Industry Committee on Oct. 5th, 2023

[The Chair, Liberal, Joël Lightbound]

I call this meeting to order. Welcome everyone to meeting No. 88 of the House of Commons Standing Committee on Industry and Technology.

Today's meeting is taking place in a hybrid format, and I offer my greetings to our colleagues who are joining us virtually.

Pursuant to the motion adopted on September 26, today we welcome the Parliamentary Budget Officer to address the report, “Break-even Analysis of Production Subsidies for Stellantis-LGES and Volkswagen”.

I'd like to welcome Mr. Giroux, Parliamentary Budget Officer, who is accompanied today by Chris Matier, director general of economic and fiscal analysis, and Jill Giswold, senior analyst. We're sorry we had to cancel Tuesday's meeting. It was the circumstances of parliamentary life that forced us to, but we're delighted to be reunited with our guests today.

Before we go to the witnesses, because I hear the bells ringing, I need unanimous consent from the committee to continue the meeting until five minutes before the vote, if that's okay with everyone. I thought the bells were supposed to ring for 30 minutes, but I've checked, and it's only 15 minutes.

Do I have unanimous consent from committee members to continue the meeting at least until the end of Mr. Giroux's opening remarks?

[Some hon. members]

Agreed.

[The Chair, Liberal, Joël Lightbound]

Go ahead, Mr. Giroux.

[Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Thank you, Mr. Chair.

Good afternoon, members of the committee.

Thank you for the invitation to appear before you today to discuss our report, “Break-even Analysis of Production Subsidies for Stellantis-LGES and Volkswagen”.

With me today I have Chris Matier, director general, and Jill Giswold, lead analyst on the report.

Our report has two objectives. The first, which aligns with my mandate to promote greater budget transparency and accountability, is to detail the federal government's break-even analysis of the $13.2 billion production subsidy for Volkswagen announced in April. At that time, the Prime Minister and the Minister of Innovation, Science and Industry emphasized a break-even timeline of less than five years. However, the supporting analysis was not published. Our report bridges that information gap by explaining how the government estimated that timeline.

Furthermore, in July, the federal government and the Government of Ontario announced production subsidies for Stellantis-LGES of up to $15 billion, although neither government has announced a break-even timeline. This brings us to the report's second objective, which is to provide an independent break-even analysis of the $28.2 billion in combined production subsidies for Stellantis-LGES and Volkswagen.

We estimated that federal and provincial government revenues generated from the electric vehicle battery manufacturing plants over the period of 2024 to 2043 would be equal to the total amount of production subsidies. This implies a break-even timeline of 20 years, which is significantly longer than the government's estimated payback within five years for Volkswagen.

To arrive at this estimate, we used results from the same study—“Canada's New Economic Engine"—that Innovation, Science and Economic Development used to determine its break-even timeline. In preparing our analysis, we consulted with ISED and Finance Canada officials.

In addition, in June we reached out to the organizations that published the study—Clean Energy Canada and the Trillium Network for Advanced Manufacturing—and provided them with technical questions and data requests. Unfortunately, in August Trillium informed us that they were not in a position to answer our questions and indicated that they could potentially pick up the conversation in October if we were interested. Despite their response, we were confident in our understanding of their study and results in order to complete our analysis.

Contrary to what some have suggested, our estimated 20-year break-even timeline captures the direct, indirect and induced economic impacts that stem from the battery cell and module manufacturing nodes of the EV supply chain in the Trillium study. These are the supply chain nodes to which the Stellantis-LGES and Volkswagen production subsidies are tied.

In contrast to the federal government's break-even estimate, we did not include additional investments and the assumed production increases in other nodes of the EV supply chain of the Trillium study. In our view, the assumptions and modelling underlying the federal government's estimate significantly overstate the economic and fiscal impacts of the production subsidies, resulting in an optimistic break-even timeline.

First, there is uncertainty surrounding the future geographic location of new investments and production related to the other nodes of the EV supply chain. Given the highly integrated nature of the North American auto industry and the global nature of the automotive industry, it's not reasonable to assume that all new investments in the other nodes of the supply chain will automatically take place in Canada.

Second, the modelling used by the Trillium Network was based on an input-output framework. As we noted in our report, a key limitation of this framework is that there are no supply constraints. For example, in such a framework there is no scarcity or reallocation of labour, so every new job is a net gain to the economy. However, since supply constraints do exist, resources from other sectors and industries would have to shift to meet increased demand across the EV supply chain.

Therefore, given the uncertainty related to the future location of the EV supply chain and to the incrementality of the economic and fiscal impacts, we incorporated the production and spinoffs related to the cell and module manufacturing nodes in the Trillium study, accounting for the production schedules provided by Stellantis-LGES and Volkswagen.

That said, even our analysis included several optimistic assumptions. For example, we assumed that both plants would continue to operate at full production beyond 2032, when the production subsidies will be eliminated. We also assumed that government revenue yields related to cell and module manufacturing would increase significantly beyond 2030.

All in all, it is certainly possible that the break-even timeline for the $28.2 billion in production subsidies for Stellantis-LGES and Volkswagen exceeds our estimate of 20 years.

We would be pleased to respond to your questions. Thank you.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. Giroux.

There are 7 minutes and 22 seconds left before the vote. Do I still have the consent of the committee members to do a first round of questions? I understand that everyone here is going to vote electronically.

I think Mr. Perkins will begin the first round.

[Brad Vis, Conservative, Mission—Matsqui—Fraser Canyon, BC]

I'm sorry, Mr. Chair. Before we begin, are you allowed to be in the House of Commons in a committee meeting?

[The Chair, Liberal, Joël Lightbound]

I'm not entirely sure because—

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

Mr. Gaheer is actually sitting in the House.

[The Chair, Liberal, Joël Lightbound]

Yes, but there is a vote right now. The House is not—

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

I don't think you can sit in the House, though.

[The Chair, Liberal, Joël Lightbound]

Just to be clear and not to waste any more time, I'll just ask Mr. Gaheer to move to the lobby, or there are some rooms there may be more appropriate.

Mr. Perkins, the floor is yours.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

Thank you, Mr. Chair.

Thank you, Mr. Giroux and officials, for joining us.

The impetus for this study was the Prime Minister's and the minister's claim at the opening that this would break even in five years or less. In fact, the minister has said publicly, many times since April, that actually there was a return on investment and that return on investment would be five years or less. Every banker would actually love that kind of a deal. You're now telling us that it would take 20 years or more just to break even, if fairy dust is all sprinkled around in certain ways.

You made an assumption based on the Trillium report. Do you have any access to how the Trillium report's numbers of the ecosystem...because when I looked at the Trillium report, I can't find the word Volkswagen anywhere in it. Without mention of that specific deal and without access to the numbers that are behind this fairy dust report of Trillium's, how do you come up with the number that it's 20 years to get it back?

There are assumptions here about taxation levels on individuals and stuff that I think are quite generous.

[Yves Giroux]

That's an interesting question.

In fact, we use the Trillium report, but we don't endorse it because we cannot replicate—we did not even try to replicate—the numbers that are in the Trillium report. That was not our objective.

We just wanted to look at the government's statements that this would be paid back in less than five years. Using the same report that they used, we conclude that it's significantly longer than that because the government's statements to the effect that these investments would be paid back in less than five years assume not only that these battery plants will be built and operational but also that a whole ecosystem will be built.

Even in the Trillium report, the report admits that for that to happen it would require additional government subsidies for all these other nodes to be established in Canada—from mining exploration to EV assembly to even EV recycling—and also that these would require infrastructure investments, for example, to get access to the mines and the minerals. There are a lot of assumptions made in that report, which suggest that the statements that the government made to the effect that this would be paid back in less than five years are, to say the least, wildly optimistic.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

One of those issues is that, on the ecosystem, there's likely to be future subsidies since we know the only one that's been announced so far by the minister in Quebec is a subsidized ecosystem.

There are 14 parts to the battery. Over 90% of the cathodes that are made for EV vehicles are made in Asia, and we know the CAMI plant that the Prime Minister and the Liberals made a big deal about six months ago has now shut down because of the lack of supply chain, and that's even with subsidies.

Is there any guarantee that this facility will continue to make batteries at the level that's projected until the subsidy ends? My second question would be this: Are there any guarantees that the plant will continue to operate when the subsidies reach zero in 2032?

[Yves Giroux]

I haven't seen any guarantees, certainly not in the contracts, that force Volkswagen or Stellantis to continue to operate the plants beyond the expiry of the subsidies. In fact, ministers have been clear that they are conditional subsidies that are tied to production, so I don't think that there are any guarantees that the plants will have to operate at full capacity even while the subsidies are being paid.

That's the short answer to your question.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

To get the payback of 20 years, it has to operate for 20 years—

[Yves Giroux]

Exactly.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

—so if the plant doesn't operate after 2032, then the payback is a minuscule amount of the money that's in there. Mind you, it's based on, in the case of Volkswagen, $15 billion of production subsidies until that point.

Is there any limit...? Let's say that miraculously the plants get an unlimited amount of access to these 14 parts and the minerals in them. Is there any limit to its going above the 100% level that you base this on? Could the subsidies actually be higher and, therefore, cause a further lengthening of the payback?

[Yves Giroux]

Do you know?

[Jill Giswold, Senior Analyst, Office of the Parliamentary Budget Officer]

For the Stellantis agreement, the amount was up to $15 billion that the government announced, so that comes with a cap. I believe the latest Northvolt is an up-to amount.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

Does Volkswagen have a cap?

[Jill Giswold]

We did not see any mention of that for Volkswagen, no.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

In terms of the likelihood of this payback happening in 20 years, the way you've put it, what would you give as a ballpark percentage, if we were betting as parliamentarians, that it will take 20 years and not five—or longer?

[Yves Giroux]

I don't tend to be a betting man because I know the odds of betting are usually stacked against me.

What I've said in my opening remarks is that even the 20-year timeline for the break-even is probably optimistic. I wouldn't want to prove the probability of that because I'm unlikely to be in the same position in 20 years.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. Perkins and Mr. Giroux.

Given that the bells will stop ringing soon, I will suspend and we'll resume after the votes.

The meeting is suspended.