Explore Canada’s evolving clean energy tax credits and the political dynamics shaping their future in this episode of Clean Incentives. Host Brendan Sigalet is joined by Serge Dupont, a seasoned public policy advisor and head of Bennett Jones’ Public Policy group, and Hon. Jason Kenney, former Premier of Alberta and Senior Advisor at Bennett Jones for an engaging conversation on the intersection of policy and clean energy investment.
This discussion explores the evolving landscape of clean energy policies in North America, focusing on the potential rollback of United States (US) climate incentives following the US election, and how Canada's clean energy initiatives align with—and differ from—the United States Inflation Reduction Act.
Delve into the political forces influencing Canada's hydrogen, carbon capture, utilization and storage and renewable energy sectors. As Canada works to maintain its competitiveness with the United States, understanding these dynamics is essential for businesses navigating an uncertain energy landscape. Tune in to discover how you can prepare for the challenges and opportunities ahead.
Transcript
Brendan Sigalet: [00:00:00] Please note that this episode was recorded in late November 2024 and therefore was recorded prior to recent political events that have transpired in Canada, such as the resignation of Justin Trudeau and the prorogation of parliament. As indicated in the recording, it was recorded after the election of Donald Trump in the United States.
Jason Kenney: [00:00:17] Because there will be a unitary government, Republicans controlling the White House, the Senate and the House of Representatives, we can expect to see, as I said, a reversal or a sun setting of many of the climate related or environmental related IRA incentives, not all of them. And we can now anticipate that in 2027, the US Congress will extend the, uh, 2017 Trump tax cuts. So, we are at risk of really falling out of alignment.
Brendan Sigalet: [00:00:57] Welcome to Clean Incentives, a podcast series within the Bennett Jones Business Law Talks podcast that discusses topics around taxation incentives for developing clean technology projects in Canada. I'm Brendan Sigalet, Tax Associate at Bennett Jones LLP, and my practice focuses on the tax aspects of energy transition deals including renewable energy, carbon capture, and hydrogen projects. Members of the Bennett Jones Public Policy Group have been invaluable for their leadership in shaping public policy in Canada and in developing business responses to these policies.
Please note that this podcast presents an overview of notable public policy trends and related updates. It is intended for informational purposes and not as a replacement for detailed legal advice.
Today we are taking a different angle on the discussion of the clean energy tax credits in Canada. Over the past few episodes, we've looked at specific clean energy tax credits that companies can leverage to build, finance, and operate new projects. What I wanted to do today was look at what might happen to these tax credits due to the recent US election win by Donald Trump and the potential change in government in Canada's upcoming election. The reality is, as a much smaller economy and marketplace, Canadian governments often have to adjust economic policies to ensure we stay competitive with our much larger American counterparts. In fact, some of the clean economy tax credits that we've discussed in previous episodes have been adjusted to reflect the policies introduced in the United States, such as the Inflation Reduction Act.
Joining me today is Serge Dupont, Senior Advisor here at Bennett Jones, that advises clients in public and private sectors on public policy and governance. Serge served in 2016 and 2017 as deputy clerk of the Privy Council and deputy minister of intergovernmental affairs for the federal government. Also joining me today is the Honourable Jason Kenney, who served as the 18th Premier of Alberta. In total, Jason has served more than 25 years in Canadian federal and provincial elected office. Welcome both to the show.
Jason Kenney: [00:03:03] Great to be here, Brendan.
Serge Dupont: [00:03:03] Good to be here, Brendan. Thank you.
Brendan Sigalet: [00:03:04] Before we dive deep into today's episode, I want to set the stage of how we're going to approach this very complex topic.
First, we'll provide some historical context of how clean energy incentives have evolved in Canada. Next, we'll look at the design and implementation of these incentives, as well as the cost and economic benefits. Finally, we'll look at future scenarios and political considerations in light of the US election results in the upcoming federal election in Canada.
And so Serge, let's start with you, just hoping you could maybe walk us through the evolution of these clean energy tax incentives in Canada, you know, programs like Class 43.1, which provides an accelerated tax depreciation deduction for certain clean energy equipment that's acquired and, you know, CERCI, that being the Canadian Renewable Conservation Expense Program, have existed for around a decade now. Uh, what were these? Programs trying to achieve and how effective were they in doing so?
Serge Dupont: [00:04:04] Yeah, Brendan, let me just back up a teeny bit and start with, you know, how typically, certainly the government of Canada, and I think most of the provinces where the corporate tax system is, you know, basically modeled on, in fact, integrated with the federal tax system. The approach historically had been in a corporate tax world, you want to have a broad base and a low rate and that meant basically you were trying to keep your tax preferences to a minimum and for most investments you were trying to align the period of depreciation to the useful life of the asset, right?
So if you had an asset that was going to last 20 years, you would depreciate over 20 years with 5, you know, kind of 5 percent rate per year, or you'd have declining basis and so forth. But basically, that was kind of the principle. And you were then trying to compete with the US and with other jurisdictions on your rate, given your base.
And, you know, people like Jack Mintz spend a lot of time working on something called marginal effective tax rates. That would combine the two and they would look to the different jurisdictions and see whether we were competitive or not. And in fact, over a number of years in the year 2000s, early 2000s, after some tax cuts introduced at the time by Minister of Finance Martin, you know, actually we did have a competitive advantage vis a vis the US on those meters. And it did, you know, provide some advantage then to the US, to the Canadian economy. Now, they were always in there, however, some specific preferences, some provisions, and including the CERCI 43.1, 43.2 has been around for a long time, and I remember even 20 years ago, virtually at every budget, we would add some new assets to this class, which contains various energy conservation, renewable energy, or clean fuel kind of assets, and that class allowed you basically in that class, you were allowed to depreciate your asset quicker, right?
So 30 percent depreciation rate or a 50 percent depreciation, but that was still basically the way it was approached was pretty contained and it was accelerating, you know the rate at which you were able to depreciate an asset then, you know kind of 2017 President Trump won, you know number one mandate introduces a tax cut a tax package in 2017 Canada responds in 2018 by trying to, you know, improve its treatment of certain investments and accelerates on a wider basis a depreciation for investments and provides 100 percent in fact for some of the investments. You then kind of have, you know, those are temporary kind of measures and it's really when 2021 or 2022 around there. But then the government, for different reasons, starts to think that it needs to become more generous in providing some, not only faster depreciation, but in fact, some tax credits in order to accelerate some investments that they consider important for the economy.
So that's where we are now. These investments, these investment tax credits have now been put out there. Most of them are legislated. And the question is, what's going to be and what is currently the response of investors to those? And will they, in fact, accomplish what they, you know, they purport to accomplish?
Brendan Sigalet: [00:08:47] Well, that's interesting that you, you kind of mentioned that the, even, you know, programs such as, you know, that I think you're referring to like the, the accelerated investment property program, which allowed even accelerated tax depreciation within class 43.1, which I think was an incentive that they announced in 2019 or something like that.
That was itself even a response to Trump policies. So this has all been kind of a cat and mouse game between, you know, the US and Canada. And largely we've been on the responsorial end of that. Uh, and you know, they come up with something new and then we immediately try and respond to them. And the refundable aspect was that was that a direct response to the US as well. Like I understand in some cases their tax credits can be refundable. In some cases they aren't, uh, was, was the need to, uh, to make them refundable thought of as a, uh, okay, let's up the ante here, um, and ensure that we're getting our fair share of this international investment.
Serge Dupont: [00:09:46] My understanding is the way the US tax credits are structured, they're basically production tax credits. And if you're actually delivering the good at the end of the day, you're going to get the value of the tax credit. And I think that for, for, for Canada here, the view is really, okay, not everybody's going to be in a taxable position. Uh, we do need to exonerate those investments. We do need to share the risk of those investments, and we, therefore, are going to put the money up front. Uh, and even in fact for clean electricity investments, uh, they announced they would do so for crown corporations that, of course, don't pay taxes. Which was perhaps the most remarkable development of all.
Brendan Sigalet: [00:10:21] Yeah, yeah, no, that definitely is a, a very interesting development. Um, and, uh, and we'll have to see, uh, how the, the Clean Electricity ITC, whether or not it progresses through Parliament and, and what its fate could be. Another, one other fascinating, you know, aspect of, of, uh, these new credits is, uh, that they appear to mirror certain US provisions while they're diverging and in others. Could you help us understand the reasoning behind some of these key design choices? For example, all these clean economy ITCs with the exception of the clean tech manufacturing investment tax credit, they come with labor requirements. Um, that basically they require you to pay a prevailing wage, which is based on, uh, certain unions, um, within the province, and you have to pay the same rate, uh, to your covered workers, which are essentially defined as people doing, you know, physical manual labor on the construction site. You have to pay them a prevailing wage equal to this amount in these certain eligible collective agreements, which are, you know, these union agreements between, you know, multiple employers and particular unions within that jurisdiction.
In some cases, these can be expensive for certain jurisdictions because the union labor is significantly more costly than the non union labor in those jurisdictions. And then also there's an apprenticeship requirement where you have to employ 10 percent registered apprentices for you know, your trades people within the site. These requirements appear to have been lifted directly from the US IRA which we understand has been it's the labor requirements in the US these prevailing wage and apprenticeship requirements have been a concept for about 20 years, whereas it's a new concept in Canada and particularly under the Income Tax Act.
Any insights either from Jason or Serge, either of you as to why they would want to lift that particular part of the IRA and duplicated in our clean economy ITC?
Jason Kenney: [00:12:26] Well, politics, Brendan, sorry to, uh, introduce that a dirty concept here. But I would argue that the Trudeau government, they placed, this is a government that's moved the liberal party from being a broad centrist, pragmatic coalition, which used to be characterized by the kind of pro-growth policies that Serge mentioned earlier with the Paul Martin corporate tax cuts, uh, to a government much more focused on satisfying the demands of discreet rent, sink, rent seeking constituencies that they would call progressive, I would say, are on the left of the political spectrum, and that includes a lot of the unions. And don't forget, this is a government that has been sustained in a minority. Parliament in two minority parliaments now for six years with the support of the NDP. So these are the kinds of things that the NDP would negotiate as demands for their support in, in various budget bills. So I, I really think it's not much more complicated than that.
And why it got into the US legislation, again, politics, uh, you know, the IRA, the Inflation Reduction Act, in which this was incorporated, made it across the line by, I think, only one, perhaps it was two votes in the Senate, and so this was a big coalition building exercise early in the Biden administration, in fact, in his transition period, uh, exactly four years ago, they, they brought in a number of people from the Bernie Sanders campaign and wing of the party, Bernie Sanders affiliated think tanks as part of a kind of brokerage deal within the Democrat party. And again, this was one price of admission for that coalition building exercise.
Serge Dupont: [00:14:00] In fact, Jason, during the political campaign, Kamala Harris was pleased to say that she had the tie breaking vote on it. So you, you're right. It was, it was, close to that extent. The other thing I would just add, Brendan, is that when you get into the world of refundable tax credits, that means the government is cutting checks. And when I was in the Department of Finance and Tax Policy, we hated them. And why did we hate them? Because we used to say, uh, it's a program. It's not a tax measure. It's really a program because you're ultimately cutting checks.
And once you're cutting checks, then all of a sudden the government feels that, well, maybe it's going to start, you know, imposing kind of more conditions, you know, because it is looking more like a program. If you're simply reducing somebody's taxes, perhaps harder to, you know, to intervene and to impose all kinds of conditions, requirements. Cutting the check does raise the stakes a bit and particularly when the government is cutting checks to, you know, in some cases say oil and gas companies are very profitable if they want to, you know, politically again, just defend themselves against some criticisms that we have, but, you know, we are imposing those requirements.
Brendan Sigalet: [00:15:11] Yeah. Uh, no, I think I think that that makes a lot of sense. Um, you know, obviously these are all, um, all these programs are developed, uh, not in the microcosm of just tax policy, but in the reality of real government. So, um, politics would obviously play a significant role, uh, in a similar vein.
You know, just wondering if you could comment at all on the reason why the federal government and I think there was this answer may be similar, but the federal government chose to restrict this, the pathways for the clean hydrogen. So, um, just generally the clean hydrogen, uh, investment tax credit. It, uh, provides that you get a tax credit for the capital cost of your equipment, um, where the, the hydrogen is being produced by one of two eligible pathways, either through water electrolysis or through, uh, natural gas reformation, uh, baited with carbon capture.
Well, it's actually eligible hydrocarbon reformation abated with carbon capture now, but, um, to take into account renewable natural gas, but, uh, explicitly or expressly not included. Well, not expressly, but a pathway that's not included. There is coal gasification, which is another prominent method by which you can produce hydrogen and when abated with carbon capture technology can still get you to the same, you know, result as far as a carbon intensity standpoint of the hydrogen, but it was, you know, it seems to have been the decision seems to have been made not to include that as an eligible pathway for the clean hydrogen ITC.
Do you also see that as kind of politics having played a role there potentially doing the use of coal in the coal gasification?
Jason Kenney: [00:17:01] Well, I would not argue that this is about electoral politics in the same way that, you know, a hardwiring union preferences into, uh, legislation is clearly targeted to certain voting constituencies. I don't think there is a big voting constituency for hydrogen incentives that exclude most economic forms of hydrogen.
I think this is much more about internal government dynamics where you've got people like the Minister of Environment and Climate Change, Steven Guilbeault, who is a fundamentalist on these issues, and he has a fairly strong following within his caucus cabinet and elements of the public service.
And then, uh, you've had a long standing kind of tension within the current, uh, Trudeau government between folks like Mr. Guilbeault and more economic realists, typically including people like, uh, Minister Freeland, former Minister O'Regan, Minister LeBlanc, and others who are more focused on sort of policies that are more broadly pro-growth policies and slightly less in favour of hard environmental approach like this.
So there's been this constant dynamic challenge and a lot of tradeoffs going on. Ultimately, in this, the dynamic is in this government, PMO adjudicates the differences around the cabinet table and as these ministers are fighting over things like this, I suspect people like Jonathan Wilkinson and fellow travelers would have preferred an agnostic approach to incentives for hydrogen.
I mean, color agnostic, blue, green, purple, whatever, but ECCC won the fight on this. And so I think that's the result. So it's not electoral politics, it's kind of internal politics with the folks much more focused. And I got to say, but the Trump administration, the likelihood of the, uh, repeal of many aspects, uh, many green subsidies in the United States that were embedded in the Investment Reduction, excuse me, the Inflation Reduction Act, and with the fairly high probability of a federal conservative government, I think that that very kind of, uh, narrow approach is going to come to an end fairly quickly. If there will be incentives in the future on things like hydrogen, I think they will be color agnostic.
Brendan Sigalet: [00:19:12] Interesting. Well, I think that that's an excellent segue into, you know, looking ahead with respect to political transition, you know, how do you anticipate, you know, the changes in leadership in the US specifically affecting these programs moving forward on the Canadian front?
Jason Kenney: [00:19:28] Uh, because the, there will be a unitary government, Republicans controlling the White House, the Senate and the House of Representatives, I think we can expect to see, as I said, a reversal or a sun setting of many of the climate related or environmental related IRA incentives, not all of them. One of Trump's central commitments is to reduce energy costs by increasing American energy production and the American oil and gas producers do want, they do like the 45Q, uh, incentive for carbon CCUS carbon utilization and storage. They appreciate that the IRA enhanced the 45Q. And it's created, I think, a fairly significant scaling up of carbon sequestration projects. They want to see those. The big major American energy producers want to see those through. Because quite apart from public policy, they'll continue to face a degree of a policy from large institutional investors for credible plans for gradual decarbonization.
And so CCUS will feature in that. So I think you can imagine CCUS staying in, uh, and perhaps some other incentives, but the rest will be fairly, I think fairly quickly repealed. And that's going to have an effect here for sure. In addition, if we have a change of government in Ottawa, Poilievre led government is going to be facing a fiscal crunch, a commitment to reduce the deficit, partly because Mr. Poilievre’s contention is that these large deficits represent stimulative spending that has been partly fueling inflation. Also, because he's going to be promising people, uh, uh, what I'll call retail tax cuts, tax cuts for ordinary Canadian taxpayers. And, uh, we can now anticipate that in 2027, the US Congress will extend the, uh, 2017 Trump tax cuts, which included a, you know, a one third reduction in the US corporate tax rate. So, uh, we, we are at risk of really falling out of alignment with our major competitor on corporate tax rates, which will put big pressure on the government of Canada, whoever's in office, to reduce federal corporate taxes.
There will be, I think, quite rightly pressure to repeal the increased inclusion rate, uh, for, Capital gains, etcetera. So for a Poilievre government to find the fiscal capacity to do some of those broader rate route cuts and also deliver some deficit reduction, means that a lot of these tax expenditures that surge has, has, uh, detailed, will be on the chopping block.
Brendan Sigalet: [00:22:14] Interesting. And so, so you anticipate that, uh, Poilievre government will take a, certainly take a hard look at whether or not to continue any of these clean economy tax programs.
Jason Kenney: [00:22:25] Yeah, at the very least, it'll be a hard look. Uh, I don't think people should assume that all of this will be zeroed out immediately by Poilievre government.
I think they're going to take a, uh, you know, they're going to take a careful look at, at them. But, but the refundable credits and, and for projects that are not yet in the ground or well advanced, I think those are at very high risk of being sunset.
Brendan Sigalet: [00:22:50] Okay. And so, so you would anticipate that any if Poilievre was to get in and to decide to cancel these programs, then there would be, you know, a sun setting of the provisions whereby certain, uh, projects, which, you know, have shovels in the ground, certainly, but, um, you know, potentially some others, whichever seen final investment decision sort of thing might be allowed to go forward. They'll have to be aligned.
Jason Kenney: [00:23:19] Yeah, you know, and they haven't drawn that line yet, and I don't expect them to be super detailed or prescriptive about that in the lead up to or during the election. I think they'll outline some general principles, but the basic imperative of a prospective future conservative government will be, uh, getting it will be a deficit reduction.
And general rate cuts in the tax system, both corporate and personal, and with the abatement of many of the IRA incentives and a growing delta between Canadian and US corporate tax rates, he's, I would argue, they're going to be putting the emphasis on general rate reductions, which will win, um, applause from people like Jack Mintz, who Serge mentioned, who believes in generally having lower rates that are not industry or project specific incentives.
Brendan Sigalet: [00:24:14] Interesting. And Serge, uh, do you think like from a practical perspective, uh, as far as, you know, if they, if they're going to cancel these, these programs, like actually implementing that change, um, that it'll, it'll, you know, it'll be kind of in the, in the method described by, by Jason and how, how specifically would they go about doing that?
For example, for, you know, for the provisions that are, you know, currently enacted. And then also I'd like to get your thoughts on provisions that haven't been enacted yet, but have just been announced.
Serge Dupont: [00:24:42] Sure. I, I think any government would be very careful about effectively expropriating value that a corporation is, is rightly expecting to, to be realizing, right?
And so I think that what is in the pipeline would normally be honored. Uh, it's, it's simply a, you know, not even a tax principle, basically a principle of, you know, sensible policy. So you would basically then, as you've indicated, Brendan, have to determine pretty carefully what's going to be. Either a phase out rate or a date at which things are no longer eligible.
But with a view to providing that those who made decisions on the basis of certain signals are able to carry forward those decisions. With at least, you know, a reasonable expectation that they can realize on the benefit that they thought was accruing to them. So I think that would be one principle. It will still be quite interesting to see.
So I agree fully with what Jason has laid out in terms of both the US and the Canadian dynamic. Just to add a couple of points, which may make it our calculation for a next government, again, of any stripe, even more difficult, is that the US may decide, you know, Jason mentioned the, you know, the preference on carbon capture, that, yeah, is actually quite popular, and they, they may decide to keep that one.
A Trump administration may not be all that keen on climate policy, but I'm not sure they'll be all that adverse to industrial policy, where this is about technology leadership for the United States. And whether it's in nuclear energy or other, uh, other parts of clean technology, clean energy, I think they may continue with some of those incentives in one form or another, not so much as to reduce, you know, carbon emissions, as to ensure that, uh, it will be basically US technology leadership in the world. That will not be eroded, uh, you know, to an extent vis a vis China, for example, that would, you know, cause some real concerns over the longer term. But in a funny way, they can kind of afford it, because being the reserve currency of the world, they can run pretty large deficits without facing, you know, the kind of fiscal crisis or fiscal reckoning that we may face earlier if we continue to pay.
Spend of the same clip, you know, where we may be in a position where we don't necessarily have the fiscal room to do everything they're doing and there's going to be a tough trade off before between kind of being competitive on these selective kind of investments. Or, uh, you know, ensuring that you're able to reasonably solid fiscal structure.
And as Jason mentioned, also a competitive tax system kind of as a, as a foundation, as a base before you get into all these, these different preferences. So I think there's going to be, you know, they're going to have to be looking at these credits one by one and see, you know, what are they actually accomplishing? What is the US kind of position on them? You know, how much is it costing us? How much is already expected by taxpayers to basically flow to them and take decisions one by one? I don't think they'll be able to come in and say, well, you know, we'll scrap all this stuff tomorrow because you know, it's going to have to be a considerably more sophisticated exercise.
Brendan Sigalet: [00:27:54] Okay interesting. So, you know if the US does and uh, you know, keeping around some of these incentives may relate to hydrogen production. There's a chance that, you know, a future government would, in Canada, would be influenced by that decision such that we would maybe keep our own tax credit.
Jason Kenney: [00:28:11] Well, I think it does because, look, there's, it's no secret that a number of the, uh, Trudeau government's green incentives in the tax system were designed. I mean, they were designed for two things. Primarily, one was to have to be part of the broader emissions reduction strategy for Canada. And the other was to ensure some degree of competitiveness with the United States on these major projects, right? And, uh, so it was to stay in the game in the competition for capital in an integrated North American economy for major capital investments on decarbonization projects.
And if that, if the latter competitive concern abates. through the withdrawal or the sun setting of IRA incentives, that there's less pressure on Ottawa to do that, regardless of who's in office. And I think it's also fair to say that on the first incentive, the first policy impulse, which was decarbonization, that will be less of a priority of a Poilievre government. It's not to say it will be no priority, but it will be less, uh, it will fall down the rank of, of, of economic priorities.
Brendan Sigalet: [00:29:12] Well, it could make sense in the context, I suppose, if a investment by the, the public in these particular industries that it has to be justified to the public.
Jason Kenney: [00:29:21] Yeah, and you know, a Prime Minister Poilievre in his perspective, finance minister are going to look down, look, look at, look at the, the cost of these kinds of tax expenditures and look at the opportunity cost for the government that could redirect those funds to broad based income tax cuts, uh, to investment friendly corporate tax cuts or to deficit reduction or to increasing spending in areas that will be a higher priority in a Poilievre government, such as a defense.
Now, I know that's not that there's not a big retail political constituency for, for example, defense spending. But table stakes with the Trump government to get a positive renewal of USMCA or NAFTA 2.0 will be demonstrating that we are serious and dependable allies. So I'm just saying there's a lot of moving parts here. Um, it, it, you know, yeah, we want to be competitive with the Americans on hydrogen in principle. But we sure as heck need, uh, tariff free access to the United States market. And that's going to require some lift on defense spending. Again, these are multiple fiscal pressures that they'll be facing the next Canadian government that have to be reconciled.
Brendan Sigalet: [00:30:34] Just as far as, you know, given all this political uncertainty, um, how should, uh, project proponents, you know, be dealing with this political uncertainty moving forward? Should they be trying to move up their FID in order to, ensure that they're, you know, caught in any sun setting of these provisions if they do get cancelled or, or, or what should they be doing in order, other than obviously trying to advocate to the Canadian public with respect to the benefit of their investments?
Jason Kenney: [00:31:03] Well, you know, there's no shortage of, um, of firms or industry associations that are trying, that are sorting that out. I would say, you know, go to, go to reliable vendors or advisors come up with a campaign strategy that begins with some deep public opinion research, both quantitative, i.e. polling and qualitative, i.e. focus groups to figure out what the public thinks about projects like that, how supportive or um, aware or, or opposed, they might be what the different kind of how those people align in terms of their voting intention, their region, their demographic cohorts, all of that analysis, and then put forward some real money to invest in, uh, advertising through both conventional and social media calls to action for people to support those kinds of initiatives.
So those kinds of public advocacy can be effective at the very least. I think the new term in the prospective policy of government is going to say, lobbyists come calling and say, we want you to maintain this particular tax expenditure, the first question that minister is going to ask, the first question a staffer and a PMO is going to ask is, what have you done to make the case to the Canadian public? And if they can't point to anything, their chance of selling the decision makers will be greatly diminished.
Brendan Sigalet: [00:32:28] And just one other thing I wanted to touch on and ask about is, is whether, you know, some of these incentives haven't yet been enacted and there's some, some other legislation for capital gains, exclude inclusion rate, for example, that haven't yet been enacted if there is a government change, what happens to that legislation?
Jason Kenney: [00:32:44] A convention has developed where a tax policy change has been considered effective from the date of the introduction of the relevant ways and means motion in the House of Commons, which is when the executive gives notice to Parliament about the intention to change tax policy, for example. But at the end of the day, if the thing is not, if there's not legislation adopted and, and given royal assent, then it, it's stillborn. And I would just say right now we're in a kind of gray zone because there are some procedural disputes in the House of Commons, which mean that means that no legislation is advancing right now. Which is why there is prorogation, which basically means the governor general on the advice of the prime minister. It just basically suspends a session, all of the legislation gets wiped out, then they have to come back with a throne speech. So, if I were a betting man, I would not be wagering on much legislative progress before the next election. Um, but, uh, I think we're in a, in a period of parliamentary dysfunction in terms of the advancement of legislation.
Brendan Sigalet: [00:33:59] Yeah, it's just, it's an interesting policy point because we've been, you know, as Canadians, we're told to govern our affairs, you know, on the basis of, you know, these, as if these things were already enacted. Right? And then, you know, and then it's, but if the government changes, then.
Jason Kenney: [00:34:17] Yeah, I would say proceed with caution, given the electoral and political timelines here, the pending massive policy changes in Washington, and the very likelihood of similarly deep policy changes in Ottawa in 2025.
Now, I think for proponents who have projects that are well advanced, that have approved credits in place, if they are at or close to shovels in the ground, I would proceed because I know what kind of investment has led up to that point and it would be imprudent to park that. Uh, I think that, that projects that have shovels in the ground, people employed, concrete progress, going to have a very compelling case to, to the government of Canada to, to make good on, on whatever, um, commitments were given.
And that's part of persuading the public, by the way. That comes back to my earlier point about, uh, the Poilievre imperative for public advocacy. If you've got a thousand people building your plant in, in some part of Canada, uh, that, that's creating a fact, a very persuasive political. And economic fact. If on the other hand, people are still at the application, the application process and, uh, or they're fairly early on in the, in the, uh, maturation of a project, I would, my advice would be, you know, continue with the current trajectory, but listen, I'm on some boards, I wouldn't, I would be disinclined on a board to vote in favor of an FID for a major capital project predicated on accessing a project Government of Canada tax expenditure, which may not exist a year from now.
Brendan Sigalet: [00:36:02] Interesting. You know, that's, that's a fair assessment. And Serge, just wanted to get your take as well. Um, with respect to, you know, a lot, a lot of this, uh, our conversation has been, kind of, you know, assuming that, you know, Poilievre will win the next federal election. Obviously that's not a certainty by any means. Um, you know, how do you see a potential future liberal government responding to, you know, the potential disruption of these economy tax credits down in the US?
Serge Dupont: [00:36:32] A liberal government would probably stand by most of what it already has put forward. I think they would not feel compelled to, to pull things out, uh, because they would still want to see, uh, you know, the progress on decarbonization effectively, they would still want to see those incentives out there and if the US were to pull them away, they would say, well, actually, we're, we're better than the US. We're, you know, we're providing better incentives and that's a competitive advantage for us in that domain. They might at some point decide to phase them out quicker or, you know, to do something to generate some savings and to realign. Where I think, um, for some other investments, for example, I know that in the EV supply chain, some of those investments, the, some of the incentives that were deliberately about trying to keep investments north of the border versus south, uh, it was pretty explicit that if the, the situation changed in the US, uh, the incentives would change.
In Canada, that was explicit and programmed at the very beginning. But I think on the other ones for hydrogen CCUS and some whatnot, I think they would want and probably clean electricity, which we didn't talk a lot about, but that ultimately affects the cost of electricity or the price of electricity for rate payers across the country because, you know, the government's providing a, a basically a subsidy or proposes to them. Implement a subsidy that is paid by the federal taxpayer and that kind of release, you know, technically, theoretically, the provincial rate payer, according, I think, for most of those, they would probably stand by with what they put and, you know, maybe refine it, try to improve it over time, depending on the experience. But, uh, I doubt that would kind of go back to the drawing board.
Brendan Sigalet: [00:38:24] Looking five years into the future, what do you think will be the lasting impact of the shifts in tax policy? Will we look at these clean economy tax credits as a success or failure with respect to either helping Canada transition in energy transition or with respect to tax policy?
Serge Dupont: [00:38:43] I think the one lesson that we probably will have regardless of what happens is that it's not all about tax. Uh, there's a lot that's driving investment decisions and should be driving investment decisions that is not about tax. And, and that includes both policy, other policy reasons, and then some real market reasons. And other policy reasons, for example, may be that while you don't have a regulatory system that can approve things fast enough, You're not going to get the response, and therefore your tax credit is not going to be utilized. Not necessarily going to be a failure of the tax credit, but it's going to be a failure of the broader policy. And in the same vein, ultimately if the market really is not there, for example, if for, you know, hydrogen producers, even with, you know, very generous tax credits, they cannot actually make the math work. There's not, the market isn't developing enough. Uh, whether domestically or for export, then, you know, that's not going to work.
It's not necessarily going to be a failure of the tax credit. It's one factor, uh, it admittedly, you know, uh, you come up with a, uh, a percentage of a, you know, of a tax credit rate. You know, at some point, uh, some, you know, a government has decided is reasonable. Time will tell. But one should keep along the way, not necessarily wait five years, Brendan. I mean, without changing the rules midway to really kind of, as I mentioned earlier, expropriate value that people may really reasonably be counting on. If you find that something is not working for a specific tax policy related reason, then you should go in and try to address it. But ultimately, there's many things that are going to determine where those investments are made.
Brendan Sigalet: [00:40:25] One other point I wanted to get out of you, Serge, was, uh, you know, the, uh, just going back to the design implementation economic landscape portion of the talk, just to touch on briefly the decision to focus on investment tax credits as opposed to production tax credits.
Serge Dupont: [00:40:42] I was not in the rooms where that was decided, so I don't know how they, I could see an argument being made that there are benefits to that, even for proponents, uh, you're, you're getting part of your investment of your capital basically funded up front, uh, through a tax credit. I mean, there is a bit of a delay, but it's, it's upfront. There is an element there for a risk sharing by the government. I mean, if the investment ultimately doesn't produce the dividends, doesn't actually work, uh, there is still a portion of that investment that will have been paid by the Government of Canada.
Whereas on the production one, uh, the risk is really borne by the proponent. Ultimately, the project doesn't work, doesn't generate the production of hydrogen that's expected or the, the carbon capture that is expected, then, then you're not getting the benefit. I don't know what calculations went in, what kind of consultations there were with the industry on that, uh, what were the preferences of industry.
What seems often to be understood is that the production tax credit is somewhat simpler. It's, it's more transparent and people know exactly what they're going to get. And to some extent it might have created a better incentive for some of the investments to flow. You know, there are at least theoretically some advantages as well to investment tax credits.
Brendan Sigalet: [00:42:10] Yeah. Thanks so much for that. Uh, you know, thinking about this, this, uh, conversation today has been certainly eye opening for me. It kind of reminds me of an analogy one of my professors at law school used in discussing taxation and the role of government and business. He always referred to government as a partner of business.
The analogy ran that government provided many of the necessary services required in order to run a successful business. The taxes businesses paid were repayment for those services provided by the government. He made the case that the value of this partnership becomes all the more evident when businesses deal in countries where these necessary services are not effectively provided by the government, and businesses instead must purchase these services on the private market.
You know, I think in the context of the clean economy ITCs. You know, this concept of government as a partner of business might hold even more weight. Clean economy ITCs are essentially a direct investment by the government in these clean energy projects. Regardless of who is in charge, this direct investment made by the government needs to represent an attractive value proposition for the government.
As compared to other uses the government could find for that cash. The present government clearly feels that the clean economy ITCs are a good investment to be making, and part of the calculus in coming to that conclusion may be the value that they are placing on decarbonization of the economy. A future government may not place as high a value on decarbonization, however, that doesn't necessarily mean that the investment is not a good one.
But I think the point that Jason has made is that businesses should make an effort to make the case for that investment. And they should make the case to the Canadian public, as ultimately they are the shareholders behind the Board of Directors, which is the Canadian government. But, uh, thanks so much for both of your time today, uh, I really appreciate it, and, uh, look forward to continue to work with you on this in the future.
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