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Canada's green subsidies a 'bankable gap' weaker than U.S.: report

It'll be difficult for Ottawa to systematically attract investment in key low-carbon technologies

A new report warns Canada will continue to rely on bespoke discretionary deals like the package offered to Volkswagen to set up a battery manufacturing facility in Ontario to make up for government incentive gaps with the U.S.
A new report warns Canada will continue to rely on bespoke deals like the package offered to Volkswagen to set up a battery facility in Ontario to make up for government incentive gaps with the U.S. (jetcityimage via Getty Images)

From producing hydrogen, to mining and refining ingredients for batteries, Canada's incentives for low-carbon industries lag those in the United States despite attempts to level the playing field in the last federal budget.

That's the thrust of a report from Clean Prosperity and The Transition Accelerator published on Tuesday. Based on an analysis of 10 low-carbon technologies in both countries, the think tanks highlight multiple gaps in Canada for "bankable" funding, the type which companies rely upon to greenlight investments. Those funds do not include less certain revenue, like Canadian carbon-credit sales or grant programs.

"This bankable gap will make it difficult for Canada to systematically attract investment in key low-carbon technologies," the report's authors wrote. "Instead, Canada will have to continue to rely on bespoke discretionary deals to make up for this incentive gap, such as the package offered to Volkswagen to set up a battery manufacturing facility in Ontario."

The U.S. Inflation Reduction Act (IRA) signed into law by President Joe Biden last year put Canada and other major economies on notice to respond. The legislation includes US$369 billion in public funding for energy security and climate change over the next decade. Canada's federal budget sets out $83 billion for clean technology tax credits through to the 2034-35 fiscal year.

The competing incentives recently sparked tense negotiations between Ottawa, Ontario's government, Volkswagen, and Stellantis over separate deals to locate two massive battery plants in Canada's most populous province.

The report identifies gaps that could threaten Canada's goal of becoming a major destination for electric vehicle manufacturing. For example, the authors found Ottawa's planned 30-per-cent investment tax credit should make Canada competitive with U.S. subsidies for lithium mines. But it falls more than one-third short of what the U.S. is offering for nickel mines, and represents only a fraction of U.S. backing for graphite mines.

Canada's hydrogen ambitions are threatened as well, according to Clean Prosperity and The Transition Accelerator. The report found a blue hydrogen project in Edmonton would be leaving almost $500 million per year on the table by locating in Alberta, versus in the south of the border. Comparing hypothetical green hydrogen plants in Quebec and New York, the report found the Canadian investment tax credit would provide less than one-tenth the bankable funding available in the U.S.

To narrow the bankable gap, Clean Prosperity and The Transition Accelerator suggest using carbon contracts for difference (CCfDs) to provide certainty around carbon credits that are generated under industrial carbon pricing systems. The think tanks also advise "sector-specific strategies for high-priority opportunity areas such as battery materials, clean hydrogen, and sustainable aviation fuels."

Experts who spoke to Yahoo Finance Canada last month cited significant political hurdles to a nationwide strategy to navigate a transition to cleaner energy.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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