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Oil Sands Cleanup Opportunity #4: Restore Subsidies for Innovation

Scaled back federal support for new tech frustrates top oil patch execs.

By Geoff Dembicki 15 Mar 2013 |

Geoff Dembicki reports for The Tyee Solutions Society (TSS).

This series was produced by Tyee Solutions Society in collaboration with Tides Canada Initiatives Society (TCI). Funding was provided by Fossil Fuel Development Mitigation Fund of Tides Canada Foundation. All funders sign releases guaranteeing TSS full editorial autonomy. TSS funders and TCI neither influence nor endorse the particular content of TSS' reporting.

[Editor's note: Geoff Dembicki continues his investigation into what's keeping the corporate-dominated oil sands from sparking a boom in homegrown Canadian "clean-tech" innovation -- and fast-tracking a cleaner environment.]

The oil sands industry often gets what it wants from Canada's Conservative government.

In July 2011, the Canadian Association of Petroleum Producers (CAPP) asked environment minister Peter Kent to limit the range and powers of federal conservation laws.

Bureaucrats warned Kent the proposal "would undermine" efforts to protect the environment. But one year later the government passed legislation closely conforming to CAPP's wish-list, cancelling almost 3,000 environmental reviews. Nearly 700 related to fossil fuel projects.

CAPP, however, was not happy with the Conservative government late last November. That was when the industry lobby group's Bob Bleaney appeared before Canada's Standing Committee on Natural Resources.

Oil and gas producers "need to continuously improve on environmental and social performance," he acknowledged.

Yet regulation, in CAPP's opinion, was apparently not the answer. Instead, Bleaney argued, producers will create a lower impact industry through "technology and innovation."

"But it can be challenging," he explained, "to fund the pilot project work and the field testing that is critical to evaluate such technology."

The federal government in 2007 provided roughly $305 million worth of tax credits to oil, gas and mining companies for offsetting those costs. But under Prime Minister Stephen Harper's leadership it has recently trimmed its support.

Once those cuts take effect in 2014, they will "erode" the ability of fossil fuel producers to reduce their environmental footprints, and otherwise improve the industry, Bleaney said.

(CAPP declined to be interviewed by the Tyee Solutions Society for this series).

In the reported opinion of Canada's largest oil and gas lobby group, Harper's government has just made it harder for the oil sands to get greener.

'Very expensive'

The incentive Bleaney referred to is the Scientific Research and Experimental Development program, popularly known in the industry as SR&ED (and pronounced, "shred").

"The way it works," said Geoff Hill, national oil and gas leader for Deloitte Canada, a professional services firm, "is you get either cash or tax credits back" for pursuing new, potentially risky projects that may broadly benefit Canadian industry.

In the oil sands, he said, qualifying projects might include trying experimental technology that conserves water, cuts an operation's greenhouse gases or cleans up Alberta's 176 square kilometres of toxic tailings ponds.

SR&ED is one of the country's most generous innovation programs, providing roughly $3.5 billion each year to Canadian companies.

But in its 2012 federal budget, the Harper government announced cuts to the program.

After next January, the basic tax refund rate SR&ED provides will decrease from 20 to 15 percent of eligible spending. Companies will also no longer be able to claim tax refunds for their capital expenses (stuff like heavy machinery and computer equipment).

Those changes may sound minor (and more than a little arcane) but they could hurt Canada's most innovative companies.

Research in Motion -- the Waterloo, Ontario-based inventor of Blackberry technology -- warned the federal government that it stands to lose $50 million a year as a result of the changes.

The hit to the oil sands could come in a different form: missed opportunities to get greener. "Trying new things is very expensive," Deloitte's Hill said. The federal SR&ED program, he added, "is critical to alleviate some of the financial burden."

'Factor of 20'

The federal government's rationale for cutbacks was that SR&ED is bloated, complex and difficult to access, particularly for smaller companies.

That was essentially the opinion of an expert panel on Canadian innovation. By trimming the program, it recommended, government could "redeploy funds" to help smaller companies "grow into larger, competitive firms."

The Harper government more or less took that advice, pledging $110 million in new funding to the Industrial Research Assistance Program.

"Yes," federal finance minister Jim Flaherty admitted last November, a leaner SR&ED tax credit program is "not as popular, no doubt, with some of the large businesses doing [research and development] in Canada."

To suggest however that it could seriously undermine innovation in Canada, "is a bit of a stretch," Flaherty insisted.

That wasn't how Gradek Energy, a small Montreal-based cleantech firm developing technology that could clean up tailings ponds in Northern Alberta, saw it.

SR&ED cuts will "have a marked effect on new technologies being developed and brought forward," company president and founder Thomas Gradek told the Standing Committee on Natural Resources last November.

Advancing projects designed to deliver cleaner oil sands from small pilot stages to full commercial scale could mean that, "your expenditures increase by a factor of 20," he said.

(Titanium Corporation, for instance, spent $15 million testing its new tailings technology, but estimates it would cost $400 million to install the same system at full scale at a large oil sands operation.)

"If there is no system to facilitate this development," Gradek said, "it will not happen."

Good subsidies?

Alan Fair is more sanguine about the cuts. He doesn't think they'll have a "drastic" short-term impact on companies like Syncrude, where he led the research and development department until his retirement in 2011.

But long-term, Fair thinks, less federal support could indeed weaken the business case for new, industry-improving solutions.

"As somebody who's had to defend the R&D budget [to management] many times," he said, "any offset you've got helps."

By limiting those offsets, Liberal science and technology critic Ted Hsu has argued, the Conservative government "punishes sectors like oil and gas technology" -- and, by extension, the environment.

The result, he suggested, could be less "efficient, safe, healthy or environmentally friendly" solutions in Northern Alberta's oil patch.

Last June, environment minister Kent promised that, "Canada is committed to phasing out fossil fuel subsidies."

Kent's comments came after accusations that Canadian negotiators at climate talks in Rio de Janeiro actually tried to weaken a proposal to eliminate all such subsidies globally.

And Canada still subsidizes oil and gas development by $1.3 billion each year, environmental economist David Sawyer estimated.

But with the recent SR&ED cuts Kent appears true to his word. The question is whether certain subsidies may be better left alone than others.

Monday: The series wraps up.  [Tyee]

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