U.S. tax credit could rev up electric vehicle production in Canada

·7 min read
An electric vehicle charges in Ottawa. Canadian automakers were relieved to hear that a U.S. bill that would have seen consumer tax credits for EVs limited to  U.S.-made vehicles could be expanded to North America after Democrats in the U.S. Senate reached a deal.  (Sean Kilpatrick/The Canadian Press - image credit)
An electric vehicle charges in Ottawa. Canadian automakers were relieved to hear that a U.S. bill that would have seen consumer tax credits for EVs limited to U.S.-made vehicles could be expanded to North America after Democrats in the U.S. Senate reached a deal. (Sean Kilpatrick/The Canadian Press - image credit)

Canadian automakers breathed a sight of relief Thursday after U.S. lawmakers scrapped part of a massive incentive package for electric vehicles that would have excluded those assembled in Canada from a proposed consumer tax credit.

The $7,500 US credit for "clean vehicles" — which include battery-electric, plug-in hybrid and hydrogen fuel cell — is part of $369 billion in proposed new spending on energy- and climate-related initiatives included in the Inflation Reduction Act.

U.S. senators Chuck Schumer and Joe Manchin, both Democrats, reached a deal late Wednesday to include the credit and a series of other tax and investment measures aimed at expanding the clean energy sector and spurring adoption of EVs in the bill, which hopes to revive an economy struggling to dig out from under 9.1 per cent inflation.

The deal was a surprise, coming less than two weeks after Manchin, a centrist Democrat whose vote is needed to get the bill through the evenly divided Senate, had said he would not support an extensive climate bill President Joe Biden was hoping to pass until inflation was under control.

The Senate is expected to vote on the bill next week before it goes to the Democratic-controlled House of Representatives.

J. Scott Applewhite/The Associated Press
J. Scott Applewhite/The Associated Press

Canada lobbied hard to be included

Flavio Volpe, CEO of Canada's Automotive Parts Manufacturers' Association, said the importance of the proposed amendment could not be overstated and, coupled with the hundreds of millions of dollars the Canadian government is funnelling into EV and battery manufacturing, should give the EV sector the boost it needs.

"This couldn't be a bigger vote of confidence in the North American auto sector," he told CBC's Katie Simpson. "All of these new investments in Canada now have an incredible runway to have this rebirth of Canada's auto sector."

Around 5.6 per cent of new car sales in the U.S. are electric and about 12.6 per cent are electric and plug-in hybrid. In Canada, it's 5.8 and 7.7, respectively.

Volpe said the "Buy American" restriction in the original Build Back Better bill posed a worse threat to the Canadian auto industry than any of the trade restrictions the previous administration of Donald Trump had imposed.

Although Canadian consumers won't directly benefit from the tax credit, the hope is that incentivizing EV consumers in the U.S. will spur manufacturers to make new investments in Canada and rev up related industries, such as critical mineral mining, to help meet growing demand on both sides of the border.

It means "job security for anyone who exports cars and parts to the U.S." from Canada, Volpe said, "which is 85 per cent of our exports."

Volpe was part of the team of Canadian industry representatives, government officials and diplomats who lobbied Manchin and other U.S. lawmakers relentlessly to get Washington to include Canadian-assembled cars in the credit and to recognize how seamless the cross-border auto parts and manufacturing supply and production chains are.

"We're one integrated market, especially in automotive. There is absolutely no border here," he said.

Creates 'level playing field,' says Hillman

Canada's ambassador to the U.S., Kirsten Hillman, was one of the people meeting with senators and lobbying on behalf of Ottawa over the last nine months. She was relieved to see that work seems to have paid off.

"The bottom line is the Canadian auto sector, the Canadian battery sector, our critical minerals sector are being treated on a level playing field with our American neighbours, so we're thrilled about that," she said.

CBC
CBC

International Trade Minister Mary Ng said the development is good news for workers and manufacturers.

"As the bill moves through Congress, we will continue to advocate for the importance of maintaining these integrated supply chains and growing a greener and more prosperous future for North America," she said.

The draft legislation includes a separate $4,500 credit for used EVs and a $10 billion investment tax credit to build clean-technology manufacturing facilities.

WATCH | International Trade Minister Mary Ng relieved at EV news: 

To be eligible for the consumer tax credits, vehicles must be priced at $55,000 or lower for new cars and $80,000 or less for pickup trucks, SUVs and vans.

They must also contain batteries that have a certain percentage of material sourced from countries that the U.S. considers free trade partners. That could be good news for Canadian mining companies supplying those critical minerals.

To qualify for the credit, U.S. consumers have to earn no more than $150,000 if they're filing for the tax credit individually or $300,000 for joint filers. For used cars, the eligibility limit is $75,000 and $150,000, respectively.

Battery production will have to ramp up

Analyst Sam Fiorani of Pennsylvania-based AutoForecast Solutions stressed that most EV incentives to date have benefited the manufacturers, not the buyers, and that's not likely to change since such incentives are meant to inspire companies to develop new products.

"Until a couple of years ago, [GM] sold their Chevy Bolts with a $7,500 incentive. After the incentive went away, the price of the Volt dropped by $7,000 almost immediately," he said. "So all that incentive was going to General Motors, not to the end user. 

"We can expect that to continue."

Nevertheless, the price cap should help get more entry-level EVs into more hands eventually, Fiorani said, although it will take time to get more cheaper models on the market.

"It's going to take a long time to build up the infrastructure to provide batteries, batteries being the most expensive part of the whole vehicle," he said.

Rick Bowmer/The Associated Press
Rick Bowmer/The Associated Press

Shortages of minerals and semiconductors, the critical materials needed to produce batteries and other EV components, have driven up prices and incentivized manufacturers to direct resources to higher-end vehicles, says Scotiabank analyst Rebekah Young.

Canada could eventually help meet some of the demand for critical minerals such as cobalt and lithium but will need to step up its extraction capacity, she said.

"To meet global EV demand, we're going to see some of these mineral requirements increase by sevenfold at least," she said. "We have the reserves, not necessarily the production capacity."

She said Canada and the U.S. are both still catching up to other parts of the world.

"In China, I think EVs are within 10 per cent price parity of an [internal combustion] engine, but they're much smaller vehicles and they've got many more players and many more models," Young said. "We're still biased toward big vehicles, [with] lots of material inputs."

Marcio Jose Sanchez/The Associated Press
Marcio Jose Sanchez/The Associated Press

Unionized-plant requirement dropped

Under the amendment, the credit will no longer be limited to manufacturers with sales of 200,000 EVs or fewer, which will benefit large companies such as Tesla, GM and Toyota, which have sold more than that.

The vehicles won't have to be assembled in unionized plants as originally proposed, a provision unions on both sides of the border were hoping would survive.

"Protecting and enhancing workers' rights throughout this transition is not just an option for governments and lawmakers; it is essential to ensuring a just transition," said Lana Payne, secretary-treasurer of Unifor, which represents Canadian autoworkers, in a news release.

Rebecca Cook/Reuters
Rebecca Cook/Reuters

Unifor praised the lifting of the U.S. assembly requirement and said it was the result of aggressive lobbying by unions, industry and government.

"The reality is that auto manufacturing in Canada and the United States is deeply integrated, and our production volumes are tied to the much larger sales market in the U.S.," said Unifor Auto Council chairperson John D'Agnolo.

Louise Blais, who also participated in the negotiations to include Canada in the credit during her time as Canada's consul-general in Atlanta, Ga., called it a "huge win" and said it wasn't a given the lobbying efforts would succeed.

But she cautioned that Canadian manufacturers and governments have to take a look at some of the other incentives that will flow to energy and climate-related projects and industries if the bill passes, which could lure some manufacturers south.

The proposed legislation includes $20 billion in loans to build new clean vehicle manufacturing facilities and $30 billion for additional production tax credits to accelerate U.S. manufacturing of solar panels, wind turbines, batteries and critical minerals processing as well as $2 billion in cash grants to retool existing auto manufacturing facilities.

"There's a lot of provisions in there that will really further incentivize manufacturers to manufacture clean technology like solar panels and others in the United States," said Blais, who is now a senior adviser with the Business Council of Canada and divides her time between Atlanta and Quebec.

"So, we really need to take a close look at this in Canada and make sure that we do not lose our competitiveness in some of these sectors as a result of this."

WATCH | Canadian manufacturers welcome news of EV tax credit:

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