ANALYSIS: The Cost of Canada’s Green Energy Subsidies

An electric vehicle being charged is seen in a file photo. CHUTTERSNAP/Unsplash.com

Ottawa has committed to spending $200 billion to fight climate change, but some economists say it may not be taxpayer money well spent.

The federal government in Budget 2023 announced five major investment tax credits (ITCs) worth more than $60 billion over the coming 10 years to accelerate clean tech in Canada. Combined with the billions in subsidies for the electric vehicle (EV) industry and many other clean energy initiatives, the final tally is approximately $200 billion, Environment Minister Steven Guilbeault said in an April 5 news release.

One economist says the multibillion-dollar subsidies on clean energy technologies, particularly the EV sector, is a “risky investment” of taxpayers’ money.

“We don’t even know the companies will succeed,” economist and University of Calgary professor Jack Mintz told The Epoch Times via email. “And it is well possible some technologies we think today will work, will be replaced by another.”

The International Monetary Fund also cautioned Canada in June that its heavy investment in EVs and EV batteries could be risky due to “rapid technological change.”

Diverting resources from more profitable ventures is not a good idea for the economy, Mr. Mintz said, adding history has shown that the government often has to keep supporting subsidized industries in perpetuity.

“If you look at the history of auto subsidies, we keep subsidizing production, at times bailing them out,” he said. The same can likely be expected of the EV industry, he said.

Moshe Lander, a senior lecturer in economics at Concordia University, also questions the heavy subsidization approach.

“Subsidies have to be really carefully designed,” he told The Epoch Times. “They can quickly become just a regular cost of doing business.”

Although Ottawa plans to phase out a few of the new ITCs—with the Clean Technology ITC and Clean Technology Manufacturing ITC worth 30 percent of the capital cost of eligible projects—by 2034, Mr. Lander says companies usually try to extend such deadlines.

He used as an example aviation company Bombardier in Quebec, which has been getting government money for decades.

“Any time the government would come along and say ‘We’re going to remove the subsidy,’ Bombardier will squeal about the number of jobs it’s going to cost or how it’s going to destroy business,” Mr. Lander said. “And so governments at that point realized that they’re kind of stuck paying the subsidy forever.”

It’s a big cost to taxpayers, he said, and it ends up distorting the market.

While he supports factoring environmental impacts into the cost of business in some way, he says the costs of this approach are high.

“When you ask people do they believe in green technology, most people would say yes, they do. But if you tell them that it comes at a cost of $5,000 in extra taxes, or $3,000 less spent on local education, all of a sudden you might find that people aren’t as committed,” he said.

“Subsidies can sometimes dull the discipline that comes with having to finance it on your own,” Mr. Lander added. Some companies may have the approach of, “if the technology doesn’t play out, or if the business fails, as long as I get my return I really don’t care.”

Much press has been given to the multi-billion dollar subsidies behind two Ontario EV battery plants run by Volkswagen and Stellantis-LG Energy Solution. But the subsidies behind many other, smaller projects also add up.

A Tally

The federal fall economic statement released Nov. 21 included details of some clean energy projects benefiting from subsidization.

Approximately $976 million in combined federal and provincial funds are covering some 35 percent of the costs for Umicore in Loyalist, Ontario, to build a facility to manufacture materials for producing EV batteries.  

Ottawa in fall 2022 proposed covering roughly 43 percent of the costs, up to $222 million, for Rio Tinto Fer and Titane, in Sorel-Tracy, Quebec, to increase the company’s production of critical minerals, including the lithium needed for EV batteries.

Federal and provincial funds (about $204.5 million and $80 million, respectively) will cover about 28 percent of the cost of building Canada’s largest lithium-ion battery cell manufacturing facility in Maple Ridge, B.C.  

Prime Minister Justin Trudeau holds battery cells while talking with B.C Premier David Eby (2nd R) and Minister of Innovation, Science and Industry Francois-Philippe Champagne (R) during a tour of lithium battery manufacturer E-One Moli Energy (Canada), in Maple Ridge, B.C., on Nov. 14, 2023. The Canadian Press/Darryl Dyck

Companies across Canada may receive up to $2.5 million each to change their medium- and heavy-duty vehicles over to low-carbon alternatives. This comes through the federal Green Freight Program, applications for which closed in November.  

Federal incentives for Canadians to buy zero-emission vehicles (ZEVs) are funded up to $2.3 billion (with each consumer receiving up to $5,000 for an eligible ZEV), plus $900 million to build public charging stations. ZEVs include battery-electric, plug-in hybrid electric, and hydrogen fuel cell EVs. Much of this money has so far gone to relatively wealthy Canadians, according to an Oct. 31 Fraser Institute report, as the high price for EVs is a barrier for many.

A delve into the climate change funding programs page on the federal government’s website shows many projects costing hundreds of thousands or millions each.

Some are geared to education campaigns regarding climate change. For example, on Oct. 4, Ottawa announced $12.5 million in funding to organizations that will “increase the scientific knowledge and environmental literacy of young Canadians, their educators, and families, as part of the long-term solutions to tackle climate change.”

Ottawa will award up to $30 million to 25 pilot projects starting the next fiscal year that will “accelerate adaptation at a regional scale through integrated, inclusive, and innovative actions” through its Climate-Resilient Coastal Communities Program.

Federal investments in the “clean economy” have totalled 4.6 percent of the 2022 gross domestic product (GDP) since Budget 2021, according to the fall economic statement.  

While Budget 2023’s centrepiece was $60 billion for the five new clean ITCs, it also included big-ticket subsidies such as $20 billion for building major clean-electricity and clean-growth infrastructure projects and $3 billion for renewable energy and electrical grid modernization projects.

Ottawa announced the first use of two of those tax credits, the Carbon Capture, Utilization, and Storage ITC and Clean Hydrogen ITC, on Nov. 29.

These credits represent $400 million for Dow to expand and upgrade its ethylene- and polyethylene-producing plant in Fort Saskatchewan, Alta., near Edmonton, to make it net-zero. These industrial chemicals notably are used in making plastic products.  

The clean ITCs are Canada’s answer to huge U.S. clean energy incentives introduced in the 2022 Inflation Reduction Act (IRA). The IRA provides US$369 billion in clean energy investments, and some say Canada must remain competitive by offering big subsidies as well, to attract clean energy business.

Competition With U.S.

A July report by think tanks Clean Prosperity and The Transition Accelerator compare clean energy incentives in Canada (including the new ITCs) with those in the United States. The report makes the case for Canada to stay competitive with big subsidies.

One of the examples it gives is of a hypothetical company looking to start a nickel mine in either Canada or the United States. Nickel is one of the critical minerals important for making EV batteries. Mining incentives in the United States would give this company $700 million more.

“If these mines were not developed, Canada would forgo a major source of revenue,” the report says. “A large nickel project could generate $1.1 billion a year.”

It notes that Canadian subsidies for the Volkswagen and Stellantis EV battery plants are competitive, as are those for lithium, though Canada’s subsidies are generally lower than those in the U.S.

CEO of Volkswagen Group Oliver Blume (C) applauds as Prime Minister Justin Trudeau and German President Frank-Walter Steinmeier hold up EV battery cells they signed during an event on Parliament Hill in Ottawa on April 24, 2023. The Canadian Press/Adrian Wyld

Competition with the United States may be overrated, says Mr. Mintz. Regarding the EV batteries, for example, he said Canada could have imported cheap batteries instead.

Many of the batteries produced in Canada will be exported to the United States for auto manufacturing there, he said. Canada could have instead exported the raw materials for the batteries and saved the billions on subsidies for manufacturing them.

There’s a danger in competing with other countries that can offer bigger subsidies, Mr. Mintz said. It can create a “race to the bottom,” he noted, something the International Monetary Fund also warned of in its June report.

As governments continually pump money into clean energy to remain competitive, it drives down the amount of private money contributions to these projects.

“The Biden administration has leashed a subsidy war that will make investors rich and distort trade in coming years,” Mr. Mintz said of U.S. President Joe Biden’s IRA.

He said Canada must also be careful about selecting specific firms to receive large subsidies. He cited the example of the now defunct Quebec biotechnology firm Medicago Inc. Ottawa gave the company more than $300 million to produce COVID vaccines that never made it to market, and the government has only received $40 million of that money back.

Mr. Lander says labour unions and others may start to charge more on clean energy projects, knowing the government is putting up billions and could be petitioned to add more.

“Subsidies as a blackboard exercise look very clean and simple,” he said. “In reality, they become very complicated because of politics and business.”