Opportunity Is Knocking With Billions To Decarbonize Canada’s Economy

By: Andrew Botterill and David Arthur, Deloitte

In a game-changing move during its 2023 budget, the Government of Canada announced C$83 billion in tax credits and other incentives to decarbonize the economy and position Canada as a leader in the energy transition. The government is incentivizing investments in the energy transition through a suite of funding tools to ensure Canada remains competitive and takes a leadership role in the green economy.

First are investment tax credits (ITCs), which are refundable and therefore equivalent to cash. The key point regarding refundable tax credits is that companies can account for it in their financial model when planning a project, which bolsters project economics and confidence. Second is low- and no-interest financing, which can also be factored into a project’s financial model. The third mechanism is direct funding for special projects, such as the funding agreement with Volkswagen for the battery plant announced in April.

Together these measures provide the certainty and flexibility needed to support projects of national significance. Furthermore, these efforts demonstrate Canada's commitment to sustainability and responsible economic growth and will position us to lead the energy transition.

Some say the federal budget falls short of what’s needed to keep pace with measures introduced by the U.S. in its Inflation Reduction Act (IRA), which on paper is valued at almost US$400 billion. From a number’s perspective, given that the U.S. economy is about 10 times larger than ours, the value of Canada’s pledged C$80 billion would equate to C$800 billion, thereby exceeding the IRA.

That said, because the IRA specifies no cap on funding many measures, the U.S. number could eventually grow, possibly doubling to US$800 billion. Also, in addition to the ITCs for a project’s capital costs, the IRA offers production tax credits (PTCs) that can be applied to the operating costs, something that’s missing from Canada’s budget.

While Canada did not enact production credits, Canada has other opportunities to stimulate investment, such as an emerging market for carbon offsets.

New regulations to reduce emissions are moving Canada from being a voluntary market to a fully regulated one. This means companies operating clean energy projects can generate and commercialize carbon offsets to sell to emitters, which in turn provides a steady revenue stream to help operate the ventures.

When examining specific opportunities in the budget, one of the brightest lights is the ITC to support and accelerate clean electricity investment. Clean electricity generation is a space where Canada already excels, given that over 80 per cent comes from non-carbon emitting sources, especially hydro and nuclear. Transitioning to clean electricity generation is a crucial step towards replacing carbon-intensive energy sources and mitigating the impact of climate change. Supporting the growth of clean electricity is a smart decision, as it could serve as a solution for many of the technological challenges that currently hinder the achievement of Canada's climate goals.

The Clean Electricity Investment Tax Credit (CEITC) represents a substantial opportunity to accelerate clean electricity investment in Canada through C$25.7 billion of new money from 2024 through 2035. It provides companies a 15 per cent refundable tax credit for eligible investments, which include non-emitting electricity generation systems, abated natural gas-fired electricity generation, stationary electricity storage systems, and equipment used for electricity transmission between provinces and territories.

This will impact oil and gas producers as power consumption is a significant aspect of operations, particularly facility operations, and scope 2 emissions are impacted by grid intensity. Let’s look at the other ways oil and natural gas companies can benefit.

While introduced prior to the 2023 budget, the Carbon Capture, Utilization and Storage Investment Tax Credit (CCUSITC) remains material to the oil and gas industry and will pave the way for how CCUS projects are implemented. This refundable tax credit will incentivize large emitters to adopt carbon capture and storage technologies.

The total investment for the program is C$9.1 billion between 2022 and 2030, with C$520 million allocated for newly announced enhancements. CCUSITC is available in Saskatchewan, Alberta, and British Columbia for projects using dedicated geological storage. There are also options to store carbon in concrete, though the process must be validated by a third party and based on an ISO standard. Oil and gas producers will be a driver in CCUS projects as a player in the ecosystem will need pore space, which is the specialization of producers.

Another oil and gas opportunity identified in the 2023 budget, was the Clean Hydrogen Investment Tax Credit (CHITC). The C$17.7 billion investment aims to encourage investment in the fast-growing hydrogen space to give Canadian companies a competitive edge and encourage the use of clean energy. The support levels vary between 15 and 40 per cent of eligible project costs, with projects producing the lowest carbon intensity hydrogen receiving higher levels of support.

These are just a few of the instruments the government is offering to spur growth in clean energy sectors. Others include ITCs, grants, and direct investments that cover electricity generation, manufacturing projects, technology adoption, and other initiatives. Details about the different tools are available in Deloitte’s Budget 2023 Point of View on Clean Energy Incentives. Many of these measures can be stacked on top of other financial incentives some provinces are offering so it is worth investigating how to best approach investment opportunities.

In addition, the government also recently launched the Critical Minerals Infrastructure Fund — first announced in the 2022 budget — that allocates C$1.5 billion towards energy and transportation projects needed for developing mineral deposits.

So, how can Canadian businesses take advantage of these opportunities? We are advising our clients to be forward-looking, understand their investments for the next five to 10 years, and recognize the funding opportunities that will benefit them most. They should also have a good grasp of their projected expenditures and be ready to start deploying the funds when they receive them. Companies also need to apply for funding well in advance and prepare a compelling story to convince government to fund their projects.

With a mix of experts that include scientists, engineers, and tax professionals whose knowhow is key to preparing successful applications, Deloitte is well positioned to assist companies identify and capitalize on the funding opportunities in the 2023 budget.

Andrew Botterill, Partner, Financial Advisory, National Leader, Energy & Chemicals at Deloitte Canada

David Arthur, Partner, Tax, Prairies Market Leader

About Deloitte

Deloitte provides audit and assurance, consulting, financial advisory, risk advisory, tax, and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries and territories bringing world-class capabilities, insights, and service to address clients’ most complex business challenges. Deloitte LLP, an Ontario limited liability partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

Our global Purpose is making an impact that matters. At Deloitte Canada, that translates into building a better future by accelerating and expanding access to knowledge. We believe we can achieve this Purpose by living our shared values to lead the way, serve with integrity, take care of each other, foster inclusion, and collaborate for measurable impact.

 To learn more about Deloitte’s approximately 330,000 professionals, over 11,000 of whom are part of the Canadian firm, please connect with us on LinkedIn, Twitter, Instagram, or Facebook.

Dear user, please be aware that we use cookies to help users navigate our website content and to help us understand how we can improve the user experience. If you have ideas for how we can improve our services, we’d love to hear from you. Click here to email us. By continuing to browse you agree to our use of cookies. Please see our Privacy & Cookie Usage Policy to learn more.