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Impact of Canada’s Clean Technology Tax Credits on Climate Innovation

A wind generator, Canadian flags. Copy space.

Impact of Canada’s Clean Technology Tax Credits on Climate Innovation

The federal government is finally giving corporations and investors what they’ve been asking for- working on introducing four investment tax credits intended for a transformative shift in Canada’s cleantech landscape.

The specific tax credits include: 

  1. Clean Technology
  2. Clean Technology Manufacturing
  3. Carbon, Capture, Utilization, and Storage (CCUS)
  4. Clean Hydrogen

This represents another key domino falling, opening the door for unprecedented policy action and investment in the sector.  

Canada holds numerous competitive advantages (e.g., geologic composition, strong post-secondary research ecosystem, natural capital, skilled workforce) over our peer nations that can help prime the country to seize a leadership position in the new low-carbon economy. Particularly when it comes to hydrogen and CCUS technologies.

Underscored in a recent KPMG report, businesses have been loudening their calls for these ‘clean energy’ tax credits to be fast-tracked, and by doing so, can begin taking the necessary steps toward delivering on its promises to support a competitive, low-carbon economy.

Canada’s Investment Tax Credits 

Canada’s Clean Technology (CT), Carbon Capture, Utilisation, and Storage (CCUS), Clean Hydrogen, and Clean Technology Manufacturing Investment Tax Credits (ITCs) represent momentous measures in the country’s climate action strategy, incentivizing the adoption and operation of environmentally sustainable technologies. 

These ITCs are proven policy levers that can help Canada foster innovation, decarbonize industrial processes, and as importantly, kick-start investments into the technologies deemed necessary for Canada to achieve it’s net-zero targets for 2050.

The CT ITC, which is effective from March 28, 2023, to December 31, 2034, provides a refundable tax credit for investments in new clean technology property, such as equipment for generating renewable energy or non-road zero-emission vehicles. Administered by the Canada Revenue Agency (CRA) and Natural Resources Canada (NRCan), the CT ITC can offer up to 30% of the capital cost for eligible properties, gradually reducing to 15% for properties acquired in 2034.

Similarly, the CCUS ITC applicable from January 1, 2022, to December 31, 2040, supports projects that capture, transport, and store carbon dioxide, aiming to mitigate greenhouse gas emissions from industrial processes. Eligible projects include those capturing carbon dioxide from fuel combustion, direct air capture, and utilising the captured carbon in industrial applications such as concrete production. Both the CRA and NRCan oversee the administration and technical guidance of these credits.

The CT Manufacturing ITC provides support to Canadian companies that are manufacturing or processing clean technologies and their precursors. This credit offers 30% of the cost of investments in new machinery and equipment used to manufacture or process key clean technologies and extract, process, or recycle critical minerals.

The Clean Hydrogen ITC offers a 15 to 40% refundable tax credit for investments in projects that produce hydrogen, with the projects producing the cleanest hydrogen receiving the highest levels of support. Equipment needed to convert hydrogen into ammonia for transportation may also be eligible.

Comparing Canada’s ITCs to similar incentives offered in countries, such as the United States and Germany demonstrates the legitimacy of Canada’s strategy by in passing them into law.

In the United States, the Investment Tax Credit (ITC) for solar energy has been instrumental in the solar sector’s growth, leading to 200x growth in the solar industry since its inception in 2006. 

Similarly, Germany’s Renewable Energy Sources Act (EEG) has driven significant advancements in renewable energy. By offering feed-in tariffs and tax incentives for renewable energy projects, Germany has become a global leader in wind and solar power. The EEG has contributed to renewables accounting for nearly 50% of Germany’s electricity consumption in 2020, supporting the country’s ambitious energy transition goals.

The result? The implementation of ITCs has and continue to help remedy investors’ concerns by providing a blend of policy certainty and market stability. 

Economic Impact

If a lesson is to be learnt on ITC implementation by other nations, then Canadian founders and funders should come to expect similar growth trends across the nations clean-tech supply chain and workforce.

At a high-level, ITCs provide financial incentives for investments across the clean-tech value chain, catalysing much-needed investment in the sector. By supporting the development and deployment of advanced technologies, these credits help reduce costs, and foster economic diversification, which in turn, helps to reduce the nation’s reliance on the oil sands. 

The Clean Technology Investment Tax Credit (CT ITC) specifically is poised to help mitigate cost challenges in keystone sectors including renewable energy, transportation, and energy-and buildings. 

For example, in the transportation sector, high production costs associated with EV production, challenges in attracting private investment, and infrastructure development expenses have been significant economic hurdles. The CT ITC directly addresses these challenges by reducing financial barriers, making it more feasible for businesses to invest in clean technologies. 

The CT Manufacturing ITC, working in tandem with the CT ITC, provides a powerful boost to Canada’s cleantech sector. By offering a 30% tax credit for investments in new machinery and equipment used in manufacturing or processing clean technologies and their precursors, this ITC tackles critical economic challenges head-on. 

Just as the CT ITC reduces financial barriers for businesses adopting clean technologies, the Clean Technology Manufacturing ITC lowers the hurdles for companies producing these innovative solutions, encouraging them to scale up their operations and drive job creation in manufacturing, engineering, and maintenance. 

This synergistic approach not only accelerates the growth of the sector but also helps to vertically integrate clean tech supply chains while ensuring supply chain security and reducing dependence on foreign producers.

As a vehicle for sector growth and economic prosperity, ITCs are a proven policy mechanism for job creation across the skills economy while helping drive innovation through the development of new products and services. As demand for clean technology grows, these investments can help stimulate economic opportunities and help Canada transition to a more sustainable economy.

Notably, the CCUS ITC promotes the establishment of projects that capture and store carbon emissions, prompting indirect job opportunities in various industrial subsectors, including concrete, plastics, and fuels. 

These projects require specialised expertise, leading to high-paying employment opportunities for geologists, chemical engineers, and environmental scientists. Additionally, the construction and operation of CCUS infrastructure can generate jobs for civil engineers, construction workers, equipment operators, and maintenance technicians, further boosting employment in related industries.

The Clean Hydrogen ITC, offering a refundable tax credit of 15 to 40% for investments in clean hydrogen technologies, is a game-changer for Canada’s hydrogen industry. By addressing unique economic challenges, such as high production costs and the need for specialised infrastructure, this ITC can help catalyse the growth of the hydrogen sector, creating a ripple effect of job creation in engineering, production, and infrastructure development. 

As the demand for clean hydrogen increases, driven by the ITC’s support, a surge of innovation can be expected to follow, fostering economic diversification and solidifying Canada’s position as a global leader in the clean energy market, leveraging its abundant natural resources and expertise in hydrogen production and carbon storage.

Spotlight: CleanTech VC Funds in Canada

VC Funds play an integral role in supporting cleantech projects in Canada; they provide the funding to support first-of-a-kind technologies and innovations. Listed below are just a few of the prominent investors behind cleantech VC funds in Canada:

Environmental Impact

As a whole, Canada’s suite of ITCs are poised to increase the rate of pro-environmental behaviour change and scale of cleantech adoption.

The result? The reduction of greenhouse gas emissions across all levels (societal, organisational, individual) and decarbonization of economic key sectors. 

Countries like the United States, Germany, and Australia have already implemented their own ITCs, proving them to be effective in driving industrial emissions reduction while supporting their nationally determined contributions (NDC).

By incentivizing investments in renewable energy sources, zero-emission transportation, and energy-efficient heating and cooling systems, the CT and Manufacturing ITCs play a crucial role in decarbonizing heavy-emitting industries such as transport and buildings. By promoting the production and integration of clean technologies, the CT ITCs provide pathways for reducing the embodied carbon in traditionally hard-to-abate industries and contribute to developing more sustainable infrastructure.

Similarly, the CCUS ITC supports projects that capture and store carbon emissions from industrial processes and fuel combustion, particularly benefiting sectors like manufacturing and industry. Leveraging Canada’s unique geological advantages and storage potential, the implementation of this ITC is timely in addressing hard-to-abate sectors (e.g., cement, chemicals, steel, oil & gas) while maintaining the competitiveness of Canada’s oil and gas industry as the world transitions to a low-carbon economy. While not a complete solution on its own, CCUS remains an important part of the broader energy strategy alongside renewable energy and efficiency technologies.

Hydrogen is uniquely positioned to complement and enhance other clean technologies. According to Natural Resources Canada, hydrogen could provide up to 30% of Canada’s end-use energy by 2050, potentially reducing up to 190 Mt-CO2e of GHG emissions annually. The Clean Hydrogen ITC encourages investments in hydrogen production technologies, which are vital for decarbonizing sectors that are hard to electrify directly, such as long-distance transportation, mining vehicles, and industrial processes. By promoting the production of clean hydrogen through electrolysis powered by renewable energy sources, this ITC not only reduces emissions but also improves energy efficiency, making it a key tool in Canada’s fight against climate change.

Spotlight: Cleantech Startups in Canada

Cleantech startups are essential in reducing emissions in Canada as they drive innovation in renewable energy, energy efficiency, and sustainable technologies, providing new solutions to decrease reliance on fossil fuels. Listed below are just some of the cleantech startups helping Canada in its emissions reduction efforts. 

Innovation and Global Competitiveness

Long has Canada been known for falling short in its capacity to scale cleantech ventures. Despite a strong innovation ecosystem and entrepreneurial ambition, the commercialization of domestic clean tech continues to remain out of reach. 

The introduction of these ITCs marks a crucial step toward creating an enabling environment where Canadian innovations can thrive on a global scale. By reducing financial barriers, the ITCs encourage businesses to invest in a wide range of sustainable technologies. This includes renewable energy, zero-emission transportation, energy-efficient heating and cooling systems incentivized by the CT ITC, and advanced manufacturing processes supported by the Clean Technology Manufacturing ITC. 

These incentives not only accelerate research and development but also facilitate the widespread adoption of these technologies, positioning Canada as a leader in environmental sustainability and attracting international investment. Moreover, the Clean Hydrogen ITC promotes investments in hydrogen production technologies, which are crucial for decarbonizing industries that are difficult to electrify directly. 

Alongside the CCUS ITC, which uniquely supports projects encompassing both geological storage and industrial utilisation of captured carbon, these initiatives distinguish Canada’s approach from other global initiatives. This comprehensive support framework not only enhances Canada’s competitiveness in the cleantech sector but also strengthens its capacity to innovate and implement transformative climate solutions on a global scale.

Experts’ Analysis on Canada’s Cleantech Future

Experts are optimistic about Canada’s cleantech future, despite recognizing the challenges and competitive pressures from global markets. Karen Hamberg, a leading voice in Canada’s cleantech sector, emphasizes the need for Canada to translate recommendations into concrete actions. She acknowledges incremental progress behind the scenes and expresses optimism about recent initiatives such as the development of a data strategy for cleantech and the establishment of regional energy and resource tables. 

These efforts, in collaboration with provincial, territorial, and Indigenous leaders, are seen as crucial steps towards fostering innovation and sustainable development.

Dominic Barton, chair of the Advisory Council on Economic Growth, echoes the sentiment, stressing the importance of leveraging Canada’s strategic advantages and past policy initiatives. He advocates for a focused approach to crafting a competitive industrial strategy tailored to Canada’s strengths. Both Barton and Hamberg share a belief in Canada’s potential to nurture a vibrant cleantech sector that not only meets net-zero targets but also drives economic growth and innovation domestically.

Passing these ITCs into law marks a pivotal moment in the nation’s journey towards a more sustainable future. However, the Climate Insider acknowledges that ITCs are merely the first step in a comprehensive and sustained effort that must involve collaboration between the government, industry, and communities to develop a robust cleantech ecosystem and ensure an equitable distribution of benefits. 

By embracing a holistic and inclusive approach, Canada can emerge as a global leader in sustainable innovation, setting an example for other nations to follow and creating a lasting legacy of environmental stewardship and economic prosperity.

Featured Image: Credit: Enel North America