Should ZEV rebates support only vehicles built in North America?

Qualifying for the U.S. electric-vehicle tax credit of US$7,500 recently became a lot more difficult for automakers, though the same can’t be said of Ottawa’s zero-emission vehicle rebate.

In the United States, new eligibility requirements came into effect April 18. To qualify for the full incentive, final vehicle assembly must take place in North America, and an escalating percentage of battery raw materials and componentry must be sourced locally or from free-trade partners.

Canada’s Incentives for Zero Emission Vehicles (iZEV) program, which offers buyers up to C$5,000, includes no such fine print. It pays the same amount to automakers whether vehicles are built in North America or overseas, and regardless of where their batteries are sourced.

The distinction puts the IZEV program at odds with the comparable initiative in the United States and other federal policies aimed to pull more battery supply chain spending into the country, said Matthew Fortier, CEO of Accelerate, an alliance of automotive stakeholders advocating on behalf of Canada’s battery supply chain.

The iZEV program was “a good jump-start,” Fortier said, but the industry has evolved since the incentive was launched in 2019.

“It’s more than just getting people to buy and lease ZEVs. It’s about getting more mining activity, more battery activity [and] more manufacturing activity kick-started in Canada because that’s really where the economic opportunity is for the country.”

CONTRADICTORY APPROACH

As Ottawa builds out its industrial policy toolkit, it needs to assess how the iZEV program can be catered to furthering the country’s mining, processing and battery sectors, Fortier said.

David Adams, president of the Global Automakers of Canada, which represents overseas car companies in the country, also pointed to contradictions in the federal government’s approach to electrification.

Ottawa is spending billions of dollars to attract foreign direct investment in ZEV and battery production in Canada, he said, but it’s also preparing to enact a ZEV mandate that will mean “we need vehicles from everywhere in order to meet those targets.”

“Those two things, in my view, are in conflict.”

But Adams, among others, warns that bundling local sourcing or assembly rules into the iZEV program will imperil EV supply.

“We’ve already seen that in the United States, where the number of vehicles that now qualify has been drastically reduced.”

As of early July, nine 2023-model-year vehicles qualified for the full U.S. tax credit, according to the U.S. Department of Energy. This compares to two dozen battery-electrics eligible for the full Canadian rebate, based on Transport Canada’s running tally.

LIMITED IMPACT

Canada’s list of eligible EVs could expect a similar haircut if the government were to add sourcing requirements, said Jeff Turner, director of mobility at Montreal-based consulting firm Dunsky Energy+Climate Advisors.

“It’s just a question of whether we want to really limit the pool of vehicles that are eligible because it’s a net friction on overall adoption ... if we take the EVs that are on the market and say that only a portion of them are going to be available for incentives.”

Whether adjusting the iZEV program could move the needle on pulling more battery supply chain investments into North America is also in doubt.

Compared with the draw of the EV tax credits and production incentives included in the U.S. Inflation Reduction Act, a change in Canada’s much smaller market would have a limited impact, said Brian Kingston, CEO of the Canadian Vehicle Manufacturers’ Association, which represents the Detroit Three in Canada.

“The IRA is really the driver of this right now, and because we’re ... included as a country that can be a location to source those materials, it’s already having a big impact on the development of a Canadian supply chain.”

But the iZEV program’s open door to imports is influencing at least one automaker’s behaviour.

Tesla began shipping a Shanghai-made variant of the Model Y to Canada from China in May. The EV maker priced the crossover just below the eligibility threshold for the program, granting it the $5,000 incentive for each qualifying delivery.

The number of vehicles imported into Canada from China surged overnight. According to data from the China General Administration of Customs acquired by Bloomberg, Canadian shipments from China rose to 6,214 vehicles in May, up from just 88 in the same month from the previous year.

‘MORAL IMPERATIVE’

But preventing imports from receiving incentive funding is no simple task, even if the move has political will behind it, said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association, pointing to likely trade rule challenges.

“The balance that we’ve always had to strike in programs like this is what are your [World Trade Organization] obligations in terms of subsidizing or requiring local content over your trading partners.”

Canada is seen as a having a “moral imperative” at trade talks today because it plays by the rules, Volpe added.

“How can I go out there and argue for fair, free trade for Canada and then use programs locally to put my thumb on the scale?”

To bolster its growing battery supply chain, Canada would be better off maintaining its strategy of making targeted investments in key battery and EV assembly projects, Volpe said.

Ottawa is giving every indication it plans to stick to this approach.

Transport Canada, the department that oversees the iZEV program, said it is “not considering any substantive changes” to the rebate based on country of origin.

The focus of the iZEV program is to increase the uptake of ZEVs in Canada, and this means making “as many eligible vehicles as possible available to Canadians to suit a variety of needs,” Sau Sau Liu, spokesperson for the department, wrote in an email to Automotive News Canada.