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TD Notes

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Canadian Federal Budget: "Green Recovery" Highlights

Opportunities Address Major Industrial Emitters Through CCUS However, Investment Tax Credit Still in Development

TD Investment Conclusion

In this note, we provide some highlights from the Canadian Federal Budget announced yesterday. This is the first budget in two years and one tabled in a post- pandemic world. While certainly not exhaustive, we focus on elements that pertain to Canada's climate change commitment, the energy-transition, and how it may impact our conventional energy coverage. These are themes we have been exploring in our ESG series (Part 1—ESG 101, Part 2—Environment, Part 3—Social & Governance, and Part 4—The Energy Sector and Net Zero?).

Canada's climate goals: Recall, Canada had a goal to reduce its emissions by 30% below 2005 levels by 2030 and with the investments outlined in the budget, it now expects to reduce it by 36%. Additional targets are expected to be announced in the near future that will further align Canada's net-zero by 2050 aspiration.

Growing a net-zero economy: The budget proposes to provide a total of $17.6B toward a "green recovery". This is in addition to the $15B announced in late 2020 as part of the government strengthened climate plan (link). Many initiatives under this umbrella are aimed at spurring the investment/development of cleantech (including $1B over five years to help draw in private sector investment), help decarbonize large emitters to create Canada's "clean industrial advantage", and grow zero-emissions technology manufacturing.

Two pathways to help industrial emissions—carbon capture (CCUS) & clean fuels: ~30% of GHGs come from a relatively small number of large industrial facilities, primarily concentrated in Alberta/Saskatchewan. As such the budget identifies these two provinces with the greatest potential to become global CCUS leaders.

• Tax incentive for CCUS to be developed but misses opportunity to fully engage oil & gas industry, in our view: Direct R&D was relatively small ($319mm over seven years) but more importantly, the federal government will convene a 90-day consultation period to develop a CCUS tax incentive. However, it does not intend to make it available to enhanced oil recovery (EOR) projects. In Canada, EOR represents the largest consumer of CO2. We believe finding ways to utilize CO2 can result in potential revenue streams that may help offset costs and support further deployment of CCUS. Meanwhile, EOR is eligible for the U.S. 45Q tax incentive, which we view as the benchmark (albeit at a lower rate of US $35/T vs. US$50/T for permanent storage).

• Government procurement emphasizes clean fuels, other low-carbon products: In conjunction with the $1.5B Clean Fuels Fund announced back in December, the budget includes $67.2mm over seven years to clean fuel development. In addition, the government's procurement strategy will prioritize lower carbon options including fuels (specifically for federal domestic air and marine fleets). Public procurement can help foster an emerging market for lower carbon products, in our view.