A year ago, the global economy was on a different path. Joe Biden’sproposed Build Back Better Act —designed to onshore clean economy manufacturing — was stalled in Congress, Russia’s invasion of Ukraine threw Europe’s energy markets into chaos, global oil prices remained north of US$100 per barrel, and China’s sabre rattling signalled the end of globalization.
A number of pundits were suggesting that the clean economic transition would need to take a backseat to energy security and that it would not yet be economically viable, pointing to increased coal use in Asia and Europe, soaring LNG prices, and predicting a deadly European winter without heat.
Instead, these challenges galvanized the Biden administration, and with some deft political maneuvering, the Inflation Reduction Act (IRA) was passed. This act is now reshaping the global economy in ways not seen since President Truman’s 1948 Marshall Plan for post-WWII reconstruction.
What is the Inflation Reduction Act?
The IRA is a US$370 billion bet — that may ultimately reach a value of more than a trillion US dollars — on what is the largest industrial strategy since WWII to reshore manufacturing and transition the US economy away from fossil fuel dependence.
The act is an impressive feat: part industrial strategy, part climate plan, and part social justice — all with a protectionist bent. Nevertheless, it is a monster that will fundamentally and permanently change the US manufacturing landscape. Future administrations will be hard-pressed to undo the IRA as more than 80% of its funding for electric vehicles, clean steel, and heat pumps has gone to Republican-controlled districts, and requirements to use domestically sourced materials and onshore manufacturing appeal to voters of all stripes.
The IRA ushers in an era of guided fiscal incentives as industrial strategy, replacing the free market approaches used for decades. In its first six months, the IRA created 70,000 new jobs and unlocked more than US$81 billion in private capital directed toward 180 clean energy projects. Automobile and automotive battery manufacturers are beating a path to find suitable sites to establish new factories before the IRA incentives expire.
New analysis concludes that the IRA could add 1.3 million solar and 250,000 wind-related jobs in 2035 compared to the US economy without the IRA. The IRA could also lower energy costs and help reduce inflation while increasing productivity and raising economic output over time.
To prevent an exodus of capital and projects to the US and its many enticing incentives, the EU passed its Green Deal Industrial Plan in February of this year, worth around US$270 billion. The plan intends to create a more predictable and simplified regulatory environment, accelerate cleantech production in Europe through financing and investment, enhance skills, and make trade work for the clean energy transition while maintaining competition and open trade (the EU’s Carbon Border Adjustment Mechanism also enters its first phase in October of this year).
The IRA and Green Deal forced a choice for Canada’s finance minister: offer similar incentives or watch potential investments hemorrhage to the EU and US. In April, Canada opted to mirror the ambition of the IRA and Green Deal, and the federal government’s Budget 2023 announced $58 billion in investments to transition to a clean economy. Budget 2023 investments are primarily through investment tax credits and funding from the Canada Infrastructure Bank.
The Inflation Reduction Act and Canada’s Economic Transition
The economic transition is already happening. In 2022 alone, close to $8 billion in EV battery investments were announced in Canada. This number has risen to $35 billion with the recent announcements of the Ontario Volkswagen, Stellantis, and Northvolt battery plants. Alberta’s current investment in wind and solar is almost $4 billion.
Budget 2023 will further accelerate clean investments across Canada, whether in critical minerals in B.C., renewable energy in the Atlantic provinces and the Prairies, or battery and EV manufacturing in Ontario and Quebec. It will also help Canada’s Indigenous nations participate in the clean economic transition through new electricity generation and transmission projects.
However, it is of the utmost importance that budget announcements, such as new Investment Tax Credits for clean energy and hydrogen, are implemented as rapidly as possible. We are in a race to decarbonization, and being able to ensure that shovels can hit the ground quickly could give Canada a real edge against bigger spenders like the US and EU.
Alberta: Canada’s Best Bet for Clean Energy Success?
Ironically, the province and premier best positioned to benefit from Biden’s all-in bet on the new economy is Alberta and its Premier, Danielle Smith.
Alberta’s pledge to bring in balanced budgets over the next three years is on the rocks.
The province’s budget relies on a 2023 oil price of US$79 per barrel falling to US$73.50 by 2025/26 to make the math work. The problem is that — even with recent OPEC production cuts to stabilize the global oil price — in the first eight months of this year, the average oil price was already 4% lower than forecast, and at times over 10% lower. This is more pronounced for natural gas prices, which, since the turn of the year, have been 35% lower on average than what Alberta has forecast for budgeting purposes and have most recently tumbled to even less than half of that.
While Alberta’s fossil fuel future may be uncertain, the province’s economic opportunities excel in other ways. With its deregulated electricity grid, skilled workforce, and culture of innovation and “can do”, Alberta leads Canada in the growth of renewable electricity and clean hydrogen.
Alberta’s clean energy future is here now. The Business Renewable Centre reported last year that Alberta’s renewable market had seen “unprecedented” growth in 2021, securing almost $4 billion worth of new wind and solar investments. In 2021, Alberta accounted for 60% of new wind and solar electricity installed across Canada, and recent analysis from Clean Energy Canada found that solar is already able to produce cheaper power than natural gas in the province and is on track to be 16% less expensive by the end of the decade. What’s more, wind and solar costs are expected to decline by as much as 40% by 2035, compared to relatively flat costs for new gas deployments.
Additionally, modelling commissioned by Clean Energy Canada shows that, under a global net-zero economy by 2050, Alberta can expect to see 10% annual growth in clean energy jobs. In a net-zero future, there will be 418,900 Albertan clean energy jobs added between 2025 and 2050, almost 100,000 more than the 324,300 decline expected in fossil fuels. Notably, jobs in carbon capture and storage for industry are set to grow almost 900% between 2025 and 2050, with 38,300 Albertans employed in 2050. In fact, there will be more jobs in the clean energy sector in 2050 than in fossil fuels in 2025.
Alberta has always had a special role in the economic success of our country. For decades, its oil and gas production has generated wealth and prosperity that have touched Canadians far beyond its borders. Alberta is exceptionally well-positioned to build on that legacy — to provide the power and innovation that drive Canada’s growth toward our net-zero future. Unfortunately, business confidence in Alberta’s economy took a recent hit with their August pause on approvals for new renewable energy projects.
Thanks to the Inflation Reduction Act, the arrival of new tax incentives, and the federal government exploring innovative financing mechanisms like Carbon Contracts for Difference, all the ingredients are there to make Alberta a hub of new investment. But urgency is required — deals like these don’t hang around forever, and if we can’t get money out the door and provide investors with certainty, we might find ourselves snatching defeat from the jaws of victory.
This post was co-authored by Ollie Sheldrick-Moyle and originally appeared in The Future Economy.
