(Ottawa) The federal Liberals have made it clear that Canada’s road to a greener economy will be paved with billions of dollars in corporate subsidies.
Proponents of this approach say it might be necessary for Canada to attract investment, especially in competition with the United States, but others express doubts about the effectiveness or efficiency of these large subsidies. long-term.
The 2023 federal budget put the green economy front and center, setting aside more than $80 billion over the next decade in everything from clean electricity to critical minerals, providing a long-awaited answer to the whole economy. investments made under the US Inflation Reduction Act.
Finance Minister Chrystia Freeland argued that Canada must rise to the occasion or fall behind as the world prepares to build the clean economy of 21e century.
The Liberal government recently made big promises to German auto giant Volkswagen, which aims to build an electric vehicle battery plant in southwestern Ontario.
PHOTO CARLOS OSORIO, REUTERS ARCHIVES
In the case of the deal with Volkswagen, the federal government has argued that the incentive will pay for itself within five years due to the jobs the potential plant would create and other spinoffs to the economy.
The exclusive contract with Canada will include an initial investment of 700 million and production subsidies for each battery manufactured and sold by the company, which could cost up to 13 billion over a ten-year period.
Ottawa is clearly betting on providing substantial incentives for the business sector to become greener. But will it work?
John Lester, executive member of the School of Public Policy at the University of Calgary, points out that there are a variety of reasons governments choose to subsidize corporations. A classic example is that of research and development, an initiative whose benefits trickle down to other members of society.
But economists and experts warn that subsidies don’t always work as intended and can be ineffective when they incentivize companies to do something they had already planned to do.
Minister Freeland also seemed aware of some of the dangers that could arise from this approach, sharing her concerns last month during a speech in Washington.
“We all know that building a clean economy and creating good middle-class jobs will take a lot of capital. So let’s be aware of a danger: it will be all too easy for us to get caught up in a race to the bottom to attract this capital,” Ms.me Freeland.
The finance minister warned that past efforts to promote investment and revive economic growth had ended up driving down corporate tax rates, undermining the national tax bases that are so essential to nurturing a thriving middle class.
No delay compared to the United States
According to Lester, the grants offered in Canada were already excessive and he called on Ottawa to rethink its approach to business grants, he hinted in a recent blog post on the University of Calgary website. .
He argued that the recent budget measures come on top of two other programs — The Net Zero Accelerator Initiative and the Strategic Innovation Fund — to provide more subsidies as a percentage of GDP than the United States offers. .
“Canada is clearly not behind the United States in the ‘race’ for clean economy subsidies,” Lester wrote. A broader assessment of business subsidies is needed. »
According to his calculations, grant spending in the current fiscal year will be $8.7 billion, up nearly 140% from 2019-20, and is expected to reach $9.8 billion by 2025-26. .
In the case of the deal with Volkswagen, the federal government has argued that the incentive will pay for itself within five years due to the jobs the potential plant would create and other spinoffs to the economy.
This claim has been met with skepticism by some economists who argue that the benefits of subsidies are difficult to calculate.
Hadrian Mertins-Kirkwood, senior fellow at the Canadian Center for Policy Alternatives, pointed out that the deal with Volkswagen illustrates the loss of efficiency that comes from competition between countries for the same investment.
“From a global perspective and certainly from a climate perspective, this is a huge waste of money. So it’s only really justifiable (if) it makes us maybe better off compared to our neighbors. But it’s not very efficient economically when you look at the big picture,” he said.
In 2021, a consortium of more than 130 countries signed a plan to implement a minimum corporate tax rate of 15%, in apparent recognition of the losses they were collectively incurring by cutting taxes to attract businesses .
Glen Hodgson, Scholar-in-Residence at the CD Howe Institute, said establishing common international practices could help mitigate a new race to the bottom in the transition to a green economy.
“Creating some sort of common practice is usually the best way to go internationally,” he said.