Contrary to what people might think, the federal budget tells us precious little about what the government is actually spending money on this year when it comes to clean economy incentives, or anything else for that matter. 

After last year’s budget, I submitted a media request asking the Department of Finance and the Ministry of Environment and Climate Change how much they were set to spend to address the climate crisis in 2022. The official response was a shoulder shrug. To find out what is actually going on, you have to sleuth through public accounts, which come out every December and tell you what was spent the previous year.  

On Tuesday, Minister of Finance Chrystia Freeland, sporting new black pumps (the finance minister traditionally wears new shoes on budget day), unveiled the “Made in Canada” 2023 budget. There were a lot of big numbers in it, tallying up $112 billion of past announcements of climate commitments since 2015, as well as a raft of announced investments in Canada’s cleantech and auto sectors. 

News headlines trumpeted that the federal budget was setting aside more than $80 billion for clean technology tax credits over the next 12 years. That’s a big number. Adjusting for the size of our economy, it is twice as ambitious as the US$369 billion that will be spent over 10 years as part of the U.S. Inflation Reduction Act. But these long-term projections should be taken with a grain of salt, asa lot can happen over a decade, including a change in government to one that might have different priorities.  

I prefer to look at what the government is going to do this year. 

On new spending, the answer is not much. The table below shows new budget funding to address the climate crisis and opportunity imperatives this fiscal year. They add up to $386 million, 0.02% of Canada’s GDP. We were happy to see the renewal of the smart grid program ($100 million over the next five years), though it was a little more modest than what Corporate Knights has been encouraging.  

On the five-year horizon, there could be an additional $19 billion of funding – mostly in tax credits – designed to boost clean electricity, hydrogen and cleantech.  

Encouragingly, the budget did include some direction to redeploy significant existing buckets of money by increasing the long-term capital allocations of the Canada Infrastructure Bank to clean power and green infrastructure projects to a total of $20 billion ($10 billion in each) and announcing that the team at PSP Investments (one of Canada’s largest pension investment managers) will take charge of deploying the previously announced $15-billion Canada Growth Fund.  

How to make sense of these amounts? 

In her budget speech, Freeland said we are in the midst of “the most significant economic transformation since the Industrial Revolution,” and she isn’t wrong.  

The budget spelled out the magnitude of investment required. “The scale of investments that Canada requires to reach net-zero by 2050 is significant, with estimates ranging from $60 billion to $140 billion per year on average,” it said. (Corporate Knights pegs it at $126 billion per year.) 

While there are no good breakdowns of the climate investment gap, the federal government’s Sustainable Finance Action Council estimates that it is large – as high as $115 billion per year. 

So, $386 million of new funding to close that gap in 2023 is like a drop in the bucket – representing 0.3% of the climate investment gap. To be fair, the new funding is designed to crowd in private sector investment, but even if you multiply it by 10, it’s not significant enough for this year. 

The carbon tax won’t save us

The budget points out that “Canada has taken a market-driven approach to emissions reduction” and says that the country’s carbon-pricing system “provides a clear economic signal to businesses and allows them the flexibility to find the most cost-effective way to lower their emissions.”  

But some of Canada’s biggest polluters, such as Suncor, are paying only a fraction of the carbon tax. I calculated the company only paid 5% of the tax in 2020, based on data from its 2022 climate report, and a CBC News analysis found that Irving Oil and a group of other big polluters in New Brunswick paid less than 2% of the carbon tax in 2019. These kinds of loopholes may help explain why the federal government quietly updated its own projections for reducing greenhouse gas emissions in January. Last year, the government rolled out its Emissions Reduction Plan to big fanfare, stating that the country would cut its emissions by 40% (of 2005 levels) by 2030. The government’s updated projections have since kicked that can down the road five years.  

Canada is going to need a lot more than a loosely applied carbon tax if it’s going to bring down its emissions meaningfully. Existing rebates, new tax credits and redeployed investment buckets all help to send a message and also provide confidence for the private sector on our direction of travel.  

But if we want to meet our goals and lead the transition to a clean economy, we need to ramp up investment this year, not in 2030.

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In what may be a first for a federal budget in Canada, the document includes an RBC Economics chart that shows electricity from solar and wind costing less than natural gas. “As electricity becomes the main source of energy, daily and seasonal demand peaks will become more pronounced. Canada will need to invest heavily in renewable generation,” the budget says.

The 270-page document lays out eight priorities for the shift to a clean economy: electrification, clean energy, clean manufacturing, emissions reduction, critical minerals, infrastructure, electric vehicles and batteries, and major projects. It introduces three tiers of strategic financing to draw private sector investment to those areas: an “anchor regime” of investment tax credits; low-cost strategic financing through the Canada Infrastructure Bank and the Canada Growth Fund; and targeted investments to meet specific sectoral needs or support projects of “national economic significance.”

Globe and Mail columnist Adam Radwanski says the government’s approach represents a risky bet on private markets that may not deliver financial support equivalent to the Biden administration’s August, 2022 Inflation Reduction Act (IRA). While the U.S. funding directly subsidizes clean energy production, Canada’s investment tax credits focus on the up-front capital cost of getting new production capacity in place, while using the Canada Growth Fund to take some of the risk out of private sector investment.

“If the government has put [the new incentives] in place properly, Canada will be able to compete with the U.S. If not, Ottawa will be forced either to watch cleantech investment head elsewhere or step back into the direct subsidy game from which it is trying to at least partly extricate itself,” Radwanski writes.

“Freeland’s bet is that, with existing Canadian advantages in attracting cleantech investment, such as a national carbon price, Ottawa doesn’t need to fully match what the U.S. is doing on tax credits,” he adds. “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.”

The budget also lays out a series of work force measures, requiring employers that receive federal tax credits to pay prevailing wages based on union rates and set aside at least 10% of tradesperson hours for apprentices. For companies that fall short of those markers, the 15% clean technology and hydrogen tax credits will fall to 5%.

The document mentions future plans to fund biomass energy and introduce carbon contracts for difference, a form of legal agreement that makes the impacts of carbon pricing more predictable and can also protect the budget’s cleantech investments from being overturned by a future government. It also commits Ottawa to disclose the cost of federal subsidies to Volkswagen’s recently-announced battery gigafactory in St. Thomas, Ontario once the deal has been finalized.

“This massive battery manufacturing facility will represent a significant portion of the North American battery manufacturing sector,” the budget document states. “It will cement Canada’s place in the North American and global battery value chains, and create good middle class jobs for Canadians, both at the facility itself and across Canada’s battery and critical minerals sectors.”

The budget mandates the Public Sector Pension Investment Board (PSP Investments) to manage the Canada Growth Fund, while adding two seats for trade union representatives to its board.

It includes funding streams for nuclear power generation through the investment tax credits for clean electricity and cleantech manufacturing.

‘Opportunity of a lifetime’

In her speech to the House of Commons Tuesday afternoon, Freeland framed the 2023 budget as part of “the most significant economic transformation since the Industrial Revolution,” in which Canada’s major trading partners are investing heavily in the clean economy and net-zero industries. At the same time, Russia’s war in Ukraine and the impacts of the pandemic “have cruelly revealed to the world’s democracies the risks of economic reliance on dictatorships,” prompting countries to “friendshore their economies and build their critical supply chains.”

Those two shifts combined “represent the most significant opportunity for Canadian workers in the lifetime of anyone here today,” Freeland said.

But the budget also casts the global shift toward energy transition technologies as a challenge.

After the U.S. IRA poured US$369 billion into mostly clean energy transition technologies, “the sheer scale of U.S. incentives will undermine Canada’s ability to attract the investments” without swift action, the budget document states. “If Canada does not keep pace, we will be left behind. If we are left behind, it will mean less investment in our communities, and fewer jobs for an entire generation of Canadians.”

It adds: “We will not be left behind.”

Gas plants and carbon capture: details to follow

The budget contains no acknowledgement of the $10 billion the fossil fuel industry had demanded to help pay for the carbon capture technologies it sees as its ticket to future oil and gas extraction. In mid-October, the Pathways Alliance, whose six members account for 95% of Canadian oil sands production, announced a $24.1-billion investment in a carbon capture hub in Alberta and a series of other emission reduction projects, but made it conditional on federal support—despite record industry profits, and on top of the $7.1 billion tax credit that Freeland had already sent their way in her 2022 budget.

“Obviously, we would love to see that tax credit explicitly exclude CCUS the oil and gas sector, but I do want to give the government credit where due,” said Vanessa Corkal, senior policy advisor at the Winnipeg-based International Institute for Sustainable Development. With program details still to be announced, “industry will be pushing hard for specific handouts for carbon capture, but I’m happy to see that there aren’t specific measures in this budget.”

The words “oil sands” do not show up in the budget document, but it does apply the clean electricity tax credit to “abated natural gas-fired electricity generation,” opening a door to carbon capture based on an emissions intensity threshold meant to keep any investment in line with the federal government’s 2035 deadline for a net-zero grid. Corkal said carbon capture projects might qualify for finance through the Canada Growth Fund, and Dale Beugin, executive vice president of the Canadian Climate Institute, said carbon contracts for difference could also become a funding pathway for CCUS.

In an analysis posted last week, Beugin said contracts for difference could make it easier for carbon capture projects to generate emission reduction credits that they could sell for cash.

The sliding scale in the hydrogen tax credit could also encourage “blue” hydrogen projects that use CCUS to capture emissions from natural gas, despite expert analysis showing that the technique produces more emissions than just burning the gas. The tax credit ranges from 40% for hydrogen projects that produce less than 750 grams of emissions per kilogram of hydrogen, down to 15% for installations that generate two to four kilos of carbon dioxide or equivalent per kilo of hydrogen.

The hydrogen tax credit continues to shut out projects that would use captured carbon to squeeze more oil out of the ground through a process called enhanced oil recovery (EOR). The fossil fuel lobby had tried and apparently failed to challenge that exclusion in the months leading up to the budget.

Ushering In a ‘New Era’

For climate and energy organizations mostly accustomed to taking their victories in small doses, the budget had a lot to recommend it.

“In terms of impacts for emissions, impacts for clean growth, impacts for competitiveness in a net-zero world, I can’t think of anything that compares to this in a budget,” said Beugin. “It really is a big deal in terms of setting a precedent for a federal game plan for being competitive in net-zero,” even though the “true deficit hawks who are worried about the spending” aren’t likely to be convinced.

In a release, Climate Institute President Rick Smith called Tuesday’s release “the most consequential budget in recent history for accelerating clean growth in Canada” and “a shrewd response to the U.S. Inflation Reduction Act.”

The Canadian Renewable Energy Association said the budget “ushers in a new era for Canadian renewables,” with tax credits that will bolster the industry’s competitiveness. “Canadian investment tax credits will stabilize investment opportunities, while safeguarding affordability for Canadians,” said President and CEO Vittoria Bellissimo. “These new incentives will help create good jobs in clean energy and make Canada a leader in the energy transition.”

“It is mostly a win,” IISD’s Corkal told The Energy Mix. “It’s easy to get bogged down in the flaws, and there are flaws. There are loopholes and things we want to improve. But it’s a win to have this much money identified for clean energy, and now the push will be to make sure those measures are equitable, and that they’re reaching the right projects.”

She added that the budget had little to say in areas like energy efficiency and public transit that received more attention and funding in years past, and left out serious measures to support a just transition to sustainable jobs for fossil fuel work forces. “This is a fairly private sector-focused budget,” she said, but government also “has a role to play in supporting communities to address [climate change] mitigation in their own back yards.”

The Atmospheric Fund CEO Julia Langer said the budget “demonstrates that the government is committing to keeping pace with massive clean energy investment in the U.S. and across the globe,” with an “unprecedented” 13-year allocation to clean electricity. She said it was unfortunate Ottawa had cut the clean electricity tax credit back to a maximum 15% from the 20 to 30% in Freeland’s fall economic statement, but said she was pleased to see the government reinvest in the SREP and smart grid programs and introduce funding for offshore wind.

The Canadian Labour Congress said the budget fell short in extending a helping hand to “hard-pressed” families, but praised measures to create good, sustainable jobs. “The government’s move to attach strings to tax credits to ensure that investments in clean energy create good jobs is positive,” CLC President Bea Bruske said in a statement. “We will continue pressing for unionized, low‑carbon jobs across all sectors of our economy to ensure workers aren’t left behind.”

Still More Ground to Cover

Several other observers of the Canadian climate scene saw gaps in the government’s approach.

“Budget 2023 phases in the good and fails to phase out the bad,” said Climate Action Network-Canada Acting Executive Director Caroline Brouillette.

“Groundbreaking investments in clean electricity will build the grid of the future and provide Canadians with safer, cleaner, and more affordable energy—if underpinned by solid regulations and respect for Indigenous rights and sovereignty,” she added. But the budget “doesn’t show any progress towards fulfilling Canada’s promise to end fossil fuel subsidies this year,” and misses out on just transition/ sustainable job investments that would have reflected “an honest examination of the future of the oil and gas industry in this rapidly shifting global economy.”

“The support given to climate solutions is still a fraction of what is being spent on subsidizing the fossil fuels that are causing the climate emergency,” agreed Julia Levin, associate director, national climate at Environmental Defence Canada. “Carbon capture and hydrogen are great for greenwashing oil and gas, but they won’t deliver meaningful emissions reductions.”

Jamie Kneen, national program co-lead at Mining Watch Canada, warned that mining related to the energy transition “has to be done in the safest way possible. If Canada wants to claim leadership, instead of just shovelling money to mining companies, we need to improve regulation and enforcement.”

Susan O’Donnell, spokesperson for the Coalition for Responsible Energy Development in New Brunswick (CRED-NB), said it was disappointing “to see tax breaks for nuclear fuel reprocessing under the guise of ‘clean tech’. Extracting plutonium from used nuclear fuel has nothing to do with climate mitigation. It is a dirty, dangerous distraction from real climate action.”

Senator Rosa Galvez, who just marked a full year since the introduction of her Climate-Aligned Finance Act, Bill S-243, questioned the government’s decision to put PSP Investments in charge of the Canada Growth Fund, noting that PSP is one of eight Canadian pension funds with direct ties to the fossil fuel industry. That suggests PSP’s new mandate “would do little to avoid inefficient climate solutions that lock in our dependence on fossil fuels,” she said in a release, unless the fund avoids any investments in carbon capture.

Galvez also took issue with the top-up for the government’s CCUS tax subsidy. “Rather than a handout to corporations with record profits, regulation could force the sector to fund their own emissions reductions according to the polluter pays principle,” she said.

Key elements of the $491-billion budget include:

• An 11-year, $25.7-billion investment tax credit for clean electricity that covers 15% of investment costs for more than a dozen power generation, energy storage, and grid transmission technologies—from wind and solar, to natural gas plants with carbon capture if they’re compatible with a 2035 deadline for a net-zero grid;

• A 12-year, $17.7-billion investment tax credit for hydrogen that sets up a sliding scale for different production processes based on their carbon intensity;

• A 12-year, $11.1-billion investment tax credit for clean technology manufacturing that covers 30% of project costs;

• $20 billion in redeployed funding through the Canada Infrastructure Bank for clean power and green infrastructure;

• A commitment to begin investing the $15-billion Canada Growth Fund in the first half of this year;

• $3 billion to renew the government’s Smart Renewables and Electrification Pathways (SREP) and smart grid programs and invest in Canada’s offshore wind potential, particularly off the Nova Scotia and Newfoundland and Labrador coasts;

• $1.5 billion for infrastructure to extract critical minerals to support battery and electric vehicle manufacturing;

• $1.4 billion over 12 years in income tax reductions for zero-emission technology manufacturers;

• A $520-million top-up to the existing $7.1-billion tax credit for carbon capture, utilization and storage (CCUS), with provisions that extend the program to new types of equipment and to geological storage in British Columbia;

• $40.4 million over five years to establish a NATO climate centre in Montreal;

• $34.1 million over three years to help eastern Canadian farmers reduce their need for nitrogen fertilizers.

This article is republished from The Energy Mix. Read the original article.

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The federal government is increasing its efforts to reduce greenhouse gases and meet tough new targets on the way to the country having net-zero carbon emissions by 2050. However, it has taken relatively little action to prepare for the catastrophic physical threats that climate change poses to the nation’s people, businesses and ecosystems, warns the Canadian Institute for Climate Choices. 

Provinces, municipalities and businesses have also been disregarding the coming impacts of increasingly severe floods, forest fires and droughts, the CICC said in a report released in early December.

In many cases, governments are making matters worse by approving infrastructure and other projects that reduce our resilience to climate change. A case in point: the Ontario government’s bill that could allow more construction on wetlands and other ecosystems that serve as natural flood management systems and store carbon that would otherwise be released into the atmosphere. The bill would give the minister more power to approve development in conservation areas, and faces a backlash from environmental groups who say it will result in the loss of important nature preserves across the province.

“It’s time that adaptation and resilience is seen as part of an integrated approach [along with emissions reductions] that is needed fundamentally,” the institute’s CEO Kathy Bardswick said in an interview. The institute is a federally-funded, arm’s-length think tank that provides analysis to help Canada move towards clean growth and address the impacts of climate change on the economy.

Adaptation received only modest mention in the updated climate plan released on December 11 by Federal Environmental Minister Jonathan Wilkinson which, among other measures. proposed steep increases in the carbon prices along with rebates to households. Two pages of the plan’s 79 were devoted to adaptation with few new measures announced. 

Instead, Wilkinson pledged to work with provinces, territories, municipalities and Indigenous communities to produce a National Adaptation Strategy that would guide future spending. The federal government previously endowed a $2-billion disaster mitigation fund to finance local adaptation projects.

The slow-motion response to climate adaptation has similarities to the COVID-19 pandemic. Politicians and business leaders were long warned and provided with credible scientific evidence that there was a high probability of a devastating viral pandemic, but failed to devote sufficient resources to prepare.

There is a growing awareness in government and business of the need for greater resilience in the face of the climate emergency, but action remains spotty. Far too often, required investments are put off for another day while development proceeds under a business-as-usual approach. 

Recognition of the staggering costs of climate change – economic as well as to our health and security – should propel an even-greater national and global effort to transform to a net-zero-carbon society.  

Climate risk consultant Laura Zizzo neatly summed up the need for a strategic approach in the Globe and Mail: “We have to work hard to avoid the unimaginable and manage the inevitable.”

Bardswick said many of the investments required to prepare for climate impacts provide additional benefits, including reducing GHG emissions, improving public health and providing natural water filtration and flood prevention systems.

The Institute’s report says the “known and measurable” costs of climate change to Canada are “only the tip of the iceberg” of what should be expected. It notes that catastrophic weather events have cost the insurance industry $18-billion over the past decade, with the number of catastrophic events three times higher than occurred in the 1980s.

The report noted that a changing climate is impairing prosperity and well-being through lost productivity, lower asset values, impaired health and loss of biodiversity.

In many cases, impacts like thawing permafrost and rapidly changing ecosystems will be difficult to quantify but are no less critical for the well-being of Canadians. Indigenous communities are particularly at risk given that their economies, identities and spiritual lives are more closely connected to the land. 

The effort to put financial value on nature is useful if it drives investment to protect and recover natural assets, but it shouldn’t ignore the non-material benefits that the natural world provides for humans and all the species with whom we share this Earth.

The Institute’s report urges governments at all levels to dramatically scale up public investment in adaptation, given economic and other benefits. It encourages Ottawa to coordinate with provincial governments to improve the effectiveness and efficiency of resilience strategies. 

And it calls for the government and private sector to enhance disclosure of physical climate risks in order to drive to planning and investment decisions. 

In the private sector, central bankers and other institutional investors are urging companies to do a better job disclosing their climate-related financial risks. Those risks include transition impacts that arise from government climate policies and competition from new, low-carbon technology; legal risks from lawsuits that charge corporate boards and executives with ignoring climate-related threats; and physical risks from extreme weather, rising sea levels and changing precipitation patterns.

Discussions around climate risk disclosure have tended to focus on the impacts of shifting climate policy and other transition risks rather than on the physical risks that climate change poses to infrastructure, supply chains and asset values, said Natalia Moudrak, director for climate resilience at the Waterloo-based Intact Centre for Climate Adaptation.

The Intact Centre has produced a guide for investors and portfolio managers to assess the physical risks that climate change poses to companies in various sectors – including energy, transportation, utilities and agri-food – and the risk mitigation measures companies in those sectors should be undertaking. The centre is funded by Intact Insurance Group.

The insurance industry is the loudest corporate advocate of greater adaptation effort, driven by increasing weather-related losses that it ascribes, to a large degree, to a changing climate.

Ahead of its release of a flood risk management report last week, The Geneva Association, an international insurance think tank, said Canada is “on the right path,” pointing to recent federal and provincial government commitments to expand flood insurance, enhance flood risk mapping and create programmes for relocation from very high-risk zones.

“However, further reform is needed to increase incentives for risk reduction and prevent measures for new buildings and retrofitting existing buildings and public infrastructure,” Geneva Association’s Maryam Golnaraghi said. 

As we’ve seen with the COVID-19 pandemic, coping with a crisis after it has hit is not only more expensive but also more disruptive to people’s lives than undertaking reasonable measures to prepare for it. 

Shawn McCarthy writes on sustainable finance and climate for Corporate Knights. He is also senior counsel for Sussex Strategy Group.

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