3.0 Risks in Delaying Canada ’s Low-Carbon Transition
Framing the Future: Embracing the Low-Carbon Economy
Along with opportunities come risks. Delaying Canada’s transition to a low-carbon economy could limit firms’ access to international markets, compromise Canada’s reputation abroad, and impose economic costs associated with the lock-in of high-emitting infrastructure and equipment.
In the previous chapter, we discussed the growing global and domestic demand for low-carbon goods and services (LCGS) and the opportunity that exists for Canadian firms to meet this demand. Our analysis of global and domestic spending on LCGS out to 2050 pegs the size of the potential opportunity at $70–$149 billion. It also highlights hydro, CCS, nuclear, and efficient industrial processes as areas of current strength with strong growth potential in the long term. We show just how much promoting current and developing new LCGS sectors matters to Canada’s low-carbon transition. But that’s only part of the story: Canada and the rest of the world must inevitably cut carbon emissions across traditional sectors of the economy.
With growth in the fossil fuel industry on the horizon, moving to a low-carbon economy presents a formidable challenge. Canada is well positioned to be a significant global supplier of oil in the years to come and to benefit economically from selling its crude to fast-growing economies. The International Energy Agency estimates a 36% rise in global energy demand between now and 2035, much of it in the form of fossil fuels.36 The National Energy Board’s forecast to 2035 includes record growth in Canadian oil and gas supplies and expansion in unconventional sources of oil in particular.37
Yet the economic risks of delaying action and of not preparing and planning for the global low-carbon transition are too great to ignore. This chapter explores two key economic risks for Canada: market access and competitiveness risks posed by the continued carbon intensity of trade and changing expectation of consumers, and risks from investment decisions on equipment and infrastructure that “lock-in” emissions for decades.
3.1 Competitiveness, Market Access, and Trade Risks
As nations take action to reduce their carbon emissions and as markets for low-carbon goods and services expand, the carbon intensity of imports and carbon risk of business ventures so too gain profile. Nations with stringent climate policies could well implement trade measures to protect domestic sectors from being outcompeted by sectors in jurisdictions without comparable climate policies. These measures pose direct risks to high-carbon exporters by imposing additional costs upon entry or by limiting demand for high-carbon goods outright. Border carbon adjustments (BCAs), low-carbon fuel standards and product carbon-footprinting are examples of measures jurisdictions are either contemplating or enacting.a
Several sectors in Canada could be exposed to such competitiveness and market-access risks in a global low-carbon economy. In the short term, border penalties against Canadian goods based on production and transport emissions are conceivable.b In the NRT’s 2011 analysis of Canada–U.S. climate policy choices, Parallel Paths, we assess competitiveness risks (including border carbon adjustments) as moderate under Canada’s current policy trajectory (i.e., “harmonize on targets”). Energy-intensive sectors like petrochemical manufacturing and iron and steel mills manufacturing could be vulnerable. Overall, $67 billion per year of Canadian exports to the U.S. (roughly 26% of exports to the U.S. in 2009) would be covered by a hypothetical U.S. scheme similar to those previously proposed.c Designing measures like BCAs to be both effective and legal under provisions of the World Trade Organization (WTO) is not without challenges, limiting their applicability in practice. However, there is no legal consensus on the potential for BCAs to be able to survive dispute settlement in the WTO.38 Furthermore, WTO obligations don’t always prevent countries from implementing controversial measures. One reason for this is the significant lag time that tends to transpire between implementation and any final resolution under the WTO’s Dispute Settlement Mechanism.d Ultimately, Canada would be gambling were it to count on WTO challenges to mitigate the risk of economic impacts associated with the potential application of BCAs.
California and the EU are implementing low-carbon fuel standards (LCFS), which penalize petroleumbased fuels that are energy intensive in the production phase. Because of its effectiveness in cutting carbon emissions from transportation, the U.S. has seen repeated calls for adopting a national LCFS. Absent commercial-scale CCS, application of such a standard would clearly hinder Canada’s export of oil sands–based crude oil to the U.S., overwhelmingly the largest customer. While the legality of LCFSs under international trade law (as a standard they would be covered by the provisions of the Technical Barriers to Trade Agreement) has yet to be tested and is therefore uncertain, forthcoming research suggests that LCFS would be considered legal.39
Short-term trade measures are one thing, but long-term risks of a high-carbon economy are also apparent; a key one pertains to reputation. A country’s reputation is like its brand and is important to its ability to sell goods globally. The combination of a perceived image of Canada lagging on climate policy and promotion of labelling schemes that help consumers manage embodied emissions associated with their consumption is particularly powerful. Such an image may also leave Canadian products exposed to consumer actions like boycotts. Modern campaigners are sophisticated enough to try, for example, to track Canadian oil sands products through the supply chain to the retail level, and to urge consumers not to buy. In a sector with such homogeneous products as retail-level gasoline, such actions might be significant.e
A negative view of Canada also has implications for Canadian firms’ ability to invest abroad and for public acceptance of high-emitting activities here at home. Just as Canada seeks to screen foreign direct investment that it doesn’t want,f foreign policy makers could feel pressure to do the same to Canadian firms that bid on projects and concessions in foreign countries. An added dimension of this risk is the increasing challenges to development that Canada’s natural resource sectors are facing from local communities and interested parties across the country and abroad (e.g., the 2011 protests in New Brunswick concerning exploratory testing for shale gas, protests in Washington and elsewhere in 2012 concerning the Keystone XL pipeline in particular and Canadian oil sands development more broadly, the protests in 2012 concerning the proposed Northern Gateway Pipeline, and protests in 2012 around metal mining in Ontario’s “Ring of Fire”). At a basic level, the manner in which Canada is perceived abroad can affect Canadians’ perception of their industries, which can in turn influence a company or sector’s social licence to operate. A plan that spells out the goals and targets needed for Canada’s low-carbon transition and actions to show for it would help alleviate concerns on all sides.
Finally, the economy’s high-carbon intensity relative to others’ and reliance on high-carbon exports will, in the long term, affect Canada’s trading position. So-called green stimulus spending that occurred in 2008 in several parts of the world signalled confidence in the higher growth potential of low-carbon economic activity relative to growth in traditional sectors.40 Although not all players will benefit from a first-mover advantage, the value of strategically assessing and seizing niches in a nascent low-carbon economy is unequivocal. Conversely, allowing an economy to centre its trade on high-carbon exports in the absence of a long-term transition plan can lead to long-term stagnation and economic malaise. Reduced carbon-competitiveness — the relative carbon intensity of one’s economy or a specific product as compared to that of one’s peers — can ultimately result in a decrease in the terms of trade for affected products (i.e., decline in the relative value of the product traded resulting from decreased demand). In the context of multinational branch plants, the lack of a supportive policy environment can also make the capital investment required to improve one’s competitive position internationally difficult to acquire.
[a] The discussion in this section draws primarily from a research report prepared for the NRT by the International Institute for Sustainable Development (Cosbey, Stiebert, and Dion 2012), available upon request.
[b] For a comprehensive treatment of BCAs, please refer to work by the OECD (Wooders, Cosbey, and Stephenson 2009).
[c] This figure is likely understated as the actual GHG intensities of a number of Canadian manufacturing sectors are thought to be higher than calculated where there are significant numbers of facilities producing GHG emissions below the 50,000 tonne mandatory reporting limit.
[d] Although the dispute settlement process, including appeals, is mandated to take roughly 14 months, in fact it can be stretched up to two years by members trying to postpone compliance. If we add the 15-month compliance period to this, and assume bad faith compliance, the reality is that WTO-illegal measures can easily be in place for three years or more before they are finally brought into line with members’ obligations. In some cases this will be enough time to accomplish the objectives for which the measures were designed.
[e] Supported by campaigning by ForestEthics, an environmental advocacy group, 16 large companies in the U.S. and one city have publicly announced their intention to limit or avoid the use of carbon-intensive transportation fuels (ForestEthics 2012).
[f] The failed Chinese takeover bid for Noranda and the controversy over competing foreign bids for Canada’s Potash Corporation are examples of this dynamic at work.
[36] International Energy Agency, 2011.
[37] National Energy Board 2011b
[38] Cosbey 2009
[39] Verrill Forthcoming
[40] Robins, Clover, and Singh 2009
© 2013