Climate change is not only a global existential challenge, but it is also a once-in-a-lifetime opportunity for Canada to develop leading-edge clean technology (cleantech) solutions for the world, create high-paying jobs and boost the Canadian economy. In its 2020 Throne Speech, the federal government announced its priority to make Canada the most competitive cleantech market globally.
The world urgently needs cleantech solutions to mitigate and adapt to the impacts of climate change. Cleantech is a broad category of technologies that includes renewable energy such as wind, solar and green hydrogen. It also includes new technologies that reduce the greenhouse gas (GHG) emissions of existing fossil fuel energy sources and processes, capture and store carbon dioxide, and restore and optimize natural carbon sinks. To accelerate the development of these cleantech solutions and encourage investment in climate change mitigation and adaptation, Canadian federal and provincial governments should develop a comprehensive set of fiscal measures in the form of grants, subsidies, blended finance and tax incentives.
This paper focuses on implementing tax incentives to stimulate and hasten the transition to a low carbon economy while ensuring Canada’s competitiveness as a cleantech titan. Historically, the opportunity to save taxes has always proven to be a powerful driver of human behavior. Properly designed and targeted, tax incentives can be a powerful tool and play a critical role in accelerating the innovations needed for a low-carbon future, essentially adapting our economy and infrastructure to a changing climate.
Tax incentives, carbon pricing and the phasing out of fossil fuel subsidies constitute a trifecta of levers that, if used together, could help Canada substantially advance our green and clean technology ambitions. We cannot achieve the outcomes we seek if we introduce carbon pricing and tax incentives while simultaneously maintaining fossil fuel subsidies.
Conventional carbon pricing theory assumes that an appropriate level of carbon pricing would defeat the purpose of tax incentives for cleantech. The thinking is that a proper level of carbon pricing ensures that the externalities of the damage inflicted by GHG emissions caused by fossil fuels will be internalized in the cost of fossil fuels. The internalization of GHG emissions’ cost creates a level playing field for fossil fuels and clean energy sources such as solar, wind and green hydrogen, and – so the thinking goes – market forces will result in economic clean energy sources that will eliminate the negative impact of climate change. Although we understand this line of thought, our paper argues that combining an appropriate level of carbon pricing and market forces is insufficient to maximize Canada’s chances to meet its net-zero commitment by 2050. To reach net-zero by 2050, in addition to gradually increasing carbon pricing, Canada should also phase out fossil fuel subsidies and simultaneously aggressively ramp up targeted cleantech tax incentives.