Canada doesn’t want ‘tit-for-tat’ with US on green transition

By Steve Scherer

OTTAWA (Reuters) -Canada will boost investments in the green transition in this year’s budget to compete with massive U.S. incentives, but the aim is to claim a portion of the growing clean-tech industry, not to go head-to-head with the world’s biggest economy, a senior Canadian government source said.

Countries across the globe are trying to take advantage of a rapid shift to low-carbon energy, and the passage in the United States of the Inflation Reduction Act (IRA) last year provides massive incentives for those who invest there.

In the 2023-2024 budget, Canadian Finance Minister Chrystia Freeland has promised to try to level the playing field, at least in some areas, with the United States after the IRA.

“It’s about growing the pie, not just dividing it up,” said the source familiar with the file, who was not authorized to speak on the record. Canada has communicated clearly its plans to the Americans. “We don’t want to get into a game of tit-for-tat,” the source said.

The U.S. ambassador to Canada, David Cohen, echoed those comments ahead of President Joe Biden’s visit to Ottawa later this month.

    “Our efforts should be focused on growing the pie. I’ve identified critical minerals as the No. 1 issue that exists as we move forward for Canada and the United States to grow the pie,” Cohen told Reuters. “There are significant opportunities there for us to work together.”

The budget is due to be released at the end of this month or early April.

“The global economy is undergoing the most significant transformation since the Industrial Revolution, and Canada cannot be left behind,” said Adrienne Vaupshas, a spokesperson for Freeland. “This is a once-in-a-generation opportunity.”

Canada sends three-quarters of its exports south of the border, and the automobile industries of the two countries are highly integrated. Furthermore, Canada has an abundance of the critical minerals needed for electric vehicles (EVs), making collaboration advantageous for both the United States and Canada.

“I always describe the American economy as like an aircraft carrier. It takes a long time to turn but once it does, it means business,” said Gerry Butts, a vice chair of the Eurasia Group consultancy and Canadian Prime Minister Justin Trudeau’s former top aide.

    “And they mean business on creating a low-carbon economy in the United States. So Canada’s got to have policy that facilitates investment in the same direction,” Butts said.

Canada has limited financial firepower compared with what the United States put forward in the IRA, which many experts say will lead to more than $1 trillion in investment, so it is going to focus on increasing the capacity of the electricity grid, on battery manufacturing and on mass timber construction, the source said, without providing details.

The Conference Board of Canada has estimated that the grid needs C$1.7 trillion in investment by 2050 to meet emissions targets.

“We need to double the electricity system by 2050,” said Francis Bradley, the chief executive of trade association Electricity Canada. “To be able to grow over the longer term, we need a commitment now.”

    Canada is already better positioned than the European Union and other countries vis-à-vis the United States because the IRA creates tax incentives for electric vehicles manufacturers in all of North America, but excludes other regions.

    EU Commission President Ursula von der Leyen is visiting Canada on Tuesday before flying to the United States to try to lobby for a deal that allows European companies to benefit from IRA tax advantages for batteries and battery components.

    Like Canada, the EU is also aiming to bolster its own investments in the green transition.

Clean Prosperity, a Canadian climate policy advocate, has analyzed the IRA and recommends Canada focus investments on direct air capture, sustainable aviation fuel and battery active materials. The source declined to say whether these would be addressed in the budget.

Clean Prosperity Executive Director Michael Bernstein said Canada’s attempt to bolster competition with the United States “is a bit of a David and Goliath story. … We can compete if we’re smart, if we don’t just copy what our competitors do, but come up with our own strategy.”

(Reporting by Steve Scherer; Editing by Denny Thomas, Jason Neely, Andrea Ricci and Mark Porter)