Industry looks to Ottawa’s March 28 budget to solve IRA incentives imbalance

Canada’s auto industry has lost out on at least two large deals to the tax incentives provided under the U.S. Inflation Reduction Act (IRA) for battery-cell and component makers. The federal government has vowed a response in its March 28 budget, but any critical misstep could automatically send more investments to the United States.

The right response is a hot debate within the industry, although the reality is that Canada lacks the sheer economic punch to go toe-to-toe with the IRA’s provisions. Perhaps it doesn’t have to, but a response from Ottawa can’t come soon enough.

Ford Motor Co. on Feb. 13 said it had picked a site in Michigan for a battery-cell plant, instead of locations in Canada or Mexico, because of the incentives offered by the IRA. A week later, Tesla cited the legislation, passed in August, for plans to scale back its battery ambitions in Germany in favour of alternatives in the United States.

VOLKSWAGEN PICKS CANADA, ANYWAY

The Canadian industry still has strong legs to stand on, even without the federal government responding directly to the IRA. Volkswagen Group announced March 13 that it will build a battery gigafactory in St. Thomas, Ont., midway between Toronto and Windsor. It’s the company’s first battery plant outside Europe, and it’s not going to the United States. Undoubtedly the project will receive significant government funding — just how much remains to be seen — but Canada’s access to critical minerals, its clean power and its overall cost equation provide an inherent advantage to building batteries, said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association (APMA).

“Don’t get lazy. Don’t assume we’re going to win things. But they’ve got to work harder [in the United States] than we do.”

Canada does not need a response that matches the IRA’s tax breaks, Volpe said, but, rather, “a fund available to spear fish.”

If the federal or provincial governments are dealing with an investment prospect from Germany or South Korea, for example, a fund needs to be available that can “make them whole,” he said.

OTTAWA GETS GOING

Federal Finance Minister Chrystia Freeland indicated on Feb. 3 that Ottawa is moving in this direction. After a meeting with provincial finance ministers in Toronto, she reiterated a pledge to hit back against the IRA in the budget. She also said the federal government is looking to collaborate with provincial governments to lock in large investments on a project-by-project basis.

This targeted approach stands in stark contrast to the catchall method of the IRA.

The U.S. legislation puts what Washington will offer investors in black and white, said Brendan Sweeney, managing director of the Trillium Network for Advanced Manufacturing.

“It’s complicated and hard to read, but if you know how to read it, there’s a certain element of transparency.”

For instance, for each kilowatt-hour a battery-cell maker produces, the IRA promises a tax break of US $35. An additional $10 per kilowatt-hour is available for manufacturers packaging cells into battery modules.

This process is “much more transparent” than the typical funding agreement struck in Canada, Sweeney said, though it is also likely to be far more costly overall because it allows many manufacturers to take part.

INCENTIVES DIFFER

The separate approaches taken in Washington and Ottawa are also nothing new.

Funding “tends to be controlled at the federal level in the United States,” Sweeney said, “where in Canada, it’s controlled by individual contracts with companies.”

Canada’s method of relying on individual contracts usually means the covenants of such deals remain out of public view, he said. But they do have the advantage of being binding.

For major automakers, however, the approach Ottawa takes on funding is less important than the result.

Keeping competitive with the United States should be the primary focus of Canada’s response to the IRA, said Brian Kingston, president of the Canadian Vehicle Manufacturers’ Association (CVMA), which represents the Detroit Three in Canada.

“The IRA puts Canadian battery production at a significant disadvantage, and corresponding action is required to level the playing field,” Kingston said.

The CVMA is calling on Ottawa to table investment supports “that can be leveraged and compared against the IRA’s production tax credit for battery modules, cells and electrode active materials.”

GO ‘TOE-TO-TOE’? NO

Ottawa needs to be “strategic” in countering the IRA, said David Adams, CEO of the Global Automakers of Canada, which represents overseas car companies in the country.

“I don’t think it would make sense, nor do they have the financial wherewithal to go toe-to-toe with the U.S.,” Adams said.

An effective response, he said, would highlight Canada’s other competitive advantages to demonstrate the country’s “total value proposition.”

Unifor President Lana Payne, likewise, said Canada should play up its access to critical minerals and skilled workers as an added selling feature. But the union also recommends that Ottawa enact tax credits for battery-parts makers and expand Strategic Innovation Fund payouts to boost the country’s competitiveness.

“That doesn’t necessarily mean that we have to match the IRA dollar for dollar,” Payne said, “but we have to make sure that we’re using the existing tools that we have to try and offset some of the competitive imbalance.”

The Canadian union, which represents about 41,000 workers in auto assembly and parts operations, has been advocating for Ottawa to mount an IRA response in its policy recommendations and during meetings with Freeland over the past several months.