A report by the think tanks Clean Prosperity and The Transition Accelerator finds that once a pair of clean-electricity tax credits are in place, Canada should be at no significant financial disadvantage in attracting investment in wind, solar and other forms of non-emitting power needed for a shift away from fossil fuels across various sectors.Jeff McIntosh/The Canadian Press
Canada will continue to lag the United States significantly in government incentives for low-carbon sectors that both countries are courting, even after new policies promised in Ottawa’s most recent budget, according to new research to be released on Tuesday.
The findings are in an update of an influential report earlier this year by the think tanks Clean Prosperity and The Transition Accelerator, which contributed to the budget’s focus on responding to hundreds of billions of dollars in green subsidies introduced by Washington through last year’s Inflation Reduction Act. A copy of the new version was provided in advance to The Globe and Mail.
It assesses that the promised investment tax credits that mostly comprise the Canadian response so far – which Ottawa is currently under pressure from industry to actually put in place – will likely have some success in levelling the playing field.
In particular, the report finds that once a pair of clean-electricity tax credits are in place, Canada should be at no significant financial disadvantage in attracting investment in wind, solar and other forms of non-emitting power needed for a shift away from fossil fuels across various sectors.
But in other priority areas directly targeted by new federal policies – including mining and refining of battery materials, hydrogen production and carbon capture – the report’s comparisons of incentives for projects on either side of the border highlight the difficult position that Ottawa is in.
While the investment tax credits introduced by Finance Minister Chrystia Freeland are projected to add up to $80-billion over a decade, constituting an unprecedented industrial-policy leap by Canadian standards, they are dwarfed in many sectors by new American spending widely expected to exceed Washington’s projection of US$370-billion over a similar period.
And although Ottawa additionally provides some discretionary subsidies to the same sectors, the report holds that the U.S. provides much greater “bankable” funding – meaning reliable enough to be built into companies’ financial projections when considering projects. That’s because Washington’s spending is mostly through production tax credits, which effectively guarantee annual subsidies per unit produced once projects are operational.
“It’s not that Canada hasn’t gone big,” said Clean Prosperity executive director Michael Bernstein, who co-authored the report with The Transition Accelerator’s Bentley Allen. “It’s just that the U.S. has gone even bigger.”
Mr. Bernstein and Mr. Allen agree that, as Ms. Freeland has said, Ottawa does not have the fiscal capacity to match Washington’s largesse across the board. But their report proposes a pair of policy paths, by breaking the sectoral comparisons into two categories.
The first of those involves sectors where Canada’s industrial carbon-pricing policies could combine with other incentives to match or exceed what’s being offered in the U.S. – but only if Ottawa provides greater certainty around the value of credits generated under that system.
One example is carbon capture, storage and utilization (CCUS), which the oil-and-gas sector and some other heavy industries are counting on to reduce emissions. The report assesses that, averaged over a decade, a project in Alberta would receive 28 per cent less per tonne of captured carbon under Canada’s proposed investment tax credit than a comparable project in the U.S. However, the Canadian incentives could be almost double the American ones, if carbon-credit values rise sufficiently.
Related is the production of so-called blue hydrogen, in which the fuel source is to be produced from fossil fuels with carbon capture-limiting emissions. In that case, the report finds the production tax credits will still be more than 10 times greater than what the bankable Canadian incentives will be worth, before carbon credits are taken into account.
For those and other sectors where a sturdier carbon-pricing system would be a difference maker – including renewable electricity, where it could give Canada an advantage rather than just being nearly even – the report makes the case for Ottawa to prioritize carbon contracts for differences. That’s a policy mechanism that could guarantee a minimum carbon-credit value to proponents of emissions-reducing projects, which the government has promised to develop but has thus far approached in a tentative and limited way.
The other category is sectors where carbon pricing provides no similar gap-closing potential.
It notably includes forms of investment that are key to Canada’s aspirations of becoming a major player in the electric-vehicle industry. Ottawa has recently proven willing, in partnership with Ontario’s provincial government, to selectively match Washington’s massive subsidies for battery factories being built by global automakers. But the report highlights other core components of the EV supply chain as areas of concern.
On mining, it finds that a promised 30-per-cent investment tax credit should make Canada competitive with U.S. subsidies for lithium mines, but fall more than one-third short of what the U.S. is offering for nickel mines and offer only a fraction of its backing for graphite mines.
Then there is refining of minerals into battery active materials. A large factory that would receive an average of more than $4 per kilowatt hour of capacity that it produced in its first decade of operation in the U.S., the report states, would get less than $1 per kilowatt hour over the same period from a Canadian investment tax credit.
Gaps in some other sectors might be even bigger. For instance, the report finds that a facility producing hydrogen from renewable electricity (which is known as green hydrogen, and is less affected by carbon pricing than blue hydrogen) would receive less than one-tenth the bankable funding from a Canadian investment tax credit as from U.S. credits.
The report makes clear there is no single tidy solution, along the lines of guaranteeing carbon credits, for keeping up with Washington in these sorts of sectors.
In some instances, it suggests, tweaks to promised investment tax credits could help – such as additionally allowing financing costs, rather than just capital expenditures, to qualify.
Otherwise, the authors say that Ottawa needs to choose industries where it believes Canada has the best chance of competing with the U.S. (while conceding some others), and develop specific strategies for them.
They credit Ottawa with starting to go down this path, both in the budget and through initiatives such as new federal-provincial working groups to align policies for priority low-carbon sectors. But they call for deeper and more urgent collaborations between government and the private sector to more clearly set growth targets and pinpoint policy tools to achieve them.
The report is likely to be taken seriously in Ottawa. Before the budget, Ms. Freeland opened a meeting with leaders of climate organizations by saying The Globe’s coverage of the initial report had caught her attention, according to several people who were there.
Katherine Cuplinskas, a spokesperson for Ms. Freeland, responded to the new version by highlighting the combination of measures Ottawa has now enacted or promised – including carbon pricing, investment tax credits, targeted financing and grants, and contracts for differences – as its plan to compete in “the race to build the global clean economy.”
The updated report does not dispute that the budget made headway toward addressing the authors’ concerns, but suggests the work is incomplete.