In her budget, Finance Minister Chrystia Freeland set a trap for the Conservatives, who promise to abolish the carbon tax. If ever once in power their leader Pierre Poilievre acted on it, he would trigger compensatory payments to the industry.
The profitability of the investments needed to produce more clean electricity and decarbonise industrial processes largely depends on the price signal sent by the carbon tax. It must gradually rise from the current $65 to $170 per ton in 2030, or consumers and businesses will remain addicted to cheap oil and gas.
To counter the political risk posed by Poilievre, the minister is proposing a clever derivative instrument, called a “contract for difference”, a form of insurance that will compensate for the difference observed between the actual price of carbon and that forecast in the government’s timetable. Contracts could also compensate for losses resulting from regulatory relaxation on clean fuels.
However, one wonders how this mechanism will adjust to the Carbon Exchange, which Quebec shares with California, but whose price of emissions is half the federal tax, due to an overabundance of pollution permits. Long live the promised reform!
These contracts will be one of the financial engineering tools of the new Canada Growth Fund, endowed with an envelope of $15 billion, the independent administration of which has been entrusted to Investissements PSP, the Montreal manager of the federal officials. The purpose of the fund is to attract private investment by de-risking projects through the allocation of concessional financing.
This strategy should cost the public treasury less than subsidies. Nothing to pay on the contracts if the carbon tax evolves as planned.
Capital will also come from the refocusing of the Infrastructure Bank, which has a pot of 20 billion.
However, the flagship measure of the budget is a tax credit on green investments, both from the private sector and from state corporations like Hydro-Québec. The reimbursement varies according to the nature of the investment: 15% for the production and transport of clean electricity, 30% to decarbonize processes and extract critical minerals, and 15% to 40% for the production of hydrogen, depending on the programs produced.
These credits are in addition to the 30% on clean electricity production and storage equipment in the November economic statement.
Oil sands operators last year obtained a credit of 37% to 50% on carbon capture and burial equipment, but Freeland refused them the 10 billion claimed in addition. A study by the Pembina Institute and the Climate Institute of Canada had sealed their indecent request, showing that the aid exceeded the support offered in the United States.
The Freeland budget is a response to the gigantic American measures of the misnamed Inflation Reduction Act (IRA). The European Union also had to unpack incentives, for fear that Uncle Sam would monopolize all the investments.
The challenge of this rivalry: to accelerate the fight against global warming, where we are lagging behind; not to come out the loser from a reindustrialisation of the world economy; which occurs in the tense geopolitical context of the redeployment of supply chains between competing but friendly countries, at the expense of China and Russia.
It is now that manufacturers choose the location of electric car and battery factories for the next 30 years. Countries that hesitate will miss the boat.
Decarbonization requires massive capital, and public money can reduce risk and accelerate private investment. However, even if the general direction of industrial policies is right, the choices made in the climate emergency cannot avoid costly failures, as several technologies are uncertain. That said, it is very much the private sector that will make these choices.
Unfortunately, the Americans refuse any carbon tax. A political opening early in Biden’s term, however, unlocked this massive US$400 billion package in tax benefits and subsidies.
The green component of recent Freeland budgets weighs in at $80 billion over 10 years. The Canadian arsenal is smaller, but better diversified with a price on carbon, regulations, tax credits, loans and loan guarantees.
According to the Climate Institute of Canada, this budget is the most important in history for accelerating clean growth and a clever response to the IRA, because it uses not just carrots, but sticks to discourage big polluters.
It’s not perfect though. He shuns fruit at hand, like building insulation, which is less sexy but has a guaranteed impact. It does not put an end to oil subsidies, as promised. It adds $500 million to an innovation fund, but this is one area where, despite public money, Canada is still struggling to move from ideas to commercialization.
Nevertheless, let us salute the seriousness of the efforts for a crisis which is just as important.