The Business Council of Canada’s submission to Finance Canada in response to the proposed investment tax credits for clean technologies.
The federal government has set a goal of achieving a 40-to-45 per cent reduction in carbon emissions by 2030 and net-zero emissions by 2050. These are substantial commitments that will require ongoing cooperation between governments and the private sector. There is urgency to getting this right. Absolute emissions in Canada need to drop by roughly 32 to 37 per cent in less than seven years while our GHG intensity per capita remains amongst the highest in the OECD1,2.
Other nations are working hard to establish a comparative advantage in climate-friendly technologies. Just last month U.S. President Joe Biden celebrated the one-year anniversary of his trademark legislation, the Inflation Reduction Act (IRA) that positions the country to be the global magnet for clean technologies for the foreseeable future. The speed and scale of the
U.S. approach to unlocking investment should not be underestimated. In fact, a recent analysis highlights that there have already been 270 new clean projects announced in the U.S. stemming from the Act, with more than $130 billion USD expected to be invested in the next two years3. When all is said and done, the IRA is expected to inject trillions of dollars into America’s energy transition4.
Investments required to achieve Canada’s net zero ambition are estimated to be approximately $2 trillion, but year over year investment levels remain well off the mark and need to increase by 5.5 to 8.5 times from where they are today5,6. A close partnership between governments and the private sector is necessary to enhance the competitiveness of Canada’s natural resource and manufacturing base, and to create the opportunities for clean technology innovators to grow their market share, both domestically and abroad. The time is now for Canada to take a leadership role in the global effort to address climate change.
The Business Council of Canada agrees with the growing consensus among experts, thought leaders and economists that the government must focus its limited fiscal capacity on economic competitiveness and the country’s most pressing decarbonization needs. Through Budget 2023 and previous work, the federal government has provided some guidance in terms of where the private sector can compete for capital by offering investment tax credits (ITC) in five specific areas: carbon capture utilization and storage (CCUS), hydrogen, clean technologies, clean technology manufacturing and clean electricity.
While important, ITCs on their own cannot generate the level of investment that Canada needs to meet its climate goals, nor are they the basis of a bold economic policy designed to drive sustainable economic growth and improve the competitiveness of Canadian firms. Canada has all the ingredients to be a go-to destination for green investing that can reduce emissions here and abroad, but it currently lacks the clear policy and fiscal incentives to attract the capital necessary to support its emissions reductions goals. Fulfilling the country’s true potential will require a broader view where numerous policies are working in concert to drive investment, grow talent and develop skills, expedite project approvals, and ramp up spending in research and development and applied science.
Nonetheless, the proposed ITCs do provide an important opportunity to bridge or at least narrow the gap between the economics of building out new decarbonization projects in Canada versus other jurisdictions. Their success will hinge on their ability to unlock an unprecedented level of private sector capital and position firms in Canada as cost competitive producers of innovation and clean technology. Central to their success is the need for the government to offer clear and achievable terms and conditions that allow businesses to secure the full benefits offered by each ITC. Of equal importance is the need for the government to clarify its intentions to support operational expenditures through tax, carbon pricing policy or public financing guarantees.
While this consultation is focused on a specific set of ITCs, the Business Council urges the government to work closely with industry to confirm its intentions to support clean growth opportunities through tax policy or other programs in markets such as biomass, biofuels, sustainable aviation fuel and for critical minerals such as aluminum and uranium.
Finance Canada’s consultation provides an immediate opportunity to clarify several aspects of the emerging ITC regime. We respectfully provide the following comments on behalf of our members.
There is an urgent need to finalize the ITCs
The federal government has committed to developing ITCs for clean technologies in its last three budgets. As of today, none are in force, minimizing their ability to support final investment decisions in the near term. For example, the government committed to developing an ITC for CCUS in Budget 2021. This commitment was met with enthusiasm and represented a chance to close the economic shortfall of carbon capture investing in Canada versus other jurisdictions.
Companies, interest groups and other stakeholders rushed to participate in numerous consultations and exercises to help shape the design of an ITC that holds the potential to position Canada as a global leader in CCUS technology and deployment. Yet roughly two years later companies and investors continue to wait for answers about how the ITC will treat specific investments (e.g., pre-combustion equipment, investments in transnational projects) while Budget 2023 added a new consultation requirement for labour and prevailing wages.
While draft legislation has been published for CCUS and clean technologies, the ITCs for hydrogen, clean manufacturing and clean electricity (including nuclear) remain conceptual and are of limited use to firms or global investors considering projects in Canada. Delays in finalizing the terms and conditions of each ITC through law effectively freezes capital and diminishes Canada’s ability to achieve its emissions reductions targets and fulfill important commitments such as exporting clean hydrogen to Germany by 20257.
Canada is in a global competition for investment dollars in the low carbon economy, thus timing matters enormously. Tens of billions of investment dollars are contingent upon Finance Canada’s ability to move swiftly to finalize the ITCs and to create the commercial case for clean technology investment in Canada. We urge policy makers to work with companies and the investor community to move expeditiously and finalize the terms for all ITCs.
Just one year after coming into force, the IRA has ushered in billions of dollars of private sector investment into ZEVs and battery technology, renewable energy, hydrogen, biofuels and CCUS. Comparatively Canada’s ITC regime remains nascent with notable investments in the energy transition driven by hallmark programs such as the Strategic Innovation Fund (SIF) and bespoke government spending.
Success under the IRA is not coincidental. Rather, U.S. policymakers deliberately revamped the country’s tax credit structure by designing incentives that provide business with long-term predictability and clarity. With most tax credits in place for at least 10 years, investors, manufacturers, utilities, and developers have enough time to plan and build projects well into the 2030s. Further, ensuring that the full value of credits will only start to decline after emissions reductions targets are met relieves Congress of the painstaking exercise of letting credits periodically expire only to be renewed at the last minute. The broad-based nature of the U.S. regime and the transferability of tax credits to anyone with a tax liability are also key features of the IRA’s success.
The Business Council is concerned that the design features of Canada’s ITCs are overly complex and inconsistent with the objective of using tax policy to attract higher levels of investment. Claw back provisions, differing phase out schedules, narrow and confusing eligibility criteria, knowledge sharing requirements and a high-level auditing risk are just some of the provisions that could discourage companies and investors from using the ITCs. Meanwhile questions remain about the stackability of certain ITCs amongst themselves and with federal programs such as the SIF and projects supported by the Canada Infrastructure Bank, Canada Growth Fund, or provincial governments.
Clean Electricity ITC
The evidence is clear that an electrical grid that is twice as big by 2050 will be necessary to electrify our homes, buildings, businesses, and longstanding industrial practices8. Finance Canada should be commended for creating a tax credit to support investment into new electricity capacity, storage, and transmission through the proposed ITC for clean electricity. However, the Business Council is concerned that the requirement for a competent authority to commit to achieving the federal government’s goal of a net zero electricity sector is overreach and unnecessarily politicizes the use of tax policy. Such a requirement will create a political barrier that delays rather than accelerates investment in new forms of electricity capacity or into areas where it is most needed. If not defined properly, the requirement could also exclude independent power producers from investing in electricity projects in a province or territory that has not committed to the federal net zero target.
Of note, the IRA constitutes a paradigm-shifting federal investment in clean power that does not impose a binding emission reduction target or political commitment as a condition of participation. We encourage the government to follow the U.S. example and remove the
proposed requirement for a competent authority to commit to the net zero target. Finance Canada should also simplify the guidance for private companies and independent operators to build new or augment existing assets that reduce emissions and respond to new demands for clean electricity.
Clean Hydrogen ITC
Several Business Council members have a strong interest in pursuing hydrogen production technologies and appreciate the government’s efforts to design a tax credit based on a “cradle- to-gate” life-cycle approach. Finance Canada needs to strike the right balance, setting ambitious carbon intensity tiers for hydrogen that are realistic and flexible, taking into consideration the relative carbon of a local grid. An overly prescriptive approach that permits access to the highest tax benefit based on the lowest carbon intensity could minimize Canada’s potential to be low- cost high-volume producer of affordable hydrogen.
The approach to measure various hydrogen production processes should be technology-neutral and considerate of a broader range of technologies, such as pyrolysis or gasification, providing the appropriate carbon intensity tier requirements are met. Canada’s carbon intensity requirements should be aligned with international best practices and consistent with models widely used and accepted in the U.S. and Europe. This will be especially important given that major trading partners such as the European Union will move forward with their Carbon Border Adjustments policy for hydrogen in September.
Lastly, the design features released in Budget 2023 do not sufficiently address ammonia-related expenses or other derivatives used to transport hydrogen such as methanol. Excluding transportation-related expenses from the hydrogen ITC would be a shortcoming that holds back Canada’s potential to become a major producer and exporter of hydrogen.
Finance Canada needs to send a clear and bankable market signal articulating the details of its ITCs. The sooner it does so, the sooner companies can invest in emerging technologies and equipment.
Keep coverage broad and allow capital formation through diverse partnerships
Clean technology projects are integrated, and no project works without its constituent parts. In real terms, project budgets include costs beyond specific technology.
Finance Canada should ensure that a broad suite of capital assets is eligible under each ITC. Assets should include a range of clean technologies and the equipment and infrastructure required to support major projects, such as dedicated roads, building structures, power, and water treatment facilities. Ensuring that the ITCs capture a broad suite of projects will help level the playing field with the U.S. and can better position Canada as a global destination for investment in emerging clean power technologies.
Companies and investors have a proven ability to create partnerships and consortiums designed to pursue project opportunities. New partnerships have no tax history and will not be able to generate revenues until their projects are operational, which could take several years. Investors seeking to leverage the ITCs may be impeded by the fact that partnerships or consortiums can include entities with varying levels of tax liability. Of all the ITCs, only the Clean Electricity ITC is accessible to non-taxable entities. While this is a good first step, Finance Canada should ensure that all owners and forms of partnerships, including tax-exempt groups such as Indigenous peoples, can benefit from the proposed ITCs. Doing so would unlock the full potential of Indigenous groups interested in pursuing clean technology projects while advancing Canada’s commitment to economic reconciliation.
Reconcile project and ITC timelines
Clean technology projects often have long and unpredictable regulatory, permitting and construction schedules typical of modern infrastructure projects in Canada. The federal government has recognized the challenge to building major projects in Canada and committed in Budget 2023 to outline a plan to improve the efficiency of project approvals and permitting processes by the end of this year9.
Unexpected project delays introduce a binary risk that project proponents manage through their relationships with infrastructure lenders and various financial instruments such as non-recourse project debt financing or equity. Securing financing for major projects takes time and evolves over the duration of a project and the risks it is exposed to, altering project schedules and their respective timelines. As currently written, the ITCs include hard cut-off dates and eligibility criteria contingent on clean technologies coming into service.
While these design features are intended to drive near-term project development, they can limit the use of ITCs for longer-lead time technologies and projects that start before and continue after the ITCs wind down, inadvertently discoursing investment. Consideration should be given to developing a safe-harbour provision, similar to what exists in the U.S., where qualified capital expenditures will continue to benefit from treatment after the hard cut-off date.
Only the CCUS ITC permits tax benefits when expenses are incurred rather than when eligible properties become available for use. We recommend that Finance Canada aligns the timelines of all ITCs with the CCUS ITC so that companies can maximize the full value of tax benefits offered by the government. Doing so will allow companies to deploy capital to projects more efficiently and reduce the need to borrow or find other sources of capital during a project’s construction phase.
The Business Council also recommends Finance Canada delay the assignment of a date of expiration of its ITCs until the government has confirmed how it will improve the regime for approving and permitting major projects in Canada.
The business community appreciates that all tax credits are refundable. Estimated project costs can vary, with some exceeding billions of dollars in investment. Quarterly rather than annual remittance can help ensure that project proponents will benefit from a reliable and predictable cash flow.
Labour conditions and prevailing wages
Canada’s major employers share the government’s vision to create good careers and opportunities for Canadians during the energy transition.
Canada’s economic security and climate objectives urgently require a record level of investment, and the proposed ITCs are helpful in this regard. Capital and a strong and nimble
workforce are needed to mobilize projects in support of sustainable growth and in accordance with the country’s emissions reduction targets. Firms deploy a mix of trade and non-trade workers through a variety of collective bargaining agreements negotiated between workers, employers, and unions regardless of trade versus non-trade affiliation.
At the same time, wage growth in Canada is accelerating while the national joblessness rate is amongst the lowest in decades. For its part, Canadian firms employing more than 500 people offer the highest average weekly working wages10 and the most comprehensive training programs in the country. However, the Canadian labour market is aging, and the construction sector is no exception with its record high vacancy rate leading to shortages of labour and skilled trades.11
We urge the government to think carefully about imposing unduly restrictive labour requirements so that capital can quickly be deployed to projects that create more employment opportunities for Canadians. A race for clean energy talent is underway, with the U.S. already drawing on the international workforce to support projects incented by the IRA. Canada needs to be careful.
The proposed labour conditions include a very narrow interpretation of an eligible labour agreement. We recommend that any collective labour agreement, existing or forthcoming, regardless of trade versus non-trade affiliation, that is registered with a Labour Relations Board of a province fully satisfies the government’s eligibility requirements under the respective ITCs.
Clarity about important items such as how a prevailing wage will be calculated and the work or property it should apply to is also necessary so that project owners can determine their ability to maximize the benefits available under each ITC. Additionally, geographic and demographic conditions may create apprentice shortages where skilled workers are not available to work on a project, limiting a company’s ability to fulfil the proposed requirements for apprentices.
Finance Canada should consider adding a “good faith effort exception” to account for potential labour shortages that are outside an employer’s ability to control. Clarity on how the Canada Revenue Agency will determine ‘gross negligence’ is also necessary.
Labour requirements need to prioritize certainty, clarity and minimize the administrative burden associated with compliance. Requirements need to be flexible and recognize the diverse skillset and availability of trade and non-trade workers in different sectors and in various locations across the country.
As written, achieving the proposed requirements will be challenging and could result in a 10 per cent reduction in the ITC rate, forcing companies to either delay their final investment decision or pay the proposed penalty to access the full credit. Much work remains to be done before the proposed labour provisions become law so that businesses can invest with confidence and unlock the full potential of clean technologies offered through the ITCs.
The federal government is exploring potential measures to address domestic content requirements and develop reciprocal treatment for countries with mutual agreements or pre- established trade agreements.
Businesses require unfettered access to a diverse supply of equipment and services provided by a fluid global supply chain. Domestic content requirements should be pursued with caution and Canada would be wise to work with its trading partners to create rules that are compliant with World Trade Organization rules, the General Agreement on Tariffs and Trade and respectful of major trade agreements such as the Canada-United States-Mexico Agreement.
Requiring Canadian businesses to source inputs from certain countries over others can significantly increase project costs thereby impacting the business case for proceeding with the project in Canada – undermining the very purpose of the ITCs. In addition, requiring Canadian businesses to source critical inputs outside their normal supply chains increases the risk of costly delay-causing disruptions.
The Business Council urges the federal government to decouple its objectives concerning reciprocal procurement measures from the proposed ITC regime. At a minimum, a domestic content requirement should not compromise a company’s ability to achieve the maximum base rate offered by an ITC.
Successful uptake of the proposed ITCs will require clear terms and conditions that are easy to understand, applicable to companies, and useful for project budgeting and financing purposes. In broad terms, the success of the ITC regime will be judged on the amount of investment it can drive towards clean energy technology projects.
The government’s ability to be disciplined and implement a broader policy framework that focusses on encouraging higher levels of investment will also be key to the successful uptake of the ITCs. New regulations focused narrowly on reducing emissions in specific sectors could jeopardize the government’s objective to level the playing field with the U.S. and discourage the record levels of investment Canada requires in the near term.
- https://www.canada.ca/en/environment-climate-change/services/environmental-indicators/greenhouse-gas- emissions.html
- https://www.canada.ca/en/natural-resources-canada/news/2022/08/canada-and-germany-sign-agreement-to- enhance-german-energy-security-with-clean-canadian-hydrogen.html
- https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1410021701 https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1410021701