Canada matches Biden’s subsidies to win Volkswagen battery factory

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(Bloomberg) — Prime Minister Justin Trudeau’s government has agreed to subsidies that could amount to up to C$13 billion ($9.7 billion) over a decade to build an electric vehicle battery plant by Volkswagen AG, the home of The company’s first giant machine outside of Europe.

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The money was provided through an unprecedented contract negotiated by Trudeau’s industry minister, François-Philippe Champagne. According to government officials, Canada will provide annual production subsidies as well as subsidies for the plant’s capital costs – effectively matching what the German carmaker can get. passed the Inflation Reduction Act if they set up factories in the US.

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The agreement provides a stark example of how America’s trading partners are trying to catch up with the financial incentives contained in the climate law signed by President Joe Biden last year. The minister said the plant, which is part of Volkswagen’s PowerCo unit, will likely be the largest production site in Canada.

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Champagne and other government officials believe that financial support for Volkswagen is necessary to protect Canada’s position in the auto sector in North America as the country retires from internal combustion engines and to ensure Canada does not considered not only an important mineral supplier but also a source of advanced production and clean technology. The minister said the government is also negotiating financial support for a plant that LG Energy Solution and Stellantis NV say they are planning to build in Ontario.

“This is about us seizing the generational opportunity,” Champagne told Bloomberg News in an interview. This is about raising our level of ambition.

The minister said the plant, which will cost about $7 billion Canadian dollars to build, will be the size of 350 football fields and will create thousands of jobs in the area around St. Thomas, the southern Ontario city where it will be located. hours northeast of Detroit.

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Champagne argues that the economic value of bringing one of the world’s largest automakers to Canada for the first time — with the extra supply chains it will create — is far outweighed by the cost of subsidies. granted to the government.

However, the size of the offers is remarkable. Manufacturing assistance alone is expected to range from C$8 billion to C$13 billion over 10 years, depending on the number of manufacturing plants and what happens to US policy. The contract was drafted so that Canada’s producer subsidies would only stay in place as long as the Inflation Reduction Act was in effect. If the United States reduces incentives for clean manufacturing, then Canada will decrease accordingly.

On top of that, Canada is providing approximately C$700 million in capital expenditure financing to Volkswagen through its Strategic Innovation Fund. And there may be more money from the provincial government of Ontario, though Champagne declined to go into details.

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The Inflation Reduction Act, despite its name, is in fact a law that enacts large-scale subsidies to low-carbon industries, particularly through production tax credits. Those incentives are generous and widely available, meaning they could exceed $370 billion in officially estimated costs, depending on how widely they’re used.

This act has put enormous pressure on Canada and other US trading partners to either provide money or lose lucrative new investments in the green economy. In a speech in Washington last week, Canada’s Finance Minister Chrystia Freeland warned that democracies should avoid a “race to the bottom” on corporate subsidies that could erode the tax base and their social safety net.

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Volkswagen’s Canada deal also raises questions about how much financial support other automakers and battery makers can get. Last year, LG and Stellantis announced a $4 billion joint venture in nearby Windsor, Ontario, across from Detroit.

“We are in talks,” Champagne said when asked if the LG-Stellantis factory would receive a similar offer from Canada. He pointed out that the government has promised to level the playing field with the US.

Champagne added that the sheer size of the subsidies means Canada has to be selective. When asked how many battery factories the country could actually support, the minister said it would be “preferably a few of them”.

Prime Minister Trudeau’s Liberal government is likely to face some backlash over the deal. It has received some criticism for not providing more details on costs. “How much Canadian money did he give to this foreign corporation?” Conservative leader Pierre Poilievre tweeted shortly after the plant was announced last month. “How much does each job cost?”

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Canadians will understand why the government is spending so much money to attract Volkswagen, Mr. Champagne said. He also noted that the money won’t start flowing for many years, as it’s tied to production at a factory that still needs to be built.

The industry minister argued that the economic impact of the factory in the first five years would be equal to the entire government budget devoted to it. Over the next 30 years, he said, the plant will generate more than $200 billion in value for Canada.

“You have to look at what other people are doing, and especially in our case, what the United States is doing,” he said. “What is the cost of inaction?”