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Benchmarking – Chapter 1 – Benchmarking for Success: Creating NRTEE’s Low-Carbon Performance Index

Chapter 1 - Benchmarking for Success: Creating NRTEE's Low-Carbon Performance Index

1.1 Introduction

The "green race" is on. And Canada needs to catch up.

As the world transitions to a low-carbon economy, Canada faces both risks and opportunities. We need to think differently about what counts as success and how to get there. We need to take steps that minimize those risks and maximize our opportunities. The reasons why are both basic and compelling. First, there are new market opportunities to be gained. The global market value of traditional environmental goods and services, renewable energy, and emerging low-carbon activities was estimated at $7,770 billion in 2007–2008[1], with growth potential as much as 45% by 2015.[2] We need to position ourselves to tap into this growing opportunity. Second, there are new market risks to be avoided. Just as global demand for low-carbon goods and services will grow, demand for carbon-intensive products could fall. Carbon barriers erected by countries or instituted by market competitors can keep Canadian goods and services from reaching global consumers. We need to shield ourselves from carbon protectionism - in whatever form it takes - to maintain and improve our standard of living. In a low-carbon world, the yardsticks for measuring competitive success are new and unfamiliar. But the nations that figure them out, focus their thinking, and marshal their strengths will be the ones on top. Canada can be one of those nations. Canada is an open, trading economy. In 2009, an estimated 30% of our wealtha came from exporting our goods and services across our borders.[3] Competition is already fierce in today’s globalized economy; it will only grow stronger in a global low-carbon economy. The federal government’s Competition Policy Review Panel stated that "New and more aggressive competitors are emerging, and new technologies are shaping entire industries." [4] The same can be said for the new low-carbon economy where so much will be about how the world produces and consumes energy. This is the new driver of world economic change. Canadian businesses need to be looking at where and how they can succeed in this emerging reality. Canadian governments need to consider where and how we can position ourselves as a country to capitalize on our strengths and lead for jobs, growth, and prosperity. The clear reality is this: our competitors are already investing and planning to succeed. We need to do the same. To assist Canada in getting ready to succeed in a global low-carbon economy, the National Round Table on the Environment and the Economy has created Canada’s first-ever Low-Carbon Performance Index. This new strategic tool will help policy-makers assess where we stand by benchmarking Canada’s low-carbon performance against the world’s most important economies. This new index compares Canada to the G8 economies of the United States, Japan, United Kingdom, Germany, France, Italy, and Russia. It also compares Canada’s performance separately with China, Australia, and Norway—countries with unique low-carbon characteristics and challenges we can learn from. The purpose of the index is simple: to create a comparison of low-carbon performance and capacity across a range of meaningful and comparable indicators that measure where we stand now and can be updated regularly to track progress. It can help tell us where we are positioned to be strong with real low-carbon competitive advantage, and where we are at risk with room to improve. Governments and businesses can make informed choices about where they need to strategically focus and invest for future low-carbon competitive success. The index is deliberately forward-looking. It assesses how well Canada is prepared to succeed relative to its peers in a future global economy in which carbon emissions are constrained. Many of the indicators therefore focus on issues of capacity in a low-carbon dynamic. Capacity ensures a country is resilient to risks and provides it with the tools required to prosper in the future, no matter how that future unfolds.

What do we mean by a "low-carbon economy"?

"Eco-innovation," "green stimulus," "carbon advantage," "green recovery," and "green jobs" are all relatively new terms to describe elements of a low-carbon future. But what do we mean by this low-carbon economy? Despite numerous publications, no standard definition has been adopted. Above all, a low-carbon economy relates to how we produce and use energy that generates carbon emissions. Therefore, a low-carbon economy is one that functions at low levels of greenhouse gas emissions per unit of GDP. For the purposes of this report, the term low-carbon economy really means, and can be used interchangeably with, low-emissions economy.

1.2 Why Benchmarking?

For over 30 years the World Economic Forum has been tracking factors that enable competitiveness in national economies by providing benchmarking tools for policy makers and business leaders about where and how to improve economic performance.[5] The Conference Board of Canada does similar work to measure Canada’s success relative to other OECD countries in terms of Economy, Innovation, Environment, Education and Skills, Health, and Society. International benchmarking studies that illustrate low-carbon competitiveness are newer but emerging rapidly as policy makers and researchers aim to understand how nations stack up against each other in this new dynamic. Low-carbon competitiveness—determined by how nations adapt to a carbon-constrained world—is being increasingly used to define capacity for future economic prosperity.[6] Organizations like the World Wildlife Fund[7] and the U.K.’s E3G,[8] for example, have all published studies that benchmark policies and progress contributing to a low-carbon transition. Private sector publications have focused on tracking spending and revenues from low-carbon energy production, energy efficiency and energy management, and climate finance,[9] in order to project market growth and investment opportunities. An Ernst & Young benchmarking report tracks the relative attractiveness for investment in renewable energy of 25 countries.[10] Regional indices such as the California Green Innovation Index,[11] sectoral indices including the Royal Institute of Chartered Surveyors Global Zero Carbon Capacity Index,[12] national-level indices like the Yale Environmental Performance Indicators,[13] and firm-level indices like the Dow Jones Sustainability Index[14] all offer different perspectives for how to measure competitiveness in a carbon constrained world. No single benchmarking study for Canadian competitiveness or performance in a low-carbon world exists. While Canada is included in other studies, none has been conducted from a Canada-first perspective. The NRTEE believes this is an information and policy gap that must be filled; that a uniquely Canadian index is necessary to help focus attention and thinking on what will prove to be the most important prosperity challenge ahead. Our country has numerous competitive strengths. A recent federal government report noted that "Our primary advantages lie in location, natural resources, a diverse economy, high-quality public education, and institutional and political stability." [15] Our proximity to, and strong trading relationship with, the U.S. market form a core advantage. Our wealth of natural resources and ability to tap into unconventional energy sources are of great economic value. The question is whether these traditional enumerators of competitive advantage are the right ones in a low-carbon future. Policy direction reports by the Government of Canada have typically focused on these traditional assessments of Canadian economic competitiveness and performance. The government’s core economic policy plan, Advantage Canada: Building a Strong Economy for Canadians, cites that "Creating a healthier environment and more sustainable economic growth, including through responsible use of our natural resources and effective use of technology" as a priority. Building Canada’s comparative advantage in environmental technologies is identified as a component for success. Compete to Win[16] notes that Canada’s biggest impediment to competitive success lies in the lack of consensus about what the problem is, what needs to be done to solve it, and whether it constitutes the "imminent crisis" referred to by many. One report, State of the Nation 2008: Canada’s Science, Technology and Innovation System,[17] takes stock of Canada’s performance in areas that affect its ability to innovate. The study is limited to a national, macro-level assessment but it does identify four sub-priorities for research and development in Canada, including environment and natural resources and energy. Innovation and Business Strategy: Why Canada Falls Short [18] finds that we have a lagging productivity growth rate, "largely due to weak business innovation," and that decisions oriented to the long term are needed now to develop competitive advantages in new markets, such as those expected to be in high demand in a low-carbon economy. Despite mentions of potential opportunities resulting from the trade of low-carbon goods and services, little emphasis is placed on global economic trends driven by climate change and what this could mean to Canada’s future competitiveness. The NRTEE believes that traditional competitive advantage strengths for Canada can be leveraged into new comparative advantage possibilities in a global low-carbon economy. This will be a transition, not a sharp, sudden turn in a new direction. Low corporate tax rates help business profits, enabling them to invest more in low-carbon innovation, for example. Government support for research and development (R&D) at the university and college levels can help build capacity for new low-carbon R&D. Open investment policies can attract new low-carbon emission investment to fund energy technology transformation. But future policy direction needs focus and measurement to guide it. This is where the NRTEE’s benchmarking study comes in.

1.3 The NRTEE Benchmarking Study and Methodology

The NRTEE benchmarking study is predicated on the view that all nations will need to address their performance across a common series of low-carbon performance categories as they decarbonize their economies to meet national and international climate goals and obligations.

These categories will be the core drivers of future low-carbon competitive success. The extent to which a country is able to successfully improve its performance across them will infl uence its ability to avoid high-carbon risk and optimize low-carbon opportunity. For Canada, this will help us achieve our own greenhouse gas (GHG) emission reduction targets and fulfill the climate policy obligations we have set for ourselves. A comparative assessment of country performance across a uniform set of categories of low-carbon performance provides broad indication of the strengths and weaknesses of particular aspects of Canada’s position as compared with other nations. It highlights areas of comparative advantage that can be maximized. It offers important insight to policy makers on where our performance is strong, weak, and needs to be improved. In this chapter, we explain our benchmarking index and outline how we developed it. Each performance category from our index is then presented in greater detail, including definitions and rationale for their importance in developing competitive capacity for a low-carbon future. The primary focus of this report is on economics and competitiveness in general and how energy is produced and used in particular. This is an important context for considering national climate change policy choices rather than simply comparing international GHG targets and progress toward achieving them. The report does not focus on other areas that are also important to a comprehensive approach to reducing carbon emissions and their contribution to a low-carbon economic future, such as transportation, energy efficiency, and buildings. Neither does it prescribe policy recommendations at this stage regarding how Canada should respond to the low-carbon challenge; rather, it provides a comparative basis for assessing Canada’s relative strengths and weaknesses, and areas of opportunity and improvement. NRTEE advice on developing a comprehensive low-carbon growth pathway for Canada will emerge as a later report from the Climate Prosperity program. To create a better, more comprehensive understanding of how Canada is performing in terms of its relative low-carbon performance, the NRTEE has created an international benchmarking tool consisting of 15 indicators grouped into five categories. Given the innovative nature of this endeavour and the breadth of possible indicators, we used a five-staged methodological approach to arrive at this index: 1 // A LITERATURE REVIEW of existing benchmarking studies and relevant reports identified success factors for national low-carbon performance. 2 // A DATA FEASIBILITY study conducted by the Conference Board of Canada assessed potential indicators and comparator countries, and their applicability to the benchmarking study and Canada’s circumstances. 3 // A STAKEHOLDER CONSULTATION session helped us gain insight from experts on the indicator selection and their utility. 4 // ANALYSIS by Deloitte & Touche LLP of the benchmarking framework, indicator selection, and methodology used helped us refine and complete the index. 5 // PEER REVIEW of the framework and results by Vivid Economics, an international economics and benchmarking firm, and other Canadian experts led to further refinements. The objective was to create a composite index of meaningful indicators that were rigorous and comparable across all G8 countries. By necessity, this meant making choices about which indicators were most useful and available for this innovative study. The composite index was developed by Deloitte to measure the overall low-carbon performance of the G8 nations by employing a consistent methodological approach. This approach invites easy, cross-nation comparison across all five categories, within each category, and across individual indicators themselves. The indicators were ultimately selected on the basis that they were (a) meaningful, they provided important insight into Canada’s and the G8 countries’ low-carbon performance both now and in the future, and (b) comparable, there existed suitable, reliable, and equivalent data across jurisdictions so valid comparisons could be made across a common range of indicators. We believe they should be subject to adjustment and refinement over time as new and better data sources become available and as understanding of the challenge and opportunity deepens. A full list of indicator definitions is set out in Appendix 5.2.

1.4 The NRTEE's Low-Carbon Performance Index

The NRTEE’s Low-Carbon Performance Index measures and compares not just progress but capacity for achieving low-carbon competitiveness.

The LCPI is built around five categories with 15 individual indicators. Each category comprises three indicators and represents a core foundation for benchmarking low-carbon performance and capacity to achieve goals and outcomes essential for a successful low-carbon transition. Importantly, while the 15 indicators themselves are uniquely focused on low-carbon performance, several of the categories themselves are well-understood and accepted aspects of any country’s general economic performance and competitiveness.