How to secure Canada’s low-carbon advantage in the global clean energy race

The American Inflation Reduction Act has opened big gaps between the incentives for low-carbon investment in Canada and the U.S., threatening our ability to compete in a world that is on a turbo-charged path to net-zero emissions.

Originally published in the Hill Times.

U.S. President Joe Biden is in Ottawa this week for talks with Prime Minister Justin Trudeau, and co-operation on low-carbon investment is high on their agenda. 

Co-operation is important. But Canada and the United States are also competing for the same investment dollars, and right now Canada looks like it’s on the back foot.

Last August, the Americans passed the Inflation Reduction Act (IRA), a landmark bill chock-full of public investments to support low-carbon technologies, from electric vehicles to solar farms to industrial carbon capture. 

The IRA is a major economic statement that is already transforming deal-making, energy production, and global supply chains. It has opened big gaps between the incentives for low-carbon investment in Canada and the U.S., threatening our ability to compete in a world that is on a turbo-charged path to net-zero emissions.

Clean Prosperity and the Transition Accelerator recently released some modelling that shows the scale of the problem for a variety of low-carbon technologies.

Take blue hydrogen, which offers an emissions-free, affordable fuel for heavy transport and industry. Canada can make low-carbon blue hydrogen more cheaply than almost anywhere in the world, but the IRA threatens this advantage. 

On average, IRA tax credits are worth a dollar per kilogram of product. Canadian investment tax credits only deliver about nine cents per kilogram. 

Similar gaps have opened up for green hydrogen, renewable electricity production, sustainable aviation fuel, carbon capture, and battery manufacturing.

What can Canada do to stay competitive and grow a prosperous low-carbon economy of our own?

The 2022 fall economic statement promised to level the playing field with the United States. Finance Minister Chrystia Freeland introduced preliminary measures like investment tax credits for clean technologies, and promised more action in March 28’s federal budget. Our modelling shows that the budget has some heavy lifting to do in order to strengthen Canadian competitiveness.

Canada can’t afford to compete dollar-for-dollar with the U.S. on low-carbon subsidies, so we need to respond strategically to close some of the incentive gaps. There are at least two things we can do to help Canada attract its share of low-carbon investment.

The first step is to tune up our industrial carbon pricing system. 

Putting a price on emissions is supposed to incentivize big investments in decarbonization. But there’s a problem: firms are uncertain about the future value of carbon credits that their low-carbon projects will generate. If Canadian climate policy changes course, then the credits could turn out to be worthless. This fear is holding back investment.

The federal government can address the problem by guaranteeing the future value of carbon credits. Companies could sign so-called contracts for difference, a kind of insurance policy that would compensate them if credit prices crash. It’s the same model that worked to grow the renewable energy industry in Alberta.

Our modelling shows that guaranteeing carbon-credit revenue could make Canada a competitive destination for investment in low-carbon hydrogen, solar power, and carbon capture. 

The second tactic to make Canada more attractive for low-carbon investment is for government to provide targeted financial support in areas where we have a strategic advantage. These are areas where Canada can compete globally and which could produce significant economic benefits, especially well-paying jobs. To be successful, this should be part of a broader industrial-policy push that indexes support to clear objectives and timelines for developing the net-zero economy.

Electric vehicle batteries are a good place to start. The government could create a complete mines-to-mobility value chain by complementing existing investments in vehicle and battery assembly with production tax credits for upstream mining and midstream chemical processing. 

With additional public support, Canada could also develop its sustainable aviation fuel industry, which could benefit rural communities across the country. And a production tax credit for capturing carbon dioxide out of the air could help launch a major new industry that will help meet our climate targets while generating clean economic growth. 

We’re all looking to Budget 2023 for bold measures that will help Canada level a challenging global playing field for low-carbon investment. There’s no time to lose.

Michael Bernstein is the executive director of Clean Prosperity. Bentley Allan, PhD, is a research director at the Transition Accelerator, and an associate professor of political science at Johns Hopkins University.

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