4.2 Innovation
Framing the Future: Embracing the Low-Carbon Economy
Innovation is “the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations.” 44 Innovation is in itself a process encompassing basic and applied research, development and demonstration, commercialization and market development, and market entry.
Overall, the strengths and weaknesses of Canada’s innovation system sum up as follows. The country focuses most on and succeeds at basic science and research and adapting (already) commercial products to meet industry requirements. Canada is less effective than its OECD peers in product demonstration and in the transition to commercial scale and market development, owing to challenges in accessing risk capital, the limited size of the internal market, and fragmentation among key players.45,46
Innovation is key to supporting a low-carbon transition. It can close the gap between the low-carbon technologies of today and the low-cost, high-performance — breakthrough — technologies that are needed for the future. In today’s global economy, Canadian firms are up against counterparts facing lower labour costs47 and, to an extent, greater access to capital and policy certainty. Rather than trying to compete on “last generation” technology by cutting input costs, a focus on innovation can enable the rise of Canada’s LCGS sectors in global low-carbon value chains. Innovation is also the only way to enhance environmental performance of traditional industries despite increased use of natural resources, including energy.
Canada’s $2 billion cleantech industry,48 of which LCGS sectors form a substantial portion, is mostly made up of young and small firms. This emerging industry posted double-digit growth rates through the global financial downturn and is expected to achieve $10 billion in revenue by its twentieth-year milestone.49 Canada’s cleantech SMEs are a strong source of Canadian low-carbon innovation and represent a key national strength. Cleantech SMEs have benefited from government support through the Scientific Research and Experimental Development tax-credit program, the Industrial Research Assistance Program, and Sustainable Development Technology Canada’s Tech Fund.50 Other federal R&D programs, however, present high barriers to entry for SMEs; streamlining administration and approvals for federal R&D programs would increase their attractiveness. Cleantech SMEs see the need for enhanced domestic adoption of their innovations for Canada to benefit from public and private R&D investments.51 If unaddressed, the lack of domestic adoption and support could hinder export growth. For innovative clean technologies, international customers expect domestic references before making procurement decisions.52
For low-carbon innovators (largely SMEs), overcoming the “valley of death” or bridging the commercialization gap (the intermediary stage between early-stage research funding and full-project financing, in which innovators attempt to achieve proof of concept to attract venture capital) is a particular financial challenge worth noting. It is one of the most common challenges in the clean technology sector (particularly where projects face high technology risk and are capital intensive), and one that is not unique to Canada. Sustainable Development Technology Canada (SDTC) has played a significant role in assisting emerging Canadian cleantech companies through the valley of death; however, challenges remain. Discussions with stakeholders identified the lack of broader support for demonstration projects as a significant barrier in moving innovative ideas from concept to commercialization, and accessing international markets and developing relationships with larger, established firms (e.g., the Global or Fortune 1000) were noted as presenting further challenges.
In discussions with stakeholders, technological innovation was noted consistently as a significant opportunity related to Canada’s highly skilled labour force, strong education institutional capacity, and strong record with respect to research and development. While it was noted that Canada cannot compete on basic economic inputs (e.g., labour, resources, cost of capital), it has the capacity to develop and globally market intellectual capital. Specific examples of emerging and next generation technologies discussed during NRT’s convening sessions are CCS (expertise and intellectual property), carbon precipitation technologies, algae-based biofuels, and advanced solar technologies. Stakeholders emphasized that Canada’s potential contribution to reducing global GHG emissions is not limited to its domestic mitigation potential but extends globally through the potential development and deployment of disruptive technologies.
4.3 Investment
Innovation, whether low carbon or otherwise, is closely related to investment. Investment in each phase of the innovation process plays a key role in enabling growth and ensuring that Canadian firms remain competitive in a global low-carbon economy.a Canada’s total private R&D expenditures were estimated at $16.3 billion in 2009, of which $8.5 billion (52%) were in manufacturing, $6.9 billion in services (42%), and only $0.9 billion (6%) in all other industries combined.55 Canada’s energy-intensive primary industries account for 4% of private R&D spending. Insufficient information was available to identify the low-carbon component of private R&D investments.
Economy-wide investment in non-residential structures, machinery, and equipment (i.e., commercial products) provides a measure of the degree to which Canadian businesses are renewing capital assets and updating (and possibly adapting) technology to remain competitive. In Canada, such investment has averaged $234 billion annually over the past decade, 81% of which has been private investment.56 Spending on machinery and equipment alone accounts for an average of approximately $137 billion (58% of spending) per year.57
A transformation of the one envisioned for a global low-carbon economy hinges on mobilizing financial capital and delivering it where it is needed. At stake is the development of LCGS and their economic, profitable, and complete deployment domestically and globally — as well as the related environmental benefits. Public investment in clean energy has been a key driver of recent LCGS growth. The emphasis on low-carbon spending was first evident as a response to the global recession through “green stimulus” funding, signalling that a green economy was a source of future growth.
Based on a review of federal and provincial programs that include a significant low-carbon focus in their funding allocation criteria, we estimate that public and private investments prompted by these programs amount to approximately $5.7 billion per year.58,b These investments are predominantly targeted at commercial products including machinery and equipment. Comparing this figure with the previously noted $137 billion annual investment in machinery and equipment suggests that Canadian low-carbon spending as a proportion of overall capital renewal is modest, in the range of 5%.
Additional analysis of government-led low-carbon investment suggests that the majority of government programs target products that are already established commercially with only CCS demonstrating significant R&D and product-development spending allocations. While the investments considered represent only a subset of the low-carbon investments being made, they are explicitly programs where government and industry have partnered to address the challenge of reducing GHG emissions. The clear message is that innovation-oriented low-carbon spending is under-represented.
Venture capital activity in Canada appears healthy: as recently as 2011, Canada ranked fourth behind the U.S., China, and the U.K. in terms of investments in cleantech.59 Much of the venture capital investment activity in cleantech takes place in Ontario with the province accounting for 48% of total Canadian investment since 2005.60 Growing and maintaining investor confidence in Canada’s LCGS markets is key to the low-carbon transition. Public investment, regulatory stringency, and a climate regime characterized by transparency, longevity, and certainty stand out as factors with the potential to do just that.61
[a] The discussion in this section draws primarily from a research report prepared for the NRT by the Conference Board of Canada (Conference Board of Canada 2011b), available upon request.
[b] This represents a low-end estimate that is considered to be representative of the scale of investment, but not precise. Data gaps for some programs were noted and partnering funding was not consistently available.
[44] OECD 2005c
[45] Analytica Advisors 2011
[46] Conference Board of Canada 2011b
[47] Conference Board of Canada 2012b
[48] Analytica Advisors 2011
[49] Analytica Advisors 2011
[50] Analytica Advisors 2011
[51] Analytica Advisors 2011
[52] Analytica Advisors 2011
[53] OECD 2011c
[54] The Canadian Business Journal (on-line) 2012
[55] Statistics Canada 2009b
[56] Statistics Canada 2012e
[57] Statistics Canada 2012e
[58] Conference Board of Canada 2011b
[59] Michael 2011
[60] Michael 2011
[61] Deutsche Bank 2009
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