Ottawa rebuffs calls for last-minute fixes to green subsidies as Indigenous leaders sound alarm

Open this photo in gallery:

As Ottawa gets close to finally putting in place long-promised tax credits for low-carbon investments, Indigenous leaders have been sounding the alarm that the measures could inadvertently discourage their communities’ participation in clean-energy projects.

The warnings – related to Indigenous corporations potentially qualifying for a smaller credit than other companies, with a slower schedule for implementation – could be of obvious concern to a federal government that has made reconciliation a priority.

But calls to tweak legislation currently making its way through parliamentary committee, by having the more generous rate cover Indigenous equity investments, are for now being rebuffed by the government.

“It’s not a big fix, I don’t think,” said Matt Jamieson, the chief executive officer of the Six Nations of Grand River Development Corp. in Ontario, which is a partner in the country’s largest battery-storage project, among other investments. “But I haven’t had any traction really with the government at all.”

He’s not alone in finding an unreceptive audience in Justin Trudeau’s government when it comes to eleventh-hour changes to the proposed tax measures, which form the heart of Canada’s strategy to compete internationally for green capital.

A similar reaction has greeted some early-stage cleantech companies whose projects would not qualify for the credits as currently drafted. The same goes for industry associations pushing for more technical changes to expand the policies’ reach.

The dynamic is the latest tension point as Ottawa tries to quickly respond to massive green subsidies being offered in the United States with a form of incentives – refundable investment tax credits covering renewable electricity, carbon capture, hydrogen and the manufacturing of clean technology – with which Canada has little history.

Much of that tension involves timelines. Ottawa has faced criticism from industry for moving too slowly in implementing measures first announced, for the most part, in 2022; now that it’s close to the finish line, with the carbon-capture and private-sector energy credits possibly becoming law by the end of this spring and others hopefully soon to follow, it doesn’t want to get bogged down again. Katherine Cuplinskas, a spokesperson for Finance Minister Chrystia Freeland, said that while the government welcomes feedback, it believes the credits have been well designed and is urging parliamentarians to promptly pass the ones in front of them.

Cost containment is also a factor. Ottawa has been clear from the get-go that it lacks the fiscal firepower to match President Joe Biden’s Inflation Reduction Act, which is distributing climate-related funds that by some estimates will ultimately top US$1-trillion, and needs to be selective about how it tries to compete. Under pressure to restrain spending in next week’s budget while also addressing affordability, the government is reluctant to layer in new provisions that could significantly raise the tax credits’ estimated price tag of $60-billion over the next decade.

While few dispute the need for both those forms of discipline, the question now is whether Ottawa has tipped too hard toward inflexibility – and whether it will subsequently be able to course correct, if need be.

That responsiveness may prove most necessary when it comes to the concerns around Indigenous investment.

Indigenous participation in renewable-electricity projects, which has skyrocketed in recent years, is increasingly viewed as essential to get those plans built. And to date, the non-taxable status of First Nations corporations has helped with the financials.

But the disparity in the coming tax measures could flip things the other way. While non-Indigenous companies are set to benefit from a 30-per-cent credit, Indigenous ones are waiting for a 15-per-cent credit for non-taxable entities that is still in draft mode. (Because they are refundable, both credits are essentially subsidies on capital costs, which explains how even companies that don’t pay tax – also including Crown corporations – can receive them.)

It’s not just a concern expressed by Indigenous businesses, but by private developers whose approach involves Indigenous equity stakes.

”In a competitive solicitation, where there’s multiple people bidding on a provincial need, you could see those that choose to partner with Indigenous communities being at a competitive disadvantage,” said Darren Suarez, a vice-president with renewable-power developer Boralex Inc BLX-T.

Part of the problem – the fact the private-sector credit will soon be bankable, while nobody knows if the non-taxable entity credit will even make it into law before the next election – could be addressed by Ottawa expediting the latter.

The rate differential could be thornier long-term. It’s not an apples-to-apples comparison, since private companies are taxed more to begin with, but advocates for Indigenous participation warn that the disadvantage would still be consequential. They also note that non-taxable status currently helps counterbalance the difficulty Indigenous companies face in accessing capital, which won’t be fully solved even by a new loan guarantee program expected in the budget.

“It’s definitely going to impact the viability of some of these partnerships,” predicted James Jenkins, executive director of the non-profit Indigenous Clean Energy.

That impact could take various forms. If not preventing partnerships altogether, since some provinces now require or reward Indigenous equity during energy procurements, it could cause private developers to do the bare minimum to meet those expectations. Or it could impede Ottawa’s efforts to make energy projects cost-competitive with projects in the United States. Beyond the partnership concerns, it could impede Indigenous-led projects.

It’s also possible that, once the measures are in place, companies will find ways to work with them. One option, which Ms. Cuplinskas raised, would be Indigenous corporations restructuring as taxable to get the 30-per-cent credit, although that’s not a popular suggestion among Indigenous business leaders. Mr. Jamieson said it would be a fundamental break with established practices and could complicate other financial arrangements, would prove unpopular with communities and jeopardize corporations’ social licence to act on their behalf.

Monitoring how it plays out stands to be a continuing challenge for the government. And the same goes for many of the other current concerns around the credits, including whether some clean technologies have been wrongly excluded.

Ottawa has generally taken the position that the credits do not need to cover relatively early-stage tech, which is unlikely to give Canada a competitive advantage any time soon – opening itself to questions about whether it got those calculations correct.

For instance, as the government tries to establish Canada as a producer of low-carbon hydrogen, it has limited the credit for that sector to green hydrogen (which involves splitting the element from water using renewable electricity) and blue hydrogen (producing it from natural gas and using carbon capture to minimize emissions). It has rebuffed requests from industry representatives to also include turquoise hydrogen – which uses a process called methane pyrolysis to produce the fuel from natural gas, with the byproduct being solid carbon rather than gaseous emissions – despite Canadian companies such as Vancouver’s Ekona Power showing promise.

It’s a similar story with the nascent field of carbon removal, which captures carbon already in the atmosphere. Ottawa has included the best-known such technology, direct air capture – in which Canadian company Carbon Engineering was a pioneer before being bought by Occidental Petroleum Corp. – in its carbon-capture credit (otherwise geared toward catching emissions at polluting industrial sites). But that credit will not cover other forms of carbon removal, such as from plant biomass and using ocean surfaces.

“Our view is that’s leaving megatonnes of carbon removal on the table,” said Nai’im Merchant, who heads the advocacy group Carbon Removal Canada, suggesting that more than 20 Canadian companies are currently developing projects in that space.

There are also instances in which relatively advanced companies may be slipping through the cracks. That notably includes Svante Inc., Canada’s only prominent maker of components for carbon-capture projects, which has unsuccessfully lobbied for its products to be included in the proposed credit for cleantech manufacturing.

There are many more such examples, carrying implicit concerns about losing investments or entire companies to the U.S. or other jurisdictions casting nets more widely.

At the same time, the sheer volume of these demands, plus more granular ones around qualifying capital expenditures, also helps explain Ottawa’s concern that trying to address them all could drag implementation into perpetuity.

Even some industry members pushing for changes acknowledge that, in principle, it’s a fair compromise to get the measures in place and adjust later as warranted, which government officials say they’d be willing to do.

But there is some skepticism about whether that will happen in practice.

To date, the tax credits have wound a tortuous path through a Finance Ministry that has not been comfortable with this form of policy. That department has recently tasked more climate-focused officials with speeding things up, but it remains to be seen whether that will mean much greater nimbleness once the tax measures are implemented and no longer a top legislative priority.

There is also a strong possibility of a change in government, not long after the incentives are enacted, to one that might be even less enthusiastic about broadening them, adding urgency to calls for doing so now.

But barring last-minute changes of heart, a wide array of interests trying to make the most of the clean-energy transition will have to live with Ottawa’s determination not to make perfect the enemy of good, as the current government races against the clock to get the measures in place at all.