With the passage of US Inflation Reduction Act (IRA), the landmark climate legislation of the Biden administration, Canada needs to step up its game with its own strategies for green industrial policy. Our largest trading partner has finally taken a decisive step on industrial policy in support of a net-zero transition. Canada should welcome this important commitment to reduce greenhouse gas emissions because it benefits us all. But the IRA also removes some uncertainty and provides guidance on how Canada should navigate its economic transition.
Despite its name, the IRA has less to do with inflation, in which it is expected to have a large neutral effect, and really about industrial policy. Passed last week by Congress, the IRA comes on the heels of the CHIPS and Science Law to strengthen and develop the US semiconductor industry.
Together, these laws constitute the most ambitious examples of industrial policy pursued by the US in decades. This development represents a shift in economic policy thinking away from globalization, finance and consumerism towards production, employment and regional economies – a change that increasingly attracts support from all parties.
The IRA, with $369 billion focused on energy security and climate change, includes a wide range of specific incentives in different sectors related to clean energy production and manufacturing. The measures include tax credits for the production of solar panels, wind turbines, batteries and critical mineral processing and investment tax credits to build manufacturing facilities that produce electric vehicles and renewable energy technologies. These incentives put further pressure on the federal government in Ottawa to work out the details of the promised net-zero technology investment tax credit in Budget 2022. Canada also needs to keep up tax incentives so as not to harm our own clean technology sector.
The IRA’s biggest immediate implication for Canada’s own net-zero transition concerns the electric vehicle (EV) supply chain. Much of the attention around the IRA has focused on the provisions for electric vehicles, particularly the extension of the US$7,500 tax credit for buyers. Thanks to lobbying efforts by the Canadian government and industry, the legislation relaxed the restrictions in previous versions regarding Buy American. Electric vehicles assembled in Canada will now be eligible, recognizing the highly integrated nature of the North American automotive sector.
The IRA provides some basic incentives. However, as has been pointed out even in the US, more incentives will be needed to meet ambitious growth targets for electric vehicle sales over the next twelve years. The challenge for Canada’s automotive industry is to seize and develop opportunities in the supply chain for critical minerals and battery technology. The adoption of the IRA should give a boost to efforts to develop a national strategy for the battery value chain, as proposed by the Transition Accelerator, Battery Metals Association of Canada, Accelerate and Energy Futures Lab.
The IRA also gives Canada the responsibility to develop key economic opportunities for the future net-zero economy. As noted in our recent report, Canada’s future in a net zero world, Canada needs to take a strategic approach to identifying and growing the value chains of the future. We highlight a number of clean competitive opportunities, including not only electric vehicles, but also hydrogen, alternative proteins, green chemistry, structural wood products and low-emission aluminium, which require the support of expansion and integration. significant portions of the power grid and green transport corridors. .
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If successful, the Canadian government initiative to establish Regional Energy and Resources Tables takes an important step towards identifying these activities, in collaboration with provinces, territories and First Nations. But then hard work will follow in pursuing specific growth opportunities through convening stakeholders, setting goals, and establishing appropriate public-private partnerships to pursue them outside of direct political or bureaucratic influence. This is the recipe pursued by many of our business partners and competitors.
A critical component of these strategies is finding ways to align public and private finances given the recognized investment requirement for net-zero transition of at least $100 billion annually. The 2022 Budget announced the creation of a Canada Growth Fund with a focus on investing in low-carbon technologies and opportunities to transform Canada’s existing industries. The fund will need to play an active role by investing in sectors that are critical to net zero and should also be integrated within the net zero capital allocation strategy announced in Budget 2022.
Canada needs this long-term perspective in its growth policy. The net zero economy of 2050 must inform how we respond to the pressing challenges of the day, such as the pandemic, energy price increases, food crises, etc. Without medium and long-term goals in mind, we risk undermining both. economic prosperity and our ambitions to reduce greenhouse gas emissions. Fortunately, our most important neighbor and largest trading partner is thinking similarly and, more importantly, is cracking down. This makes it all the more compelling and urgent for Canada to step up our ambitions.
The US Inflation Reduction Act removes some uncertainty and provides guidance on how Canada should steer its economic transition, write @derek_eaton and Anik Islam @SP_Inst. #GreenJobs #circulareconomy #NetZero #sustainablefinancing #CdnEcoStrategy
Anik Islam is a Research Associate at the Smart Prosperity Institute, working on sustainable finance, green industrial strategy, and green fiscal policy development.
Derek Eaton, PhD, is director of public policy research and outreach at the Smart Prosperity Institute, where he currently leads teams working on green industrial strategy, finance, and clean growth in agriculture.