Gattinger: Energy And Climate In The Federal Budget — Room For Optimism, But Devil Will Be In The Details And Implementation

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The federal budget was released yesterday amid higher prices and inflation, ballooning debt, the war in Ukraine and the new Liberal-NDP deal. With all the uncertainty, it was an open question where the government would take fiscal policy.

Compared to the wild spending of the last few pandemic budgets, Ottawa appears to be taking public finances towards restraint. The government committed to a fiscal anchor (bringing the debt to GDP ratio down from 45.1 to 41.5 per cent in five years), a path to reducing the deficit (from $53 billion to $8 billion in five years), and more modest new spending compared to recent budgets ($56 billion).

Affordability and economic growth are the budget’s key priorities, with $10 billion for affordable housing and $15 billion for a new Canada Growth Fund. The NDP got the beginnings of its dental plan ($5.3 billion) and $8 billion was dedicated to defence ($8 billion). These are big dollars to be sure, but nowhere near the hundreds of billions rushed out the door at the height of pandemic lockdowns.

One thing is sure: Canadians won’t be going to the polls over the budget. NDP leader Jagmeet Singh says the budget honoured his party’s agreement with the Liberals. While some worry the deal will pull the government to the left, instead, shelter from a snap election may be giving Ottawa room to take a more thoughtful approach to fiscal policy. Or perhaps it’s the realities of mounting debt, soaring inflation, rising interest rates, and growing criticism from the private sector that the government doesn’t have a plan for growth or the country’s finances.

Whatever the reason, the government is signalling it’s paying closer attention to matching spending and revenues, and moving in the direction of fiscal restraint.

On energy, the budget underscored the positive contribution of oil and gas revenues to Ottawa’s fiscal position. Alongside inflation and economic recovery, high commodity prices generated an $85 billion windfall for the government, taking some of the sting out of the deficit spending of recent years.  

On energy and climate, notable announcements include the Canada Growth Fund ($15 billion), a Critical Minerals Strategy ($3.8 billion), a new tax credit of up to 30 per cent for clean technology investments in battery storage, clean hydrogen and net zero technologies, and a broader mandate for the Canada Infrastructure Bank to invest in small modular reactors, hydrogen and carbon capture.

The Growth Fund aims to attract investment capital to reduce emissions, diversify the economy and restructure supply chains, with the budget estimating Canada will need between $125 billion and $140 billion a year in investment to become net zero by 2050. This is a huge leap from the typical $15 to $25 billion in annual investment in the country. The budget also commits to creating a $1 billion Canadian Innovation and Investment Agency to foster R&D spending.

There are a range of announcements building on previous commitments, like supporting the purchase of zero emission vehicles ($1.7 billion) and the $9.1 billion in funding announced in last week’s Emissions Reductions Plan.

But the real test of these measures will be in the details and implementation. Take the new clean tech tax credit. How will the government define ‘clean hydrogen’ — just electrolysis or blue hydrogen as well? And what about the Growth Fund and the new innovation agency? Canada has struggled to rapidly stand up and effectively administer these sorts of programs in the past.

What’s more, many measures require enough workers and functioning supply chains to make things happen, along with consumers to take governments up on their offers. ZEV incentives are great, but dealerships need to have the cars in stock. The fact that the program has only supported Canadians buying or leasing 136,000 ZEVs since 2019 gives pause. This is a fraction of the 1.5 to 2 million light duty vehicle sales in Canada each year.

Ditto for charging stations, where the budget boasts helping build 1,500 charging stations since 2015, something like 200 a year, an awfully long ways from its commitment to add 50,000 ZEV chargers and hydrogen stations across Canada.

Same goes for planting trees, where only 30 million of the 2 billion have been planted to date. At that rate, we will only be about 10 per cent of the way to 2 billion by 2030.

All of these plans succeed or fail at the implementation stage.

Among the most highly anticipated announcements were long-awaited details on the investment tax credit for carbon capture, utilization and storage. The ITC came in at a reasonable 60 per cent for direct air capture, 50 per cent for point source capture, and 37.5 per cent for transportation, storage and use. The government anticipates the credit will be worth an estimated $2.6 billion over five years.

But many devils await in the details. The government held firm on the exclusion of enhanced oil recovery projects from eligibility for the credit, but will capture projects be excluded from eligibility if some of the CO2 sold is used in an EOR project? This could reduce Canada’s competitiveness in emerging net zero oil markets, exemplified most recently by the direct air capture/EOR deal between Occidental and SK Trading International in the United States.

The budget notes that ‘other CO2 uses could be made eligible in the future’ if ‘no incremental CO2 emissions result from the use of the product that is produced.’ This may open the door to broadening eligibility but how will ‘incremental CO2 emissions’ be defined?

Details will also matter on the government’s intention to reduce the tax credit by 50 per cent from 2031 to 2040. Creating an incentive for industry to move quickly makes sense — and is in keeping with the government’s projected contributions of the oil and gas sector to its 2030 plan (a reduction of 42 per cent of 2019 oil and gas emissions by 2030).

But eight years is a very short time to finance, permit and build the extensive CCUS infrastructure envisioned by industry and government — particularly when projects involve developing partnerships with Indigenous communities. Will the government be open to revisiting its plans to scale things back in 2031? Time will tell.

There are grounds for optimism that the budget will help Canada realize its energy and emissions reduction potential, but many questions need to be answered in the months and years to come. The success of the government’s plans will hinge on getting the details right and effective implementation.

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