Federal Budget 2017: Billions on the Table, But Time Is Short

Federal Finance Minister Bill Morneau tabled the 2017 federal budget in the House of Commons on March 22. Équiterre has analyzed the Liberal government’s second budget in light of the commitments made in the Pan-Canadian Framework on Clean Growth and Climate Change signed last December. Overall, the funding allocated in 2016 and 2017, along with the new funding announced in the budget, will ensure we can implement the new climate plan. But Équiterre is disappointed to see little progress on Minister Morneau’s commitment to phase out federal production subsidies to the fossil fuel industry.

--> Sign Équiterre's and Environmental Defence petition calling on the Canadian government to stop giving government money to fossil fuel companies

--> Consult Équiterre's press release published after the tabling of the 2017 budget.

The federal government forecasts a deficit of $28.5 billion for 2017, compared to the $23 billion expected for 2016. Titled Building a Strong Middle Class, the 2017 budget relies on government spending and new programs to fuel economic growth and create jobs in Canada.

Clean technologies

This year’s budget certainly places emphasis on innovation, with targeted funding at all stages of the research, development and commercialization of new technologies. It includes a particular focus on the clean technology sector, proposing more than $2.2 billion to support clean energy research, development, demonstration and adoption as well as to accelerate the growth of clean technology companies. This includes making available nearly $1.4 billion in new financing on a cash basis over three years, starting in 2017–2018, through the Business Development Bank of Canada and Export Development Canada.

You may recall that through its participation in Mission Innovation, Canada committed to doubling its investments in clean energy research, development and demonstration over the next five years. The investments announced in Budget 2017 support this commitment.

The government also proposes to expand tax support for clean energy. The Canadian income tax system encourages businesses to invest in clean energy generation and energy efficiency equipment by allowing them to deduct the cost of eligible capital assets on an accelerated basis. New tax deductions will therefore be available to the geothermal energy sector.

Eliminating federal subsidies for fossil fuel production

Given these new measures to attract private capital into clean technologies, it is all the more important to ensure a cohesive tax system and eliminate federal tax measures that encourage investment in fossil fuel production in Canada. Two timid measures have been introduced:

• Budget 2017 proposes to no longer permit eligible small oil and gas corporations to treat the first $1 million of Canadian development expenses (CDE deductible at a rate of 30%) as Canadian exploration expenses (CEE fully deductible).
• Budget 2017 proposes that expenditures related to drilling or completing a discovery well (or in building a temporary access road to, or in preparing a site in respect of, any such well) generally be classified as CDE instead of CEE. This will ensure that expenditures more clearly linked to success are deducted gradually over time as development expenses (CDE deductible at a rate of 30%).

This is how Budget 2017 justifies these new measures:

“Oil and gas development is associated with environmental impacts, including the release of air and water contaminants, the emission of greenhouse gases and the disturbance of natural habitat and wildlife. The tax treatment of oil and gas exploration costs is only one of many factors that influence investment decisions, but to the extent that the revised treatment impacts investment decisions, this measure could reduce environmental impacts. By improving the neutrality of the tax system, this measure supports Canada’s international commitments to phase out inefficient fossil fuel subsidies.”

Of the estimated $1.3 billion granted each year in federal subsidies, these adjustments represent about $150 million a year, which will be returned to Canadian taxpayers though income tax paid by Canadian oil and gas companies.

So we’re still waiting for a concrete plan and specific timeframe for the phase out of federal fossil fuel subsidies as stated in the Minister of Finance Mandate Letter.

What’s more, citing the challenging economic circumstances arising from weak commodity prices affecting the oil and gas sector, the federal government will make a one-time payment of $30 million to the Government of Alberta to support provincial actions that stimulate economic activity and employment in Alberta’s resource sector.

--> Sign Équiterre's and Environmental Defence petition calling on the Canadian government to stop giving government money to fossil fuel companies.

Funding for the implementation of the climate plan

In addition to the $2 billion Low Carbon Economy Fund from Budget 2016 (which will now be spent over five years), Budget 2017 includes an additional $650 million over the next 5 years for implementing aspects of the Pan-Canadian Framework on Clean Growth and Climate Change, including:

• Supporting the transition to a cleaner electricity grid: $11.4 million over four years, to Environment and Climate Change Canada to support the accelerated replacement of coal-fired electricity generation by 2030, and set leading performance standards for natural-gas-fired electricity generation
• Transitioning to lower-emission alternatives for communities reliant on diesel fuel for electricity and heating, with $21.4 million over 4 years (from 2018) to Indigenous and Northern Affairs Canada to continue the Northern Responsible Energy Approach for Community Heat and Electricity Program: $220 million over the next 11 years to reduce diesel reliance in remote communities south of the 60th parallel; and $400 million in an Arctic Energy Fund to address energy security north of the 60th parallel.
• Using wood in building construction: $39.8 million over 4 years (from 2018) to support projects and activities that increase the use of wood as a greener substitute material in infrastructure projects helping to create new markets for sustainable Canadian products
• Improving energy efficiency: $67.5 million over 4 years (from 2018) to NRCan to renew and continue existing energy efficiency programs
• Emissions from Governmental operations: $13.5 million to best approaches in federal departments to implement energy efficiency and clean energy technologies, to retrofit federal buildings, and to reduce or eliminate emissions from vehicle fleets
• $260 million for climate adaptation and resilience, for a number of measures, including creating the new Canadian Centre for Climate Services
• Policy, communications and engagement: $162 million for a whole-of-government approach to climate change and support for Indigenous collaboration on climate change.

Further, for the previously announced infrastructure spending, new details were announced in Budget 2017 that show how infrastructure can support the implementation of the Pan-Canadian Framework on Clean Growth and Climate Change. As announced in the 2016 Fall Economic Statement, the Government will invest $21.9 billion in green infrastructure, including initiatives that will support the implementation of the Framework. While there is still lots of work to be done to ensure infrastructure investment won’t lock Canadians into a high-carbon path, Budget 2017 helps to clarify how the green infrastructure funds will be spent, including identifying three distinct funding streams:

1. Integrated bilateral agreements ($9.2 billion over 11 years) directly to provinces and territories for projects to reduce GHG emissions;
2. The Canada Infrastructure Bank (at least $5 billion over 11 years)
3. A series of national programs ($2.8 billion over 11 years) including:

• $100 million to support next-generation smart grid, storage and clean electricity technology demonstration projects
• $200 million to support the deployment of emerging renewable energy technologies nearing commercialization
• $220 million to reduce the reliance of rural and remote communities south of the 60th parallel on diesel fuel, and support the use of more sustainable, renewable power solutions
• $120 million to deploy infrastructure for electric vehicle charging and natural gas and hydrogen refuelling stations, as well as to support technology demonstration projects
• $182 million to develop and implement new building codes to retrofit existing buildings and build new net-zero energy consumption buildings across Canada
• $2 billion for a Disaster Mitigation and Adaptation Fund to support national, provincial and municipal infrastructure required to deal with the effects of a changing climate.

But a large part of this new funding will not be paid out before 2018 or 2019, so we’ll have to wait several years to see concrete results in terms of resulting GHG reductions. We believe that the urgency of the climate crisis requires strict criteria to be established regarding eligible projects and desired results in terms of GHG reductions, as well as rapid implementation of these investments.

To be continued.