OTTAWA — The Liberal government’s green industrial policy bets tens of billions that EV battery plants can be the engines of a booming automaking industry, connecting a domestic supply chain that will support a generation’s worth of jobs. 

But Parliament’s self-described “heartless economist” is putting the plan in less lofty terms. Parliamentary budget officer (PBO) Yves Giroux says it will take 20 years for the federal and Ontario governments to break even on $28.2 billion in combined subsidies to Volkswagen’s PowerCo. and the Stellantis-LG Energy Solutions (LGES) consortium. Here’s what you need to know.

The cost: The feds and province are offering production subsidies for both plants, meaning the amount they pay out will depend on how many cells roll off the lines. They’re pegged to those offered under the U.S. Inflation Reduction Act, winding down in 2032. 

That works out to up to $13 billion for the Volkswagen facility in St. Thomas, Ont., and up to $15 billion for the Stellantis-LG factory in Windsor, Ont. (The federal Strategic Innovation Fund is also paying for some plant-startup costs, but ignore those for our purposes here.)

The government’s math: Landing Volkswagen’s battery plant is “the best deal for Canada, with a payback of five years for a company that will be there for a hundred years,” Innovation Minister François-Philippe Champagne told a parliamentary committee in April. He and Prime Minister Justin Trudeau have cited that half-decade figure ever since.

Ottawa’s estimate is based on a September 2022 study from the Trillium Network for Advanced Manufacturing, a London, Ont.-based non-profit that seeks to boost Ontario’s factory ranks. Cell-making facilities “have the potential to anchor other elements of the EV battery supply chain,” the report notes, citing component and module production.

The study laid out several possible futures for the sector. In the one Ottawa chose, EV sales on both sides of the border hit policymakers’ targets, meaning more demand for Canadian-made green cars. It also assumes that more of the lithium, nickel and other inputs for the batteries are mined and refined within the country.

All told, Ottawa’s math figures that the Volkswagen plant alone will be worth $4.05 billion in annual government revenue in 2030. At a $13-billion cost, that’s a three-and-a-third-year payback period.

The economist’s math: The PBO estimate pulls in only Trillium’s figures for cell and module manufacturing, then applies them to the expected production timeline of the two plants. The result: “A payout period of at least 20 years, which is significantly longer than the less than five years that the government has been mentioning in the media,” Giroux told reporters on Tuesday.

Ottawa can’t assume that its subsidies to the battery plants will generate all the supply-chain spinoffs for which it’s hoping, according to Giroux. “The North American market is highly integrated,” he noted, so “input into the battery manufacturing … as well as the assembly of electric vehicles could very well take place in the U.S. and Mexico.” For example, Volkswagen doesn’t yet make cars here, and may simply ship Canada-made cells to plants across the border for installation.

Continental integration of the sector also means Canadian parts makers should be able to find customers even if the government hadn’t spent billions on battery factories, the PBO said. 

The division: Gathering more of the auto-sector supply chain within the country’s borders is sort of the point of the Liberal industrial policy push. Starting with the September 2020 deal to subsidize new EV lines at Ford’s assembly plant Oakville, Ont., Ottawa has offered billions in financing for facilities producing cars as well as steel, cathodes, copper foil, critical minerals and lithium hydroxide. 

The goal is a “battery ecosystem in Canada from the mine to the recycling plant,” Champagne told The Logic in December 2021, before he’d closed a cell deal. 

The reaction: The PBO report “demonstrates that the [two plants] are good deals for Canadians, the auto sector and our workers,” Champagne claimed in an X post on Tuesday, while noting that the study “does not capture many of the broader economic impacts on the supply chain.” 

What if…? This isn’t the first time economists have questioned Ottawa’s economic modelling of its battery-plant subsidies. The government should have used a cost-benefit analysis, comparing the outcomes to other potential uses of the money, some told The Logic earlier this year. 

The PBO didn’t do one of those, either, but that didn’t stop Giroux from noting other things the government could’ve done with $28.2 billion. Investments in post-secondary education and research might’ve yielded more, he noted. 

Still, he acknowledged that policymakers must account for non-fiscal considerations, like ecosystem-building or national security. “That’s why it’s elected politicians who make these decisions,” he quipped, “and not heartless economists like me.”