Canada must aggressively counter U.S. incentives for battery manufacturers, auto industry experts say. But given the inordinately high value of the tax credits within the U.S. Inflation Reduction Act (IRA), many are skeptical that Ottawa has deep enough pockets to mount an efficient defence with fiscal tools alone.
“We’re not going to give you the option to beat the IRA when it comes to amount of cash, but we want to match some features in order that we are able to encourage the investment to occur in Canada where it is sensible,” GM Canada President Marissa West said Feb. 8 on the inaugural EV Innovation and Technology Conference in Toronto.
With automotive supply-chain decisions typically made at the worldwide level, the federal government needs to make sure 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 quick and aggressive response to the U.S. IRA plan is required to maintain those efforts on course,” Leclerc said on the conference.
Federal officials, including Finance Minister Chrystia Freeland, have pledged to counter the incentives included within the IRA, which cleared the U.S. Congress last summer. But up to now, they’ve provided little clarity.
In the autumn economic statement, Ottawa said “significant” actions to be sure that Canada “stays a first-choice destination for businesses to take a position” can be included within the 2023 federal budget this spring.
But over the intervening months, the IRA has already begun to tug in investment into the USA.
Ford Motor Co., announced Feb. 13 it might spend $3.5 billion to construct 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 USA due to the tax incentives.
“The IRA was incredibly essential for us,” she said. “And albeit, 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 within the IRA. Tax breaks targeting the auto industry are designed to loosen China’s grip on the worldwide marketplace for lithium ion batteries and add as much as tens of billions of dollars.
U.S. government guidance that can walk industry through exactly how the credits can be applied is due in March.
Battery cell manufacturers can be eligible for a US$35 credit for every kilowatt-hour produced. Depending on output, this adds as much as tons of of thousands and thousands, and even billions of dollars in annual savings for a single plant. For example, the NextStar Energy Inc. plant being in-built Windsor, Ont., has been planned with a forty five gigawatt-hour annual capability.
Had the Stellantis and LG Energy Solution three way partnership opted for the USA, it might have been eligible for $1.58 billion annually from the U.S. Internal Revenue Service, if running at capability.
Additional incentives are also available for other stages of battery production, similar to a $10-per-kilowatt-hour credit for U.S. operations that package battery cells into modules.
However it takes time to get to full production capability, and the IRA clock is already running, said Conrad Layson, senior alternative-propulsion analyst on the U.S.-based forecasting firm AutoForecast Solutions.
Because cell plants can take years to succeed in their capacities, the tax credits tied to output would even be slow to ramp up, he said.
The IRA credits will last a decade, creating a comparatively narrow window for the various cell plants not expected to open before the mid-2020s.
Cell makers in the USA get the total value of the tax credits through 2029. The motivation will then be phased out between 2030 and 2033, dropping in value 25 percentage points in the beginning of annually.
But with North America’s EV supply chain being built over that timeframe, 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 without delay. We’ve got to be certain that we’re competitive with the USA.”
The quantity needed to offset the pull of the IRA can be “significant,” he said.
CHANGED PLAYING FIELD
Freeland acknowledged there could be considerable costs to counter the U.S. incentives but recommitted to further federal motion within the upcoming budget following a gathering with the provinces Feb. 3.
The IRA, “has modified the playing field with regards to the worldwide 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 within the battery supply chain, said Vic Fedeli, the province’s industry minister.
“We’ve got heard about IRA at a few of our meetings, however it’s not the one incentive on the market.”
Canada’s clean-power grid, critical minerals and universal health care are all strong selling points to counter questions on incentive levels, he said.
Ontario is at all times prepared to think about financial assistance to prospective investors, he said, however it is as much as Ottawa to counter Washington’s incentives.
With files from Michael Martinez, Automotive News