Long-Term Cost of Net-Zero Investment Tax Credits $10 Billion Higher, Says Budget Officer

Parliamentary Budget Officer Yves Giroux waits to appear before the Senate Committee on National Finance, in Ottawa on Oct. 17, 2023. (The Canadian Press/Adrian Wyld)

Investment tax credits geared toward reaching net-zero emissions will make a larger dent in the budget than predicted by Ottawa, the Parliamentary Budget Officer (PBO) estimates.

In an analysis released on July 3, the federal budget watchdog projects the total fiscal costs for six investment tax credits will reach $103 billion from fiscal years 2022–2023 to 2034–2035.

The PBO’s estimate is $10 billion higher than what is projected in the government’s Budget 2024. “The difference is mostly attributable to higher projected eligible investments in the electricity generation sector as it aims to achieve decarbonization by 2035,” says the PBO.

The tax credits relate to investments in the fields of carbon capture, clean technology, clean energy, clean hydrogen, clean technology manufacturing, and electric vehicle supply chain.

The budget watchdog estimates that nearly $500 billion in investment could be eligible for one of the six investment tax credits. The sector of clean electricity generation is expected to incur the largest cost in tax credits with over $35 billion.

The PBO notes the Canada Energy Regulator’s 2023 Canada Net-Zero scenario expects large investments in nuclear power generation, for which the cost is higher than other technologies such as wind or solar.

Ottawa’s push to reach net-zero emissions of greenhouse gases in the electricity sector by 2035 has faced some pushback, notably by Alberta and Saskatchewan. The oil- and gas-producing provinces rely on hydrocarbons to generate electricity and want to address emissions reductions on their own terms.

The PBO says in its July 3 report it did not analyze the long-term economic impact of the various investment tax credits, saying “such estimates would need to account for the interaction with other climate policies which is beyond the scope of this report.”

How the projected investments in clean technologies will impact the economic outlook is also “uncertain,” says the PBO, which adds that “some investment will be offset by declines in spending on fossil fuels and other industries.”

The budget watchdog previously estimated that Ottawa’s emission reduction policies would boost investments in the electricity sector, but that overall they would have a negative overall impact on the economy.

The PBO has taken a similar stance on the overall impact of the carbon tax, or fuel charge, on the economy.

The carbon tax has been a battleground between the Liberal government and the Conservative opposition.

Liberals say the tax is revenue neutral and that 8 out of 10 households get more back from carbon rebates than they pay in fuel charge, a view backed by the PBO.

However, when the economic impacts of the carbon tax are factored in, the PBO previously said the figure flips and 8 out of 10 households are worse off.

The budget watchdog faced controversy a few weeks back after it revealed it made an error in its calculations of the economic impacts, since it included the industrial pricing system along with the fuel charge, the two facets of federal carbon pricing.

Liberals said this led to an overestimation of the real costs of the fuel charge.

PBO Yves Giroux announced an updated analysis would be released in the fall and said he doesn’t expect the overall conclusion to change given the industrial pricing system does not weigh as much as the carbon tax.

Mr. Giroux also said Environment Canada’s own non-public analysis aligns with his in regard to the carbon tax having a negative economic impact.