The IMF has some advice for Canada

The UN’s top financial body just finished up a trip to Canada and has some friendly advice on how to handle green investments. 

What happened: In a new report, the International Monetary Fund (IMF) gave Canada props for taking action against climate change but cautioned that how it structured subsidies for green energy and EV batteries could stoke “a race to the bottom” for green investments.  

  • The IMF felt that investment tax credits and other complementary measures risk distorting investment decisions so that they’re made on the ability to offer subsidies.

  • Instead, it recommended more international cooperation and for Canada to consider crafting a standard incentive program instead of company-specific deals.

Why it matters: The US set the pace with the Inflation Reduction Act, which could result in a corporate subsidy war where countries offer increasingly ludicrous sums to secure green energy investments. 

  • In fact, it might already be happening, with Canada luring Volkswagen to build its first North American EV battery plant here with $13 billion (or is it $16 billion) in subsidies.

  • It also creates an environment where companies have far more leverage, as evident in Stellantis’ move to abruptly stop building a battery plant unless it gets more money. 

Yes, but: For Canada to take the IMF’s advice, other friendly nations will have to play along. As is, Canada is already losing homegrown green startups to the allure of US subsidies. 

Zoom out: The IMF’s report touched on other subjects from housing to banking—suggesting Canada do things like keep fiscal policy tight, have more stress tests for nonbank financial institutions, and set a concrete target for the country’s debt as a percentage of GDP.—QH