The Decibel - Canada races the U.S. on a ‘green economy’

Episode Date: March 23, 2023

Canada has committed to going net-zero by 2050 and a big part of making that goal a reality is by transitioning the economy from being fossil fuel dependent to a cleaner and low-carbon one. Canada’s Finance Minister and Deputy Prime Minister Chrystia Freeland calls the change the most “significant economic transformation since the Industrial Revolution”.So what will a ‘green economy’ look like for Canada? And how can it establish itself as a major player as it competes with the United States, its biggest ally and rival? The Globe and Mail’s climate change columnist Adam Radwanski explains.Questions? Comments? Ideas? Email us at [e-mail]

For years now, we've known that Canada has to transition from a fossil fuel dependent economy to a green and low carbon one. But what would that transition actually look like? And what would it take to attract green businesses to build here? We may know more next week, when the government tables the federal budget, which it said will prioritize a clean economy. Today, we're talking to The Globe's climate change columnist, Adam Radwanski. He'll tell us what this transition might include, and how Canada's efforts stack up against those of the U.S. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Adam, thank you so much for joining me today.

Oh, thanks for having me. So when we say a green economy in Canada, what exactly do we mean by that? We're talking about a transition, really, from traditional industries toward newer, lower carbon industries. And this is something that's not just in Canada. It's happening around the world as we try to decarbonize and as there's sort of a race going on as to who can both transition what they have already and provide new technologies and services that can be exported to help lower emissions elsewhere. Okay. I mean, this is a transition that seems like a pretty massive change in society. How do we do that?

How do we make that transition to a green economy? It's not just government, obviously, that has to lead on transition to a green economy. It's also, obviously, the private sector, and some of it is happening regardless of what public policy involves. But I do think you need to provide incentives, and you need to provide regulation, so both carrots and sticks, to try and both carrots and sticks to try and move industry along and to try and move people along in their day-to-day lives. Okay. So there's two sides to that. I think government regulation, people can kind of understand how that can help, but what do we mean on the other side of things? Like, is that attracting investment or what do we mean?

Incentives can obviously involve people's day-to-day lives, things like subsidies to buy an electric vehicle or to retrofit your home to make it more energy efficient. But what we're really talking about right now a lot is incentivizing industry. And it's largely in the form of tax credits or grants or other things that can be either for existing industry to say, okay, we're going to help you pay for lower carbon technologies, for carbon capture, change your industrial processes, whatever. Or it can be to attract new investment, say in electric vehicle manufacturing. We're going to provide help with the capital costs or we're going to help subsidize your production down the road. Basically, as a lot of different countries are recognizing that this is where the global economy is going.

Okay. So it sounds like a lot of this stuff is government focused then. We're talking about grants and things like that. That's something that the government is doing. Government has certainly a role to play because one of the challenges is that some of the technologies that companies will be investing in, some of the new products they're making just might not be commercially viable yet otherwise. We know that lower emissions technologies are otherwise not as cost-competitive right now.

So therefore, we're going to step in to help subsidize it. So can you give me an example of that? What kind of thing are we talking about here? One of the more obvious technologies that require subsidies would be carbon capture and storage. Oil and gas is the one that most prominently and controversially advocates for it. Of course. But you could also include other heavier industries

like cement, for instance, where that's going to be necessary both for those industries to function in the long run in a relatively low emissions way, compared to at least now, and to compete internationally. So government has to find a way to make that viable. That can be done via tax credits, via incentives, via carbon pricing,

which we have, which essentially attaches value to each reduced ton of carbon. So there's different ways to do that. But it's that type of thing where you say, without the government stepping in somehow, it's hard for companies to justify this investment for the bottom line. Okay. So it sounds like government subsidies do help to make Canada more attractive to invest in. Is there anything else that sets us apart though? There's a few advantages Canada seem to have in terms of attracting this kind of investment. We do have, generally seem to be a pretty strong workforce for newer technologies and in some existing industries like the auto sector.

We have an existing carbon price, which does matter compared to some other countries, including the US. We have as well a degree of political stability here that does matter, some degree of consensus. I've looked quite a bit at things going on in Ontario, where there's been a fair amount of clean technology, especially electric vehicle investment recently, and actually surprising cooperation between the federal and provincial governments, despite some political differences. And that does set us apart from some countries where, especially again, the United States, where there is a high degree of partisanship here. And then there's also our natural resources. I

mean, for things like electric vehicle manufacturing, where you need critical minerals, we do have access to those, although we're sometimes slow to get them out of the ground. Right. Okay. So I think something that's on a lot of people's radar is the federal budget, which is coming next week. And Chrystia Freeland, who's finance minister and the deputy prime minister, she's named a green economy as a priority for this government. This week, she said that Canada will, quote, invest aggressively or be left behind, end quote. So Adam, what do you expect to find in next week's federal budget around this green economy?

There are a lot of different options that the federal government has had to be grappling with as it puts together its budget and it tries to compete economically in this rather rapidly decarbonizing world. And a lot of it comes down to how it competes for the United States, because the U.S. has put forward an enormous amount of money in the past year, really, starting last summer, toward clean investment. And one of the challenges for Canada is it probably can't do everything the U.S. is

doing just because of the sheer amount that's being spent there. So they're having to pick some lanes. So there are some areas where. So they're having to pick some lanes. So there are some areas where I think they are likely to invest heavily in this budget. One is the electricity grid. That's somewhere that Canada seemed to have an existing advantage because we have a relatively clean electricity supply and a relatively ample electricity supply. But the needs for electricity are going to rapidly expand, probably double or triple in the coming years because of electrification of a lot of different things, transportation, buildings, heavy industry. So I think there's going to be some significant measures taken on electricity. I think there are specific sectors where you may see some prioritization.

I keep mentioning electric vehicles. That is one where they at least need to provide some clarity on how they're funding that. There are areas like hydrogen, which is somewhere that Canada sees potential to develop an industry and export a product where you could see it. There's a lot of these different areas where they're going to have to choose

which sectors they think we can best compete in. Electricity is the surest one, I think, but there's going to be a bunch of others as well where they say, okay, this is somewhere that meets our prioritization standard. Okay. Well, what you're saying is really, this is, we're trying to keep on pace with the U.S. essentially here and kind of pick what we can, what we can win at essentially and really go in there. I can't stress enough how much of a challenge it's going to be for Canada here to keep up with the U.S. in terms of how much it spends. You know, you may have seen the number that's thrown around about the Inflation Reduction

Act, which passed in the United States last year. This is Biden's big bill to move towards a green economy. Yes, it's not just for that. That's the biggest component of it. It's a strangely named bill that is really largely about climate. And a number that often comes up is 369 billion US in climate measures, not just in one year, spread over multiple years, but still a lot of money. So Canada simply isn't even proportionately, it is not going to spend that

much money. So the question then is, again, which sectors do we home in on? What mechanisms do we use? How do we keep up? And they really have to be focused on maximum bang for their buck because there are sectors where if we don't spend at a comparable level with the U.S., we're going to lose a lot of investment. So you kind of have to say, OK, where are we going to put our resources and where are we going to say, OK, maybe we just can't compete in this area? So a lot of this seems to center around kind of federal government action, subsidies, money that they're providing here.

And one criticism, Adam, that gets leveled against subsidies of this kind is that they're basically handouts for a lot of big businesses. So is this really where we should be spending our money? Is this the most efficient way to do this? I think it's very fair to criticize this as corporate welfare. There is a degree of that. I mean, you can look at something like the Volkswagen electric vehicle battery plant that is being brought to St. Thomas, Ontario. This is a fairly new announcement. New announcement. We don't yet know how much money is going toward it, but you can bet it'll be in the billions in one form or another and say, why are we giving this might auto giants for something that ultimately presumably will be profitable for them?

And that's fair. But I think the one thing we have to recognize is that this is kind of the way the world is going right now. So certainly the United States is going extremely heavy on subsidies, more than we are. The European Union is subsidizing heavily. Asian economies are subsidizing heavily. So you could say, we don't want to play this game, but you're going to have to accept that you are not pursuing a lot of these newer low-carbon industries. And that would include things like electric vehicle manufacturing. It would include things like hydrogen production. It would include some of the decarbonizing heavy industries like steel or cement or aluminum or other areas where they are going to be getting support elsewhere to decarbonize. So you would

have to take a real free market approach compared to a lot of other countries to do that. You could, but you have to accept then that you're going to have to find other industries to grow because these ones are really in the midst of a race that involves heavy subsidies. We'll be back after this message. So as you said, Canada is competing with a lot of other countries here, but one of the biggest competitors is our neighbors to the south, the U.S.

So what exactly is the U.S. doing on this front? By far, the biggest thing that the U.S. is doing is the Inflation Reduction Act, which passed last summer, somewhat surprisingly, because there was doubt about whether Joe Biden's administration could get this through. But this is a package. It's not the only thing in there, but the climate measures are massive. You've probably seen the number of $369 billion. Big number. Huge number already. Spread over multiple years, but still a huge number. That is sort of the sum of all the climate measures in there. It's actually probably a lot more than that if you speak to people who are tracking these things closely, because the way they've done it are largely sort of open-ended

production tax credits, which essentially provide a subsidy for units of production going forward to anybody who meets certain criteria in clean industries. And if there's high uptake, which there seems to be, there's no ceiling on this. So it could be double that amount. It could be a trillion dollars. So that is a massive amount of money that's going out. The U.S. is making an extremely aggressive effort. The other key difference that's important to understand with how the U.S. approaches this versus Canada, the way that Canada gives out subsidies for clean technology and most other things

is on a fairly discretionary basis mostly. What I mean by that is there are some tax credits, but it's sort of a long process. Companies will submit to the applications for it. It may take years. That's jumped a lot of hoops. It's not certain when they make their decisions. In the US, because they've gone really heavily with production tax credits, which essentially say, if you do X and X,

you will get this subsidy going forward. It's easier to get money out that way, it sounds like. Easier to get money out in the US right now, quicker, much more predictable. So if you're a company deciding where to make an investment, a challenge for Canada is that if a company is looking at building, say, a refinery for minerals in the US, it could say, okay, we know as we're

formulating our business plan, if we are producing X amount, we will get X subsidy. In Canada, they could say, well, we know that we can apply to this program and we will get X subsidy. In Canada, they could say, well, we know that we can apply to this program and we may get a subsidy. It could be generous, but we've got to see how it goes. It may take years to figure out. And we don't know exactly what amount we'll wind up qualifying for. So it is very different. And there's a lot more certainty right now in the US. But Canada doesn't have much history of subsidizing in that way. And I think there is nervousness about going too far down that road because it does put a lot of risk on government that your costs are going to skyrocket in unpredictable ways.

Yeah. Oh, yeah. I mean, that's a really interesting question, though, when we're talking about competing against the U.S. If those kinds of subsidies, and you're talking about that electric vehicle battery plant, the amount that a company would get by being in the US is so much more than being in Canada. It kind of begs the question of why a company would make the choice to come to Canada. There's a few answers that typically come up.

One is, in some sectors, including EV batteries, access to minerals, that although we are not currently mining at a rate that would significantly help with that, we do have these reserves of key minerals, lithium, cobalt, nickel, et cetera, where that could be tapped into. And in the long run, if these are multi-decade investments, that could make a difference. Another is workforce. There's a sense that both we have a fairly well-educated and stable and experienced workforce in some sectors, also lower workforce costs because we have healthcare. And that does significantly impact the bottom line for employers. Another would be clean electricity supply. We do currently have a cleaner electricity grid in most places in Canada than the United States.

So companies that increasingly care about setting net zero targets. And there's a political stability argument, which sounds kind of funny because we don't still think of the U.S. as being politically unstable. But there is a sense, there's all these incentives being offered by a democratic administration. There's no guarantee that they're going to stay in place if there's a change in administration in the US. In Canada, of course, there's no guarantee either that a conservative government federally would keep all of the liberals' climate policies.

But you do have encouraging things happening like the federal and Ontario governments working closely together to attract investment and sort of being on the same page, even if they don't agree totally on policy or on climate goals, they seem to agree on clean economy investment and the importance of it. So that's one other factor that I think matters. So Adam, US President Joe Biden is in Canada this week. Will he and Prime Minister Trudeau talk about these incentives here? I'm sure that the Inflation Reduction Act and clean economy policy

will be a subject, one of the subjects that's on the table when President Biden is here. One of the aspects of the Inflation Reduction Act that has rankled a lot of other countries is that there's a strong protectionist element to it. You know, a made in America component of incentives that are tied specifically to products we made in the US or buy American policies for government purchases and a bunch of stuff like that. Canada is relatively in a good position on that because the government here has already negotiated its way out or into some of the protectionist measures and it helps attract an EV plant, say, to Ontario

because they're not going to be penalized. So this is interesting because, I mean, even though we are competitors in a lot of ways, there's a lot of times when our economies are intertwined and we can see maybe a little bit of cooperation that might happen there as we go forward, it sounds like. There's absolutely an opportunity to cooperate on a lot of these areas.

And I keep coming back to electric vehicles, but it's probably the most obvious example because you've got a very integrated supply chain in Ontario and Michigan and some other states, but especially there. And the border has typically been almost seamless there where it goes back and forth, and you want to preserve that. There are a whole bunch of areas where the money is flowing in the US and Canadian companies are going there. So that is a concern for Canada in that you want to have some of these projects, but you can also say, well, it's better they're going somewhere than nowhere.

So at least they're kind of growing the pie for these folks. I think a big question is the longevity of this, the prioritization of a green economy. Does this extend beyond the government of the moment, like if governments change power, you know, and is there enough popular support for it? Does the public like these policies? And so will they stay around? So one obvious answer to try and make these policies last is to put in popular policy. So the more that they bring jobs, the more that they reduce household costs, the more that, you know, there's no strong objection to them, the more that they help existing industries that are in trouble, whatever, that there's no strong objection to them, the more that they help existing industries that are in trouble, whatever, that obviously makes it less likely a future

government will get rid of them. But I do think that in terms of the public, there is some degree of concern here for all of the constraints they place on finances, for all of the competing priorities out there, the things that they can't spend on because they're spending on this, is it actually worth it? If you go back about three years to the start of the pandemic, if you haven't blocked that out of your memory entirely, there was a lot of talk at that time around a green recovery.

And as governments were pouring out a ton of stimulus, there was this idea that that money would go at least partly toward simultaneously creating a more sustainable economy, lower emissions, and improving people's day-to-day lives. So you would get money to retrofit your home that would be more energy efficient, your energy bills would be lower, and we'd be using less fossil fuels to power your house. Or making transportation more green and at the same time, modernizing it and making it more comfortable to get around, those kinds of things. More recently, the focus has been almost entirely on competitiveness, especially since the Inflation Reduction Act passed last summer.

And I can't really criticize that because like 95% of the things I write have some line in them about the importance of competing with the US or being competitive in a decarbonizing world. It is hugely important. But I do think there may be more of a need to relate this to people's day-to-day lives to say, either here's the economic opportunity, here's the affordability, here's the potential cleaner air, whatever, because it's possible to lose touch with that. And simply being in sort of an arms race with other countries may not be that compelling

to people dealing with day-to-day concerns. That's an interesting point to end on there, Adam. Yeah. Adam, thank you so much for taking the time to speak with me today. Thank you. That's it interesting point to end on there, Adam. Yeah. Adam, thank you so much for taking the time to speak with me today. Thank you. That's it for today. I'm Maina Karaman-Wellms. Jay Coburn helped produce this episode.

Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrienne Chung is our senior producer. And Angela Pachenza is our executive editor. Thanks so much for listening and I'll talk to you tomorrow.