Canada’s federal government imposes 2035 EV mandate

On December 21st the Liberal government published draft regulations requiring that all new passenger vehicles and light trucks sold in Canada after 2035 be electric zero-emission vehicles. The rules will be phased in gradually, starting with a 20% requirement in 2026.

The regulations will help the prime minister, Justin Trudeau, to deliver on a 2021 electoral promise and add weight to the federal government’s efforts to mitigate the effects of climate change. The electric-vehicle (EV) mandate comes in addition to the federal carbon tax, another climate-change initiative, which is due to rise from C$50 (US$37) to C$65/tonne on April 1st—the first C$15 increase since the tax was introduced in 2019. The carbon tax will continue to climb by C$15 per year until it reaches C$170 in 2030. We expect Mr Trudeau to remain undeterred by his critics, primarily in the Conservative Party, who believe that the federal government’s environmental policies will contribute to still-high inflation and undermine oil and gas production (primarily in western Canada).

The new mandate will encourage domestic production of EVs and battery components in an effort by the federal government to revive Canada’s faltering auto industry. For the past two decades investment into Canada’s automotive industry has been lost to the US and Mexico, primarily owing to Mexico’s lower labour and energy costs. The Canadian federal government believes that the highly skilled labour force, research and development infrastructure, and government financial support will attract EV investment. However, Canada’s share of North American vehicle production has slipped in recent years, to 8.5% in 2021, from almost 14% in 2014. Canada’s mandate follows similar initiatives in the US to attract EV investment.

The federal government and Ontario—Canada’s most populous province, where all of the country’s vehicle assembly plants are located—are making EV investment a central pillar of their industrial policies. Last month a US-based automotive manufacturer, General Motors, finished converting one of its plants in Ontario into the country’s first EV assembly line. Meanwhile, the federal government is offering rebates of up to C$5,000 (US$3,686) for the purchase of a new EV. Other provinces, such as British Columbia and Quebec, offer additional incentives. Despite these efforts, we believe that Canada’s shortage of charging stations will dampen some EV demand compared with other industrial countries, especially the US.

We expect the Liberal government to boost environmental investments and regulations to meet its campaign promises and bolster support from voters ahead of the next general election, scheduled for October 2025.

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