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Shell's Quest Carbon Capture and Storage (CCS) facility in Fort Saskatchewan, Alta., on October 7, 2021.TODD KOROL/Reuters

Ottawa is banking on Canada’s transition to a low-carbon economy as a key driver of economic growth, looking to a suite of tax credits and a new $15-billion investment fund in an attempt to leverage private capital to help the country meet its emissions reduction targets.

Finance Minister Chrystia Freeland described the focus on the green economy as her budget’s hallmark. A swath of new policies in Thursday’s federal budget are aimed at further deterring investment in fossil fuels while making it cheaper to launch clean energy projects such as battery-storage solutions, clean hydrogen, and carbon capture, utilization and storage (CCUS). Developing those sectors is critical to cutting Canada’s greenhouse gas emissions.

The spending plan comes after the United Nations Intergovernmental Panel on Climate Change released a landmark report calling for a faster shift away from burning coal, oil and gas. Last week the government released its $9.1-billion plan to reduce greenhouse gas emissions by 40 per cent below 2005 levels by the end of the decade. Delivering on that target requires steep changes, given that Canada has the worst emissions record in the G7 since the 2015 Paris climate deal was struck.

The green transition is “essential” and expensive, Ms. Freeland told reporters Thursday. She said the policies laid out by her government “will help Canada make that major, major shift,” which she called the biggest change since the Industrial Revolution.

Chrystia Freeland’s 2022 federal budget is a political instrument as much as an economic ledger

Chief among the government’s proposals is the creation of the Canada Growth Fund, an arms-length investment vehicle capitalized at $15-billion over five years. That’s not new cash; rather, it is being reallocated from other federal funds that haven’t been spent.

How the fund will be structured will be fully explained in the fall economic update, officials said. But the budget document sets the expectation that for every $1 of government money, it will attract at least $3 of private cash.

In addition to the new fund, the Canada Infrastructure Bank will take on an expanded role that allows it to invest in technology that make up a critical part of the government’s Emissions Reduction Plan. Small modular reactors, clean fuel and hydrogen production, transportation and distribution, and CCUS will all fall into the infrastructure bank’s broadened wheelhouse. The bank has been criticized as being slow to get off the ground since its inception in 2017 and has struggled to attract private capital.

The budget is “clearly focused on the transition,” said Robert Asselin, senior vice-president of policy at the Business Council of Canada. It contains good ideas, he said, but the question is whether they will be effectively implemented – something he said the government has previously struggled with.

One of the most expensive new climate programs is the long-awaited refundable CCUS tax credit that is key to the oil and gas sector’s ability to cut emissions while still producing fossil fuels. Ottawa expects the new program to cost $2.6-billion over five years starting in 2022-23.

The new tax credit will use a sliding scale to cover 37.5 per cent to 60 per cent of eligible expenses, backdated to Jan. 1. The tax credits will drop by half from 2030 through to 2040, which the government hopes will expedite projects so Canada can start capturing more carbon, faster.

Carbon capture facilities force carbon-dioxide emissions deep into the ground or into concrete to keep them out of the atmosphere.

The federal government is expecting between 20 and 40 facilities to be up and running by the end of the decade.

The bulk of those projects will likely be eligible for a 50-per-cent tax credit under the new program – the minimum level that the Alberta government believes would make the facilities feasible. The largest tax break under the new program – 60 per cent – is reserved for direct-air capture, a fledgling technology that hasn’t yet shown feasibility at a large scale.

While environmental groups criticized the CCUS tax credit as another fossil fuel subsidy, industry groups welcomed the move, saying it shows the government understands the importance of the oil sands to the country’s energy security.

MEG Energy president and chief executive Derek Evans told The Globe that although the oil and gas sector had initially asked for a 75-per-cent credit, 50 per cent will be “incredibly supportive” for all emissions-intensive industries across the country, including fossil fuels.

At the same time, Ottawa is phasing out flow-through shares, which allow public companies to transfer to investors certain exploration costs, and play an important role in small oil and gas companies securing shareholder investment. That tax deduction will be eliminated as of March 31, 2023, as part of Ottawa’s pledge to end federal fossil fuel subsidies.

Another key pillar of the budget is to reduce the risk that private companies shoulder in order to jump-start necessary but expensive capital projects. With a new $3.8-billion critical minerals strategy, costed over eight years, the government is aiming to unlock the country’s large rare-earth mineral deposits that are essential to building an electric-vehicle battery supply chain.

The budget provided more detail on the initiatives laid out in last week’s emissions reduction plan, including: more money to help homeowners make energy-efficient upgrades; creating a national grid council to expand clean-electricity infrastructure; ramped-up spending on natural climate solutions; funding for Indigenous-led climate solutions; and $900-million to expand the country’s zero-emissions vehicle charging infrastructure.

The budget held few details for the government’s planned expansion to the zero-emissions vehicles rebate, but made clear that the revamped program will include more expensive options, such as vans, trucks and SUVs. The government will spend another $1.7-billion over five years on the incentive.

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