Ottawa and Queen’s Park are getting played by Stellantis STLA-N, but you can’t say they didn’t ask for it. By deciding to engage in a subsidy war with the United States, Prime Minister Justin Trudeau and Ontario Premier Doug Ford ensured they would be held for ransom.
Politically, they have no choice now but to pay up. Mr. Ford and Mr. Trudeau have boasted so much about attracting electric-vehicle investments, they would both lose face if Stellantis packed up its marbles. They may argue in public over who should pay most of the ransom to prevent Stellantis from cancelling plans to build a $5-billion electric-vehicle battery plant in Windsor, Ont. But none of that will matter in the end.
No one is surprised that Stellantis would come back to the trough after the federal government broke the bank to snag a Volkswagen VWAGY “gigafactory” (the industry term for a large-scale EV battery facility) to St. Thomas, Ont. Stellantis’s joint venture with South Korean battery maker LG Solutions was announced in early 2022, before the U.S. Congress passed the Inflation Reduction Act, which unleashed a global subsidy war.
Canada could either match the IRA’s massive incentives or forget about playing the EV subsidy game altogether. A government that truly believed in evidence-based policy making would have opted out of such a zero-sum game. An economic analysis that accounted for the opportunity costs would have poured cold water on the idea that such incentives would “pay for themselves” over time.
Instead, Ottawa agreed to provide Volkswagen with up to $13-billion in production tax credits plus $700-million in upfront construction costs, proving it was willing to put up record amounts of taxpayer dollars for the ephemeral bragging rights that came with bagging the German automaker’s first battery plant outside Europe.
No one could have expected Stellantis and LG to settle for the mere $1-billion or so that Ottawa and Queen’s Park had promised last year for the construction of their proposed NextStar plant in Windsor. On Monday, the maker of Chrysler cars and Ram pickups halted construction “related to the battery module production on the Windsor site,” saying the Canadian government had “not delivered on what was agreed to.”
Canadian taxpayers should brace for another shakedown.
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Under the IRA, U.S.-produced EV battery cells qualify for a tax credit of US$35 per kilowatt-hour of capacity, and battery modules qualify for a credit of US$10 a kwh. A battery module that does not include a battery cell qualifies for a US$45 tax credit. To match those incentives, Ottawa and Queen’s Park would need to offer about $3-billion more in production tax credits alone for Stellantis’s Windsor facility, which has a proposed capacity of 45 gigawatts.
“We’ll go toe-to-toe with any state down in the United States,” Mr. Ford said on Monday, calling on Ottawa to pony up. “The only thing we can’t do is go toe-to-toe with the U.S. federal government. That’s the federal Canadian government’s job.”
Still, it’s quite something to hear Mr. Ford, who railed against the previous Ontario Liberal government’s green-energy subsidies, embrace much the same “jobs” argument for subsidizing EV assembly and battery production plants that former premier Dalton McGuinty advanced in passing the Green Energy Act in 2009.
Back then, Ontario justified paying a hefty premium for wind and solar energy contracts by arguing the province would gain a first-mover advantage as a manufacturing hub for wind turbines and solar panels. It turned out the plan violated international trade rules, leaving the province vastly overpaying on long-term renewable energy contracts.
The IRA is also a blatant attack on the spirit if not the letter of global trading rules, but one that U.S. President Joe Biden is likely to get away with as just about every other Western country jumps on the subsidy bandwagon. The U.S. justifies the IRA on national security grounds to end China’s dominance of the EV supply chain. But the overall economic costs of the subsidy war Washington has unleashed will be high.
“A new race to the bottom over subsidies could undercut the very objectives these tools are designed to achieve,” former Biden administration officials David Kamin and Rebecca Kysar argue in the May issue of Foreign Affairs. “The danger is that rather than helping governments develop green technology and diversify their supply chains, more of the subsidies will be consumed in higher after-tax corporate profits and higher costs of production, with little or no benefit to workers overall.”
Indeed, for Canada, the likelihood is that Volkswagen and Stellantis, neither of which has any previous experience in EV battery production, will demand ever-increasing subsidies to keep their Ontario plants open rather than relying on innovation and cost-efficiencies to be competitive. Who is to say they will not be looking for a bailout in the future?
Canadian taxpayers have seen this movie before. It does not have a happy ending.