The transition to a zero-tailpipe emissions future in North America has coincided with a resurgence of industrial policy in the United States. This confluence, combined with the movement away from globalization and free trade to managed trade arrangements, and a business environment focused on ethical and sustainable investing, have necessitated a sector-wide re-imagination. As Sarah Goldfeder writes, this is an opportunity like no other – generational, transformational, and complex.

Sarah Goldfeder

The re-negotiation of the North American Free Trade Agreement, now USMCA/CUSMA/T-MEC, re-defined the rules of origin for the automotive sector, ensuring the survival of North American manufacturing. It also added a consideration for labour value content, new in this agreement, that effectively upped the ante, requiring that at least 40 percent of the value of eligible vehicles be produced by workers who earn the equivalent of at least US$16 as an hourly wage. The New NAFTA, as it is commonly called, combined with the qualifications for consumer incentives for EVs contained in the Inflation Reduction Act (IRA), effectively codified friend-shoring before friend-shoring was a thing.

The North American auto sector has been integrated since the Auto Pact of 1965, ensuring that both Canada and the United States have a place in the production of parts and vehicles for an integrated market, guided by aligned regulatory processes for both motor vehicle safety and emissions. Historically, Canada has accounted for approximately 10 percent of North America’s vehicle production, and with the move towards EVs, that percentage should only increase.

The future of the sector will rely heavily on the availability of ethically and sustainably produced critical minerals and rare earth elements. Both critical minerals and rare earths are currently primarily produced and processed outside of North America, but the combination of the requirements laid out in CUSMA, the US IRA consumer incentive structure, and the push towards sustainable and ethical governance from investors and consumers alike, all but guarantee a role for a Canada in the future. Nowhere on the planet is better situated to benefit from the supply chain transitions in the automotive sector than Canada.

Canada is rich in mineral resources, has clean energy to power the extraction and processing requirements and, most important of all, is next door to the primary market. The old adage of geography is destiny has never been more appropriate. Canada’s proximity to the market and the overwhelming costs of mining, processing and manufacturing, including in greenhouse gas emissions, mean that it is in a pole position.

Quebec has understood the opportunity and prepared itself uniquely to optimize its advantages. The investment in the industrial park in Bécancour is one example. Situated on key transit and trade routes, powered by almost 100 percent emissions-free electricity and close to the natural resources that will be needed for battery production, it is a natural site for mineral processing.

The regulatory frameworks that govern the steps along the way are rigorous, but also an advantage. OEMs, investors, and consumers are all committed to the same sets of values that prioritize sustainability and community. The devil is in the timing. Pulling all the strings together, in a timely fashion that facilitates the current, accelerated rate of construction and commissioning, is necessary to protect Canada’s advantage in this race.

Canada has a window of opportunity. The investments that will create the foundation for the new automotive sector are happening now. Being aggressive on upstream investments will lead to the downstream investments that sustain the auto sector. What do upstream investments look like?

They include mineral processing – the steps along the way that turn raw mineral ore to battery materials. Even if that processing needs to depend initially on materials imported from elsewhere, situating it in Canada provides the rationale for future investments in mining projects. Auto makers and others understand the Canadian advantages and have positioned themselves to benefit. All of them understand that having the midstream processing capabilities near mineral deposits and gigafactories only makes sense, and (again) that geography is destiny.

The old adage of geography is destiny has never been more appropriate. Canada’s proximity to the market and the overwhelming costs of mining, processing and manufacturing, including in greenhouse gas emissions, mean that it is in a pole position.

The Canadian auto sector is both integrated and reliant on the United States market. The cars made here are sold there. This means that whatever the regulatory standards are in the United States, it makes sense for Canada to align in ways that facilitate one North American market. The Motor Vehicle Safety Act in Canada facilitates alignment between the National Highway Transportation Safety Board (NHTSB) in the US and Transport Canada on regulations that apply to safety standards. Initially, the Corporate Average Fuel Economy (CAFÉ) standards for greenhouse gas emissions did the same thing for emissions.

One of the early battlefields of the Trump administration was these very standards. The Trump roll-back created new friction in the marketplace, with California choosing to create its own standards, rather than relinquish the advancements towards an all-electric future. That opened the doors for others, including Canada, to consider how to forge ahead on the pathway to zero tailpipe emissions. The Biden administration doubled down on the original intent of the CAFÉ standards and spent the first two years of its mandate reworking them, releasing them just recently.

Canada was ahead of that process, as it had begun the rework of the regulations earlier. Rather than wait for the U.S. Environmental Protection Agency (EPA), Environment and Climate Change Canada (ECCC) in late December 2022 released a proposed regulatory framework that would entrench the disharmonization from the US standard. Consultations are ongoing, but the hope of the industry is that the recent April release of the US-updated standards will provide enough stringency to convince ECCC to re-align.

The reality is that the new US standard will essentially force the industry to produce and sell zero-emissions vehicles because it is otherwise impossible to meet the requirement. This is the stick that the Biden administration has developed to complement the carrots included in the IRA.

The Biden administration outlined its transition goals in two pieces of legislation, leading with the Infrastructure, Investment and Jobs Act (IIJA). Within the IIJA, the Biden team inserted funding for EV charging infrastructure. The National Electric Vehicle Infrastructure (NEVI) program provides up to 80 percent of project funding to states to “strategically deploy electric vehicle (EV) charging stations and to establish an interconnected network to facilitate data collection, access, and reliability.”

Canada’s Zero Emission Vehicle Infrastructure Program (ZEVIP) provides up to 50 percent of project funding. These two programs specifically address one of the biggest concerns consumers have about EVs – range anxiety and the availability of charging stations. Both programs also fall short. The United States has a stated goal of 500,000 public charging stations by 2030. In contrast, Canada’s goal is 84,500. Industry experts agree that both these targets are far less than what is needed.

That said, most of the early adopters of EVs charge at home and many consumers find that at-home access to vehicle charging is sufficient for the bulk of their driving requirements. Which means that we need another kind of infrastructure investment – into bi-directional charging and clean energy grids. All of this is attainable, but it does require innovation and investment. Governments will have to overcome the initial loss trap for both charging and supporting infrastructure, providing subsidization until there is a market case for investment, in order to ensure the transition is successful.

It is critical to understand the pace of this transition. Innovation is happening in real time and everything, including processing methods for minerals, production methods, and battery chemistry, is evolving. The pace of this change is being driven by those core concerns of supply, sustainability, and affordability. There are two keys to getting consumers to commit to the EV future: reliability and affordability. That means creating the appropriate infrastructure to power them and managing the cost of the vehicles.

One more critical piece of the puzzle is consumer incentives. Electric vehicles are an example of when consumer incentives are best deployed: EVs are, in general, more expensive than their internal combustion equivalents and public policy priorities demand that we move traditional consumer choices toward these EVs. Consumer demand for EVs will mean, at some future point, that incentives can be phased out, but for now, they have a critical part to play in the success of these vehicles. The United States, in the IRA, has created double-duty requirements inside their consumer incentives. This leveraging of incentives as a policy tool means that it no longer just guides consumer behavior, but also the auto sector.

The thresholds for adoption of EVs in Canada are higher. There are the geographic and climate factors that cause many consumers to think twice about EVs outside of the major urban centers as well as the availability of fewer consumer incentives. But the secret to the Canadian market is the US market. Canadians will have access to the best EVs in North America if those vehicles are first and foremost successful in the U.S. market.

In this new industrial revolution, Canada has a unique combination of competitive advantages. We are on the right path and the pace of investment by automakers in Canada is proof. This is a transition that the planet, its people and our governments have demanded. We must make it work.

Contributing Writer Sarah Goldfeder, a former State Department officer who served under two American ambassadors to Canada, is a member of the public policy team at GM Canada, based in Ottawa.