Here’s how the Trudeau government is responding to Biden’s Inflation Reduction Act

The Trudeau government’s 2023 federal budget is backing nuclear power in a big way, unleashing a new $80-billion arsenal of tax changes that also offer incentives for hydropower, critical minerals, hydrogen, carbon capture and renewables.

It’s all part of a bid to arm Canada with new weapons to compete against an onslaught of industrial subsidies from the Biden administration, enshrined in the White House’s Inflation Reduction Act (IRA).

The Liberals have proposed the largest package of tax incentives available to nuclear energy and manufacturing to date from the federal government, a Finance Canada official confirmed. Both large-scale nuclear plants and small modular reactors are winners in Tuesday’s rollout of multiple new refundable tax credits, tabled in the House of Commons by Finance Minister Chrystia Freeland.

That’s good news for TC Energy, the large oil and gas company behind the Coastal GasLink pipeline being built through Wet’suwet’en territory without the consent of that nation’s Hereditary Chiefs. The company had lobbied the government to include nuclear power, including small modular reactors, as part of an investment tax credit for low-carbon energy.

The Pathways Alliance group of oilsands companies has also made nuclear power part of its plan to lower emissions in the oilpatch, and TC Energy has floated the idea of using nuclear reactors in the oilsands. The Canadian Environmental Law Association, by comparison, has advocated against the idea.

At the same time, the government introduced new rules to allow companies that make hydrogen from fossil fuels to still take advantage of favourable federal tax treatment, as long as the emissions are abated using carbon capture equipment.

And while the budget proposes some funding for federal officials to talk with Indigenous communities in order to “update” guidelines outlining the Crown’s duty to consult Indigenous Peoples, it also hinted at a new plan to streamline the permitting process for major projects, and slash timelines to get them built.

“It should not take 12 years to open a critical minerals mine,” the budget said.

Carbon pricing not enough to compete with U.S. IRA: federal budget

The message running through the budget document is that the carbon pollution pricing system, and other federal green policies like clean fuel regulations, are not enough on their own to compete with the new clean energy and clean technology incentives in the United States.

The latest U.S. legislation poses a “major challenge” to Canada’s plans to build a low-carbon economy, the budget said. Without a broader federal response, it predicted the “sheer scale of U.S. incentives” will neutralize Canada’s ability to attract clean technology investments.

Yet Canadian officials ruled out a response that mimics the U.S. approach. The White House plan is based on industrial production, and offers uncapped subsidies that could result in anywhere between US$369 billion and $1.7 trillion in incentives, depending on how much activity it provokes.

A senior government official said Canada wasn’t convinced that this approach could guarantee rising productivity over the long term. It was also less predictable, they said, than the tax breaks offered in the Canadian budget, because those will be based on upfront capital costs.

Hydropower, nuclear, renewables handed tax breaks in federal budget

The centrepiece of Canada’s plan to compete with the U.S. is a $25-billion, 15-per cent tax break for investments in “non-emitting electricity generation systems” that will run through 2034.

Despite having an electricity grid that’s already 83 per cent non-emitting, the government believes it needed to provide more incentives to “preserve this advantage.” The budget said Canada’s goal of net-zero emissions by 2050 will require the country to become a “clean electricity superpower.”

The resulting “Clean Electricity Investment Tax Credit” would be available as of next year’s budget and is designed to incentivize the construction of renewables like wind, solar, wave, and tidal power.

The government is also allowing conventional large-scale hydropower and large-scale nuclear power plants, as well as small modular reactors, to apply for the tax break. And it will be available both for new and refurbished projects.

In an unprecedented move, the government is making this tax break available to public utilities, saying it made sense since two-thirds of Canada’s installed capacity was already publicly owned. Crown corporations, “corporations owned by Indigenous communities” and pension funds are also eligible.

The Canadian Nuclear Association had called for nuclear technologies to be included in clean energy manufacturing tax credit programs. But the Canadian Environmental Law Association advised against what it described as “unproven reactor designs.” The association said small modular reactors “pose safety, accident, and proliferation risks” and had called on the government to eliminate federal funding for the facilities.

The budget said there will be a penalty of 10 percentage points for all users of the tax program that fail to pay prevailing wages and create apprenticeship training opportunities. The government said it will consult with labour unions and “other stakeholders” to “refine” these measures.

Provincial authorities will also have to sign off on a commitment that the money will be directed towards lowering electricity bills and achieving a net-zero electricity sector by 2035.

More tax changes for critical minerals, nuclear equipment

The budget proposes another new, refundable tax credit worth $11 billion, which will allow for a 30 per cent break in the cost of investments in equipment used for “key critical minerals” like “lithium, cobalt, nickel, graphite, copper, and rare earth elements.”

Refundable tax credits are called as such because a company can receive a tax refund equal to the difference between the amount they owe in taxes, and the amount that the credit is worth.

Manufacturing of nuclear energy equipment, and processing nuclear fuels and heavy water, will be eligible too — as will renewables, energy storage equipment and zero-emission vehicles, including components like batteries. The measure can be used for mining, processing or recycling.

Businesses can only claim one of the five tax breaks on offer for hydrogen, carbon capture, clean technology, clean electricity and clean manufacturing, if they’re eligible for more than one.

Volkswagen announced this month that its subsidiary was building a “gigafactory” in St. Thomas, Ont., a large battery plant. The budget is tight-lipped about how much the government paid for this agreement, only stating that projected costs were “fully accounted for” and that further details would be forthcoming after the automaker finalized the deal.

Low corporate income tax rates for nuclear manufacturing

The 2021 budget slashed corporate income tax rates in half for manufacturers or zero-emission technology. Tuesday’s budget proposes to lengthen the availability of these lower rates by three years, through 2034.

Here, nuclear power will also benefit, as the reduced corporate rate is being allowed to be applied to the manufacturing of nuclear energy equipment as well as the processing and recycling of heavy water and nuclear fuels.

The Canadian Nuclear Safety Commission is also getting access to a chunk of a fund costing $1.3 billion over six years for improving the “efficiency of assessments for major projects.”

The Impact Assessment Agency of Canada, the Canada Energy Regulator and other federal departments also get access to this funding.

The Canada Infrastructure Bank is being retooled as the government’s financial arm for “clean electricity generation,” as well as power transmission and storage. It’s being ordered to invest at least $20 billion towards building “major clean electricity and clean growth infrastructure projects.”

Indigenous consultations, but also speedier projects

Under a section called “Getting Major Projects Done,” the budget tasks Crown-Indigenous Relations and Northern Affairs Canada to “engage with Indigenous communities” and update federal guidelines for fulfilling the Crown’s “duty to consult Indigenous peoples and accommodate impacts on their rights.”

The government said that this would support the implementation of the United Nations Declaration on the Rights of Indigenous Peoples Act.

There are several other measures meant to support “Indigenous economic participation in major projects,” and “unlocking the potential of First Nations Lands,” including funding for Natural Resources Canada to develop a “National Benefits-Sharing Framework,” and orders to the Canada Infrastructure Bank to offer loans to Indigenous communities to help them buy equity stakes in projects the bank is investing in.

Meanwhile, the budget also says that over the next year, the government will “propose further steps” that will ensure the “effectiveness” of Canada’s reviews of major projects.

“By the end of 2023, the government will outline a concrete plan to improve the efficiency of the impact assessment and permitting processes for major projects, which will include clarifying and reducing timelines, mitigating inefficiencies, and improving engagement and partnerships,” reads the budget.

In another section, the budget expands on self-determination, saying Indigenous governments “must be able to set and implement priorities respecting their communities, lands and resources.”

Hydrogen tax measure allows for some pollution, if captured

Hydrogen, which the Liberals are touting as a future transportation fuel, can be produced through electrolysis, which creates no emissions if done using renewable electricity.

Or it can be derived from fossil fuels, usually natural gas, which is mainly made of methane, a potent greenhouse gas. The gas method is what the oil and gas industry typically uses.

The budget puts some meat on the bones of the investment tax break for hydrogen production that was first introduced in Freeland’s fall economic statement in 2022.

Companies will be eligible to claim 15 per cent of project costs as a tax break if each kilogram of hydrogen they produce emits less than four kilograms of carbon dioxide equivalent.

Producers who are able to limit the carbon intensity further, to under two kilograms of carbon dioxide equivalent, can access a broader, 25 per cent tax break. If they can keep it to under 0.75 kilograms, they can access a 40 per cent reduction.

That means companies producing hydrogen from natural gas can still get at least some tax benefits in the new budget, as long as the emissions are captured with carbon-capture technology.

Hundreds of academics and organizations signed an open letter to Freeland in February, asking her to avoid designing the program in a way that subsidized what they deemed “fossil-hydrogen technology.”

“The only scalable and truly near-zero emissions hydrogen is produced from water using renewable energy … hydrogen produced from fossil fuels, including pathways that use carbon capture … should not be eligible for support,” reads the letter.

The government’s push for hydrogen also includes a 15 per cent tax reduction for equipment used to convert hydrogen to ammonia, which is used to transport the fuel. There’s a penalty of 10 percentage points for companies that don’t meet labour requirements.

Expanding carbon capture to British Columbia

Last year’s budget introduced a tax break for Carbon Capture, Utilization, and Storage, or CCUS. The 2023 budget lays out some more specifics of the program.

The tax incentive is meant to battle the largest source of Canada’s greenhouse gas emissions, the oil and gas sector, which account for 27 per cent of all carbon pollution.

Finance officials said Tuesday they expected this measure to account for about $15 billion of the $80-billion tax incentive package.

That is roughly the same dollar amount as what the Pathways Alliance has estimated will be the initial cost to build a network to capture and store emissions from oilsands projects.

The government is expanding eligibility of the program to underground carbon storage in British Columbia, in addition to Saskatchewan and Alberta, where the Pathways companies are based and where its large project is proposed.

There will be a third-party validation process for projects that inject carbon dioxide into concrete. And companies that have set up so-called “dual use” systems that include both heat or power equipment, as well as water use equipment, will be eligible.

The tax break will be prorated according to how much energy the carbon capture process uses, and it will be subject to unspecified labour requirements the government said will come into effect on Oct. 1, 2023, but will be announced at a later date.

Environmental Defence Canada has argued that the carbon-capture tax incentive should not be made available to oil and gas companies, and that the government should not be funding carbon capture through investments.

The ‘Poilievre insurance’ for carbon pricing

The budget proposes new consultations to develop a program allowing companies to lock in future carbon prices, regardless of what happens to the carbon pricing system.

While the system has laid out a predictable path for the price of carbon through 2030, Pierre Poilievre, the leader of the Conservative Party of Canada, has promised to revoke the system if his party wins power.

As a result, the government is moving to establish “carbon contracts for difference,” which is being viewed in internal government circles as a type of “Poilievre insurance,” according to a report from Radio-Canada.

Poilievre’s promise is generating hesitation in the business community to make low-carbon investments, Radio-Canada reported. The new contracts are expected to eliminate that risk by guaranteeing to companies that they can plan for a given carbon price regardless of what happens at the political level.