On the heels of the federal government’s new plan to accelerate the transition to a low-carbon economy, today’s budget twiddled tax policy levers to encourage that shift — tweaks that favour carbon capture projects and critical mineral exploration over the energy sector.
Today’s federal budget proposed to scrap the flow-through share regime for the fossil-fuel sector.
“This will be done by no longer allowing expenditures related to oil, gas, and coal exploration and development to be renounced to flow-through share investors for flow-through share agreements entered into after March 31, 2023,” the budget said.
The government also announced measures designed to encourage investment in the development of carbon capture, utilization and storage (CCUS) technologies, and to facilitate mining for “critical minerals” such as nickel, lithium, cobalt and zinc. Those minerals are essential to the production of low-carbon technologies such as zero-emission vehicles, lithium batteries and semiconductors.
Specifically, the budget announced a new 30% tax credit for critical mineral exploration expenses that are incurred in Canada, and renounced to flow-through share investors under agreements entered into after budget day and before March 31, 2027.
The new tax credit, which will apply to certain exploration expenditures targeting critical minerals, is expected to cost $400 million over the next five years.
Alongside the new tax credit, the budget also proposed to spend up to $3.8 billion over eight years to grow the industry, including infrastructure and supply chain investment.
Additionally, today’s budget proposed the adoption of a new refundable investment tax credit targeting CCUS technologies, which are also seen as an essential — albeit unproven — component of Canada’s overall emission reduction strategy.
“CCUS technologies are an important tool for reducing emissions in high emitting sectors where other pathways to reduce emissions may be limited or unavailable,” the government said, noting that these technologies can help curb emissions in the energy, chemicals and power sectors.
A tax credit for CCUS was originally proposed in last year’s budget, and after public consultation, the government has finalized its design, proposing a refundable credit for businesses that incur eligible CCUS expenses, starting in 2022.
“The investment tax credit would be available to CCUS projects to the extent that they permanently store captured [carbon dioxide] through an eligible use,” the budget said.
The proposed new credit is expected to cost at least $2.6 billion over five years starting in 2022-2023, and about $1.5 billion annually after that, the budget said.
The initial investment tax credit rates will apply until 2030, and will be cut in half after that, which the government said is intended “to encourage the industry to move quickly to lower emissions.”
The government also said that it will engage with the provinces “in the expectation that they will further strengthen financial incentives to accelerate the adoption of CCUS technologies by industry.”
In addition to the tax levers, the government is moving forward with enhanced climate disclosure requirements.
“The federal government is committed to moving towards mandatory reporting of climate-related financial risks across a broad spectrum of the Canadian economy, based on the international Task Force on Climate-related Financial Disclosures (TCFD) framework,” it said.
In the financial sector, the Office of the Superintendent of Financial Institutions (OSFI) will consult on climate disclosure guidelines this year, “and will require financial institutions to publish climate disclosures — aligned with the TCFD framework — using a phased approach, starting in 2024,” the budget said.
The budget also pledged $8 million over three years to support the launch of the Montreal office of the new International Sustainability Standards Board, which is developing global sustainability disclosure standards.