Long-Term Fiscal Cost of Major Economic Investment Tax Credits
The PBO recently published the five-year costs of five of the new federal investment tax credits (ITC) which target investments in the clean energy and technology sectors. Following these publications, we received requests from parliamentarians to analyze the long-term cost of these ITCs. This report presents a long-term analysis of the six tax credits using the Canada Energy Regulator’s 2023 Canada Net-Zero Scenario as the baseline for our projections.
Summary
The federal government has announced six major investment tax credits (ITC) designed to support investments in clean energy and technology:
- Carbon Capture, Utilization, and Storage (CCUS) Investment Tax Credit (Budget 2022);
- Clean Technology Investment Tax Credit (Fall Economic Statement 2022);
- Clean Electricity Investment Tax Credit (Budget 2023);
- Clean Hydrogen Investment Tax Credit (Budget 2023);
- Clean Technology Manufacturing Investment Tax Credit (Budget 2023); and,
- Electric Vehicle (EV) Supply Chain Investment Tax Credit (Budget 2024).
Budget 2024 estimates that these ITCs will have a fiscal cost of $93 billion over 2022-23 to 2034-35.[^1]
The Parliamentary Budget Officer (PBO) recently published the five-year cost estimates of five of the ITCs.[^2] This report presents a long-term analysis of these credits using the Canada Energy Regulator’s (CER) 2023 Canada Net-Zero scenario as the baseline for our projections.
PBO estimates that almost half a trillion dollars in investment could be eligible for the six ITCs, with a large portion in the renewable electricity sector. PBO estimates that the six ITCs will cost $103 billion from 2022-23 to 2034-35 (Summary Table 1). The bulk of the costs are concentrated in the fiscal years beyond 2027-28.
PBO’s long-term cost estimate for the six ITCs is $10 billion higher over 2022‑23 to 2034‑35 than Budget 2024 projections. The difference is primarily due to the higher projected eligible investments in the electricity sector. The Canada Net-Zero scenario projects large investments in nuclear power which has a higher investment cost than other renewable technologies. The Canada Net‑Zero scenario also projects significant new wind power capacity over 2031 to 2035.
The project list provided by Natural Resources Canada and Finance Canada suggests that the Canada Net-Zero scenario is on track to be met for CCUS. If all projects become operational, carbon capture could reach up to 240 MT of CO2 annually by 2050.[^3] Similarly, based on project-level data provided to the PBO, hydrogen production could reach 5.9 MT by 2035, which exceeds the estimated production under the Canada Net‑Zero scenario.[^4]
Background
Canada’s Net-Zero emissions objective
The government stated its commitment to achieve net-zero emissions by the year 2050 under the Canadian Net-Zero Emissions Accountability Act on November 19, 2020.[^5] To ensure the attainment of the emissions reduction, the Act announced legally binding targets for each five-year milestone from 2030 to 2050 and was passed into law on June 29, 2021.[^6][^7] In the following year, in March 2022, the government introduced Canada’s 2030 Emissions Reduction Plan which further detailed the government’s medium-term climate policies and targets.[^8]
Net-zero GHG emissions, or carbon neutrality, refers to a state where the amount of greenhouse gases emitted into the atmosphere are counterbalanced by the amount that is removed or offset, resulting in no net increase in the concentration of such gas emissions.
The costs and mechanisms for decarbonizing the Canadian energy sector, in particular electricity production, have been studied by the Canadian Climate Institute (2022), Trottier Energy Futures Project (2016) and Dolter & Rivers (2018) among others. In June 2023, CER published Canada’s Energy Future 2023 (CF2023) which includes a detailed pathway for achieving net‑zero emissions in the electricity sector by 2035 and the broader energy sector by 2050.[^9]
Investment tax credits
According to CF2023 and Environment and Climate Change Canada (ECCC) modelling[^10], expanding electricity generation by renewable sources as well as increasing the use of biomass, hydrogen and carbon capture will be required to decarbonize the energy sector. Beginning in Budget 2022, the government announced several ITCs to incentivize the development and adoption of clean energy and technology:[^11]
- Carbon Capture, Utilization, and Storage (CCUS) Investment Tax Credit (Budget 2022);[^12]
- Clean Technology Investment Tax Credit (Fall Economic Statement 2022);[^13]
- Clean Electricity Investment Tax Credit (Budget 2023);[^14]
- Clean Hydrogen Investment Tax Credit (Budget 2023);[^15]
- Clean Technology Manufacturing Investment Tax Credit (Budget 2023);[^16] and,
- Electric Vehicle Supply Chain Investment Tax Credit (Budget 2024).[^17]
Budget 2024 estimates that the six ITCs will cost $93 billion over 2022-23 to 2034‑35.[^18][^19]
Inflation Reduction Act
The United States has also enacted significant policy measures to support clean technologies via the Inflation Reduction Act (IRA).[^20] The IRA allocates approximately $400 billion USD toward clean energy and climate initiatives.[^21] The IRA introduced clean electricity and clean manufacturing tax credits which are estimated to cost the U.S. federal government nearly $200 billion USD from 2022 to 2031.[^22]
PBO’s long-term cost estimates
PBO previously published five-year cost estimates for five of the ITCs. These tax credits are longer-term in nature, expiring between 2034 to 2040 and, along with other policies, support the government’s broader climate objectives such as decarbonizing Canada’s electricity sector by 2035 and attaining net-zero emissions by 2050. This report presents a long-term analysis of the ITCs using the CER’s 2023 Canada Net‑Zero scenario as the baseline for our long-term projections.
Detailed methodology for each five-year ITC costing can be found in the individual costing notes on our website.[^23] The methodology used in this report is largely unchanged from previous releases.[^24] We continue to assume that all provinces and eligible enterprises will meet the applicable federal policy and labour requirements to access the ITCs.
We determined that the Canada Net‑Zero scenario is the most consistent with the government’s climate objectives and future policy path. We provide a sensitivity analysis of our cost estimates under alternative policy scenarios in the risk section of this report.
According to Budget 2023, "The scale of investments that Canada requires to reach net‑zero by 2050 is significant, with estimates ranging from $60 billion to $140 billion per year on average." PBO estimates that almost half a trillion dollars in total capital investment over 2022 to 2035 will be eligible for the six ITCs (Table 1). This represents $40 billion in annual investment, on average, over this period.
We did not estimate the long-term economic impact of these investment tax credits. Such estimates would need to account for the interaction with other climate policies which is beyond the scope of this report. Moreover, certain investments are required to meet regulatory standards such as clean electricity generation. In this respect, the ITCs serve to reduce costs to end-users.[^25]
The impact of the projected investments in clean technologies on the economic outlook is uncertain. Some investment will be offset by declines in spending on fossil fuels and other industries. PBO (2021) projected that the government’s emission reduction policies would increase real GDP and investment in the electricity sector but would have a negative overall economic impact by 2030.[^26] The Bank of Canada (2022) estimated that real investment would decline in Canada under various climate transition scenarios despite an increase in capital expenditures in the electricity sector.[^27]
Nonetheless, emerging clean technologies have the potential to expand domestic and export markets for Canada[^28] and limit the economic impact of the transition to net‑zero.[^29] The Canadian Climate Institute (2024) finds that while the impact of the ITCs on emissions by 2030 are relatively small, they are complementary to other policies and potentially important for economic competitiveness and attracting long-term investment.[^30]
We project that the six ITCs will cost $103 billion over 2022-23 to 2034-35 (Table 2). The fiscal impact is significantly higher for the 2029-30 to 2034-35 period due to a substantial increase in investment.
The bulk of the fiscal costs are concentrated in the long-run; average annual spending is estimated to average $11.2 billion per year between 2029-30 to 2034-35 with a peak of $12.9 billion in 2031-2032 (Figure 1).
The most important cost driver of these ITCs is the pace at which emerging technologies are adopted so that the Canadian economy can transition to net‑zero.[^31] Another potential key source of uncertainty is interprovincial energy trade. Dolter & Rivers (2018) estimate that linking provincial electricity grids could reduce the investment costs of decarbonizing Canada’s electricity grid.
Comparison with Finance Canada’s cost estimates
Budget 2024 estimates that the six ITCs will cost $93 billion over 2022-23 to 2034-35.[^32] PBO’s long-term cost estimate of these ITCs is $10 billion higher over 2022‑23 to 2034‑35 than Budget 2024 projections (Table 3).
Office of the Parliamentary Budget Officer
Finance Canada
Natural Resources Canada
Office of the Parliamentary Budget Officer
Finance Canada
Natural Resources Canada
Totals may not add due to rounding. PBO’s estimates do not include eligible equipment related to heat generated from biomass.
The difference is mostly attributable to higher projected eligible investments in the electricity sector.[^33] PBO’s estimates are based on the Canada Net‑Zero scenario which assumes that large investments in nuclear power, which have higher capital costs than other power sources, are required to decarbonize Canada’s electricity grid. The Canada Net‑Zero scenario also projects significant new wind power capacity over 2031 to 2035. Overall, there is considerable uncertainty about the future investment, adoption and effectiveness of new technologies.
Several factors contribute to the difference in our forecast for clean technology manufacturing. Variances may arise from undisclosed projects or confidential information within the EV supply chain ecosystem. Our forecast primarily relied on limited public announcements and historical data to estimate current and future investments.
PBO’s estimates of the hydrogen and CCUS ITCs are roughly in line with the government’s estimates. Nonetheless, there is considerable uncertainty about the future role of these developing technologies.
Contribution to GHG reductions
The federal government has committed to achieving net-zero greenhouse gas (GHG) emissions by 2050. One of the key milestones is reducing GHG emissions by 40-45 per cent below 2005 levels by 2030.
Office of the Parliamentary Budget Officer.
National inventory report.
Office of the Parliamentary Budget Officer.
National inventory report.
In Budget 2021, when the government proposed the introduction of the CCUS ITC, it stated a goal of reducing emissions by at least 15 MT of CO2 annually. The CER’s Canada Net-Zero scenario projects 220 MT of CO2 captured using CCUS by 2050.[^34] Based on the current list of projects provided by Natural Resources Canada and Finance Canada, it is anticipated that the Canada Net-zero scenario is on track to be met. Based on our current projection, assuming all projects eventually become operational, carbon captured per year could reach up to 240 Mt CO2 by 2050.[^35]
When considering hydrogen production, the Canada Net-Zero scenario estimates that total production would reach 5.3 MT by 2035. Net emissions from hydrogen production are estimated to reach -1.4 MT of CO2 by 2035.[^36] Given the list of projects, the PBO estimates that production capacity could reach up to 5.9 MT by 2035.
The CF2023 estimates that GHG emissions produced by electricity generation will decline from 53.7 MT CO2 eq in 2023 to negative 5.7 MT in 2035, thereby achieving a net-zero electricity grid by 2035.[^37]
The manufacturing and EV supply chain ITCs will primarily affect GHG emissions in the transportation sector. In 2021, the transport sector was the second largest contributor to GHG emissions accounting for 150 Mt CO2 eq, or 22 per cent of total emissions. Passenger vehicles made up 85.8 Mt CO2 eq.[^38] The CER estimates that by 2050, the transportation sector as a whole will decline to 14 Mt CO2 eq.
Risks
We highlight specific risks to the cost of each ITC in the five-year costing notes published on our website. The fiscal risks grow progressively over time with the greatest uncertainty occurring between 2030-31 to 2034-35.[^39]
The clean energy and technology sectors have made significant progress in attracting investment, but they must evolve even more rapidly to meet the government’s net-zero objective. Public announcements and confidential data received mainly relate to projects that are in the early stages of planning, which contributes to the uncertainty surrounding these projects, particularly in the long-term. Moreover, due to the limited number of operational projects in Canada and worldwide in areas such as CCUS and Hydrogen, there is a persistent level of uncertainty on the timelines and future capacity. Furthermore, there exists a potential risk concerning the dependability of the supply chain and the availability of proficient trade workers to support the CCUS and Hydrogen industry.
Given the elevated levels of uncertainty, we consider the fiscal cost of the ITCs under alternative CER scenarios (Table 4).[^40] Of the three scenarios, only the Canada Net‑Zero scenario is estimated to achieve net-zero GHG emissions by 2050. Neither the Evolving Policies nor Current Measures scenarios achieve net-zero emissions; however, the Evolving Policies scenario achieves more emissions reduction than the Current Measures scenario.
Data received for CCUS and Hydrogen consists of projects in the early stages of planning and include incomplete and/or estimated data. We assumed most projects would eventually be operational under the baseline scenario.
Capital costs for renewable technologies are anticipated to decrease in the future due to economies of scale and mass production, which could lower the future cost of the ITCs. We assume costs in line with the CER’s technology assumptions.[^41]
PBO will continue to monitor future developments that could have fiscal implications for Canada’s transition to net zero.
Appendix A: Overview of Canada’s climate policies
References
Bank of Canada (2022). Transition Scenarios for Analyzing Climate-related Financial Risk.
Canadian Climate Institute (2022). The Big Switch: Powering Canada’s Net Zero Future.
Canadian Climate Institute (2024). Which Canadian Climate Policies will have the Biggest Impact by 2030?
Canada’s Energy Regulator (2023). Canada’s Energy Future 2023: Energy Supply and Demand Projections to 2050.
Dolter & Rivers (2018). The Cost of Decarbonizing the Canadian Electricity System.
Environment and Climate Change Canada (2021). A Healthy Environment and a Healthy Economy.
Lazard (2023). Lazard’s Levelized Cost of Energy 2023+.
Parliamentary Budget Officer (2021). Beyond Paris: Reducing Canada’s GHG Emissions by 2030.
Shapiro & Metcalf (2021). The Macroeconomic Effects of a Carbon Tax to Meet the U.S. Paris Agreement Target: The Role of Firm Creation and Technology Adoption.
Trottier Energy Futures Project (2016). Canada’s Challenge and Opportunity: Transformations for major reductions in GHG emissions.