The United States has thrown down the gauntlet with its Inflation Reduction Act (IRA), putting Ottawa under pressure to respond and avert further flow of business investment south of the border, particularly that impacting its green initiatives. But the feds are hampered by their ideology, an economist says, noting that more government-directed investment with its poor track record isn’t going to work.
“It’s a very selective decision that we’re going to follow the U.S. lead when it agrees with our ideology—which is green energy, and climate change—and we’re going to ignore the U.S. competitiveness, when it involves things like lower taxes or reduced regulation,” Philip Cross, Munk senior fellow at the Macdonald-Laurier Institute and former chief economic analyst at Statistics Canada, told The Epoch Times.
“When you exclude oil and gas, we’re running at less than half the trend of business investment [as the United States]. Why don’t we focus on that? … How come that never bothered us before?” he said.
“And then suddenly, the IRA comes along, and all of a sudden we’re going to follow the supposed U.S. model of economic development?”
Cross points out that the U.S. model of economic development is based on business investment writ large, not just renewable energy investment.
A key chart in the government’s 2022 Fall Economic Statement (FES), released Nov. 3, shows how business investment in Canada—especially when excluding the oil and gas sector—substantially lags the United States and other G7 nations. Even when including investment from the oil and gas industry, Canada noticeably lags the United States and is below average among the G7.
“The oil and gas industry is regularly told … you’re not part of our future. The future in this country is green energy,” Cross said.
The IRA is thus seen as another watershed moment where one of Canada’s weaknesses, business investment—which leads to greater productivity, more robust economic growth, and job creation over the long run—is expected to be even harder to attract going forward.
Ottawa Reacts to ‘Game-Changer’
The IRA is a “game changer for climate transition” and a “gravitational black hole to attract capital,” a senior government official told reporters at an embargoed briefing prior to the release of the FES.
Ottawa took some initial steps in the FES, such as an investment tax credit for hydrogen and a refundable tax credit of up to 30 percent on the cost of certain types of capital investments. The feds said Budget 2023 will do more in response to the IRA.
In the meantime, parliamentarians are working to understand the business community’s concerns about the IRA. On Nov. 1, automotive and manufacturing groups told the Standing Committee on International Trade that the IRA is a major threat to competitiveness and that Ottawa must do something to restore some competitive balance.
“While the IRA has been presented in many quarters as key legislation to fight climate change, in reality it is an act of trade protectionism, forcing the on-shoring of future powertrain production within the borders of the United States at the expense of all other countries, including Canada,” Scott MacKenzie, director of corporate and external affairs at Toyota Canada, told the committee.
Committee witnesses testified that Canada obviously can’t match the IRA dollar-for-dollar, but said Canada needs an industrial strategy of its own.
‘Projects Moving to the U.S.’
The IRA’s credits for battery cells and modules and critical materials tilt business investment toward the United States instead of Canada, said Flavio Volpe, Automotive Parts Manufacturers’ Association president, at the committee hearing.
For example, the IRA extends a US$7,500 electric vehicle tax credit for 10 years for a wide range of vehicles, but to qualify for the full credit, the vehicle must meet criteria designed to encourage U.S. domestic manufacturing.
Matt Poirier, senior director of policy and government relations at Canadian Manufacturers and Exporters, said the IRA could result in fewer manufacturing jobs in Canada.
Catherine Cobden, president and CEO of the Canadian Steel Producers Association, told parliamentarians that U.S. producers will be getting the benefit of IRA investments and climate subsidies without facing a cost for carbon, while Canada’s carbon tax ramps up to $170 a tonne by 2030.
Robert Asselin, senior VP Policy at the Business Council of Canada, in his testimony to the House of Commons Standing Committee on Finance’s pre-budget consultations in advance of the 2023 Budget, said, “We are already hearing of projects moving to the U.S. to take advantage of the IRA.”
A major piece of Ottawa’s response is the $15 billion Canada Growth Fund (CGF), first announced in Budget 2022.
Accompanying the FES, a technical backgrounder for the CGF was published. It didn’t hold back saying, “a substantial transformation of our industrial base will be required to meet our climate targets.”
Like the Canada Infrastructure Bank, the CGF will use public funding—initially $15 billion, to be invested over the next five years—to attract private capital, and it will focus on net-zero projects in the scale-up stage.
“The energy security and climate change provisions in the recently passed Inflation Reduction Act (IRA) in the United States have created particular urgency for Canada,” the CGF backgrounder stated.
But Cross remains skeptical of this mode of generating investment.
“And then we have the federal government with its superclusters and its green funds, and its infrastructure banks—none of which have worked, none of which have spawned sustainable growth. So don’t hold your breath.”
Misnomer
The IRA was signed into law on Aug. 16. Its US$369 billion spend marks the single largest climate investment in U.S. history.
The name “Inflation Reduction Act” has been called a misnomer, as analysts in the United States have said it would have no meaningful effect on bringing down prices and could even have the opposite effect.
“They really didn’t name this Inflation Reduction Act correctly. It should be exactly the opposite,” Michael Busler, a finance professor at Stockton University, told NTD, a sister media of The Epoch Times.
The name is completely misleading, Cross said.
“It should be called the ‘Climate Change Act,’ not the ‘Inflation Reduction Act.’”
Cross says it will probably aggravate inflation through more deficit spending to expedite the transition to green energy, which is itself inflationary, as shown by recent history with the curtailment of fossil fuel production when this energy source is still in significant demand.
“If switching from fossil fuel to renewable energy really was profitable and it really did lower costs for solar, we wouldn’t have to subsidize it. The market would do it on its own,” he said.
