Automotive
Ottawa’s EV mandate may destroy Canadian auto industry
From the Fraser Institute
No one had to force the public to abandon land lines for cellphones, or vinyl records for CDs and then online streaming. When superior products appear, people will switch voluntarily. An EV mandate may be affordable by 2035—but only if the product quality and user costs have progressed to the point that people want to switch anyway, in which case the mandate is not needed.
According to energy transition and “net zero” enthusiasts, the future looks bright for electric vehicles (EVs). So bright that the federal government and some provincial governments have had to offer some $15 billion in subsidies to prompt carmakers to develop Canadian production facilities while also offering lavish subsidies to get people to buy EVs. And since even that isn’t enough, according to a Trudeau government mandate, all new light-duty vehicles sold in Canada must be electric or plug-in hybrid by 2035. In other words, the government wants to ban traditional internal combustion engine vehicles (ICEVs).
The fundamental problem is that EVs cost more to make and operate than most consumers are willing to pay. In a 2016 submission to the Quebec government, which was then considering an EV mandate of its own, the Canadian Vehicle Manufacturing Association warned that its members were then losing between $12,000 and $20,000 per EV sold. Since then, the situation has gotten worse, with Ford reporting first quarter 2024 losses of US$132,000 per EV.
What will be the economic consequences of a national EV mandate in Canada? In a new paper forthcoming in the peer-reviewed Canadian Journal of Economics, I develop and run a detailed inter-provincial model of the Canadian economy including the auto sector. I argue that during the phase-in period the auto sector will raise the price of ICEVs and earn above-market rents on them, but that won’t cover the losses on the EV side and the industry will go into overall losses by the late-2020s. The losses will be permanent unless and until EV production costs fall enough that a mandate is unnecessary. In short, the 2035 mandate is affordable only if it’s not needed. If it takes a mandate to force consumers to choose EVs over ICEVs, the mandate will destroy the Canadian auto industry.
The mandate sets up a race between regulation and technology. Some aspects of EV production are falling, such as batteries. Others, such as specialty metals used in motors, are sole-sourced from China and are not getting cheaper. Other user costs are rising including electricity, for which we can thank two decades of green energy madness. Taking all aspects together, suppose EV technology improves so quickly that by 2035 consumers are absolutely indifferent between an EV and an ICEV, so the mandate is costless thereafter. Getting to that point would still impose Canadian auto industry losses that total $140 billion compared to the no-policy base case. As of 2031 the losses in real GDP and industrial output compared to the base case would average more than $1,000 per worker across Canada. Greenhouse gas emissions would fall by just under 3 per cent relative to the base case as of 2035, but the abatement costs reach about $2,800 per tonne as of 2030.
That’s the best-case scenario. What if full EV cost parity takes until 2050? According to the model, the auto sector will lose $1.3 trillion relative to the base case between 2025 and 2050. Of course, in reality the sector would simply shut down, but in the model a sector must keep operating even at a loss. In absolute terms the national economy would continue to grow but much more slowly. Economic losses relative to the base case as of 2035 include a 4.8 per cent reduction in real GDP nationally (8.9 per cent in Ontario), a 2.6 per cent cut in real earnings per worker, 137,000 jobs lost, a 10.5 per cent drop in auto demand nationally and a 16.8 per cent drop in capital earnings relative to average. Greenhouse gas emissions would fall by just under 6 per cent against the base case as of 2035 but at a cost of more than $3,400 per tonne, 20 times the nominal carbon tax rate.
These are unprecedented costs, but then again we have never before proposed to ban the production and purchase of one of the most popular consumer products of all time. A large part of our economy is organized around making and using gasoline-powered cars, so if the government plans to outlaw them we should not be surprised that doing so will have harsh and far-reaching economic consequences. While production of EVs will partially offset the losses, it’s a classic error in economic reasoning to suppose the policy package as a whole could yield a net gain or offer a genuine economic opportunity. If it could, think of all the economic growth we could contrive simply by banning things. We could ban computers and make people read books instead—think of the boom in publishing. We could ban all forms of transportation and make people walk. Think of how much money they’d save, and the opportunities this would open up for shoemakers.
I better stop there before I put ideas in politicians’ heads. To be clear, people are willing to pay for computers, cars and lots of other things because they perceive that they get greater consumption value than the cost of buying the item. So far that has not proven to be true of EVs, so an EV mandate by definition must make people worse off. No one had to force the public to abandon land lines for cellphones, or vinyl records for CDs and then online streaming. When superior products appear, people will switch voluntarily. An EV mandate may be affordable by 2035—but only if the product quality and user costs have progressed to the point that people want to switch anyway, in which case the mandate is not needed.
Will an EV mandate destroy the Canadian auto industry and impose serious harm on the Canadian economy? There’s a simple way to tell: if the government perceives, based on trends in vehicle sales data, that a mandate is necessary to force consumers to switch, the answer is yes.
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Quick Hit:
Nissan is reportedly abandoning merger talks with Honda, scrapping a $60 billion deal that would have created the world’s third-largest automaker. The collapse raises questions about Nissan’s turnaround strategy as it faces challenges from electric vehicle competitors and potential U.S. tariffs.
Key Details:
- Nissan shares dropped over 4% following the news, while Honda’s stock surged more than 8%, signaling investor relief.
- Honda reportedly proposed making Nissan a subsidiary, a move Nissan rejected as it was initially framed as a merger of equals.
- Nissan is struggling with financial challenges and the transition to EVs, still reeling from the 2018 scandal involving former chairman Carlos Ghosn.
Diving Deeper:
Merger talks between Nissan and Honda have collapsed, according to sources, after months of negotiations to form an auto giant capable of competing with Chinese EV makers like BYD. The proposed deal, valued at over $60 billion, would have created the world’s third-largest automaker. However, differences in strategy and control ultimately derailed the discussions.
Reports indicate that Honda, Japan’s second-largest automaker, wanted Nissan to become a subsidiary rather than an equal merger partner. Nissan balked at the idea, leading to the collapse of negotiations. Honda’s market valuation of approximately $51.9 billion dwarfs Nissan’s, which may have fueled concerns about control. The failure of talks sent Nissan’s stock tumbling more than 4% in Tokyo, while Honda’s shares rose over 8%, reflecting investor confidence in Honda’s independent strategy.
Nissan, already in the midst of a turnaround plan involving 9,000 job cuts and a 20% reduction in global capacity, now faces mounting pressure to restructure on its own. Analysts warn that the failed merger raises uncertainty about Nissan’s ability to compete in an industry rapidly shifting toward EVs. “Investors may get concerned about Nissan’s future [and] turnaround,” Morningstar analyst Vincent Sun said.
Complicating matters further, Nissan faces heightened risks from U.S. tariffs under President Donald Trump’s trade policies. Potential tariffs on vehicles manufactured in Mexico could hit Nissan harder than competitors like Honda and Toyota. The stalled deal also impacts Nissan’s existing alliance with Renault, which had expressed openness to the merger. Renault holds a 36% stake in Nissan, including 18.7% through a French trust.
While both Nissan and Honda have stated they will finalize a direction by mid-February, the collapse of this deal signals deep divisions in Japan’s auto industry. With Nissan’s financial struggles and the growing dominance of Chinese EV makers, the company must now navigate an increasingly challenging market without external support.
From Energy Now
By Jim Warren
Northvolt, a wannabe electric vehicle (EV) battery manufacturing superstar, based in Sweden filed for Chapter 11 bankruptcy protection in the US on November 21, 2024. In just eight years the company had blown through $15 billion USD in startup capital. Bloomberg says it was one of the most indebted companies to file for bankruptcy in the US in 2024.
Northvolt promised to be everything green transition crusaders could hope for in a company. And it isn’t surprising the “whiz kids” in the Prime Minister’s Office and the environment ministry made sure Canada got in on the action. According to Bloomberg, Canada made pledges amounting to $7.3 billion CAD ($5.4 billion USD) in loans, equity stakes and subsidies for Northvolt.
Canada’s investments included support for the construction of four electric vehicle (EV) battery factories—one in B.C., two in Ontario and one in Quebec. As of today, only a cockeyed optimist could believe those four plants will be churning out batteries any time soon, if ever.
Northvolt was supposed to be a cutting-edge EV battery innovator. It had the cachet of companies claiming to be implementing next-generation technology. When the company was launched in 2016 it was hailed as Europe’s flagship entry into the international race to produce enough non-Chinese batteries to support a widely anticipated boom in electric vehicle demand in Europe and North America.
For eight years Northvolt rode the wave of green propaganda that accompanied government regulations phasing out the production of vehicles with internal combustion engines. The company further endeared itself with environmentalists by claiming it would be at the forefront of development for the mammoth batteries required to back up solar and wind power generation.
The Economist reports that prominent Wall Street players like BlackRock, Goldman Sachs and JPMorgan Chase ditched any aversion they might have had for getting into business with governments. They contributed to the $15 billion in startup money. Governments got on the Northvolt band wagon. Northvolt received $5 billion USD in grants from five countries: Canada, the European Union (EU), Poland, Germany and of course Sweden.
Private investors weren’t deterred by the fact governments had “picked a winner.” They actually liked the fact governments were backing Northvolt. They assumed the governments of wealthy countries dedicated to Net Zero by 2050, would patiently nurse Northvolt through its growing pains and back it financially when setbacks arose. Risks would be minimized—success was as close to guaranteed as anyone could hope to expect.
Governments in Europe as well as Canada had been busy implementing policies designed to reduce CO2 emissions and combat climate change. Building EV batteries dovetailed nicely with those goals. It was a virtuous circle of mutually reinforcing virtue signaling.
Around the same time it was becoming fashionable for businesses to adopt the principles of Environmental, Social and Governance (ESG). “Progressive” investors including union pension funds required companies they invested in to adopt the goals of environmental sustainability, diversity, equity and inclusion—the core missions of ESG.
Some of Europe’s car makers got behind Northvolt. They wanted to see a vertically integrated European EV industry developed to better withstand competition from cheaper Chinese imports. VW, BMW and Scania AB pre-ordered $50 billon USD worth of Northvolt’s products.
By the fall of 2024, Northvolt already had at least one foot planted on a banana peel. But that didn’t prevent 24 lenders including JPMorgan Chase from throwing it a $5 billion USD lifeline. According to The Economist, this was the biggest “green loan,” ever made in Europe. It apparently wasn’t big enough to prevent the company from filing for Chapter 11 protection.
Odd as it seems in hindsight, private sector investors had embraced a project led by politicians, bureaucrats and research scientists with little to no experience in commercializing their lab experiments. The company’s inability to meet the technical challenges of increasing production to the point of commercial viability was one of the reasons it failed. It turns out it is hard to transform next-generation technology from ideas that work in a test tube into something that makes money.
Ironically, it is car makers from China who are best placed to capitalize on Northvolt’s downfall and dominate Europe’s EV and battery markets. Without tariff support European and North American automakers simply won’t be able to compete with the less expensive government-subsidized Chinese made models.
In 2015 the Chinese government launched its ambitious “Made in China 2025” project. Under the program the government has plowed hundreds of billions into industries that combine digital technology and low emissions technologies. The EV sector was one of the program’s big success stories. Last year, BYD a Chinese manufacturer, overtook Tesla to become the world’s biggest EV producer.
This past November The Economist reported, Chinese auto makers already account for two-thirds of global EV production. They had sold 10 million of them in the previous year. Chinese manufacturers also made 70% of the EV batteries produced globally in 2024. Big investments in factory automation in Chinese EV plants have increased per worker productivity, reducing manufacturing costs.
Government subsidies combined with manufacturing know-how succeeded in creating the world’s most significant EV and EV battery manufacturing industries in China but similar efforts in Europe and North America (e.g. Northvolt) are struggling. It is embarrassing to realize China has become the world’s largest manufacturer and exporter. The West has been left in the dust when it comes to making things like solar panels and EVs.
Europe’s car makers are pressing their governments to limit the number of Chinese made EVs sold in Europe. Yet some EU member states like Germany are reluctant to antagonize China by putting tariffs on its EVs—many German manufacturers rely on access to the Chinese market.
EV sales declined by 5% across Europe in 2024 and high prices for European models are one of the factors responsible for declining sales. Allowing cheaper Chinese EVs into Europe tariff-free should improve EV sales making it more likely that governments’ emissions targets are met. But that makes it more likely that some European car makers will struggle to remain profitable. If large numbers of auto workers are laid off in Europe it will signify the breaking of a major promise made by environmentalists and governments. They have consistently assured people the green transition would create more than enough new green jobs, to make up for job losses in high emissions industries.
The bad news for EV champions extends beyond Europe. Donald Trump has signed an executive order killing federal grants to consumers purchasing electric vehicles. Getting rid of the Biden administration’s EV subsidies should give internal combustion engines a new lease on life. You have to wonder how Trump squared that move with Elon Musk. Perhaps Trump’s promise of tariffs on Chinese goods has been enough to satisfy Tesla. It helps that many EV purchasers in the US prefer big luxury models since the Chinese don’t make too many electric Hummers.
Here in Canada, the Liberal government has said it will cease subsidizing EV purchases as of March 31. It looks more and more like the wheels are coming off the Trudeau-Guilbeault environmental legacy.
While the EV markets in Europe and North America are on shaky ground it is unlikely Northvolt will find the investors required for another last minute bailout. That’s good news for people concerned about Canada’s fiscal health–the Liberals won’t be able to blow any more money on Northvolt if it doesn’t exist.
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