Wind turbines viewed from the Transalta wind farm project in Ardenville, Alta., on Oct. 5, 2022.Guillaume Nolet/The Globe and Mail
The federal government’s new industrial strategy is predicated on removing politicians and bureaucrats from public investment decisions in favour of a more market-driven approach, even as it commits tens of billions of new dollars to backing low-carbon sectors.
It’s an attempt to shift away from Ottawa’s usual ways of doing business, outlined in a federal budget focused on competing with massive new green subsidies in the United States, and rests on two untested pillars.
If the government has put them in place properly, Canada will be able to compete with the U.S. If not, Ottawa will be forced either to watch clean-tech investment head elsewhere or step back into the direct subsidy game from which it is trying to at least partly extricate itself.
One of those pillars is much greater reliance on broad-based tax credits – including for clean-tech manufacturing and mining, carbon capture and hydrogen production, and even public electricity infrastructure – which is somewhat comparable to what the U.S. has put in place.
The idea is to get money out the door more quickly, in ways that can be more reliably built into companies’ business plans when they’re deciding where to site their projects. That’s seen as preferable to the more discretionary grants and other funding tools on which Canada has mostly relied to date, which often involve long and opaque application processes that can be shaped by political lobbying.
The other pillar is an unusual model of providing financing through the new $15-billion Canada Growth Fund, an arm’s-length agency tasked with using an array of tools – including equity, loans, contracts for differences and offtake agreements – to de-risk private investments in clean technologies. Vaguely promised a year ago, that entity is now taking shape in a surprising way, with the budget revealing that it will be entrusted to the Public Sector Pension Investment Board.
Together, as some government officials acknowledged during background budget briefings Tuesday, the tax-credit and financing plans add up to a high-stakes experiment that will require the government to put broad policies in place, then step back and see how the market and independent decision makers respond.
On the tax credits, the overarching question is whether the government has correctly guessed what portion of companies’ investment costs it needs to cover to entice projects that wouldn’t otherwise happen here.
Most of the ones it is putting on the table – including a 30-per-cent investment tax credit for clean-tech manufacturing, a hydrogen one ranging from 15 per cent to 40 per cent and an expanded, 50-per-cent one for carbon capture – are superficially in the same range as comparable incentives in the U.S. under the Inflation Reduction Act. The government estimates they’ll amount to $80-billion between now and 2035, although that number is difficult to predict given the uncertainty of uptake.
In practice, though, they’re likely less generous than the American versions. That’s because the U.S. is offering production tax credits, which essentially provide large annual subsidies after new low-carbon projects are operational. The Canadian credits will instead help cover capital costs, which means they may provide more backing upfront but significantly less revenue for companies to bank on in the long run.
Finance Minister Chrystia Freeland’s bet is that, with existing Canadian advantages in attracting clean-tech investment, such as a national carbon price, Ottawa doesn’t need to fully match what the U.S. is doing on tax credits. But whether it’s come close enough in that regard won’t really be clear until the credits are in place and business decisions are being made accordingly.
Another, somewhat separate test of the government’s new tax-credit approach will be whether it succeeds in preserving what the budget recognizes as the most pivotal of Canadian advantages: our clean-electricity supply, which is currently ample by international standards but needs to be at least doubled to meet rising demand in the coming decades.
Given that power grids are mostly a provincial jurisdiction, and the majority of that infrastructure is publicly owned, an obvious approach would have been to commit to striking funding agreements with each province tailored to its needs.
Instead, Ottawa will make its new 15-per-cent refundable electricity credit available even to non-taxable entities such as Crown corporations, public utilities and Indigenous-owned corporations. It’s a novel solution to a complex problem, and the government estimates it will ultimately pay out more money than any of its other new credits, but again it’s hard to know how many projects will be made sufficiently appealing by effectively promising a 15-per-cent share of building costs.
Meanwhile, the uncertainties around the Canada Growth Fund are of a different order.
Its managers from the pension board, known as PSP Investments, have been given a daunting task, to say the least. They have been chosen, per the government, because of their experience with the $225-billion in assets they currently manage, from which the Canada Growth Fund will be kept separate. But they will also be expected to take more risks with those decisions, as they try to attract low-carbon projects that might not otherwise be financially viable, than they would when managing people’s pensions.
Key to the concept is that they will be free from political interference. But just how hands-off Ottawa can really be is something that will challenge the government as the fund takes shape.
For one thing, there is the matter of how much direction it provides regarding which sectors to back and which financing tools to use for that purpose.
For instance, a key part of the Canada Growth Fund’s mandate is to negotiate carbon contracts for differences (CCFDs), a way of backstopping industrial carbon prices in case the credits they generate don’t rise in value as expected. That’s a higher-risk mechanism than some of the others that will be at the pension managers’ disposal, and finance officials hedged Tuesday as to whether the government will require that a specific share of the fund’s $15-billion capitalization go toward it.
There is also the matter of how much patience the government will show toward the Canada Growth Fund. The cautionary tale of the Canada Infrastructure Bank – the government’s other attempt at a quasi-independent financing arm, which has only recently started to have an effect in backing electricity infrastructure and other projects – suggests the potential for growing political involvement and attempted overhauls if such agencies are slow to get off the ground.
While nobody is looking to repeat that experience, the Canada Growth Fund’s leaders will require some time to find their feet, which is a tough spot to be in considering the government’s urgency about landing green investments.
That really is a subtext for all of this: Just how much and for how long will the government be willing or able to take a step back from its usual level of direct intervention as it waits to see the effect of its new measures?
It hasn’t gotten out of bespoke funding agreements altogether. Its $8-billion clean-tech grants program, the Net Zero Accelerator, remains in place, although it didn’t get significant recapitalization in this budget. And the yet-to-be-detailed (but certain to be ten-figure) subsidy for the recently announced Volkswagen battery factory in St. Thomas, Ont., is a reminder of that method still being in play.
But the notion being articulated on budget day was that such deals are now to be a last resort, in rare cases when the tax and financing measures they’ve put in place don’t go far enough.
Ideally, Ottawa will wait a good while to see where it does fall short, based on the market response. During a clean-tech arms race, taking that step back will be easier said than done.
Federal budget 2023: Ottawa's fiscal anchor under strain of higher spending and slowing growth
Trudeau government bets on green economy, expands dental care in 2023 federal budget