High interest rates and economic uncertainty could see the federal government hold back on new green investments in the fall economic statement set to be released Thursday, according to a Royal Bank of Canada economist.
Finance Minister Chrystia Freeland is among the top government officials to signal the fiscal update will begin to spell out Canada's response to the U.S. Inflation Reduction Act (IRA). The legislation, signed into law by President Joe Biden in August, includes a massive US$369 billion in incentives related to climate change and energy security.
"With the IRA providing broad stimulus to green projects south of the border, Canada risks losing competitive position in the new green economy," RBC senior director of economic thought leadership Cynthia Leach wrote in a report on Tuesday.
Natural Resources Minister Jonathan Wilkinson echoed those concerns last week, saying the legislation has created an uneven playing field between the two nations.
However, Leach warns that with a recession looming, and Canada's fiscal outlook waning, Ottawa may opt to "retain fiscal dry power," rather than spend heavily on clean energy and climate change.
"Beset by outsized risks, clean technology deployment could suffer in the current environment of high interest rates and economic uncertainty," Leach wrote.
From her earliest days as finance minister, Freeland has linked Canada's economy with the country's climate goals. In 2020, she insisted the recovery from the COVID-19-related slump "needs to be green."
Last month, she warned of "difficult days ahead" for Canada's economy, with rising interest rates dampening growth as the Bank of Canada strives to tamp down inflation. At the same event, she called for a "muscular industry policy" to encourage companies to invest in Canada.
Ottawa has made a series of commitments to this end, including investments in electric vehicles, a critical minerals strategy, a Net Zero Accelerator, the Canada Growth Fund, and major investments in carbon capture utilization and storage.
However, Scotiabank economist Rebekah Young says that's not enough.
"These are positive developments, but still fall short of a cohesive growth agenda (and execution is mostly still pending)," she wrote in a report published Monday. "We expect a new growth agenda will mostly be a Budget 2023 story (and potentially be backed with more dollars at that time)."
Time is of the essence, according to RBC. The bank says Canada needs to invest $2 trillion between now and 2050 to reach net zero, or about $80 billion per year.
"At only $10 to 20 billion per year in current investment, deployment of green technologies needs to rise four to eight times above current levels," Leach wrote in her report.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.