Making a clean tech push

The 2023 federal budget was keenly anticipated by the manufacturing sector, partly because it would lay out how the government hoped to respond to the incentives created by the U.S. government’s Inflation Reduction Act (IRA), to create an environment that would encourage further investment here rather than south of the border. There was also the question of how it would tackle Canada’s emissions reduction targets driving towards net-zero transitions.

The Conference Board of Canada’s Chief Economist Pedro Antunes was positive about the outcome of the budget because it encourages further investments to stimulate change.

“Initially, we thought this might be a very frugal budget,” said Antunes. “There's a lot of concern regarding whether we can put something together that will keep up, or try and keep up, with what the U.S. is doing. I think the government has been frugal in some respects in terms of cutting back on departmental budgets and on consulting fees while looking to secure funding for [clean tech] initiatives. Twenty-billion [dollars] is not nothing, so there's opportunity.”

Dennis Darby, president/CEO of Canadian Manufacturers & Exporters (CME), was also positive about the budget, in that it addressed a number of issues his organization had asked the government to consider. A few of the investments include:

• The creation of a Clean Technology Manufacturing Investment Tax Credit to match similar manufacturing credits found in the IRA that addresses some concerns about potential lost investment in Canada.
• The creation of a Clean Electricity Investment Tax Credit to help Canadian manufacturers transition to net-zero production.

• Expanding the scope of the Tax Credit for Carbon Capture to help Canadian industry compete with the IRA.

“We asked the government to address the IRA with some measures that would attract investment, and they listened,” said Darby. “They did make some progress, so I can say that is good. With tax credits, of course, the devil will be in the details in terms of what the conditions will be. We’re really just beginning the process of seeing how this will work. I know the government said we can't match everything that the U.S. is doing, but obviously we need to put ourselves in a better position, and this works towards that.”

Antunes is blunt about how this compares to what the U.S. is doing to incentivize green investments.

“There is somewhere around $400 billion that the U.S. has committed to incentivizing green investments out of the $1.5 trillion plan that they've put forth,” he said. “We've responded in this budget with about $20.9 billion in funding over the next five years. I don't think we're going to be very competitive upfront with the U.S. There are other backend-loaded investments that are to come; in the total budget on green incentives, we're talking about $70 billion. But over the next five years it's $20.9 billion, which is not a huge amount. Is this going to be a game-changer? I just don't see it as transformational enough to help us hit the targets that we've committed to for 2030.”

Clean Tech IP Shift

William Aylward, director of industrials and environmental corporate finance (M&A) at Deloitte LLP, noted that it’s really too early to say how either the budget or the IRA will affect industry, but he did note that the green shift by governments is something of a bellwether for the appetite to invest in the clean tech space.

“We are talking to private equity and debt funds all the time, and there had been a bit of a pullback of investments from the clean tech space over the last few years,” Aylward explained. “That investment is actually coming back. The confidence in this sector is coming back from the conversations we are having. So we've got a few early-stage clients that are in the space that two, three years ago we probably wouldn't have touched from a risk perspective. Now, with the conversations that we're having in the space, these private investment funds are saying ‘Actually, yes, we are interested in investing in this space again.’”

The definition of “clean tech” is amorphous, of course. Where nuclear or gas-generated hydrogen may not have been considered “green” in the past, the need for fuel alternatives have brought them back to the table as essential components to a viable, expanded clean electricity grid in this budget.

“Broadly, ‘clean tech’ is just any sort of technology with the aim of reducing environmental impacts,” said Kyle Mitchell, senior associate, in the Deloitte Corporate Finance team. “I know that that's a very broad definition, but there isn't really a better one that I've seen yet that captures the entire market. It goes all the way from solar, wind, and hydro down to sustainable extraction and recycling of key minerals used in the production of batteries.”

Pushing the Process

Oilsands companies are ready to continue investing in clean tech like carbon capture, but they are waiting for additional investment announcements from the government to push further.

“The uncertainty around major big capital projects can be an issue,” said Antunes. “It's the uncertainty around the regulatory approval process. How much time will these processes take? What are the policies in place, including policies on greenhouse gas emissions and the green economy? I think there's been a fair bit of uncertainty, and uncertainty is a big constraint when it comes to where you're going to put your investment dollars.”

This hesitancy has been seen in the oil and gas sector.

“Pathways Alliance, which is made up of the six largest Canadian oilsands companies, is very supportive of these emissions reductions targets, but they want to see more co-investment from the government,” said Brendan Collaco, an executive director in Deloitte's Corporate Finance team. “The federal government later this year is going to announce the Canada Growth Fund, which is apparently another $15 billion package. Once that gets announced, we might see more details and how and where these companies can invest.”

Collaco said small modular nuclear generation is just one example of how oilsands and other remote working areas may “green” their operations. “There is definitely a lot of interest in that technology in the oilsands,” he noted.

Manufacturing Support?

One of the challenges for Canada is whether investments in new technology will help in terms of intellectual capital and manufacturing. One can support the other, creating a productivity pipeline for the future. In this sense, Aylward believes the budget and other efforts to push this sector are valuable for Canada.

“There are a number of companies that offer world-leading technology in Canada,” said Aylward. “We've spoken with a number that have startup technology, proprietary IP they’ve developed off the back of something that they were doing already, such as water filtration that cleans water used in hydrocarbon production processes, which is a huge issue internationally.

“I've been very impressed with the amount of intellectual property, the amount of innovative technology that Canadian players are bringing to the market. And you only have to look at the kind of inbound interest from across the border from these funds in the U.S. that traditionally invest in this space. They are really coming after these Canadian companies hard because they have such market leaders in the space.”

Mitchell suggests that it was early regulatory moves that have given some of these companies a leg up.

“I think we had regulations and mandates before the U.S. did, so our companies have had a bit more time to develop and there's a lot of interest from the U.S. for this tech,” he noted.

For manufacturers, however, there remains a gap in funding as part of the budget. This is one of the issues Darby remains concerned about.

“The big difference between Canada and the U.S. on clean tech tax credits is ours are tax credits on investment only,” he explained. “The IRA, meanwhile, has a production tax credit attached to it as well.” So, while this budget is supporting the development of the clean tech intellectual property, keeping production in Canada needs extra support.”

Darby insists that this has to be both a provincial and federal effort, though. After all, the U.S. federal government isn’t alone in incentivizing change.

“Atlantic Canada, for instance, has an investment tax credit, and the Ontario budget just introduced a 10 per cent manufacturing investment tax credit that matches that,” said Darby. “Anything that provides an incentive for a company to make an investment in manufacturing in Canada is important. We under-invest relative to all of our OECD peers. Our productivity has not gone up significantly in the past 20 years. So measures like this will be key.”

U.S.-Canada Bonds

Darby noted that, ultimately, Canada should gain from both Canadian government support at all levels and the U.S. IRA.

“The U.S. moves were obviously not made in opposition to Canada,” he said. “They are trying to pull investment from elsewhere back to North America. For instance, clean tech products that are produced in Canada will receive the same tax credit to consumers in the U.S. as those produced in the U.S. There is also what you might call a ‘union clause’ in the IRA that companies have to hire at prevailing wage rates, so there won’t be attempts to undercut prices in comparable markets like our own in that manner.”

Can more be done to encourage competitiveness in manufacturing more broadly? Always. “We obviously had asked for the government to extend the accelerated capital cost allowance, and they didn’t,” said Darby. The main benefit of this allowance was that it allowed for a larger capital cost allowance (CCA) deduction within the first year of acquiring an eligible depreciable asset. They did get a commitment to review the Scientific Research and Experimental Development (SR&ED) incentive system, but like all else here, the devil will be in the details.

Editor Robert Colman can be reached at rcolman@canadianfabweld.com.