Canada: Eyeballing Budget 2024 From An Energy Perspective

Federal Budget 2024 is overall less aggressive than other recent budgets in the area of energy and renewable energy, in many cases reiterating commitments and programs that have been previously announced. Below, we have noted energy-related items in the budget that are new, have changed or been updated.

Carbon contracts for difference

Canada has issued a limited number of carbon contracts for differences (CCFDs) to encourage a counterparty to invest in green energy technology, by mitigating their exposure to market risk in the future price of carbon.

Budget 2024 indicates that Canada will continue to offer bespoke CCFDs and carbon offtake agreements, with a focus on provinces contributing significantly to greenhouse gas (GHG) reductions. The budget says Canada will also explore ways to broaden its approach. For example, by developing off-the-shelf contracts for certain jurisdictions and ways to offer these contracts on a competitive basis for a set amount of emissions reductions. The Canada Growth Fund has about $6 billion remaining to devote on a priority basis to CCFDs and carbon offtake agreements.

Carbon capture, utilization and storage

Budget 2024 reiterates the previously announced investment tax credits for carbon capture, utilization and storage (CCUS). The draft legislation to implement the tax credit provides further detail on how this will work (as noted below in italics).

The size of the credit depends on the type of equipment involved. An investment tax credit of 37.5% is available for equipment for carbon storage and for carbon transportation. The rate is up to 60% for facilities to capture carbon from the ambient air.

There are several requirements for a claimant to qualify for the tax credit:

• Facilities must be in commercial operation by 2031  to qualify for the full tax credit. Smaller tax credits are available for facilities completed later.
• The tax credit only applies in designated jurisdictions which have sufficient laws and enforcement governing the permanent storage of carbon. Currently, the designated jurisdictions are British Columbia, Alberta and Saskatchewan.
• A claimant must submit an initial project evaluation to the federal Minister of Natural Resources for approval.
• A company claiming $20 million or more of qualified CCUS expenditures must publish a climate risk disclosure report for the year. The report must address areas such as climate-related risks and opportunities, governance, impacts of climate on the corporation's business, strategy and financial planning, processes used to identify, assess and manage climate-related risks, as well as metrics and targets.
• Workers on a project whose duties are primarily manual or physical in nature must be paid a prevailing wage. The requirement is not limited to the claimant's own employees, it also applies to others engaged at a site. The prevailing wage for an employee covered by a collective agreement is based on the regular wages, vacation, pension, health and wellness benefits in the collective agreement. Otherwise, the employer must identify an “eligible collective agreement” in their region that most closely aligns with the covered worker's experience level, tasks and location. This could be a multi-employer collective agreement for a given trade or a project collective agreement that has been negotiated with a labour union for a given trade.
• A claimant must make reasonable efforts to ensure that Red Seal apprentices work at least 10% of the total hours that are worked during the year by Red Seal workers.

Budget 2024 reiterates that another tax credit, the Clean Electricity Investment Tax Credit, will only be available to claimants in a province or territory that publicly commits to work toward a net-zero electricity grid by the year 2035. Comments from government have suggested that a similar requirement is under consideration for other federal green energy tax credits. However, at least for the moment, there is no 2035 requirement in order to access the investment tax credit for CCUS.

Further detail: The legislation to implement the CCUS tax credit is called Bill C59, An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023. Bill C59 received First Reading in the House of Commons on November 30, 2023. Budget 2024 anticipates that Bill C-59 will receive Royal Assent by June 1, 2024 with an effective date for the tax credit as of January 1, 2022, and the associated labour requirements as of November 28, 2023.

Provincial and Territorial Crown corporations

Budget 2024 provides detail on how a provincial and territorial Crown corporation can access the previously announced Clean Electricity Investment Tax Credit. This is a 15% refundable tax credit for eligible investments in new equipment or refurbishments related to:

• Low-emitting electricity generation systems using energy from wind, solar, water, geothermal, waste biomass, nuclear or natural gas with carbon capture and storage.
• Stationary electricity storage systems that do not use fossil fuels in operation, such as batteries and pumped hydroelectric storage.
• Transmission of electricity between provinces and territories.

This tax credit is only available in a province or territory where the government has committed to work towards a net-zero electricity grid by 2035. A claimant must also satisfy labour requirements for prevailing wages and apprentices (see above).

Applying a tax credit to a Crown corporation that is tax-exempt raises some interesting issues. Presumably, the final outcome will be some form of federal grant. To be eligible for the tax credit, a provincial or territorial government will have to commit to:

• Publicly report, on an annual basis, on how the tax credit has improved ratepayer bills.
• Pass through the value of the tax credit to electricity ratepayers to reduce ratepayer bills. It will be interesting to see whether this requirement is applied in a simple, common sense manner. In many cases, the tax credit will not result in lower net ratepayer bills but rather ratepayer bills that are lower than they otherwise would have been. The setting of rates for Crown electricity and gas utilities is detailed, complex and usually regulated. An overly literal requirement to “reduce” bills could easily get bogged down in detail and process. Budget 2024 indicates that Finance Canada will consult with provinces and territories on the details before legislation is introduced this fall.

Amend the Impact Assessment Act

In October 2023, the Supreme Court of Canada struck down much of the federal Impact Assessment Act  (the Act) as unconstitutional. Budget 2024 indicates that the government plans to introduce amendments in response and the provides a sneak peak at some of the amendments that are under consideration. These include:

• ensure the Act is constitutionally sound;
• enhance the principle of “one project one review”;
• facilitate efficient project reviews;
• advance Canada's clean growth and protect the environment;
• increase flexibility in substitution of assessments to allow for collaboration and avoid interjurisdictional duplication;
• clarify when joint federal-provincial review panels are possible;
• allow for earlier agency screening decisions as to whether a full impact assessment is required after the planning phase; and
• remain consistent with the United Nations Declaration on the Rights of Indigenous Peoples Act.

As the discussion in Budget 2024 is high-level, we will have to await more substantive details.

Electric vehicle supply chain tax credit

Budget 2023 offered a 30% Clean Technology Manufacturing Investment Tax Credit to businesses that manufacture electric vehicles and their precursors. Budget 2024 announces a further inducement for manufacturers to locate in Canada, a 10% Electric Vehicle Supply Chain Investment Tax Credit. This applies to the cost of buildings used in three supply chain segments:

• electric vehicle assembly;
• electric vehicle battery production; and,
• cathode active material production.

To qualify for the investment tax credit, the taxpayer must claim the credit in all three of the above segments, or two of the three specified segments and hold at least a qualifying minority interest in an unrelated corporation that claims for the third segment.

The tax credit will apply to property acquired between January 1, 2024 and 2032, with a reduced credit of 5% for 2033 and 2034.

Carbon rebate to small businesses

Budget 2024 proposes to return fuel charge proceeds to small businesses in those provinces where the federal fuel charge applies (Part 1 of the Greenhouse Gas Pollution Pricing Act). This will be done through a refundable tax credit. To qualify, a business must have 499 or fewer employees.

There is a retroactive refund for fuel charge proceeds collected between 2019 and 2024 and the refund will be available in future years.

The federal government is consulting with Indigenous governments on how best to directly return fuel charge proceeds to their communities. The share of fuel charge proceeds allocated to Indigenous governments will double to 2% of direct proceeds beginning this year.

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