What we can learn from America’s Inflation Reduction Act

One year has passed since President Joe Biden signed the landmark Inflation Reduction Act (IRA) into law, unleashing more than US$370 billion to fight climate change. The IRA sent shock waves around the world, particularly in industries such as automotive that stood to benefit from incentives designed to accelerate the clean energy transformation.

The implications of the IRA were exceptionally large for Canada given how integrated our economy is with the U.S. What have we learned one year later and, more importantly, what does it mean for Canada going forward?

The most important lesson for Canada is that incentivization is a powerful tool to tackle climate change. The IRA sparked a wave of new clean energy investment, estimated at US$278 billion, creating 170,000 new jobs. According to the White House, the legislation has put America on the path to cutting emissions by 50 to 52 per cent below 2005 levels by 2030.

Look to the auto industry as a prime example. Automakers have announced 65 new EV investments in the U.S. totaling US$44.1 billion since the IRA’s passage, creating 32,428 jobs. Combined with powerful EV consumer purchase incentives equivalent to $10,000 per EV, and the U.S. is on track to top one million EV sales for the first time this year.

While the IRA put Canada’s auto industry at a significant competitive disadvantage for new investment, the federal government stepped up with the support of provinces to level the playing field. As a result, Canada has secured new automotive investments of over $25 billion since 2020.

Incentivization works and is the key to realizing the clean energy transformation.

Second, Canada can compete with the U.S. when it focuses on its advantages. Canada will always be outmatched by the U.S. on sheer fiscal firepower. But as demonstrated in the auto industry, when we focus our efforts on key sectors where we have unique advantages, such as a clean electricity grid, we can compete for new investment.

This is particularly true in the broader EV supply chain, where Canada has an advantage over the U.S. given our critical mineral endowments. Increasing and diversifying Canadian production of critical minerals presents a generational opportunity thanks to IRA sourcing requirements that are designed to create a North American supply chain.

See tiny Bécancour, Que., for a recent example. Benchmark Mineral Intelligence estimates that 28 per cent of North American cathode output, critical to EV battery production, will come from Bécancour by 2030.

What does the IRA mean for Canada going forward?

The highly integrated nature of our economy requires that we align our approaches to climate change with the U.S. Canada is simply too small of a market to go it alone without dire economic consequences.

Nowhere is this more apparent than in the automotive industry that depends on a tightly connected and highly efficient North American supply chain. Aligned regulations and competitive supports have enabled Canada to reap enormous economic and social benefits by being part of an integrated auto sector in North America.

For example, the federal government’s plan to decouple Canada from the North American automotive market by establishing Canada-unique EV sales regulations works directly against the IRA and its ambition to create a continental EV supply chain. Rather than focusing on emissions reductions, sales mandates dictate what types of vehicles Canadians can and can’t buy.

Instead, Canada should keep harmonizing its policies with the strongest-ever federal U.S. regulations for vehicle emissions. This is the most effective way for Canada to lower vehicle emissions and meet our EV sales objectives.

Not only do the proposed EV sales regulations threaten the progress we have made in winning new auto investment, but they are also unlikely to succeed given Canada’s slow EV charging infrastructure rollout and comparatively weak EV consumer purchase incentives.

Keeping pace with the IRA requires a smarter approach.

This includes continued alignment with the U.S. on vehicle emissions standards and addressing the largest barriers to widespread EV adoption. When it comes to securing and attracting auto investment, we must constantly identify and react to the competitive gaps in our manufacturing sector that are exacerbated by the act and other initiatives, such as the recently announced $15.5-billion funding package focused on retooling factories for the transition to EVs.

The IRA has shown that harmonized policies, incentivizing investment and addressing barriers to EV adoption are the path to a successful clean energy transformation, particularly in the automotive industry. Canada should take a page from Biden’s approach if we want to compete in the race to electrify.

Brian Kingston is president and chief executive officer of the Canadian Vehicle Manufacturers’ Association (CVMA), representing Canada’s leading manufacturers of light- and heavy-duty motor vehicles.