There’s a powerful opportunity for GTHA investors lurking just beyond view in the analysis of this week’s federal budget, the U.S. Inflation Reduction Act (IRA), and the inevitable disconnects between the two.
Clean technology investment was one of the top themes when Finance Minister and Deputy Prime Minister Chrystia Freeland rose in the House of Commons Tuesday afternoon to deliver her 2023 budget. The priority the government attached to the emerging green economy was a high-water mark for anyone interested in the powerful business development and job creation gains that flow out of a serious response to the climate crisis.
The budget commits tens of billions of dollars to a collection of major investments that have been on the energy transition wish list for years, including:
- $25.7 billion over 11 years for a clean electricity investment tax credit;
- $17.7 billion over 12 years for a hydrogen investment tax credit that limits the maximum rebate of 40% to the greenest forms of the fuel;
- $11.1 billion over 12 years for a 30% cleantech manufacturing ITC;
- $3 billion to refinance the federal government’s Smart Renewables and Electrification Pathways (SREP) and Smart Grid programs and support offshore wind.
It’s an ambitious agenda that covers many of the top energy transition priorities that fall within the federal government’s jurisdiction.
But from the perspective of a region like the Greater Toronto and Hamilton Area (GTHA), some of the best opportunities in Freeland’s budget and the Biden administration’s IRA are hiding in plain sight.
For months, ever since U.S. President Joe Biden signed the IRA into law, Ottawa has been trying mightily to reconcile an impossible reality.
The conventional wisdom in Canada is that, with roughly one-tenth the population of the United States, we’re doing well in any area of investment if we match our southern neighbour with one-tenth of the commitment.
But when it comes to the competitive clean energy technology revolution that is just beginning to sweep the world, those resources won’t be enough to pry away the private attention and investment that are now piling into the U.S. economy. Canada is not the only country with concerns—the European Union, as well, has been scrambling to retain investment since the IRA came on the scene last summer.
Through a federal government lens, the best solution is to concentrate the available funds where they’ll make the greatest difference, and for the most part, Freeland’s budget moves solidly in that direction. But when you shift the focus to include local and potentially provincial governments, a wider set of solutions comes into view.
The GTHA isn’t California, so we can’t put ourselves forward as the world’s fifth-largest (soon to be fourth-largest) economy. But with a population of 7.3 million in 2021, en route to 8.6 million over the next eight years, we still have enough critical mass to create our own clean energy opportunities if we focus on the right ones.
The Made-in-GTHA Solution
Our region can and should take advantage of every bit of funding and financing the federal government has to offer, not to mention what is available under the IRA in the States. But we are running out of time to have a meaningful impact on carbon emission reductions, and those supports won’t be enough to get us to our emissions targets. Fortunately, there are creative ways for the region to step up, with our own resources supplemented by any funding we can leverage from other levels of government.
By virtue of our geography, our population, our industrial base, and the potential to rapidly expand the local pool of skills and training, we can push wider and deeper than the federal budget’s necessary focus on power grids, manufacturing, and supply chains.
The available federal and provincial incentives won’t always be enough to land a major clean energy manufacturing investment. But nearly 2.7 million households will be buying a lot of batteries, heat pumps, smart building systems, and electric cars and bikes for the foreseeable future. And we have the investment clout to keep a good share of that economic value and activity in the region.
To keep that share, we need to invest with impact and focus. Focus on those clean technologies that can be deployed in the GTHA and which will have the most impact on carbon and other public benefits. This may be somewhat more complicated for impact investors in the GTHA who will need to follow the progress of the U.S. IRA, find the smart start-ups with products we can use, and take equity positions that include licencing agreements to deploy those products here. But it makes sense for everyone involved.
The investee companies gain a new source of capital and access to a dynamic, developed market, with relatively little added effort.
The GTHA gets steady access to the technology, climate, health, and economic benefits of building the wider value chain of distribution, installation, and servicing around someone else’s emerging product.
Impact investors achieve their objectives while getting a multiplier effect through both the investee company and the local deployment partner. The prospect of increased and diversified revenues at a lower cost reduces the risk of investment.
And everyone wins when the region that is home to nearly one-fifth of Canada’s population speeds up its shift off carbon.