OTTAWA — The U.S. is spending hundreds of billions on industrial policy, promising to bankroll a slew of semiconductor fabs, carbon-capture installations and EV battery plants across the country. On Thursday, the Liberal government unveiled details of its new $15-billion growth fund, touting it as a “down payment” to help Canada stay in contention for private-sector investment in the face of the Biden administration’s largesse.

The federal government plans to establish the Canada Growth Fund (CGF) by the end of the year, it revealed in Thursday’s fall economic statement, then spin it out as a separate entity by June 2023. 

The fund, first announced in April’s budget, will deploy $15 billion over five years, backing emission-reducing projects using pilot-proven but still new technologies like carbon capture, utilization and storage (CCUS) or biofuels, as well as helping scale up companies commercializing green products. The public money is designed to attract private capital—the fund will make deals that reduce the risks of getting involved for firms and institutional investors.

Since the April budget, events across the border have seen business lobby groups turn up the pressure on the Liberals to go big on industrial support. The U.S. Inflation Reduction Act (IRA) passed in August lays out US$369 billion over 10 years in tax incentives and grants to encourage clean-energy projects and manufacturing. The CHIPS Act, enacted the same month, promises US$52.7 billion for component R&D and production.

“We know these represent just a down payment … to ensure that Canada remains globally competitive and can lead the way in the global net-zero transition,”  Finance Minister Chrystia Freeland told reporters.

Thursday’s economic statement admits the problem. “Significant steps will need to be taken to ensure that Canada remains competitive in North America and the world,” it states. In a media briefing Thursday, a senior government official was more emphatic. The IRA is “a game-changer for the rebuilding of the industrial structure of America and North America for the next generation,” they told reporters. (The government conducts such briefings on the condition that media not publicly identify the officials.)

After extensive lobbying by Ottawa, U.S. lawmakers included Canada in some measures, such as tax incentives for EV buyers. But much of the planned U.S. spending is geographically specific, requiring or incentivizing domestic production. “They’ve created something of a gravitational black hole for international capital to be pulled into the United States,” said the official. 

Canada must spend $125 billion more every year through 2050 to hit the federal climate targets, Finance Canada estimates.

Institutional investors have thus far proved leery. In consultations conducted last year, pension funds and other financiers told Innovation, Science and Economic Development Canada (ISED) that cleantech projects don’t meet their investment metrics, saying such ventures are typically too small and technically risky, and the returns too uncertain.

Ottawa is hoping the CGF will help bridge the gap. On Thursday, the government revealed the fund may take equity stakes in or lend money to project operators, seeking below-market returns or structuring deals so that it takes more downside or less upside than other financiers. It could commit to purchasing enough of what a project produces to get it up and running until private-sector buyers start to show interest. 

The fund could also guarantee revenue for carbon-capture or hydrogen projects using instruments called contracts for difference. Under such agreements, Ottawa would make up the shortfall if the market price for a project’s emissions-reductions or gas falls below set targets. The U.K.’s program for low-carbon electricity generation, launched in October 2014, uses a similar system. “It’s effectively a long-term government commitment to act as the backstop offtaker of carbon,” said Nicholas Hann, previously head of investments at the Canada Infrastructure Bank (CIB), in a September interview with The Logic.

Hann contrasted that with Ottawa’s tax credit for the capital expenses of setting up CCUS installations, announced in the April budget. “It’s useless in catalyzing project financing, because it does nothing to set the price,” he said. “It just reduces the amount of capital you invest.” 

The CGF could also put capital into existing green-project funds. Across its portfolio of stakes, loans and contracts, the goal is to recover its initial capital and recycle it into new projects.

The CGF is just one part of the government’s promised response to the massive new business incentives on offer in the U.S. and elsewhere. Finance Canada is set to launch consultations on a new hydrogen-technology tax credit as well as incentives for advanced manufacturing, with details due in next year’s budget. 

Thursday’s economic statement also promised specifics “in the coming weeks” about the new investment and innovation agency announced in April’s budget. The agency will be focused on “injecting R&D In traditional industries” like forestry, mining, and agriculture, the senior government official told reporters. “That’s where we in Canada have to step up our productivity.”

Federal officials have been consulting on its design and the programming it should offer. Last month, Innovation Minister François-Philippe Champagne, Finance Canada deputy minister Michael Sabia and ISED deputy minister Simon Kennedy met with industry executives, a session that two sources told The Logic was focused on the agency. The Logic agreed not to identify the sources because they were not authorized to speak publicly. Attendees included Goldy Hyder, CEO of the Business Council of Canada; Jim Balsillie, chair of the Council of Canadian Innovators; and Yung Wu, CEO of MaRS.

Ottawa has tried the investment-attraction fund model before. In June 2017, it set up the $35-billion CIB to bring private capital into transit and other mega-projects. But the arm’s-length agency has struggled to get institutional investors involved.

The challenge is broader than the IRA alone. Canadian business-investment levels lag those of the U.S, and the gap is increasing, with spending on manufacturing and equipment and IP products below or close to pre-pandemic levels here but up across the border. That trend comes as Ottawa looks for huge sums of private cash to finance the transition to a net-zero economy.