Hesitation is the New Cost of Capital: Monetizing Ambition in Canada’s Clean Economy
By: Ava Kleiser
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Hesitation is the New Cost of Capital: Monetizing Ambition in Canada’s Clean Economy
In the global race for energy, hesitation has quietly become one of the most expensive line items within a project's capital stack. In today’s market, the mandate is simple: fund projects now or lose them to the markets that will.
Envision a clean energy developer comparing two offers: a generous tax credit with restrictive conditions accessible only after project completion, or a guaranteed revenue stream that can be kept or sold immediately for cash. This example highlights the differences between Canada’s delayed, conditional subsidies and the United States’s immediate, liquid incentives.
Before the passing of the “One Big Beautiful Bill Act” (OBBBA) in 2025, the U.S. undoubtedly had the advantage in attracting capital for clean energy projects. However, the advent of the OBBBA has accelerated the retirement of key Inflation Reduction Act (IRA) production-side incentives for clean energy. Given that the U.S. has ceded competitive ground, Canada faces a critical question: can the country restructure its financial and legislative architecture to draw capital investment north of the border?
Mind the $2 Trillion Gap
In December 2015, The Paris Agreement was signed, requiring countries to commit to reducing emissions, and kicked off a clean-energy industrial race among major economies. This industrial race extends beyond policy designs; it carries consequences that could undermine Canada’s economic stability and ability to meet its climate goals. Canada is already facing a major funding gap, requiring an estimated $2 trillion CAD over the next 30 years to achieve a 75 percent reduction in emissions. Without sufficient capital, Canada risks losing the industrial base of the future net-zero economy.
The disadvantage becomes clearer when you look at key supply chains. In the EV battery sector, the total gross subsidies available through U.S. tax credits and grants can be more than 20 times higher than what Canada offers for specific components. The disparity is just as stark in hydrogen. A major hydrogen project located in Canada instead of a comparable U.S. site could forfeit as much as $500 million CAD per year in financial support. Faced with these massive shortfalls, it’s no surprise that capital and manufacturing capacity were shifting south.
Stars, Stripes, and Subsidies
Before the OBBBA, the U.S. Inflation Reduction Act (IRA) was a vast industrial policy framework that incentivized every step in the clean energy supply chain. Since the IRA’s system was uncapped and volume-dependent, it was both production-linked and demand-driven. The incentive system was broad, encompassing Investment Tax Credits (ITCs), Production Tax Credits (PTCs) and Advanced Manufacturing PTCs for specific component production. However, the 2025 U.S. OBBBA has since eroded the IRA’s dominance as it introduced protectionist supply-chain caps and accelerated sunset clauses.
The core advantage of the U.S. IRA system was its seamless conversion of tax credits into cash through transferability and direct pay options for both ITCs and PTCs. Allowing tax credits to function as immediate cash injections eliminated the need for developers to secure high-interest upfront construction loans, thereby lowering the weighted average cost of capital (WACC).
IOU, Not ITC
With a total estimated scale of $103 billion CAD throughout 2024-2035, Canada’s Clean Economy Anchor Strategy focuses on overcoming high initial investment costs. Refundable ITCs are administered under the Income Tax Act as a tax refund processed by the Canada Revenue Agency (CRA), and are only accessible after the project is “available for use.” Since refunds are processed after the project has been constructed, developers are required to cover initial project costs. Developers must secure high-interest bridge loans while waiting for their refunds to process, but the cost of these bridge loans imposes a substantial penalty to the weighted average cost of capital, offsetting the generous nominal ITC rate.
To complement the ITCs, the Canada Growth Fund (CGF), an "arms-length" public investment fund, attempts to de-risk projects primarily through Carbon Contracts for Difference (CCfDs), hedging instruments that guarantee a future price floor for carbon. However, these contracts only offer long-term revenue guarantees, and do not address short-term capital needs.
Bureaucratic friction frequently stalls complex projects as they typically require certification for technical eligibility and carbon intensity modelling from Natural Resources Canada (NRCan), in addition to the CRA for financial administration. CGF mitigates some long-term revenue risk by providing up to $7 billion CAD in Carbon Contracts for Difference (CCfDs) and offtake agreements, but these non-standardized contracts cannot be used as collateral for alternative forms of financing. While Canada offers high nominal ITCs and select opportunities for long-term revenue certainty, insufficient upfront liquidity and bureaucratic friction renders projects less competitive compared to systems offering immediate monetizable incentives.
Three-Phase Action Plan from Net-Zero Promises to Net Present Value
Canada is at a crossroads in the global clean energy race. Tax credits are not enough. To transform clean energy funding, Canada must take three steps: inject liquidity with sovereign-backed instruments, modernize financial and legislative frameworks to make incentives bankable, and provide production-based guarantees that match the revenue certainty of the pre-OBBBA U.S. IRA system. Together, these reforms replace red tape with revenue certainty, turning delayed projects into the kind of investment-grade assets that can win the global race for clean energy.
Phase 1: Breaking Ground on Capital
To bridge the initial funding gap for perceived high-risk or First-of-a-Kind (FOAK) projects, the government must utilize Federally Guaranteed Receivables to transform deferred ITC claims into sovereign-backed financial instruments. By implementing a “One Project, One Review” framework with binding Service Level Agreements (SLAs) for provincial clearances, Canada will replace jurisdictional silos with an accelerated, single-window approval engine.
Upon receipt of all necessary Front-End Engineering Design (FEED) studies and carbon intensity calculations, ISO-accredited third parties will perform technical verification of project milestones. Third-party verification will leverage the same Independent Engineering (IE) standards used in project finance, utilizing accredited firms to certify technical milestones have been achieved. Once this verification is complete, NRCan will issue an Initial Credit Authorization (ICA), acting as the “legal trigger.” This authorization transforms accrued, but unrealized, ITCs into sovereign obligations suitable as high-grade collateral, or transferable assets for immediate monetization through secondary sale. By converting the tax credit into a secure, upfront financial asset, the ICA and FGR provide the liquidity necessary to reach a positive Final Investment Decision (FID).
By mandating FGR issuance within 14 days of technical certification, Canada can expedite regulatory throughput, and unlock the capital required to trigger the estimated $40 billion CAD annual investment catalyzed by ITCs. This structural shift leverages private capital to bridge the construction funding gap, using government guarantees as collateral, or cash infusions through secondary sales, to ensure a low-cost build while deferring direct public spending until milestones are met. By issuing FGRs, the government transforms the existing $103 billion CAD projected ITC expenditure from a contingent future cost to a binding financial guarantee.
Phase 2: Let the Credits Flow
Phase 1 "liquifies” existing ITCs by transforming deferred tax credits into FGRs suitable for collateral or transferable assets to bridge initial funding gaps for clean energy projects. Phase 2 enlists the CGF to de-risk projects’ future operations through: 1) structuring complex, non-standardized offtake contracts for FOAK projects, and 2) issuing high-grade, pre-approved CCfDs for projects using proven technologies.
FOAK projects typically do not have standardized markets to participate in or a clear list of buyers for their output. In this case, the CGF would act as a “Buyer of Last Resort,” structuring bespoke offtake agreements, guaranteeing it will buy the project’s product at a set price. For projects with proven technologies, the risk is less about the technology and more about carbon price volatility. In this scenario, CCfDs issued by the CGF will function as an insurance policy as the CGF will pay the difference if the carbon price falls below the determined strike price. If the carbon price rises above the strike price, the project will pay the excess back to the CGF. By establishing a protocol where the Bank of Canada and commercial lenders treat a standardized CCfD’s Net Present Value (NPV) as a high-grade financial asset, Canada can unlock institutional capital at scale. With these contracts serving as high-quality collateral, lenders can offer higher advance rates and Loan-to-Value ratios, stabilize the borrower’s cash flow and lower the cost of debt. Fundamentally de-risking the project’s profile and securing superior debt terms solidifies projects’ investment-grade status before the FID is made.
Phase 3: Turning CapEx into Cash-Ex
While Canada’s ITCs, FGRs and CCfDs effectively neutralize construction liquidity gaps and carbon-price volatility, they cannot compete with the uncapped revenue certainty provided by PTCs. PTCs guarantee operational revenue, moving ongoing technical performance and productions risks from the private sector to the sovereign balance sheet. While CCfDs function as insurance policies against regulatory volatility in carbon markets, PTCs serve as volume-based revenue floors by guaranteeing a fixed return on every unit produced. Together they shift the burden of technical performance and market fluctuations from the developer to the public sector, providing the certainty required to attract institutional capital at scale.
To compete with the U.S. IRA, Canada’s PTCs must be structured as an uncapped, volume-dependent credit that mirrors the scale and certainty of the U.S. model. The credit must guarantee long-term revenue certainty for clean energy outputs, providing the stable, multi-year cash flow necessary to secure non-recourse project financing. The incentive must be technology-agnostic, using performance-based intensity brackets to determine credit values rather than prescribing a specific production method to drive outcomes. Integrating PTCs with standardized CCfDs creates a framework with two distinct hedges: CCfDs stabilize carbon-linked revenue streams while PTCs provide certainty for clean energy production-based revenues. This structure ensures that regardless of whether carbon prices shift or global commodity markets fluctuate, the project maintains the predictable cash flow required for investment-grade status.
The key fiscal challenge in this reform lies in managing the cost multiplier risk. As demonstrated by the U.S. IRA, uncapped credits can exponentially exceed initial financial projections. For example, if Canada introduces a Clean Hydrogen PTC, the sovereign liability becomes linked to realized production volumes. Canada must incorporate sunset clauses or performance-based triggers that phase out support as the technology achieves market-clearing competitiveness. This model offers unlimited volume for a limited time, driving growth while maintaining a disciplined exit from public funding as markets mature.
Although uncapped PTCs introduce immediate budgetary risks, the alternative of ITCs alone invites continued capital flight and economic stagnation. The adoption of targeted PTCs is not a matter of fiscal preference, but a necessary alignment with the evolving standards for global industrial competition.
P0: Uncompetitive capital stack; expensive bridge loan inflates WACC and leaves lenders with weak collateral.
P1: ICA converts deferred tax refund into FGR, replacing the bridge loan with a sovereign-backed receivable or collateral for a lower-cost loan.
P2: Standardized CCfDs act as an insurance policy, locking in a carbon price floor so lenders can fund projects at a lower rate.
P3: Uncapped PTCs guarantee a steady revenue stream for every unit produced, turning clean energy into an investment-grade asset.
Go Big or Go Green
Canada is no longer competing in a clean energy contest measured by promises or headline-grabbing funding announcements. The real focus is on execution: accelerating deployment, delivering high-quality projects on time, and channeling capital into initiatives that generate tangible, lasting impact.
The OBBBA’s debut, alongside the recalibration of America’s energy policy, has presented Canada with a defining moment for its industrial future. Every policy delay, hurdle to financing, and project stalled is more than a missed opportunity; it is a surrender of market share, a stagnation of innovation, and global influence eroded.
Ambition alone will not secure Canada’s energy future. To lead, Canada must abandon reactive policy and deploy a high-velocity framework that prioritizes liquidity and speed-to-market. Canada stands at a threshold: the country can define the global clean energy frontier today, or become a secondary buyer paying a surcharge to enter the markets it should have owned.
Editor(s): Howard Yu
Researcher(s): Miranda Lee, Justin Chen
