A new report says the U.S. is guaranteeing as much as 20 times more government backing for electric-vehicle battery factories.Keith Srakocic/The Associated Press
The numbers, juxtaposed against each other, are cause for alarm about Canada’s ability to compete for low-carbon investment during the industrial transition ahead.
Since last summer’s passage of the Inflation Reduction Act opened the floodgates for hundreds of billions of dollars in clean-technology subsidies by the U.S. government, there have been calls for Canada to keep pace – which Finance Minister Chrystia Freeland has indicated will be an aim of her coming budget.
But there has been a lack of clarity about how much of a disadvantage Canada is currently at, in terms of incentives that could sway decisions about where to produce climate-friendly goods. Ottawa has suggested that the gap is already minimized by carbon pricing and other pre-existing Canadian policy mechanisms, including some spending programs.
Now, a new report contradicts those reassurances, by laying bare how Canada has been surpassed by the United States in putting money on the table for specific sectors.
To be released on Tuesday by think tanks Clean Prosperity and The Transition Accelerator, the report – provided in advance to The Globe and Mail – includes such staggering assessments as the U.S. guaranteeing as much as 20 times more government backing for electric-vehicle battery factories. And it shows Canada being outflanked even in pursuits, such as renewable hydrogen production, that Ottawa has presented as areas of strategic advantage.
It sheds light on urgent choices facing Ottawa about where to try to compete on subsidies, given the unlikelihood of matching Washington everywhere. And it makes the case for different funding mechanisms than Canada has previously used, to convince companies that green investments are no riskier than next door.
A key to comparisons made by the report’s authors – Clean Prosperity’s Michael Bernstein and Bentley Allan, an industrial policy expert at Johns Hopkins University – is a fundamental difference between the types of financial incentives the countries have put on the table.
Most Canadian green subsidies are offered discretionally, through broad funds such as Ottawa’s $8-billion Net Zero Accelerator, in which companies must submit to opaque and sometimes lengthy application processes. Another incentive is the chance to earn industrial carbon-pricing credits. But those credits’ value is affected by a trading market yet to take shape, and by political uncertainty about whether the carbon price will rise as scheduled. To the extent that Canada offers tax breaks, they’re mostly relatively modest investment tax credits, providing help with upfront costs.
The U.S. has instead gone massive on production tax credits. That approach is riskier for government, because it does not put a ceiling on public spending. With strong uptake, the total could dramatically exceed the US$369-billion reported when the Inflation Reduction Act was passed. But it’s less risky for companies making investments, as they can count on annual subsidies (per unit of production) once operational, so long as they meet certain criteria.
Canadian industry groups and analysts recently have flagged that predictability contrast. But the report quantifies it, by separating “bankable” subsidies – reliable enough for companies to factor into financial projections – from more uncertain incentives.
In some cases, the U.S. is obviously prepared to spend more money than Canada is, regardless of what form – with EV battery assembly the most staggering example.
Federal and provincial subsidies committed for the lone battery factory that Canada has attracted thus far – a Stellantis-LG plant being built in Windsor, Ont. – have not been publicly specified, but are believed in the industry to be worth about $1-billion in total.
Meanwhile, U.S. production tax credits for battery-making – $45.68 per kilowatt-hour of battery capacity produced – would subsidize a comparable facility approximately $2-billion annually for a decade. (All figures in these comparisons are in Canadian dollars.)
Further up the EV supply chain that both countries are racing to build, there are similar if less massive discrepancies. That includes production of cathode active materials, in which minerals are converted to battery components. Canada again landed plans for new facilities – a General Motors-Posco Chemicals partnership and a BASF plant, both in Bécancour, Que. – before the Inflation Reduction Act happened. The federal and provincial governments are providing unspecified subsidies. But they’re likely much lower than the credits that Washington is now offering – about $5.25 a kilowatt-hour of battery capacity produced, worth hundreds of millions of dollars annually for plants of comparable size – raising doubts about competing for further such investment.
There are big gaps in other sectors, too, when it comes to what’s being guaranteed to investors.
That includes green hydrogen, an emerging energy source for heavy industry produced from renewable electricity. A large U.S. plant would annually receive an average of $4.02 in production tax credits per kilogram of hydrogen. Bankable incentives for a comparable one in Canada, from a federal investment tax credit, would average out to 29 cents a kilogram each year. The gap shrinks when more unpredictable considerations, including comparably cheap clean electricity in Canada, are factored in. Even then, the report finds Canadian incentives only reach about $2 a kilogram.
In the odd case, Canada is theoretically offering higher incentives than the U.S.
Carbon capture is an example: If industrial carbon pricing takes shape as intended, carbon credits combined with a Canadian credit could amount to an average of about $248 per captured ton of CO2 – double what’s offered through an American credit.
But it’s a leap of faith, since the bankable incentive from the credit in the U.S. is greater than from the Canadian credit.
And it’s a similar story with blue hydrogen, in which the energy source is produced from fossil fuels, with carbon capture used to minimize emissions. The incentives for a facility in Alberta (which is trying to build a blue hydrogen industry) could be slightly above the $1 credit offered in the U.S., if industrial carbon-pricing credits reach their full intended value. But the bankable subsidy in Canada is a credit averaging out to 7 cents a kilogram.
As complex as it may be to sort through all this, figuring out a quick solution is even more daunting.
Ottawa has shown no intention of a comparable wave of giant, guaranteed, uncapped subsidies, for which it arguably lacks capacity anyway. So the imperative is to figure out how limited dollars can keep in play as many sectors as possible.
The report’s authors advocate a two-pronged approach.
For sectors in which greater certainty around carbon pricing would boost competitiveness, particularly those involving carbon capture, they propose the use of carbon contracts for differences. That’s a mechanism, for which Clean Prosperity has generally been pushing, in which government would enter agreements with proponents of emissions-reducing projects, to guarantee a minimum value for carbon credits they generate.
Ms. Freeland has signalled plans to introduce the carbon contracts for differences through the Canada Growth Fund, a somewhat ambiguous new financing agency. But as of now, the plan seems to be to negotiate only a small number of those deals for the largest possible projects. The report points toward offering this mechanism more widely and systematically, to make credits bankable as companies consider investments.
The other response that Mr. Allan and Mr. Bernstein recommend is to go down the production tax credit route – but only in a few sectors where Canada is deemed to have the best chances of competing globally, and with the greatest potential for broad economic benefits.
When it comes to the EV supply chain, they would target cathode production – value addition to the battery materials Canada hopes to mine – over trying to match the exorbitant battery assembly subsidies.
Another sector they suggest targeting is direct air capture, a method of mitigating emissions by pulling carbon out of the atmosphere, for which the pioneering Canadian company Carbon Engineering was drawn to the U.S. for its first big project. The suggestion is that, unlike an existing Canadian tax credit for that technology, a production tax credit combined with greater carbon-pricing certainty could give a bankable edge over a U.S. credit now in place.
A third is sustainable aviation fuels, on the basis that Canada has the makings of a strong biofuels industry, and could have an easier time matching a production tax credit that’s in place for only five years (rather than a decade like many of Washington’s other incentives).
Federal decision makers, and others, could easily disagree with that priority list.
A case could be made, for instance, for trying to match the U.S. credits for green hydrogen – which some provinces want to leverage excess renewable electricity potential to produce and export to Europe – over options like direct air capture, which can arguably be done anywhere.
It’s also possible to contest the premise that Canada needs its own production tax credits at all.
Ottawa could contend that it’s better to keep relying on discretionary backing for green investments (through the Net Zero Accelerator, Canada Growth Fund and other channels) to get maximum bang for its buck, rather than tax credits untailored to projects’ individual needs.
But at minimum, the report underscores the need to get that money out the door in a way that is more strategically, predictably and expediently targeted at industries where matching or besting the U.S. is a realistic possibility.
The alternative, as the side-by-side comparisons make clear, is to risk ceding competition across the board, as a bigger neighbour offers companies greater confidence that generational investments in the industries of the future will pay off.