Trudeau will force a business case for EVs whether we like it or not

Trudeau will force a business case for EVs whether we like it or not

Whether there’s a business case for EVs is a question most of the rest of the world currently seems to be asking. But not Canada

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“Don’t put all your eggs in one basket” is the oldest rule of investment diversification. Really shrewd investors go one step further and don’t put all their baskets on the same truck.

In the literature, such rules of thumb are known as “naive diversification.” Sophisticated diversification looks at the covariance of the returns of different kinds of investments. Those that go up and down together might as well be a single investment.

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For true diversification, you want assets whose returns move in opposite directions through the business cycle. That way you’re protected: if one asset goes up, the other goes down. If the historical covariances are reliable predictors of future patterns, you can in theory mix up your asset allocation to choose from a wide range of risk/return profiles. Of course, the future often surprises.

Do you get the sense that the federal government is practising even naive, eggs-in-different-baskets diversification regarding its favoured industrial policy? Or that it has any inkling that the future can surprise? Or is the government, as it would appear to be, all-in on batteries and electric vehicles?

Lately, it’s as if Prime Minister Justin Trudeau, finding himself of a morning in a mid-sized Ontario or Quebec town, looks around (as one could imagine, in another era, Louis XIV looking around) and says, “This is a fine looking place with, in our opinion, all the makings for an electric vehicle/battery manufactory. Here, my good people, is several billions of dollars of taxpayers’ money. Take it and build such a factory.”

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First there was the $13-billion deal with Volkswagen to build a battery plant in St. Thomas, Ont. Then, after Stellantis-LG Energy Solution objected, the government more than matched that deal for a plant in Windsor, Ont. And then it added another almost $5 billion for a Northvolt battery plant in Saint-Basile-le-Grand, Que. (previously best known as the site of a PCB warehouse fire in 1988).

The announced total of these deals was $37.7 billion, though the parliamentary budget officer reported in November that the real cost would be more like $43.6 billion. And we know that when the spending actually starts, with Ottawa in charge, “Versailles’ the limit,” as you might say. And now, right on cue, there’s another $5 billion for a new Honda EV/battery operation in Alliston, Ont.

I’m from a cohort that’s still impressed by a million dollars. I realize the average selling price of a home in Canada in March was almost $700,000, which is well on its way to $1 million, but whenever people ask, “Do you want to be a millionaire?” my rule is always to say “yes, please.”

A billion dollars — a thousand times that — I have trouble grasping. I know the old joke in Ottawa is, “What’s a billion?” But the current Ottawa crew seems awfully at ease tossing around $13 billion here, $15 billion there, at the rate of several billion a week, it seems.

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These days Canada’s GDP is running at almost $3 trillion a year; the $43.6 billion Ottawa is spending on just the first three big EV/battery deals is about 1.5 per cent of GDP. That’s real money with real consequences. Especially when the government backs it up with rules and prohibitions.

The prime minister, who has no background in business, is nevertheless fond of talking about “the business case” for things. There is no business case for exporting liquefied natural gas (though it’s an established thing), he told German Chancellor Olaf Scholz, who came asking for help just after Russia invaded Ukraine. But there is a business case, apparently, for exporting hydrogen (though it’s not yet an established thing).

Whether there’s a business case for electric vehicles is a question that most of the rest of the world currently seems to be asking. If you’re the head of a car company that has made big bets on EVs, you must be seriously worried that demand for them is falling. You may even be scaling back production because dealer lots are filling up with unsold cars.

But in Canada, there is no such self-doubt. Doubt be damned, the government powers ahead. First there’s the torrent of money it is pouring into the industry. And then there’s the banning of competing technologies: no new gasoline-powered cars after 2035, no matter how wonderfully efficient this technology, now well into its second century, has become. Plus a hard cap on oil and gas emissions, which pretty much means a hard cap on oil and gas output.

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Economists would say: tax carbon at a price reflecting the damage it does and then see what happens. If there’s an energy transition, fine. If there’s no energy transition, that means the damage done by burning carbon-based fuels is less than the benefit they produce.

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But this government says: There must be a transition. We insist on a transition. And to make sure it happens we need to get businesses to stop teetering and fall off the fence into the transition. So we create the business case by forcing the issue with subsidies firms can’t say no to and rules that knock any competition out of business.

The business case for EVs, c’est moi, as Louis XIV might have put it. His ancien régime didn’t end very well, of course. I fear the forced transition to electric vehicles won’t either.

Financial Post

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