February 28, 2005

Federal budget for 2005 offers a full range of measures for a sustainable environment

In his 2005 budget, titled "Delivering on Commitments," federal Finance Minister Ralph Goodale outlined a $5-billion package of measures over the next five years to support a sustainable environment. The fiscal commitments will: address climate change by promoting reductions in greenhouse gas (GHG) emissions and encouraging the development of environmental technologies; build on existing tax measures to encourage Canadian businesses to invest more in efficient and renewable energy generation; invest in public infrastructure to encourage more efficient use of energy and remediation of brownfield sites; and protect Canada's natural environment, including the Great Lakes, oceans and national parks. Details are summarized as follows.

To meet Canada's climate change objectives, the budget provides funding for six policy instruments.

Market mechanisms: The introduction of a $1-billion Clean Fund is intended to encourage the most cost-effective projects to reduce GHG emissions while complementing the continuing development of a market for emissions trading. The Fund will purchase emission reductions from Canadians, industry and-in those cases when it is in the national interest and involves Canadian companies reducing greenhouse gas emissions-projects in other countries.

The Fund will have three streams of activity. First, it will use market mechanisms to purchase project-based domestic offsets, with funding awarded through a competitive process to the most cost-effective projects. It is expected that the fund will help stimulate the development of a domestic market for emissions trading and help serve as a catalyst for technology development and application. The Fund will be available for projects using a broad range of new technologies and processes to improve GHG emission levels.

Second, the Fund will consider targeted support for large strategic projects in partnership with the private sector. Examples might include carbon dioxide capture and storage or clean coal technology.

Third, in those cases when it is in the national interest and involves Canadian companies, the Clean Fund will purchase internationally tradable emission reduction credits tied to specific projects in other countries.

Tax measures: The tax system has encouraged investment by businesses in efficient and renewable

energy generation equipment through an accelerated 30% capital cost allowance (CCA) rate. The CCA system determines how much of the cost of a capital asset a business may deduct in a particular year.

To encourage the generation of more environmentally friendly forms of energy, the government provides an accelerated CCA for certain equipment that produces energy efficiently or from renewable sources. Among the types of eligible equipment are cogeneration equipment, wind turbines, small hydroelectric facilities, and geothermal energy systems.

The 2005 budget enhances this support by increasing the CCA rate from 30% to 50% for certain high-efficiency cogeneration equipment and the full range of renewable energy generation equipment currently included in Class 43.1 of the Income Tax Act (including wind turbines, small hydro facilities, active solar heating equipment, photovoltaics and geothermal energy equipment). This increased rate will apply to equipment acquired during the next seven years, at the end of which period the effectiveness of the measure will be reviewed. This incentive is also being extended to include district energy and biogas production systems.

Enhanced incentives in this area will contribute to reduced GHG emissions, better air quality and a more diverse energy supply. The government has also pledged to review potential tax measures such as a revenue-neutral "feebate" for vehicles to achieve enhanced environmental outcomes.

In addition, the budget includes tax measures aimed at protecting Canada's natural heritage. These include: a reduced inclusion rate on capital gains from donations of ecologically sensitive land; and an immediate deduction for contributions to qualifying environmental trusts established for the reclamation of mine, waste disposal and quarry sites.

Targeted incentives: The 2005 budget delivers on the government's commitment to quadruple the Wind Power Production Incentive (WPPI) to 4,000 megawatts MW.

Budget 2001 provided $260 million for the WPPI, a per-kilowatt incentive paid to eligible wind energy projects commissioned between March 31, 2002, and April 1, 2007. Since the launch of the program, 450 MW of capacity has been commissioned and most provinces have announced plans, or are considering plans, to increase the share of electricity generated from renewable sources such as wind.

Building on the success of this program, the 2005 budget provides $200 million over five years and a total of $920 million over 15 years to expand the WPPI target to 4,000 MW. This is equivalent to the amount of power needed by approximately one million average Canadian homes.

As under the original terms of the program, an incentive payment of one cent per kilowatt-hour of production for the first ten years of operation will be made to eligible projects commissioned before April 1, 2010. The eligible production per project will be determined by Natural Resources Canada (NRCan).

Other forms of green energy will be encouraged through a new Renewable Power Production Incentive (RPPI) to stimulate the installation of up to 1,500 MW of new renewable energy electricity generating capacity other than wind. The budget provides $97 million over the next five years and a total of $886 million over 15 years for the RPPI. Preliminary details will be announced shortly by the Minister of Natural Resources and, following consultations, final program details including eligibility criteria will be announced before April 1, 2006. The eligible production per project will be determined by NRCan.

Targeting household energy use, the budget allocates $225 million over the next five years to quadruple the number of houses retrofitted under the EnerGuide for Houses Retrofit Incentive program. This new federal level of effort will support energy efficiency improvements in a total of 500,000 homes by 2010 (up from 125,000 homes).

Thousands of homeowners have already taken advantage of this program and have improved their energy performance, receiving grants averaging $630 and experiencing savings of 27 per cent on their energy bill every year. On a $2,400-per-year energy bill, this translates into over $600 in annual energy savings.

Public infrastructure investment: The 2005 budget outlines a series of infrastructure-related investments through two complementary streams:

Sustainable Environment

* an additional $300 million for the Green Municipal Funds, $150 million of which will be used to help communities clean up and redevelop brownfields.

Sustainable Communities

* the equivalent of $5 billion over five years out of federal gas tax revenues to assist municipalities with infrastructure projects such as transit, water and community energy systems.

* the renewal of infrastructure programs such as the Canada Strategic Infrastructure Fund and the Municipal Rural Infrastructure Fund, which invest more than 50 per cent of funding toward sustainable infrastructure.

Investment in innovation: In recognition of the importance of new environmental technologies, the budget allocates $200 million for the development, by the end of 2006, of a Sustainable Energy Science and Technology Strategy. The main objectives of the strategy will be to: lever both the ideas and financial resources of the private sector, universities, provinces and territories; develop a set of medium-term research goals for the efficient production and use of conventional and renewable energy; and develop a detailed action plan for achieving these goals.

As part of this process, the Minister of Natural Resources will examine the effectiveness and efficiency of existing federal investments in environmental and energy science and technology in order to ensure that these resources support the direction of the strategy. The government currently invests approximately $200 million per year in technology-related programs and initiatives such as Sustainable Development Technology Canada, the Program for Energy Research and Development (PERD, an inter-departmental research program managed by NRCan), and the CANMET Energy Technology Centre.

To further promote innovation, the budget directs $250 million toward the creation of a Partnership Fund to deliver targeted support for large strategic climate change projects that are jointly agreed priorities for the federal government and provinces and territories.

This fund will take over from and expand the Opportunities Envelope established in the 2003 budget, with funding amounts to be augmented as projects are identified and developed. Given the scale of the potential emission reductions, and the likely timing of the projects, the size of the fund could grow to $2 billion to $3 billion over the next decade.

Projects could include a carbon dioxide capture and storage pipeline, clean coal, cellulosic ethanol plants and construction of an east-west electrical transmission infrastructure to bring hydro power to provinces heavily dependent on fossil fuels. The government believes these investments could lead to transformative change in important economic sectors, as well as significantly reducing GHG emissions.

Regulation/voluntary action: The government is pursuing agreements with both large final emitters (LFEs) and vehicle manufacturers to ensure concrete action on the largest sources of greenhouse gas emissions by establishing real targets. LFEs include firms in the production, refining and distribution of oil and gas, electricity generation, and mining and manufacturing, such as cement plants and iron and steel mills. They are expected to produce about half of Canada's total greenhouse gas emissions by 2010.

While these enterprises have made considerable strides in improving the emissions intensity of their production, a mandatory emissions reduction regime and emissions trading system (including the related legal framework) to be unveiled by the government will support further improvement by LFEs in addressing climate change.

The system will have four main characteristics. First, it will be market-based. Second, emission targets for the industry will be based on best-available technology standards for new facilities. Third, companies will be able to buy and sell emission reductions, both domestically and internationally. Fourth, the approach will consider how best to ensure equivalency agreements which will enable provinces and territories to oversee the system in their jurisdiction.

The trading system will include the establishment of a new research and development Technology Investment Fund, which will provide an alternative way for firms to achieve a portion of their target and support the development and deployment of innovative technologies that reduce greenhouse gas emissions.

Additionally, the government is negotiating an agreement with the auto manufacturing sector which would improve the fuel efficiency of vehicles sold in Canada by 25%, or its equivalent in greenhouse gas reductions, by 2010.

Environmental protection

The budget provides funds in a number of areas dedicated to protecting the natural environment, including:

$85 million over five years to minimize the risk of invasive alien species (new funding for the Invasive Alien Species Strategy includes an incremental $2 million per year over the next five years for the Sea Lamprey Control Program, which is jointly administered by Canada and the United States to control the presence of sea lampreys in the Great Lakes);

a further $40 million over the next five years to bring forward the next phase of the Great Lakes Action Plan, which will continue the environmental restoration of key aquatic areas of concern identified under the Great Lakes Water Quality Agreement;

$28 million over two years to implement Phase I of the Oceans Action Plan, which will focus on improving oceans management and preserving the health of Canada's oceans;

$276 million over the next five years to enable the Canadian Coast Guard to support the Oceans Action Plan through the procurement, operation and maintenance of six new large vessels, including two offshore fishery research vessels and four midshore patrol vessels to support the conservation and protection of fisheries;

$15 million annually to discourage foreign overfishing in the Northwest Atlantic;

an additional $90 million over five years to conduct health risk assessments and research to reduce Canadians' exposure to toxic substances;

$209 million over five years to improve public infrastructure in Canada's national parks; and

$60 million over five years to restore the ecological integrity of our national parks.

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