- Most of the federal government’s climate spending is being delivered with tax credits
- Tax credits are intended to “incentivize” the private sector
- To be effective, tax credits must be transparent and accountable
- The necessary scale of climate action requires government leadership and direct investment.
The twin crises of climate change and inequality faced by Canada and countries around the world are rooted in failings of our current economic system. Damages—social and environmental—are externalized to the broader public sphere while the benefits are increasingly concentrated in the wealth of the global elite. To address these crises, Canada needs a wholescale just transformation to a low-carbon and inclusive economy.
Budget 2023 makes two major investments which could support that transition. The first is nearly $200 billion of funding into Canada’s public healthcare system over the next 10 years. The Care Economy offers a bright future for Canada as a low-carbon sector that could create greater equity and well-being if focused on providing high-quality publicly accessible services, delivered by workers with good jobs.
The second big investment comes via tax credits. Combined with last year’s credits, Canada plans to spend $88 billion over the next 10 years to incentivize greening the electricity grid, as well as clean technology (cleantech) innovation and emissions reduction across major sectors of the economy.
These tax incentives mark Canada’s largest investment so far in climate action and are an incredibly risky gamble. They send tens of billions of public dollars into the private sector with little assurance that it will result in the necessary scope, scale, or pace of economic transition.
Further, without necessary wealth redistribution tools, such as higher corporate income taxes and/or a wealth tax, these measures threaten to widen the income and wealth gap. Meanwhile, the U.S. is introducing new tax measures on large profitable corporations to generate revenue for its significant cleantech investments.
By Finance Canada’s own admission, these tax credits are based on the traditional way of viewing the economy—as a free market system where governments should intervene as little as possible. Finance officials suggest that the tax credits put money where the expertise exists—in the private sector—to transform electricity infrastructure, innovate manufacturing, and reduce emissions.
However, there is a significant body of research showing that the greatest transformative moments in our economy, in the sense of both productive innovation and social benefit, have come through direct public sector leadership and investment, not tax credits.
Political economist Mariana Mazzucato points to numerous examples of government-led investment that resulted in seismic economic shifts, not the least of which were smart phones. More recently we have seen how government-supported research was instrumental in quickly developing COVID-19 vaccines.
Two critical questions need to be explored in understanding what Canada’s new climate tax credits might achieve. First, will the tax credits result in meaningful economic shifts that will both lower emissions and spread the benefits of our burgeoning clean economy to more people? Second, are tax credits the most effective form of investment in climate action?
A closer look at tax credits: Some reasons for optimism, many reasons for concern
One reason for optimism about the direction of climate tax credits is the inclusion of labour requirements to receive the credits’ full value.
It is important that the government recognizes that jobs associated with the low-carbon transformation need to be of good quality. However, the requirements are better described as “incentives”, since they are not mandatory. Rather, employers are enticed to pay workers better and invest in workforce development in order to receive the top tier of the credit.
A business-as-usual approach to employment still nets a tax break. Second, the incentive only applies to “workers whose duties are primarily manual or physical in nature.” It explicitly excludes workers involved in “administrative” or “clerical” work - often the lowest paid jobs and dominated by women. Thankfully, the government has indicated that it will continue to develop these requirements.
Canada’s previous experience with government subsidies for businesses during the pandemic should serve as a caution about the potential for corporations to misuse or take advantage of public funds. Government spending of this scale should include a clear set of conditions for corporations with robust transparency and accountability measures built in.
The Clean electricity tax credit, more specifically, offers some additional cautious optimism. The credit is open to "taxable and non-taxable entities such as Crown corporations and publicly owned utilities, corporations owned by Indigenous communities, and pension funds". This could result in a greater public control and share of the benefits from new clean electricity generation.
Canada should follow the lead of the U.S., which will provide tax credits as direct payments to public utilities from the Internal Revenue Service. A recent study proposed that these direct payments carry “enormous promise” for a renaissance in public energy production.
However, the Cleantech investment and manufacturing tax credits eligibility rules and conditions are murky, and may result in missing an opportunity to support public sector or community-based economic growth in these areas by funneling the tax credit only to private corporations.
Carbon capture and storage (CCS) tax credits, in their current form, will largely be a subsidy for the oil and gas sector and may be used to excuse further expansion of fossil fuel extraction. As a result , CCS risks worsening emissions. There remain potential ways CCS could be developed and deployed that the government should be exploring. However, these should be developed as a service that oil and gas companies pay for rather than a technology they control.
The clean hydrogen could also become another subsidy for oil and gas, while adding the administrative burden of having to assess a facility’s overall emissions in order to confirm that they have met the requirements of a net reduction in order to receive the credit. Canada could simplify the process and restrict the credit to green hydrogen generation, as is done by other countries.
Less reliance on tax credits: more direct government investment
Budget 2023 doesn’t discuss how these policies will be managed or what transparency and accountability measures will be in place. We need adequate oversight to ensure that the credits are not only used for their intended purposes but explicitly help Canada reach its climate action goals while building a truly inclusive economy.
Canada should learn from the problems with the Canada Emergency Wage Subsidy (CEWS), which included little oversight or conditions on corporations.
Tax credits are not the only way the federal government is building excessive reliance on the private sector into its climate plan. Budget 2023 also passes the responsibility of overseeing the Canada Growth Fund (CGF) into the hands of an arms-length entity, the Public Sector Pension Investment Board. Instead, Canada should be building the civil service’s capacity to undertake this role for true democratic accountability to be in place. This brings us back to the Finance official’s comments and our great concern about their ideological blindspot—Canada’s climate plan can not succeed without significant public sector capacity and expertise.
Tax credits can be a useful tool but they should be employed sparingly. They complicate the tax system, create administrative burden for tax authorities and employees, and misplace government responsibility to lead investment.
The tax system has an integral role to play in shaping Canada’s path to a lower-carbon economy. Taxes can be used very effectively to distribute the costs of climate action, fund public leadership and investment, and ensure climate funding does not unjustly enrich corporations and their owners. The key is for publicly-accountable governments to demonstrate leadership with the overdue investment in a prosperous and sustainable economy.