Responding to the IRA: Creating a Canadian Advantage?

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!

Resources

• Read the full working paper
• Read the industrial policy briefing

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!