Responding to the IRA: Creating a Canadian Advantage?
Wednesday, March 8, 2023
Moderator: Heather Scoffield, Senior Vice President – Strategy, Business Council of Canada
Speakers: Bentley Allan, Research Director, The Transition Accelerator; Michael Bernstein, Executive Director, Clean Prosperity
Last year the United States passed the Inflation Reduction Act (IRA)—a landmark bill that is already transforming deal-making, energy production, and global supply chains. A recent working paper released by The Transition Accelerator and Clean Prosperity showed how the IRA has opened big gaps between the incentives for low-carbon investment in Canada and the U.S.
Canada risks missing out on massive economic opportunities if it doesn’t move quickly and deliberately to respond to the United States’ Inflation Reduction Act (IRA), said experts in the Transition Accelerator’s March 8 webinar, co-hosted by Clean Prosperity.
In August 2022, the IRA introduced significant subsidies for a wide range of low-carbon technologies and manufacturing, mainly in the form of production tax credits. Canada needs a smart, strategic response to close the incentive gaps this creates for building a low-carbon industrial economy, said Bentley Allan, Research Director at The Transition Accelerator, and Michael Bernstein, Executive Director at Clean Prosperity. Their recent working paper, Creating a Canadian Advantage: Policies to Help Canada Compete for Low-Carbon Investment, is the first comparison of the dollar value of the incentives offered by Canadian and U.S. governments for clean technology investments. The analysis examines seven key clean technologies, including solar energy, direct air capture, carbon capture and storage, and hydrogen production, offering concrete suggestions for how Canada can close the investment gap with the U.S.
“Investment is a really important thing to look at, not just from a decarbonization standpoint, but also from an economic opportunity standpoint, because it’s the early investments that will create the innovation ecosystems.” explained Allan. “Expertise and intellectual property will be developed out of those experiments.”
A Pathway for Canada to Compete for Low-Carbon Investment
The most promising opportunities for creating a Canadian advantage are anchored in our carbon pricing system, say Allan and Bernstein, who are publishing an expanded analysis in an upcoming report. Most people are familiar with the “sticks” of the policy: a carbon price on an industry’s share of emissions. But the policy also includes carrots, where emission reductions are translated into credits that can then be sold to other firms to avoid paying a carbon price. It’s the potential revenues from these credits that would build the foundation of a thriving clean energy economy, say experts — but those aren’t guaranteed.
Revenue uncertainty for Canadian net zero projects is the biggest barrier to attracting investments, say the experts. Unlike with the IRA, much of the funding that would support Canada’s clean energy transition is not considered “bankable”, meaning that firms or investors considering a clean energy project in Canada cannot be sure of the actual value of those credits. “We are perhaps only one election away from losing the Pan-Canadian Climate framework, and therefore from [the carbon price revenues] disappearing,” said Bernstein.
“It’s as if Canada is offering companies a coach ticket with the chance of an upgrade, while the Americans are offering to send them straight to first class,” he added. “But there are strategic moves we can make to fix that.”
Recommendation 1: One way to make Canada’s funding more certain is a contracts for difference — a type of insurance policy on the future value of carbon credits that would give firms the confidence to make big decarbonization investments. “This is a tool that will not cost the government anything, and yet will provide a strong signal and a powerful incentive across many of the key clean technologies,” said Bernstein.
Recommendation 2: The second strategy presented in the working paper is to offer targeted financial support to the industries where Canada can compete globally and generate significant economic benefits, good jobs, and manufacturing value-added, such as in battery materials and sustainable aviation fuels.
In closing, both experts emphasized the need for a strategic net-zero industrial policy that balances minimizing risk with seizing the unique economic opportunity at hand for Canada. “I think we have a choice here… we have been cautious Canada and our neighbour to the south is ambitious America,” said Bernstein. “The question now for us is, are we going to stay in that cautious mindset? Or are we going to shift to an ambitious mindset? We think the latter is merited here.”
Allan and Bernstein will publish an expanded analysis in a report coming this spring. Register for our newsletter to stay tuned!
- Read the full working paper
- Read the industrial policy briefing
- Look through the presentation slides shown during this webinar
- Watch the full video recording
We are grateful to all our panelists and our moderator for sharing their expertise and insights into the challenge that is bringing a smart industrial policy response to the IRA.
This panel was part of the Transition Accelerator’s Pathways to Net Zero webinar series. The Transition Accelerator is a charity dedicated to empowering and guiding decision-makers toward net zero with the tools and knowledge they need to unlock a sustainable future for Canada.
We welcome suggestions for discussions you would like the Transition Accelerator to host. Email us your ideas!
About Our Panel
Heather Scoffield, Senior Vice President – Strategy, Business Council of Canada
Heather Scoffield is Senior Vice President of Strategy at the Business Council of Canada. Heather crafts and pursues the strategic priorities of the Council in collaboration with her Council colleagues and members. Her focus is finding practical solutions to the major economic and growth challenges of our time – competitiveness, climate and a constantly changing workforce.
Previously, Heather spent 30 years in journalism, covering economics, policy and politics at the Toronto Star, The Canadian Press and the Globe and Mail. She has a Master’s degree in journalism and an undergraduate degree in International Relations.
Bentley Allan, PhD, Research Director, The Transition Accelerator
Bentley Allan, PhD, is a research director at the Transition Accelerator, as well as an Associate Professor of Political Science at Johns Hopkins University. Dr. Allan is an award-winning scholar who has written on the dynamics of international order, science and politics, climate policy, and the political economy of decarbonization. Dr. Allan co-leads the project Canada’s Future in a Net-Zero World which builds support for a green industrial strategy in Canada. The project identifies economic opportunities in the energy transition, co-develops industry roadmaps to accelerate action, and distills lessons for smart industrial policy from international case studies.
Michael Bernstein, Executive Director, Clean Prosperity
Michael Bernstein is the executive director of Clean Prosperity, a Canadian non-profit that works toward practical climate solutions that reduce emissions and grow the economy.
Michael is an economist by training. He is an advisor to elected leaders across the political spectrum and a frequent commentator on climate policy. His career has spanned business, management consulting, international development, and politics.