Opinion: The true costs of a transitioned economy with EVs

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Slightly more than one year ago, I argued that the looming federal policies and regulations for EV mandates for a 100 percent electrified transportation fleet by 2035 could result in more than just unintended negative consequences.

In December 2023, Canada reaffirmed new targets for light-duty vehicles under the Environmental Protection Act that would require a 100 per cent EV transportation fleet by 2035. Meanwhile, the marketplace is showing a significant shift in public sentiment to the overall acceptability of pure EVs. Major North American manufacturers, confronted with material financial losses and mounting unsold inventories have understood this trend and, even in the face of mounting regulatory demands, are slowing EV production — a trend also reflected by major car rental corporations as they reduce their EV fleets. Globally, although all-electric vehicle registrations have increased year to year, the overall market share appears to have plateaued at 15 per cent of total sales. For Canada, Statistics Canada reports sales of EVs amount to three per cent of 2022 registrations.

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While some may view these trends as normal for a marketplace as it “transitions” to an electrified transportation sector, many would view them as yet another confirmation of the risks of central planning. Major corporations that are accountable to shareholders and sensitive to the needs and wants of consumers are quickly adapting to the realities of the marketplace as consumer demand for EVs appears to have largely plateaued as buyers choose more affordable, practical hybrid and ICE vehicles.

There are material issues for Canada should these trends negate aspirations for 100 per cent adoption of EVs by 2035, especially in light of the material subsidies and consumer grants designed to speed adoption of electric vehicles. During recent meetings in Davos, Finance Minister Freeland cited billions in subsidies and urged delegates to consider investments in Canada’s net-zero decarbonization programs noting that: “We think this is a moment that cement is being poured for the new economy”.

Those federal ambitions are being furthered by a $15-billion Canada Growth Fund for decarbonization projects allocated to the Public Sector Pension Investment Board, and net-zero investment tax credits for green transition incentives, ostensibly established to compete with the U.S. Inflation Reduction Act (IRA), that are estimated to exceed $120 billion. These massive subsidy programs, crafted to encourage “investment” in a Canadian green transition, have also seen billion-dollar agreements to subsidize electric battery plants in Ontario and Quebec.

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The Parliamentary Budget Office has expressed caution that the estimated total cost of governmental support for EV battery manufacturing would be $43.6 billion from 2022-23 to 2032-33 – $5.8 billion more than originally announced costs. With an estimated “break-even timeline” of 15 and 23 years required to recoup the $13.2 billion and $15 billion, production subsidies that have been negotiated with Volkswagen and Stellantis, respectively, medium-term automotive preferences of Canadians could seriously derail these predicted returns.

The March 2023 federal budget tabled by Minister Freeland indicated that Canada’s overall budgetary balance had worsened by almost $70 billion over five years with a predicted deficit for 2023-24 estimated at $47 billion. Meanwhile, the federal government continues to push ahead with its aggressive green agenda with more regulations and massive subsidies. But what would be the consequences should the Canadian marketplace reject, in whole or in part, implementation of the proposed EV regulations? Experts increasingly are questioning the practicality of the proposed regulatory EV mandates to prohibit the sale of ICE vehicles by 2035. Worse, there are signs that many of the economic assumptions underpinning the current subsidies may prove to be optimistic should projections for EV sales, and the concurrent need for batteries, not be met.

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In addition to material legal issues associated with the planned rapid transition to EVs, there are other parallel, compounding risks as Canada struggles to address the costs and logistical challenges required to double its national electrical generation and transmission system to meet current federal objectives for a 100-per-cent net-zero Canadian electrical grid by 2035.

In short, there may be much more at stake here than Canada’s faltering productivity. The proposed EV regulations, along with associated policies and subsidies designed to effect the net-zero transition, entail negative financial risks that private sector investors are clearly unwilling to accept without subsidization. Ottawa needs to acknowledge these financial risks and, in light of Canada’s declining productivity, mounting debt levels and challenges from inflation, understand that the preferences of Canadian consumers appear to be increasingly at odds with their goals for a “transitioned” economy.

Ron Wallace is a fellow of the Canadian Global Affairs Institute who resides in Calgary.

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