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5.0 Harnessing Canada ’s Low-Carbon Opportunity

Framing the Future: Embracing the Low-Carbon Economy

A successful transition to a low-carbon economy will be underpinned by policy certainty, a price on carbon, a level playing field, and efficient regulations that complement marketbased measures to reduce GHG emissions. This final chapter sets out the NRT’s framework for low-carbon growth, including our vision for 2050, key low-carbon growth objectives, and essential conditions for success.

The NRT’s Measuring Up report concluded that Canada is not yet well positioned to compete in a carbon constrained world.⁷⁸ Despite a strongly growing cleantech sector,⁷⁹ Canada currently faces challenges in low-carbon innovation particularly with respect to commercialization. While strength is evident in Canada’s cleantech venture capital investment record,⁸⁰ overall low-carbon investment and investor confidence is low.⁸¹ Though clear exceptions exist, Canadian companies are failing to fully capitalize on the opportunity to supply growing global demand for LCGS, in part due to the significant effort required to access international low-carbon markets.⁸² LCGS sectors also face the potential for labour shortages as demand for skilled labour is high across the Canadian economy and innovative talent is highly sought after the world over.⁸³

But what will it take to put Canada firmly on a path to low-carbon growth? Our research and convening show that vision combined with leadership and the collaboration to achieve it is critical. Above all else, there needs to be a conscious decision that low-carbon development is a desirable goal for Canada and that governments should bring to bear the policy tools needed to realize it. Strong communication of this decision is essential. Private sector support for and engagement with this process is crucial. A focus on accelerating innovation and investment in low-carbon infrastructure and technology, enhancing LCGS market access, and boosting Canada’s capacity and understanding of low-carbon skills and labour requirements is also key. Political and corporate leaders must recognize that successful realization of this long-term goal will require action in the short term accompanied by regular re-evaluation of the path forward — in short, a plan.

This chapter presents the NRT’s contribution to the development of a low-carbon growth plan for Canada. Here, we offer a low-carbon vision for the country and discuss the strategies, actions, and governance required to achieve it.

5.1 The NRT’s Vision for a Low-Carbon Canada

The NRT’s vision of what a low-carbon economy could look like for Canada recognizes the country’s realities and strengths in both contributing to global efforts to arrest the speed and scale of climate change and taking advantage of the economic opportunities that lie ahead. The vision we propose is as follows:

IN 2050, CANADA

// has diverse, clean, and sustainable energy and electricity systems;
// continues to be a nation of abundant natural resources that are developed in a responsible, respectful, and sustainable manner;
// is a global marketer of low-carbon energy resources, technology, and expertise, and is seen as a responsible trading partner and energy producer;
// has become renowned for its innovation, particularly in the cleantech sector, and is a country where ideas and collaboration flourish within its academic institutes and in its private sector;
// employs coordinated and collaborative approaches to governance that continue to support and prioritize its low-carbon economy; and
// has a diverse, skilled labour pool that supports its low-carbon economy and responds to growing demands for skills and technologies.

The vision we propose could well be incomplete, not having benefited from the direct input of regional discussions. However, it’s a starting point for considering what is desirable and possible, and what actions need to be taken to get there. The following sections present our view of the critical elements of a framework for low-carbon growth. Combining a competitive economic context with collaborative and coordinated approaches to governance, as well as measures to stimulate innovation, mobilize investment, enhance access to LCGS markets, and foster talent and skills development, will position Canada to prosper through the low-carbon transition.

5.2 Essential Conditions for Low-Carbon Growth

A competitive economic context is prerequisite to a nation’s low-carbon success. When it comes to competitiveness, Canada has had mixed performance in the past compared to its peers. However, recent budgets tabled and actions taken by both the federal and provincial governments are set to address the weaknesses highlighted in the Global Competitiveness Index⁸⁴ (i.e., government budget balance, gross national savings, and general government debt). This same global index notes Canada’s institutions, goods market efficiency, labour market efficiency, and financial market development as strengths of the country’s economic framework conditions.

Canada should make use of market forces to foster low-carbon growth. Economic analysis has consistently demonstrated that market-based mechanisms are typically most effective and efficient in guiding investment decisions as they drive private-sector action while minimizing intrusion by government. Low-carbon growth requires a reorientation of the economy over the long term to take into consideration existing externalities. While progressing on this front, Canada needs to make certain that any measures taken by governments do not introduce unnecessary administrative or compliance burden so as to ensure effective use of government resources and continued competitiveness on the part of Canadian companies. Our analysis builds on the work of the OECD⁸⁵ and identifies four essential conditions related to Canada’s economic framework that need to be addressed to efficiently advance low-carbon growth: 1) providing policy certainty, 2) appropriately pricing pollution and natural-resource use, 3) establishing a level playing field for energy investments, and, 4) ensuring regulatory coherence and a focus on outcomes.

Long-term certainty around climate, energy, and innovation policy must be established. Policy certainty is fundamental to providing the private sector and individual Canadians with the signals they need to make decisions that factor in the global low-carbon transition. A lack of policy certainty is the single most significant barrier to investment in low-carbon innovation and, more broadly, interest in finding solutions to other investment challenges critical to the low-carbon transition.^a While the literature focuses significantly on certainty with respect to climate policy, the principle applies to all significant related areas of policy development. Not only does Canada need “investment-grade climate change policy,”⁸⁶ but it also needs investment-grade energy and innovation policy. Policies that reflect transparency and longevity and that engender certainty can help materialize the required low-carbon investments.⁸⁷

Transparency speaks to the clarity and predictability of laws, regulations, and policies. Government credibility relates to this, and hinges on how laws, regulations, and policies are developed and interpreted.⁸⁸ Clear communication of meaningful information, advanced notification, and prior consultation with respect to regulatory and policy changes, and consistent administration and application of laws and regulations all influence government credibility. Transparency with respect to how governments implement and change rules and regulations dealing with investment is a critical determinant in investment decisions.

Long-term commitment periods for policy are vital to establishing predictability and certainty for business decisions. The time frame to achieve policy goals and targets should match the expected time frame required for investments to generate an appropriate return. In the case of investments in lowcarbon energy, a return period between 15 and 25 years is not uncommon.⁸⁹ Investor confidence takes time to develop but can be undermined very quickly. Negative investor experience can spill over to other regions — for example, Spain’s cuts to feed-in tariff levels for existing projects in 2011 damaged investor confidence internationally.⁹⁰

Certainty requires both transparency and long-term time frames, but speaks more fundamentally to both government commitment and performance. It requires clear commitment by the political leadership and a coherent long-term vision for growth, as well as actual delivery on the vision.

To induce low-carbon activity across the economy, market prices need to account for the full cost of production and resource use. Market mechanisms to internalize the social and environmental cost of pollution and capture the long-term costs of transforming natural capital into other forms of capital are among the most cost-effective and efficient policy instruments.⁹¹ A price on carbon is fundamental to achieving the required efficiency gains and innovative drive to support low-carbon growth.⁹²

A level playing field is required. Subsidies that encourage pollution or the over-extraction of resources ultimately place a drain on the public purse and need to be discontinued. Fossil fuel subsidies often work counter to and are ultimately incoherent with the introduction of a carbon price.⁹³ Consistent with commitments of the G-20⁹⁴ in 2009 and Asia-Pacific Economic Cooperation⁹⁵ (APEC) in 2011, and building on the federal commitment in Budget 2012,⁹⁶ federal and provincial governments should “phase out inefficient fossil fuel subsidies that encourage wasteful consumption.” Research by the International Institute for Sustainable Development’s (IISD) Global Subsidies Initiative estimated Canada’s federal and provincial subsidy^b support for upstream oil activities in 2008 at $2.8 billion, with the federal share accounting for half.⁹⁷ The research found non-conventional production followed by exploration (new drilling) as disproportionately benefitting from these subsidies. It concluded that subsidies to the oil and gas sector resulted in only a slight positive benefit to the economy, and that they stimulated exports but were not critical to the growth of the sector (the sector is projected to be about twice as large in 2020 as in 2005 with or without subsidies). Impacts on total employment were found to be negligible, and government balances were found to be lower, even with higher corporate taxes and royalty payments. It was further suggested that continued subsidization of this rapidly expanding sector risks long-term growth in subsidy obligations. Federal action to adjust subsidies focuses on aligning support for oil sands development with support for conventional oil and gas by 2016.^c The playing field for low-carbon energy resources (e.g., renewable electricity, biofuels) remains uneven, relative to fossil energy sources.⁹⁸

Efficient, effective, and outcome-oriented regulations are required. In addition, regulatory frameworks should support both economic prosperity and positive environmental outcomes. Regulations are sometimes necessary complements to market-based mechanisms. This is the case for reducing GHG emissions from buildings (e.g., energy efficiency standards in building codes) and transportation (e.g., Canada’s Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations). Efficient regulatory approaches focus on outcomes and provide flexibility in attaining the performance objective, ultimately reducing compliance costs and spurring innovation,⁹⁹ thereby ensuring the ongoing competitiveness of Canadian businesses.

In addition, coherence across environmental and economic regulations and policies is important. Interdepartmental policy coherence within federal and provincial governments, interprovincial coherence with respect to policy and regulatory frameworks, and federal-provincial policy and regulatory coherence are all necessary. For example, clear and consistent grid-connection standards across Canada could facilitate increased penetration of small-scale renewable generation capacity, and provincial waste management regulations could interfere with provincial plans to make use of biofuels derived from waste. The adoption of a systems perspective is necessary to tackle an issue as multi-faceted and complex as low-carbon growth. Such a perspective would consider the implications of all policy and regulatory initiatives on GHG emissions, innovation, low-carbon investment and economic growth. The expanded use of regulatory impact assessments to broadly include GHG emissions implications would assist this process.

[a] A report commissioned by three major international investor climate change networks identifies policy risk as “the major risk in low-carbon investments in the energy sector.” This is because while significant progress has been made, many low-carbon power generation technologies are not cost-competitive with conventional generation sources (i.e., they have not reached grid parity). This problem is compounded by subsidies and support provided to the fossil-fuel industry (Institutional Investors Group on Climate Change et al. 2011).

[b] For the purpose of their work, IISD employed the definition of subsidy from the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM).

[c] The federal government has implemented a phase-out of the accelerated capital cost allowance (ACCA) for general investment in oil sands projects; however, this will only take effect in 2015 with approximately 90% of oil sands facilities benefitting from this subsidy. The regular 25% ACCA rate will remain applicable to all oil sands projects, and additional subsidies for intangible oil sands costs as well as broader exploration and development subsidies, totalling in the range of $700 million annually, remain. For a comprehensive analysis, please see Fossil Fuels – At What Cost? (Sawyer and Stiebert 2010).

[78] National Round Table on the Environment and the Economy 2010

[79] Analytica Advisors 2011

[80] Michael 2011

[81] Conference Board of Canada 2011b

[82] Goldfarb 2010

[83] Toronto Region Research Alliance 2011

[84] World Economic Forum 2011b

[85] OECD 2011c

[86] Institutional Investors Group on Climate Change et al. 2011

[87] Institutional Investors Group on Climate Change et al. 2011

[88] OECD 2012a

[89] Accenture 2011

[90] Institutional Investors Group on Climate Change et al. 2011

[91] OECD 2011c

[92] OECD 2011c

[93] Gerasimchuk 2012; Institutional Investors Group on Climate Change et al. 2011

[94] Leaders’ Statement: The Pittsburge Summit 2009

[95] 2011

[96] Government of Canada 2012c

[97] Sawyer and Stiebert 2010

[98] International Energy Agency 2012

[99] OECD 2008