With an estimated $83 billion in mostly clean economy incentives, the 2023 federal budget makes a big bet on private sector investment to decarbonize the grid, build strong manufacturing sectors and supply chains for electric vehicles and batteries, jump-start hydrogen production, and seize Canada’s place in a burgeoning global green economy. This is welcome news for VCIB, who offers financing solutions to project developers, installers and building owners driving the low-carbon transition.
In the weeks leading up to Budget 2023, much of the discussion swirled around how or whether Canada would be able to compete with the US$369 billion the Biden administration had poured into climate and clean energy incentives through the August, 2022 Inflation Reduction Act.¹ On March 28, Deputy Prime Minister and Finance Minister Chrystia Freeland set out to meet the moment with a $491-billion budget featuring future-forward investments to advance Canada’s net-zero economy.
Here is our roundup of highlights from Budget 2023 from the lens of our Climate Finance team:
Tiered Investments Address Eight Strategic Priorities
Pre-budget commentary emphasized the need for Canada to concentrate available resources on aspects of the net-zero transition where the country can either build on its strengths or readily establish new ones. Budget 2023 lays out a tiered investment strategy that treats pollution pricing and the national Clean Fuel Regulations as a cornerstone for three levels of financing:
• 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”.
These public commitments are meant to draw significant private sector investment to eight strategic priority areas: electrification, clean energy, clean manufacturing, emissions reduction, critical minerals, infrastructure, electric vehicles and batteries, and major projects.
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Investment Tax Credits
The budget introduces or expands investment tax credits in the following areas.
Clean Electricity Investment Tax Credit ($6.3 billion through 2028², $19.4 billion through 2035)
Maximum 15% refundable tax credit for eligible investments in:
• Non-emitting electricity generation systems: wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal, nuclear (including large-scale and small modular reactors);
• Abated natural gas-fired electricity generation (which would be subject to an emissions intensity threshold compatible with a net-zero grid by 2035);
• Stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage, and compressed air storage; and
• Equipment for the transmission of electricity between provinces and territories.
Clean Hydrogen Investment Tax Credit ($5.6 billion through 2029, $12.1 billion through 2035)
15 to 40% tax credit for project costs, depending on the carbon intensity of the production process, plus a 15% tax credit for equipment to convert hydrogen to ammonia for shipping.
Clean Technology Manufacturing Investment Tax Credit ($4.5 billion through 2029, $6.6 billion through 2035)
Maximum 30% refundable tax credit for investments in new machinery and equipment to manufacture or process key clean technologies, and extract, process, or recycle key critical minerals, including:
• Extraction, processing, or recycling of critical minerals essential for clean technology supply chains, specifically: lithium, cobalt, nickel, graphite, copper, and rare earth elements;
• Manufacturing of renewable or nuclear energy equipment;
• Processing or recycling of nuclear fuels and heavy water;
• Manufacturing of grid-scale electrical energy storage equipment;
• Manufacturing of zero-emission vehicles; and
• Manufacturing or processing of certain upstream components and materials for the above activities, such as cathode materials and batteries used in electric vehicles.
Carbon Capture, Utilization, and Storage Investment Tax Credit ($520-million top-up through 2028)
Variable-rate refundable tax credit for eligible expenses, retroactive to 2022
The budget adds to the $7.1-billion CCUS investment tax credit announced in the 2022 budget and extends eligibility to projects aiming to store carbon dioxide in geological storage in British Columbia.
Clean Technology Investment Tax Credit ($6.9 billion through 2028)
30% refundable tax credit for eligible expenses
The budget extends the Clean Technology Investment Tax Credit through 2034, increases the available funds in the short term, and expands its scope to include specific types of deep geothermal projects, on the condition that they not “co-produce oil, gas, or other fossil fuels”.
The tax credits are largely conditional on employers adhering to specific labour standards: to receive the maximum funds available, they must pay prevailing union wages and assign at least 10% of tradesperson hours to registered apprentices in Red Seal trades. Firms that fall short of these standards will see their investment tax credits fall from 15 to 5%.
Reduced Tax Rates for Zero-Emission Technology Manufacturers ($1.3 billion)
The government is extending a provision from its 2021 budget that halved the corporate tax rate for zero-emission technology manufacturers, from 9 to 4.5% for small businesses and from 15 to 7.5% for larger enterprises. The reduced rates will now be available through 2034, and they will also be extended to “the manufacturing of nuclear energy equipment and the processing and recycling of nuclear fuels and heavy water,” beginning in the 2024 tax year. The tax reductions are expected to cost $20 million through 2028 and another $1.3 billion through 2035.
Strategic Finance
Canada Infrastructure Bank ($20 billion)
The budget calls for the Canada Infrastructure Bank to earmark $10 billion each to clean power projects and green infrastructure. “These investments will position the Canada Infrastructure Bank as the government’s primary financing tool for supporting clean electricity generation, transmission, and storage projects, including for major projects such as the Atlantic Loop,” a large power grid megaproject in Eastern Canada for which the budget commits to further negotiations.
Canada Growth Fund ($15 billion)
Originally announced in the 2022 Fall Economic Statement, with a plan to finalize its structure by mid-2023, the $15-billion Canada Growth Fund is meant to “help attract private capital to build Canada’s clean economy by using investment instruments that absorb certain risks in order to encourage private investment in low-carbon projects, technologies, businesses, and supply chains.” Budget 2023 mandates the $225-billion Public Sector Pension Investment Board (PSP Investments) to manage the Fund and states that it will “begin investing in the first half of 2023.”
Targeted Initiatives
Strategic Innovation Fund ($500 million new, $1.5 billion existing)
The federal Strategic Innovation Fund will allocate $500 million in new funding and $1.5 billion from existing resources to projects in “clean technologies, critical minerals, and industrial transformation”. The budget notes that the Fund has created or maintained 105,000 jobs across 107 projects since 2018, using $6.9 billion in contributions to leverage $67 billion in private investment. Examples to date include:
• 200 million to Algoma Steel in Sault Ste. Marie, Ontario, to support a shift to lower-emission electric steelmaking;
• $47.5 million to Moltex Energy Canada Inc. in St. John, New Brunswick, for small modular nuclear reactor research and technology development;
• $25 million to Burnaby, B.C.-based Svante Technologies to develop carbon capture technology for heavy industrial emitters.
Clean Electricity Projects ($3 billion)
The budget earmarks $3 billion over 13 years for three categories of clean electricity projects that include the popular Smart Renewables and Electrification Pathways Program, originally an eight-year initiative that launched in 2021 and worked its way through its initial $964-million budget and a $600-million top-up in less than two years. SREP is to share the $3-billion allocation with a renewed federal Smart Grid program and new investments in science-based activities to support offshore wind development off the coasts of Nova Scotia and Newfoundland and Labrador.
Clean Fuels Fund
The budget lists potential opportunities in bioenergy development across the 10 provinces and commits to explore possible support mechanisms with the industry.
Carbon Contracts for Difference
The budget opens a discussion on carbon contracts for difference³ as a tool to make the carbon pricing that backstops future investments more predictable and help “derisk major projects that cut Canada’s emissions.” The budget document says contracts for difference “allow companies to plan ahead, supporting the growth of Canada’s clean economy by making clean projects more cost-effective than more polluting projects.” The approach has seen considerable discussion recently as a way to protect federal cleantech investments from being overturned by a future government.
VCIB Comments
On the whole, the budget has largely been seen as a transformative win and a moment of opportunity to jump-start energy transition investment in Canada.
“The federal commitments and incentives outlined in Budget 2023 will provide a much-needed boost to accelerate the deployment of decarbonization technologies”, said Trish Nixon, Managing Director of Climate Finance at VCIB. “The race to net-zero is our most urgent priority, and we are motivated to work with existing and new borrowers as well as public sector partners to finance more projects, faster.”
For more on VCIB’s climate financing or to talk to us about your clean energy project or energy efficiency retrofit, visit our website or contact us.
¹ https://www.whitehouse.gov/cleanenergy/inflation-rduction-act-guidebook/
² All time references for funding initiatives are based on the federal fiscal year, which runs from April 1 to March 31.
³The Canadian Climate Institute published an explanation of this investment tool last week: https://climateinstitute.ca/what-are-contracts-for-difference/.
*Reproduced with the permission of the Department of Finance, 2023
