Canada must aggressively counter U.S. incentives for battery manufacturers, auto industry experts say. But given the inordinately high value of the tax credits in the U.S. Inflation Reduction Act (IRA), many are skeptical that Ottawa has deep enough pockets to mount an effective defence with fiscal tools alone.
“We’re not going to be able to beat the IRA in terms of amount of money, but we need to match some aspects so that we can encourage the investment to happen in Canada where it makes sense,” GM Canada President Marissa West said Feb. 8 at the inaugural EV Innovation and Technology Conference in Toronto.
With automotive supply-chain decisions typically made at the global level, the government needs to ensure Canada retains an edge on the electrification investments it has worked hard to win over the past several years, said Honda Canada President Jean Marc Leclerc.
“A fast and aggressive response to the U.S. IRA plan is required to keep those efforts on track,” Leclerc said at the conference.
Federal officials, including Finance Minister Chrystia Freeland, have pledged to counter the incentives included in the IRA, which cleared the U.S. Congress last summer. But so far, they have provided little clarity.
In the fall economic statement, Ottawa said “significant” actions to ensure that Canada “remains a first-choice destination for businesses to invest” will be included in the 2023 federal budget this spring.
But over the intervening months, the IRA has already begun to pull in investment into the United States.
Ford Motor Co., announced Feb. 13 it would spend $3.5 billion to build a battery cell plant in southwestern Michigan.
Lisa Drake, vice-president of EV industrialization, said Ford considered sites in Canada and Mexico but picked the United States because of the tax incentives.
“The IRA was incredibly important for us,” she said. “And frankly, it did what it’s intended to do.”
CAN BILLIONS BE BEAT?
Industry skepticism about Canada’s ability to match the U.S. credits stems from the colossal value of the incentives included in the IRA. Tax breaks targeting the auto industry are designed to loosen China’s grip on the global market for lithium ion batteries and add up to tens of billions of dollars.
U.S. government guidance that will walk industry through exactly how the credits will be applied is due in March.
Battery cell manufacturers will be eligible for a US$35 credit for each kilowatt-hour produced. Depending on output, this adds up to hundreds of millions, or even billions of dollars in annual savings for a single plant. For instance, the NextStar Energy Inc. plant being built in Windsor, Ont., has been planned with a 45 gigawatt-hour annual capacity.
Had the Stellantis and LG Energy Solution joint venture opted for the United States, it would have been eligible for $1.58 billion annually from the U.S. Internal Revenue Service, if running at capacity.
Additional incentives are also available for other stages of battery production, such as a $10-per-kilowatt-hour credit for U.S. operations that package battery cells into modules.
But it takes time to get to full production capacity, and the IRA clock is already running, said Conrad Layson, senior alternative-propulsion analyst at the U.S.-based forecasting firm AutoForecast Solutions.
Because cell plants can take years to reach their capacities, the tax credits tied to output would also be slow to ramp up, he said.
The IRA credits will last a decade, creating a relatively narrow window for the many cell plants not expected to open before the mid-2020s.
Cell makers in the United States get the full value of the tax credits through 2029. The incentive will then be phased out between 2030 and 2033, dropping in value 25 percentage points at the start of each year.
But with North America’s EV supply chain being built over that time frame, Ottawa must match the incentives or risk losing future battery plants, said Brian Kingston, CEO of the Canadian Vehicle Manufacturers’ Association, which represents the Detroit Three in Canada.
“The window is open right now. We have to make sure that we are competitive with the United States.”
The amount needed to offset the pull of the IRA will be “significant,” he said.
CHANGED PLAYING FIELD
Freeland acknowledged there would be considerable costs to counter the U.S. incentives but recommitted to further federal action in the upcoming budget following a meeting with the provinces Feb. 3.
The IRA, “has changed the playing field when it comes to the global competition for capital,” she said.
As automotive stakeholders await Ottawa’s response, the U.S. tax credits have been discussed in Ontario’s meetings with prospective investors in the battery supply chain, said Vic Fedeli, the province’s industry minister.
“We have heard about IRA at some of our meetings, but it’s not the only incentive out there.”
Canada’s clean-power grid, critical minerals and universal health care are all strong selling points to counter questions about incentive levels, he said.
Ontario is always prepared to consider financial assistance to prospective investors, he said, but it is up to Ottawa to counter Washington’s incentives.
With files from Michael Martinez, Automotive News