax Credit
The 2022 Fall Economic Statement announced the details of the Clean Technology Investment Tax Credit, which will provide support to Canadian businesses in adopting clean technology at a 30 per cent refundable rate. In Budget 2023, the federal government is expanding the eligibility for the Clean Technology Investment Tax Credit.
Budget 2023 proposes to expand eligibility for the Clean Technology Investment Tax Credit to include geothermal energy systems that are eligible for capital cost allowance Classes 43.1 and 43.2. The Clean Technology Investment Tax Credit would be available to businesses investing in such property that is acquired and becomes available for use on or after the day of Budget 2023. Projects that will co-produce oil, gas, or other fossil fuels would not be eligible for the Clean Technology Investment Tax Credit.
Budget 2023 also proposes to modify the phase-out of the Clean Technology Investment Tax Credit. Rather than starting the phase-out in 2032, the tax credit would now begin to phase out in 2034 and would not be available after that year. Including geothermal systems in this measure is expected to cost $185 million from 2023-24 to 2027-28. This will bring the total expected cost of the Clean Technology Investment Tax Credit to about $6.9 billion over the same period.
Enhancing the Carbon Capture, Utilization, and Storage Investment Tax Credit
Carbon capture, utilization, and storage (CCUS) is a suite of technologies that captures carbon dioxide (CO2 ) emissions to either store the CO2 or to use in other industrial processes, such as permanent mineralization in concrete. In Budget 2022, the federal government announced design details of the Investment Tax Credit for Carbon Capture, Utilization, and Storage— a tool for reducing emissions in high-emitting sectors. In August 2022, a consultation on draft legislation and additional design features was launched, which provided the Department of Finance with submissions that have informed additional design elements of the investment tax credit.
Budget 2023 proposes that the Investment Tax Credit for Carbon Capture, Utilization, and Storage:
- Include dual use heat and/or power equipment and water use equipment, with tax support prorated in proportion to the use of energy or material in the carbon capture, utilization, and storage process, subject to certain conditions.
- In addition to Saskatchewan and Alberta, be available to projects that would store CO2 using dedicated geological storage in British Columbia.
- Require projects storing CO2 in concrete to have their concrete storage process validated by a third-party based on an ISO standard prior to claiming the investment tax credit.
- Include a recovery calculation for the investment tax credit in respect of refurbishment property.
The government intends to apply labour requirements to the Investment Tax Credit for Carbon Capture, Utilization, and Storage. Details will be announced at a later date. These labour requirements will come into effect on October 1, 2023. A full package of legislative proposals will be released for consultation in the coming months. Once legislated, the tax credit will be retroactively available to businesses that have incurred eligible CCUS expenses, starting in 2022.
Details of Other Measures
Canada’s Biofuels Sector
The government thinks that the production of biofuels offers economic opportunities for Canada’s energy sector, as well as for Canada’s agricultural and forestry sectors, which provide essential feedstocks used in these fuels. These include canola, pulping liquor, bio-charcoal, and organic matter in municipal and industrial wastes.
In the months ahead, the federal government will engage with the biofuels industry to “explore opportunities to promote its growth in Canada”. This will include an examination of different support mechanisms that could support the sector in meeting the growing demand.
Contracts for Difference
Perhaps the most unusual announcement in the Budget’s climate-related sections concerned the so-called “contracts for difference”, an “investment tool” of the Canada Growth Fund to support clean growth projects. These contracts backstop the future price of, for example, carbon or hydrogen, providing predictability that helps to de-risk major projects that cut Canada’s emissions.
Contracts for difference, it is claimed, would allow companies to plan ahead, supporting the growth of Canada’s clean economy by making clean projects more cost-effective than (i.e. giving them competitive advantages over) more “polluting” projects.
Building on this, Budget 2023 announces that the government will consult on the development of a broad-based approach to carbon contracts for difference that “aims to make carbon pricing even more predictable, while supporting the investments needed to build a competitive clean economy and help meet Canada’s climate goals.” The Budget states that this would complement contracts for difference already offered by the Canada Growth Fund.
Click the button below to view the 2023 budget plan PDF.
View Plan
Credits to Friends of Science, Robert Lyman
blog.friendsofscience.org
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