The Liberals’ touted green tech tax cut for companies comes with uncertainty

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When Canada’s Minister of Innovation, Science and Industry attends this coming week’s World Economic Forum in Davos, he will be touting a policy that his government has not yet introduced.

As part of an effort to attract green investment, Navdeep Bains will highlight a 50-per-cent corporate tax cut for companies that develop and manufacture net-zero-emissions technology – a commitment that was made by Justin Trudeau’s Liberals during last fall’s election campaign and received limited attention at the time.

It’s a messaging plan, confirmed by Mr. Bains’s office, that sheds a bit of light on Finance Minister Bill Morneau’s recent foreshadowing of a climate focus in this year’s budget. While there are almost endless possibilities for what that focus could include – from further carbon-pricing plans and new regulations to infrastructure spending and additional industrial supports – the inclusion of the clean-tech tax cut seems one of the earliest safe bets.

But even with the Liberals acting as though it’s already a big component of their strategy to make Canada a leader in the global transition to a lower-emissions economy, it remains unclear what form the new incentive will take. Behind the scenes, they are wrestling with how to structure it in a way that’s not so narrow that it gets little uptake or so broad that it becomes a boondoggle. And how they resolve those questions will say much about their capacity to implement an ambitious and complex climate agenda.

The basic case for the tax cut – which according to the Liberal campaign promise would see qualifying companies pay a corporate rate of 7.5 per cent and a small-business rate of 4.5 per cent, rather than 15 per cent and 9 per cent, respectively – seems to be that it could help expand Canada’s clean-tech sector in two ways.

The first would be improving the prospects of fledgling, homegrown companies. While it wouldn’t have much immediate benefit for recent startups, which usually don’t have any profits to tax, it could potentially help them attract capital because of the prospect of greater after-tax profits later.

The second, more along the lines of what Mr. Bains is about to pitch, would be to help lure bigger companies to set up clean-tech operations in Canada. A best-case scenario, albeit unlikely in the short term, would be persuading automakers to make electric vehicles here. A more realistic short-term example might be attracting more renewable-energy manufacturing.

While the breaks for more established companies could draw criticism as gratuitous corporate welfare no matter what, the Liberals might be able to make convincing counterarguments. They could reasonably contend that to get a foothold in various clean-tech sectors that stand to increasingly shape industry, Canada needs to compete with other jurisdictions that offer generous subsidies.

But first, the Liberals will first need to resolve a lot of questions unanswered by a campaign announcement that, hurriedly rolled out alongside other environmental pledges in the days before Mr. Trudeau joined Greta Thunberg at a climate protest in Montreal, was light on detail.

Much of the ambiguity revolves around what net-zero-emissions production is exactly.

That question applies to the products themselves, amid much debate around the precise emissions impact of various emerging technologies. (Biofuels, which the Liberals mentioned as a potentially qualifying sector at the time of their campaign promise, is one example.) By what process will the government determine whether production ultimately puts no more carbon into the atmosphere than it removes?

The question also applies to the companies manufacturing them. The policy could be set so that manufacturers need to be net zero across all their Canadian operations to qualify, but that could be way too restrictive. Or it could be designed to allow one facility within a company’s broader Canadian operations to qualify, or even the making of one net-zero product within a facility that doesn’t fit the bill as a whole. But that would increase risk of the system being gamed.

Getting it right – being able to eventually say they attracted clean tech that would not have happened here otherwise, and avoiding rewarding companies for greenwashing or for advances that would have happened regardless – seems like a very tall order by spring.

It wouldn’t be a surprise if Mr. Morneau’s budget merely reiterated the campaign pledge, maybe clarifying the cost projections, while punting the details a few months down the road. But Ottawa probably can’t wait much longer than that.

Mr. Trudeau made this promise, alongside all the others in the middle of the campaign, in the context of putting Canada on pace to beat its Paris Agreement targets by 2030 and achieve net-zero emissions nationwide by 2050.

The tax pledge is not a big enough commitment that all the best minds in his government will be able to squarely focus on it. But that’s where the capacity test comes in, because like various other components of its climate plan, the government has to move swiftly to have much chance of making good on the goals it has set.

Besides, Mr. Bains is about to be out selling. If he finds any takers in Davos, he probably shouldn’t leave them hanging too long.