April 18, 2023 – With the US Inflation Reduction Act (IRA) and its climate policies top of mind for leaders in many countries, Canada must respond by competing to win through its climate strategy, according to a new report from the C.D. Howe Institute.
In “Game On: The Implications of the US Inflation Reduction Act for Canadian Competitiveness,” author Glen Hodgson examines US climate and industrial policy in the IRA, assessing its coverage and potential impacts as well as providing an assessment of the federal government’s response – most recently through Budget 2023.
“Canada’s focus on carbon pricing mixed with targeted incentives is a less costly approach than that of the US IRA,” notes Hodgson.
The most significant initiative by the US so far to address climate change, the IRA was signed into law in August 2022 and provides tax credits and other fiscal incentives to invest in and produce domestic energy sources with low or no greenhouse gas emissions (also known as clean energy). It also provides nearly $300 billion in green finance, to be delivered by US government agencies. All told, it is expected that the IRA could tilt the playing field for clean investment in North America to its advantage.
Wide-ranging but not necessarily comprehensive, according to Hodgson, it does not include market-based mechanisms such as carbon pricing, which Canada has in place. “Carbon pricing should continue to be a centrepiece of Canada’s climate policy,” notes Hodgson.
All told, the author finds that with an overall total of over $80 billion in tax credits (which is comparable in relative terms to private sector estimates of the IRA’s costs), Ottawa’s 2023 budget has made a big bet on zero-emission electricity and hydrogen as the energy sources of the future, as well as on clean technology manufacturing. In these areas, the author notes, Canada should be able to maintain and perhaps even strengthen its competitive position.
Although the climate and industrial policy put forward in the budget does not match the overall coverage provided by the IRA, he notes that it is both selective and expensive – responding in a way that maintains a level playing field between the two countries for certain types of clean investment, and for clean finance.
“Providing refundable tax credits for clean investment comes at a high fiscal cost, but there could be upside potential – and there was also an economic cost of not acting to level the playing field vis-à-vis the US, potentially resulting in lost investment, production, jobs and export opportunities,” says Hodgson. “However, carbon pricing should continue to be the focus of Canada’s emissions-reduction strategy.”
It should also be anticipated that further climate-related industrial policy will be implemented elsewhere; therefore, Canada will need to be vigilant so its own initiatives and green supply-chain products are treated as equivalent under these emerging policies adopted by important trading partners. “Delivering a coherent, integrated climate and economic development policy at reasonable cost to Canadians will require vigilance and constant adaptation to international and domestic forces,” concludes Hodgson.
For more information contact: Glen Hodgson, Chief Economist at International Financial Consulting Ltd. and Fellow-In-Residence at the C.D. Howe Institute; or Lauren Malyk, Communications Officer, 416-865-1904 Ext. 0247, lmalyk@cdhowe.org