Why the Liberals should break one of their climate campaign promises

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Included in Justin Trudeau’s recent mandate letter to Finance Minister Chrystia Freeland was a direction to finally make good on a Liberal campaign pledge from the 2019 election.

To help “make Canada a world leader in clean technology,” the Prime Minister instructed, Ms. Freeland is to “cut tax rates by 50 per cent for companies that develop and manufacture zero-emission technology.”

It’s a proposal that on its surface seems timelier now than when first made. As the world moves increasingly swiftly toward a clean-economy transition, Ottawa is under particular pressure to keep pace with a new U.S. administration determined to give American clean-tech companies competitive advantage – and Ms. Freeland’s coming budget may be the best chance for the Liberals to show they’re up to the task before the next federal campaign.

Look closer, though, and this is actually a case in which the government would be doing itself – and more importantly the industry it wants to support – a favour by breaking a promise.

By all means, it should be urgently looking at ways to use the tax system to encourage Canadian clean-tech investment, to supplement planned increases to the national carbon price.

But this particular one seems to have been cooked up more because it could make for a few relatively straightforward sentences in a campaign platform, as a signpost of the Liberals’ intent to treat climate transition as an economic opportunity, than because it responds to the needs of Canadian companies.

If Ottawa actually wants to address obstacles faced by domestic makers of climate-friendly products, there are much more promising ways to go about that, many of which clean-tech advocates have long promoted.

The most common growth concern, among those who work in this space, is around emergent businesses’ ability to scale up. While there are reasonably strong supports at the earliest start-up stage, difficulty attracting capital in a risk-averse investment culture leads to struggles with commercialization, causing too many promising companies to fizzle out or be snapped up by foreign interests.

Cutting business rates is nobody’s idea of the best way to solve that problem, because it doesn’t do much for younger companies not yet turning taxable profits. Conceivably, the promise of eventual profits being taxed at a low rate could help them attract early-stage investment. But that seems a rather unreliable way of helping them meet immediate capital needs.

There are more direct ways of addressing that challenge. Among the most obvious, already used by a few provinces, is a tax credit for angel investors. Allowing businesses or individuals to write off a portion of their share purchases of early-stage clean-tech companies, and thus giving them some short-term financial benefit, would reduce the risk of investments that otherwise hinge on new technologies catching on.

In a similar vein, Ottawa could use the budget to expand the availability of flow-through shares – the financing tool in which the investor, rather than the issuing company, is able to claim certain expenditures by the company to get tax reductions. It’s another way of deriving immediate value from fledgling businesses with uncertain futures. And the mechanism has a certain appeal because Canada long ago pioneered its usage to attract investment in the resource sector, it has more recently been extended to some forms of renewable energy production, and it could relatively easily be made to include more forms of clean tech.

Not that attracting investment to early-stage businesses is the only possible target for new tax measures. Another challenge is getting more established companies to spend money on greening their operations.

But that largely involves trying to get businesses in carbon-intensive industries to reduce emissions (ideally developing or purchasing Canadian-made clean technology in the process), not expecting them to quickly transition to being completely emissions-free in a way that the new tax rate would presumably reward.

Here, too, it would make more sense to expand an existing policy approach. In their first term, the Liberals changed rules around capital cost allowances so companies can effectively get tax write-offs for the entire purchase price of certain forms of clean-energy equipment. But the mechanism is still being applied narrowly here, relative to comparable policies in the United States. Organizations such as the Ottawa-based Smart Prosperity Institute (which has also done work on investor tax credits and flow-through shares) have called for the allowance to now be applied to a broader swath of technologies.

So if the Liberals’ business-tax promise isn’t really designed to help newer clean-tech companies, or to help older industry reduce emissions, what is it primarily meant to accomplish?

The best explanation seems to be that it could help compete internationally for large deals to build zero-emissions products, with electric vehicles an example that Liberals have previously cited.

But it could be an inefficient way of doing even that. If there are particular forms of low-emissions large industry where Canada believes it could have competitive advantage, it might make more sense to develop specific strategies for them – with narrow-targeted tax measures, grants, infrastructure investment – than to offer a one-size-fits-all tax cut. (The current prebudget push for a carbon-capture tax credit perhaps fits this mould.)

It doesn’t help that the government has been struggling since the 2019 election to define what exactly would qualify as zero-emissions under its policy – including whether it needs to be across an entire company, facility, or just a product.

Reasonable arguments can be made against the other tax supports Ottawa could introduce, and each has its own design challenges. But they’re at least relatively road-tested ways of addressing identified needs, with more study already having been done outside government about how to make them work.

The good news is that it’s unlikely most Canadians noticed the specific tax-cut promise in the election – which didn’t even get much coverage during the Liberals’ climate-policy rollout – let alone based their vote on it.

The article of faith, with more people, is that the government will to the best of its ability position Canada to be a leader in the shift to a low-carbon world. In this case, that should mean going back to the drawing board, rather than being wedded to an idea scratched onto it during a campaign.

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