Government handouts to woo sustainable industries must pass the cost-benefit test

Net-zero manufacturers want public cash to stay in Canada. The evidence says we should give it to them.

Reaching net zero will require an economy that limits greenhouse gas output to a level low enough that it can be absorbed out of the atmosphere, for instance by oceans and forests. This will require huge changes to our manufacturing and energy sectors, presenting lucrative opportunities for technology that hastens the transition, such as renewable energy or electric vehicles. These sectors require investment, and governments are stepping up with funds to power net zero manufacturing.

After months of speculation, the provincial and federal governments have reached a deal with Stellantis to build a battery factory in Windsor, Ont. The factory had been jeopardized by U.S. President Joe Biden’s Inflation Reduction Act (IRA), which offers billions in new subsidies for net-zero manufacturers willing to relocate to the U.S.

After Stellantis threatened to do so, policymakers in Queen’s Park and Ottawa developed a counteroffer. Stellantis will now receive up to $15 billion over 10 years in public subsidies, one third of which will come from the province.

The deal follows a similar investment of $13 billion in Volkswagen’s battery plant. These numbers have many analysts asking how much is too much when it comes to net-zero subsidies. In the Star, Tegan Hill and Matthew Mitchell were skeptical that this public expense would create as many jobs as promised or even keep the firm in the area.

Hill doubled down earlier this month, writing that large subsidies can even lead to layoffs if they incentivize resource misallocation. Meanwhile, Kent Fellows warned in the Globe that the tax breaks offered to green manufacturers alongside such incentives mean governments will lose money rather than see a positive return on their contribution. As he put it, “These are subsidies, not investments.”

Had funding been withheld and production relocated, the fallout would have likely been more expensive than the funding itself. Canada’s manufacturing is centralized, with vehicle production concentrated among just seven factories. This means any loss can cause substantial damage.

The closure of GM’s Oshawa factory in 2019 is estimated by labour union Unifor to have led to 14,000 job losses and cost Ontario $44 billion in GDP. The closure also cost federal and provincial revenues of $1 billion per year. Nevertheless, pessimists might say such closures are inevitable, with protective subsidies a meaningless waste of public funds.

But in other countries, these dour predictions have proven overly pessimistic.

When the U.S. Congress passed the IRA in August, it took just a few months to see returns. We don’t yet know how much has been spent, but the Congressional Budget Office estimates a cost of US$391 billion over 10 years.

That translates to an average monthly cost of $3.25 billion, or just $16 billion over the first five months. In that time, Climate Power estimates 94 new clean energy projects opened, adding over 100,000 jobs and totalling US$90 billion in private investments — a return worth four times the government’s original contribution.

Had subsidies not been offered, the U.S. economy would likely be smaller than it is today. Of those investments where the amount has been publicized, half (49 per cent) came from firms headquartered outside the country. It’s also unlikely those investments would have been made without the IRA, as clean power projects received more in private investment over the eight months following the act than they did in the five preceding years combined.

The American experience is no outlier. Japan is now planning to spend US$150 billion on sustainable projects, which are projected to catalyze $1 trillion in private spending.

France recently introduced a tax credit for investments in green technology that will cost the state €500 million per year but is projected to generate €23 billion in private investments by 2030.

Canada first experimented with the concept using the Strategic Innovation Fund through which the government invested C$2 billion into technologies, including net-zero industries, and triggered over $44 billion in private investment.

That’s not even taking account of the billions in consumer savings estimated from cheaper energy or the jobs indirectly created around new plants. As Deputy Prime Minister Chrystia Freeland and Industry Minister François-Philippe Champagne explained, "[Stellantis] only assemble batteries, they don't make the components, so all these components need to be made here in Ontario now: cathode, anode, separator, copper foil, electrolytes, lithium hydroxide — each of those six major components will be a $1-billion-plus company coming to Ontario."

That process won’t be automatic, but public subsidies do seem to be motivating private-sector growth in sectors beyond those directly funded. A new paper by the Banque de France showed the largest gains to the economy from subsidies come in their first 10 to 20 years, as external businesses form symbiotic clusters around subsidized industries. This means that while repayment to the government may be slow, delayed by tax breaks and other incentives, repayment to the economy could be rapid.

Neglecting the evidence that green subsidies can generate new jobs and investments, detractors of the Stellantis deal seem driven more by an ideological conviction limiting the state’s role in the economy than any rigorous cost-benefit analysis. So long as total gains are greater than the initial costs, governments should consider green subsidies a prudent investment and choose to promote growth rather than attempt to appear “responsible” in their spending. They should consider how much our economy stands to gain by these investments, and how much we can afford to lose.

Gideon Salutin is a researcher with the Social Market Foundation, a non-partisan think tank based in London, U.K., where he researches environmental policy, transport and inequality. Prior to joining the SMF, Gideon worked for the International Development Research Centre, reviewing sustainable development initiatives in the Global South and organizing dialogues at COP26 and COP27. He holds an MSc in International Social and Public Policy from the London School of Economics and BA Hons in Economic Development and History from McGill University.