IMF warns Canada's green subsidies are 'race to the bottom' but applauds our climate action

The International Monetary Fund warns that Canada's green subsidies could stoke an international race to the bottom, even as it credits the country for a "multipronged" approach to addressing climate change.

The international agency published Tuesday the preliminary findings of its staff from an official visit to Canada.

"Canada's actions to meet its climate commitments and to incentivize investment in green sectors are welcome, although the design of some incentives could pose some risks," the report says.

The IMF applauded Canada's climate action, including its carbon-pricing regime and 2023 federal budget investments in the green economy.

But it called for better international co-ordination to avoid a "race to the bottom" where countries compete over investments with even larger subsidies.

"Moreover, the current strong focus on electric vehicles — and their batteries in particular — as key to Canada’s green industrial development will require a cautious approach given rapid technological change," the report says.

It also says Canada should consider a standard incentive regime to promote fairness and transparency, instead of negotiating company-specific packages.

The preliminary report comes as the Liberal government makes historic investments in the green economy and is enticing automakers such as Stellantis and Volkswagen with billions of dollars in subsidies.

The IMF staff also provided some analysis of the current economic situation in Canada, noting the Bank of Canada's recent rate hike was warranted, given the economy has more steam than anticipated.

On the fiscal policy front, the IMF says government spending should remain tight to help bring inflation down. It's also recommending better fiscal anchors, or rules, to balance spending with revenues.

"While Canada's public debt is relatively low in international comparison, it remains substantially above pre-pandemic levels," the report says.

The international agency says Canada should work to rebuild its fiscal buffer, which would allow government to address any future crises that require higher spending.

The IMF also called for more action to address housing affordability and boost supply, including increased co-ordination on housing policy between levels of government and stakeholders.

"While the Housing Accelerator Fund, introduced in the 2022 budget to provide incentives for municipalities to expand housing supply, is a step in the right direction, more needs to be done to expedite permitting and promote densification," the report says.

In a news release, Finance Minister Chrystia Freeland welcomed the IMF's findings, which she said "highlighted Canada's resilient economy, stable fiscal outlook, clean economy plan and actions to improve housing affordability."

This report by The Canadian Press was first published June 20, 2023.