Understanding the proposed Clean Electricity Regulations (part 1)

See part 2.

See also our August 2023 blog, Five things to watch for in the Clean Electricity Regulations.

On August 10, the government of Canada released its long-anticipated draft Clean Electricity Regulations, giving us our first comprehensive look at the new policy, including more insight into its context, design, and implications. This blog is the first in a two-part series exploring the regulations. It digs into their key provisions, explores the trade-offs they seek to balance, and explains how they will move our grid towards net zero electricity by 2035. Part two will turn to the related policies that the Clean Electricity Regulations work alongside, and how Canada can address the electricity sector emissions that will remain after 2035.

The importance of these draft regulations can’t be understated. They represent a significant step towards delivering on the government’s commitment to a net zero electricity grid by 2035, which is crucial for meeting Canada’s emissions reduction targets and accelerating Canada’s energy transition to net zero economy-wide by 2050. 

These regulations are part of a broader package of policies the federal government has already put in place or has been rolling out to support the deployment of clean electricity, including numerous measures announced in Budget 2023, and all guided by an overarching electricity vision that was also released in August.

Canada’s Clean Electricity Regulations come at a critical time. Escalating wildfires, flooding, and other consequences of climate pollution around the world underscore the urgency of rapidly decarbonizing our economies. Evidence from numerous studies, ranging from the International Energy Agency to Canada’s Energy Regulator, points to the fact that a cost-effective transition to a net zero economy by 2050 depends upon having a clean electricity grid ahead of that date. Other countries — including the United States and the rest of the G7 — understand this as well and have similarly committed to a net zero electricity grid by 2035. Simply put, clean electricity is the foundation upon which the entire energy transition is built. Clean cars, clean industries, clean homes: all of them need clean electricity. 

Debates on these topics need to be grounded in facts, rather than inaccurate assertions about the regulations and their impact. So let’s unpack some of the details of what’s actually being proposed in the draft Clean Electricity Regulations. 

How the proposed Clean Electricity Regulations work

The regulations are based around the creation of a near-zero emissions standard for fossil -powered electricity generation, as well as several important compliance flexibilities to help manage a transition, that together would still allow some emissions past 2035. Fundamentally, this means that while the Clean Electricity Regulations play a critical role in propelling the country’s grid towards net zero by 2035, they do not, on their own, get us all of the way there

Under the proposed regulations, the electricity sector in 2035 will still be allowed to release low amounts of residual emissions, which will need to be reduced or offset by other policies and measures in order to achieve the target of a net zero grid. These additional measures could include both carrots and sticks: strengthened carbon pricing to further incentivize emissions reductions, funding to build new non-emitting electricity generation, and potentially other measures to offset remaining emissions (which we’ll discuss in the second part of this blog series). 

The fact that there are likely to be emissions remaining in 2035 after the application of the standard was a deliberate design choice to help ensure grid reliability. The regulations are also largely technology-neutral, leaving provinces to choose how they want to plan and build their systems in response to the regulation, as these governments are ultimately responsible for the design and operation of electricity systems. This approach strikes a balance between driving emissions reductions and ensuring reliability and cost-effectiveness — all while respecting provincial jurisdiction.

Digging into the details

As mentioned above, the draft regulations include a variety of measures that will help drive down emissions while also allowing for flexibility that will support system reliability and cost-effectiveness. As the regulations get finalized, striking the right balance for these measures will be essential. Below we dig into some of the most impactful measures that have been advanced, providing both context and a preliminary assessment of their implications. 

Performance standard

The first, and perhaps most fundamental, element of these new regulations is the performance standard it establishes for electricity generators. By 2035, any electricity generating facility that uses fossil fuels to generate 25 megawatts or more of electricity, and that sends more electricity to the grid than it draws, must not emit more than 30 tonnes of carbon dioxide equivalent per gigawatt hour (CO2e/GWh) as an average over a calendar year. 

By choosing to use a higher-than-zero threshold for emissions, the government has sought to balance the need to make this regulation technology neutral (by maximizing the range of technologies that provinces could choose to meet the standards) with the need to achieve meaningful emissions reductions. At first glance, a standard of 30 tonnes of CO2e/GWh looks to have achieved this balance. The proposed level of stringency would require roughly a 90-to-95 per cent carbon capture rate for fossil gas facilities. Attempting to impose a more stringent standard could have significant impacts on cost, with only a marginal impact on emissions. Furthermore, carbon capture and storage (CCS)  technology would likely struggle to achieve a higher capture rate than what is proposed. 

Recognizing that it may take time to troubleshoot the application of CCS technology in gas-fired facilities, the government has also introduced a provision that allows a facility that has deployed a CCS system to emit slightly more emissions for a slightly longer period of time beyond 2035. The government designed this measure to reduce the uncertainty that faces first-generation CCS technology, but has suggested that CCS would likely be sufficiently mature by 2040 that the exception could be phased out at that time. 

While we should be extremely cautious of relying too much on untested CCS technology to achieve the emissions reductions required, there is no question that it will have a role to play. It therefore makes sense to write into the regulations an exception that helps decrease the risks associated with deploying the technology, as well as ensuring that system operators can continue to provide electricity from these units during the adjustment period. 

To summarize: the performance standard incentivizes either non-emitting generation or heavily abated fossil gas by 2035, while leaving runway for CCS technology to further develop. This ensures that provinces can still look to fossil gas to play a role where necessary, but that they do so in a way that delivers meaningful emissions reductions.

Old vs. new units and understanding the end-of-prescribed-life conditions

Importantly, the proposed performance standard doesn’t immediately apply to all facilities at the same time. Instead, the regulations create distinct categories that face different timelines for meeting the standard, often based on their “commissioning date” (the date upon which the facility first begins to operate). The most significant division is between “new units” and “existing units.”

“New units”

Any unit that comes into operation after January 1, 2025, will be required to meet the performance standard by January 1, 2035. Given that a fossil gas facility typically operates for at least 40 years, this requirement will create planning certainty for utilities and project developers that any fossil gas that comes online after January 1, 2025, must also utilize CCS technology or be CCS-ready by 2035. This gives “new” fossil gas units, as defined in the regulations, only a decade or less to operate prior to facing the performance standard. 

There’s no question that fossil gas will continue to play a role beyond 2035 on our electricity grid. But to the greatest extent possible, that gas must be abated, and utilities and project developers need to start treating unabated fossil gas as a last resort. It’s critical, therefore, that we examine whether the regulations provide a strong enough signal to disincentivize the construction of new unabated fossil gas units, while also incentivizing the development of new non-emitting sources. Otherwise, the continued construction of new fossil gas plants (those commissioned after January 1, 2025), which would not require CCS technology until 2035, could have the effect of backloading emissions reductions and placing pressure on future governments to weaken the regulations. 

“Existing units” and end of prescribed life

Existing units, which are defined as facilities that were commissioned before January 1, 2025, won’t necessarily be required to meet the performance standard by 2035. Instead, they are expected to align by whichever date occurs later: January 1, 2035, or “following the unit’s end of prescribed life,” which is defined as 20 years after its commissioning date. 

That means that a facility that started operation before 2015 would be subject to the performance standard immediately in 2035, while one commissioned in 2024 would be permitted to operate outside the standard until 2044. 

There’s an important tradeoff here. On one hand, creating a phaseout period for “existing” fossil gas units provides some important benefits. First, this approach stretches the potential costs and grid impacts of removing or upgrading these units over a longer timeline. This helps ensure that the transition can be orderly, with time for planning to resolve grid impacts and accessing forecasted price declines in emerging alternative technologies, like battery storage and enhanced geothermal. Second, existing facilities may face higher costs to retrofit with CCS technology, given that they were never designed with that in mind. This will require thoughtful planning and a longer timeline to either remove units for upgrading, or procure new resources to replace them. In either case, a transition period may be warranted.

On the other hand, providing too long a transition period risks entirely undermining the intent of the regulations by disincentivizing the transition to non-emitting sources of electricity and terminally delaying the emissions reductions that need to be achieved. Indeed, the government’s models found that allowing “existing units” to operate for 25 to 30 years saw both costs go up and emission reductions go down.

In short, while an end-of-prescribed-life provision is an understandable flexibility provided to provinces to ensure an orderly and cost-effective transition, the impact of a 20-year grace period should be assessed carefully, and extension beyond the current 20 years should not be considered. 

Exception for fossil gas flexibility

Another significant exception to the standard allows for the operation of fossil gas facilities outside of the performance standard for short periods of time over the course of a year. Specifically, the Clean Electricity Regulations propose allowing fossil gas units to emit up to 150 kilotonnes of CO2 per year and operate for up to 450 hours/year. This roughly equates to a facility operating for around 5 per cent of the total hours of the year at 100 per cent capacity.

In practice, this is intended to create a role for fossil gas peaker plants — dispatchable electricity units that are kept as a backup and can be brought online quickly to help address periods of high demand or to balance variable production from renewables.

There will be a lot of debate regarding this provision. 

On the one hand, using both a non-zero performance standard, and including exceptions like this, which provides an ongoing role for unabated fossil gas, makes the challenge of achieving a net zero electricity grid by 2035 more challenging. 

On the other hand, there’s merit to the argument that retaining a limited amount of system back-up — even in the form of unabated fossil gas — may be warranted to support a transition to a non-emitting system. Given the size and cost of the build out of non-emitting power required to meet even the average annual system needs, permitting a small amount of emitting generation that is highly deployable (can be turned on and off at short notice) can help provide reliability in an affordable manner while we work to transition our energy systems to 100 per cent non-emitting sources. And these emissions would still be subject to the carbon price, providing further incentive to only operate these resources when they are actually needed.

Furthermore, it’s worth noting that not all regions of Canada face the same challenges — or are starting from the same point. Jurisdictions like Alberta, Saskatchewan, and parts of the Maritimes still heavily rely on fossil fuels for their power generation. In addition to requiring a more sweeping transition, they can also face colder temperatures with high energy demand for heating in the winter. While non-emitting technologies — including energy storage — are quickly becoming cost competitive, providing an exception that allows a limited role for fossil gas-based backup is warranted as these resources are being built out and properly integrated.

One of the key questions that will be debated is whether 450 hours provides an adequate limit to meet these system needs. A first issue is whether that kind of utilization rate is sufficient to ensure system reliability, and whether it provides an appropriate weighting of emissions reductions versus cost. In the government’s modeling, an 8-10 per cent utilization rate saw a marginal decrease in costs of between 1 and 3 per cent but a 4 to 15 per cent increase in emissions. The second issue is whether operating for this period provides adequate financial incentives for companies in each jurisdiction to keep gas capacity online. Given important differences between provinces, including market structure, weather, and current share of fossil-based power, there will be different calculations. 

For instance, in Alberta, where an exception for peaker plants may be especially important, the combination of a liberalized energy market, the lack of a dedicated capacity market, and a cap of $1,000 per megawatt hour may mean that 450 hours does not provide enough incentive to maintain a peaking facility. Whether this is predominantly a provincial market design challenge or a federal regulatory design challenge is an important question, but there’s no doubt the policy needs to achieve emissions reductions without undermining the reliability or affordability of the grid.

Capturing all generators, including cogeneration facilities

Another major policy decision that will be hotly debated is the inclusion of cogeneration facilities — facilities that are used to generate both heat and electricity at the same time. The new regulations would impose the performance standard on any facility that has net exports to the electricity grid (more electricity provided to the grid than used from the grid) over the course of a year.

Cogeneration is used in a number of different industries across Canada but particularly in the oil and gas sector. While this element of the policy could have some impact on certain facilities and sectors, the inclusion of the 25-megawatts minimum for a facility to be captured by the regulations, as well as the requirement that a facility be a net exporter of electricity to the grid over a year, will likely limit the unintended capturing of primarily non-electricity sector cogeneration.

Its inclusion in the Clean Electricity Regulations is particularly noteworthy from an emissions perspective, however. Roughly 28 per cent of Alberta’s electricity is generated from cogeneration, accounting for approximately 19 megatonnes of greenhouse gas emissions from the province. Failing to include cogeneration could  risk creating a loophole that incentivized the deployment of unabated cogeneration units that wouldn’t be subject to the new regulations. The final regulations will need to clearly delineate which cogeneration facilities across the country are captured by the regulations, and what impacts that inclusion or exclusion may have on other industries.

Looking beyond the Clean Electricity Regulations

In order to properly understand how the Clean Electricity Regulations operate — and the potential impacts they will have — it is essential that the implications of these and other specific design choices are well understood. Our detailed submission to the government’s consultation process will get into greater detail about these trade offs, where we see the right balance being struck, and where some adjustments may be required. 

However, it is impossible to fully consider the utility of the Clean Electricity Regulations without also discussing the other policies that must work in conjunction with them to accelerate Canada’s clean energy transition. In particular, we must consider both how carbon pricing will be applied in the electricity sector, and how residual emissions will be dealt with. We dig into both of these in the second part of this blog series.

Evan Pivnick is Clean Energy Program Manager with Clean Energy Canada. Jason Dion is Senior Research Director with the Canadian Climate Institute. 

Read Clean Energy Canada & Canadian Climate Institute’s submission

Let’s make climate change boring in 2022

There are some dramas that people actually like.

The season finale of the HBO hit Succession, for example, was extremely entertaining. I and millions of other viewers loved it.

Here’s the thing about drama: a little can be a lot of fun. But too much—especially the stuff we feel like we can’t control—starts to take a mental toll.

It often felt, over the past year, that we were collectively being held hostage to real-life dramas that rivalled those of our favourite TV show.

The prime culprits—of course—are the tough choices we’ve had to make through the COVID pandemic. It’s the drama that just won’t stop. It’s overwhelming. It’s unrelenting. It’s so unprecedented we’ve had to create a whole new vernacular to describe the experience.

Another ongoing drama is the existential threat of climate change. Whenever I tell people that I work on climate change for a living the first question out of their mouths is some version of “Are we screwed?” It never fails—at a dinner party, at the barbershop, you name it.

This widespread angst is backed up by public opinion research. Nearly 60 per cent of global youth say they are very worried about climate change and almost half say those concerns about climate affect their daily lives. Here in Canada, this “eco-anxiety” is exacerbated by the extreme wildfires and flooding we saw this year and the expectation that the devastating effects of climate change will only get worse.

Does it need to be this way? Do we have to suffer from the anxiety and uncertainty of a frightening, dystopic future? The short answer is no.

Of course, we’re not going to sort out all of the world’s current craziness, but here’s one thing we could do in 2022 to ease Canadians’ climate change worries: make climate change boring. Boredom means predictability. It means calm. And I think we could all use a bit of that right now.

There’s a quote attributed to Winston Churchill that goes like this: “Let our advance worrying become advance thinking and planning.” That’s what we have the potential to do in the coming year in this country.

Canada now has a climate change law at the federal level, the Net Zero Emissions Accountability Act, which requires—by the end of March—the country’s first 2030 emissions reduction plan. For the new Minister of the Environment and Climate Change, Steven Guilbeault, this plan needs to include mandates for electric and zero emission vehicles, cutting down on methane pollution, capping and cutting emissions from the oil and gas industry, and transitioning to a net zero electricity grid.

If the government does all of this, we’ll be well on the way to taking a significant bite out of carbon emissions in this country for the first time.

Will this instantly lift the worry-burden that people are feeling with respect to climate? Of course not. But knowing that we have a plan, that we’re starting to bend the greenhouse gas emissions curve downwards, will be a significant psychological milestone in the history of the Canadian carbon conversation.

Other countries that have already made more progress on carbon reduction show us the way forward. The U.K., for instance, has halved carbon emissions since 1990. It has settled into an annual cycle of executing the national carbon reduction plan, assessing progress against the plan, updating the plan, then repeating. It’s boring. It’s predictable. It’s working.

When public policies are working well, they usually cease being hot topics of discussion. My hope for 2022 is that we’ll need to talk about climate change less, because we’re doing more.

Originally published in Maclean’s.

Five reasons to feel some hope after reading the IPCC report on climate change

There was undeniable urgency to the first part of the Intergovernmental Panel on Climate Change (IPCC)’s sixth assessment report released on Monday: Global warming is happening faster than expected and it’s driving extreme weather on every continent. 

We see the consequences on a daily basis. Too many people living in Canada are already experiencing first-hand the destruction caused by climate change: floods, fires, heat waves. Canada is warming faster than much of the rest of the world: an average of 1.7 degrees increase since 1948. We need to do so much more to adapt to climate change in order to save costs and lives over the next few decades. 

So, yes, there is a lot to feel anxious about between the covers of the new IPCC report. 

But that’s not all there is. So often, with climate change, the public discussion takes on a tone that verges on nihilism. But the future is still ours to write. With the backing of the IPCC’s historic scientific report, here are my top five reasons that I’m ending this week feeling some hope: 

  1. The worst impacts of climate change can be avoided.

This is the best piece of news: it’s not too late to change course—though we are in a rapidly closing window. Projections in the IPCC report show with a high degree of certainty that if we hit net zero emissions globally by 2050, we could still limit warming to 1.5 degrees Celsius, avoiding catastrophic tipping points. The scientific consensus is clear: the faster we reduce our emissions, the cooler the planet will remain.

  1. Global warming is reversible—if we act fast.

In the IPCC’s worst-case scenario, global emissions double by 2050, causing temperatures to rise an estimated of 2.4 degrees Celsius between 2041 and 2060. But in the best-case scenario, one in which we reduce emissions quickly over the next decade, the global temperature would rise an estimated 1.5 degrees above pre-industrial levels between today and 2040, would top out around 1.6 degrees and then begin to fall toward the end of the century.

Source: IPCC
  1. Global progress towards reducing emissions is already happening. 

Over the past 10 years, clean energy has become cheaper, while climate policies in Canada and abroad have become stronger. Global emissions have slowed, rising only 1 per cent a year over the past decade. We’re still falling short of what was promised in the Paris Agreement, but the very high emissions scenarios predicted in the past are unlikely to come to pass. We’re trending in the right direction, particularly compared to where we were in 2010. 

  1. Carbon doesn’t stick around forever.

Between 65 per cent and 80 per cent of CO2 released into the air dissolves into the ocean over a period of 20 to 200 years. As the IPCC report makes clear, achieving low or very low greenhouse gas emissions will lead, within years, to discernible effects: swiftly reducing emissions today means that global temperature would begin to detectably trend downward within about 20 years.

  1. Rapidly reducing GHG emissions can be win-win-win. 

The IPCC report emphasizes that reducing greenhouse gas emissions will improve air quality, which will save lives in Canada, as well as dollars: the societal health burden from air pollution, currently around $8.3 billion a year in Canada, could fall to $0.7 billion by 2050. And that’s just one example of the benefits. Our report on Canada’s Net Zero Future shows that doing Canada’s part to keep warming to 1.5 is not just achievable, it will be beneficial to our future health and prosperity. 

People, as well as climate systems, have tipping points, as the authors of a study called “Plausible grounds for hope” point out. There is every reason to believe we are on the verge of one of those tipping points now: changes made in Canada and globally could help to trigger an acceleration in decarbonization. If the past year and a half of COVID-19 has shown us anything, it’s that we can adapt our behaviour—sometimes very quickly, if not always easily. Let’s get to it.

Canada’s top court validates carbon pricing. Now what?

Today, the Supreme Court of Canada upheld the federal government’s carbon pricing legislation. I’m not going to unpack the legal implications here, but I will take a closer look at what it means for climate policy in Canada. Here are two things that change with the decision, and one thing that stays the same.

Change #1: With more policy certainty, Canada has now a credible shot at achieving its 2030 target

As I have written previously, Canada’s current climate plan is unusual in the history of Canadian climate plans: it actually has sufficient stringency to achieve the country’s 2030 target. A carbon price that rises to $170 per tonne by 2030 is a critical part of that plan. Modelling from Navius Research, for example, suggests that that this price puts Canada on track to deliver the emissions reductions required over the next decade. 

Our own analysis of Canada’s pathways to net zero reinforces the same finding. Getting to the 2030 target will depend on rapidly scaling up “safe bet” solutions—commercially available, tested technologies and practices. Increasingly ambitious carbon pricing can do exactly that, by creating incentives for businesses and individuals to adopt those solutions in order avoid paying that carbon price.  

By validating the federal carbon price backstop, the Supreme Court has increased the certainty that the price on carbon emissions will in fact follow the planned trajectory to 2030. Increased certainty means a stronger incentive to invest in the solutions now that will pay off in lower emissions (and lower carbon costs) in ten years. Still, while legal uncertainty has passed, political uncertainty remains.  

An aggressive (and more certain) carbon price isn’t just about the 2030 target; it will also provide a foundation for achieving net zero by 2050. For one, our net zero pathways show that driving changes in Canada’s economy in the next 10 years is a foundation for deeper changes to 2050. But getting to net zero (and maintaining a prosperous economy) also depends on unlocking emerging new “wild card” solutions. More certain carbon pricing helps here too: expectations regarding high carbon prices in the future can drive innovation by creating incentives for investment in new, emissions-reducing innovations that will pay off in the future, perhaps in unexpected ways.   

Change #2:  It’s time for the provinces and territories to make carbon pricing their own

The last few years have seen some heated conversations on carbon pricing within the federation. And fair enough: the push and pull within the federation on climate change policy is one more chapter in Canada’s history of policy in areas of shared policy jurisdiction.   

Now, the Supreme Court ruling has provided the clarity needed to move forward. The federal government can indeed impose a backstop on provinces or territories that haven’t adopted a sufficiently stringent carbon price of their own. But the decision still gives provinces and territories plenty of room to maneuver.

With legal rumbles put to bed, provinces and territories have all kinds of incentives to play along. Expect to see provinces and territories actively designing their own carbon pricing systems, and critically, making their own choices about how revenue can and should be recycled back to people and businesses within the province. Provincial and territorial governments can customize those revenue recycling choices according to their own priorities.  

What doesn’t change:  There’s still work to be done

The Supreme Court ruling clears the way for carbon pricing to play a leading role on the path to 2030 and beyond. That doesn’t mean it’s time for climate policy wonks to take their eyes off the ball. 

First, to be effective, the federal plan must be implemented as described. Actions speak louder than words, and the federal government has to follow through on the plan—and the increase in the carbon price and rebates—it has proposed. The new independent Net Zero Advisory Body and accountability legislation can help increase the likelihood that future governments will follow through on carbon pricing and other policies. 

Second, governments must adjust critical design choices in their carbon pricing systems to ensure effectiveness. As carbon prices increase, these design choices will increasingly matter for the overall performance of policies. And in some cases, existing systems could be improved.  The Institute has new analysis underway to provide guidance as to how to do so. 

Third, carbon pricing isn’t the only policy lever that counts in advancing “safe bets” or “wild cards.” The pathways we explore to 2030 and on to net zero by 2050 will require other actions and policies that can complement carbon pricing. For example, new infrastructure—to transport hydrogen, electricity, CO2, or a combination of all of them—will be required. Additional government support for a portfolio of potential wild cards that can reduce greenhouse gas emissions and contribute to new sources of economic growth in the future can make sense.  

Carbon pricing and beyond

Carbon pricing has taken up lots of oxygen in the Canadian policy debate for the last few years. That isn’t necessarily a bad thing—as a country, it feels like we’ve worked through some hard conversations around climate policy, and ultimately converged on policy that can be both cost-effective and effective in reducing emissions. Now that one of the major arguments against a nationally consistent carbon price has been dismissed, it’s time to take a deep breath—and turn our attention to making carbon pricing work even better on the way to net zero. 

You asked, we answered: FAQs about net zero

Since launching Canada’s Net Zero Future last month, we’ve received great questions from fellow researchers and other people we’ve engaged with. While each conversation and correspondence has sparked different lines of inquiry, a number of questions have come up again and again. We’ve responded to those here. Please keep the questions coming, so we can keep the conversation going.  

  1. If you had to sum up the whole report, what’s the takeaway?

First and foremost, that net zero is achievable. Our analysis identifies more than 60 possible pathways that reach Canada’s stated target of achieving net zero greenhouse gas emissions by 2050. 

But getting there will require two types of solutions—safe bets and wild cards. Safe bets are no-regrets solutions that are commercially available today, such as energy efficiency measures, electric vehicles, and heat pumps. Wild cards, on the other hand, are solutions that are in the early stages of development, face potential barriers to scaling up, or may be unable to outcompete lower-cost solutions even when they do prove technically viable. 

We find that the next decade is all about driving forward safe bet solutions, while at the same time supporting the development of wild cards so that they’re ready when we need them to drive deeper emissions reductions in the future. It’s too soon to say which ones will pay off, but the modelling shows we will very likely need some wild cards to come through to achieve net zero by 2050.

  1. Why are nature-based solutions considered a wild card? 

Nature-based solutions, also referred to as “land use” in our analysis, cover a variety of practices to absorb carbon dioxide, such as: 

  • forest management practices, like boosting conservation for existing forests or planting new ones
  • agricultural practices, such as no-till planting or mixing trees with agricultural land 
  • ecosystem management, by protecting or restoring grasslands, wetlands, and coastal ecosystems. 

These solutions meet the “wild card” definition for a few reasons. First, there are concerns around the permanence of the emissions reductions from these solutions. Carbon stored in nature doesn’t necessarily stay there forever—for example, carbon sequestered in a forest can be released due to wildfire, drought, invasive pest species, logging, or urban development. In other words, the emissions sequestered through nature-based solutions can be reversed. 

In addition, nature-based solutions may face barriers to scaling up since the huge land mass needed (especially for approaches like afforestation) may conflict with other land use priorities (like food production) and could have negative impacts on neighbouring ecosystems. And, critically, to move ahead at scale, these systems would also need to respect the inherent, treaty, and constitutionally protected rights of Indigenous Peoples, since these solutions would often be deployed on their traditional lands. 

  1. What role does nuclear energy play? What about small modular reactors?

Short answer: our analysis does not assess the role of nuclear specifically. Instead, we looked at the role of non-emitting electricity broadly, which could include nuclear, as well as hydro, wind, solar, biofuels, geothermal energy, and natural gas paired with carbon capture utilization and storage (CCUS). As a whole, the use of non-emitting electricity grows across all of the paths to net zero we examine and is considered a “safe bet” solution. 

In terms of small modular reactors (SMRs), these technologies are still in the early stages of development and have not yet reached commercialization (outside the Navy, where they mostly power submarines). For this reason, the model did not have the capability to include SMRs in the analysis. Although SMRs are not included, they would be considered a wild card in our framework as they represent a potential game changer for non-emitting firm power and for industrial heat and power. Though, again, this depends not only on the technological viability of SMRs, but also on their ability to become cost-competitive with alternative solutions. 

  1. Why doesn’t your report see a bigger role for hydrogen in Canada? Why is hydrogen a “wild card”?

Our analysis shows that by 2050, hydrogen could supply between 3 and 10 per cent of final energy demand in Canada (or between 294 and 628 petajoules). Other studies (like this 2016 study by the Trottier Energy Futures Project) have similarly found that hydrogen is not destined to be a huge part of the energy mix, but that it will nevertheless play an important role in certain applications (like heavy freight). Yet, we recognize that our modelling analysis is not able to capture particularly high-demand pathways for hydrogen that some see ahead for Canada. For example, the model allows for blending of hydrogen into gas pipelines (a reference blending rate of two per cent hydrogen by volume and a high blending rate of 20 per cent), but it does not allow for dedicated hydrogen pipelines to be built. 

Hydrogen is considered a wild card for a few reasons. Both the costs of hydrogen production and distribution and the costs of end-use technologies (like fuel cells) would have to decline from current levels and outcompete other solutions (like electrification, biofuels, or advanced CCUS). And its widespread deployment would require new or enhanced infrastructure, including building pipelines to move hydrogen and retrofitting gas networks and gas-using technologies to accommodate higher hydrogen blends. 

  1. Why isn’t electricity playing an even bigger role on the path to net zero?

Our analysis finds an important and growing role for electricity across all possible net zero pathways. By 2050, electricity supplies between 28 and 55 per cent of final energy demand and plays a critical role in decarbonizing a number of sectors, such as personal transportation, regardless of what pathway Canada takes. Other studies in Canada (including Pathways to Deep Decarbonization in Canada and the 2018 Canadian Energy Outlook) have identified similar roles for electricity. 

However, as with hydrogen, there are some limitations to our modelling, which means that the full potential of electricity could be even greater than we project. These limitations include the inability to represent interprovincial transmission, storage potential, as well as time of use pricing—a key tool for balancing demand in a highly electrified energy system. 

  1. Which net zero pathways are most likely or desirable?

In the report, we discuss the relative feasibility of alternative net zero pathways and look at the barriers that would have to be overcome for a pathway to come to fruition. However, we stop short of assigning likelihood or desirability. Likelihood is difficult to predict with certainty and highly subjective: How exactly the transition will play out will depend largely on uncertain factors outside of Canada’s control, like the speed of global climate action and technological change. Though that’s not to say we see all pathways as equally likely—some face more barriers than others, and some face greater uncertainty. 

Desirability, on the other hand, is a much bigger question that requires weighing different priorities and making trade-offs.

To be sure, informed conversations about the likelihood and desirability of net zero pathways need to happen in Canada.  We plan to use this paper as a foundation and evidence-based touchstone for those discussions.

  1. What about the regional implications of a net zero transition?

We recognize that Canada’s transition to net zero will have huge implications across the country and that it could play out very differently for different regions. While it’s not something we took on in depth in this report, it’s a question we plan to return to in the coming weeks and months. 

Stay tuned as we continue to unpack what net zero means for Canada.  

Canada should spread its bets in the transition to net zero

Uncertainty can be paralyzing. Uncertainty when the stakes are high, doubly so. Ask five people how Canada should get to net zero emissions by 2050, and you may get six answers. There is no shortage of ideas: electrification, carbon capture and storage, direct air capture, hydrogen fuel, small modular nuclear—all are on the table, and many more. As a result, uncertainty and debate persists around the relative importance of any one solution on the way to net zero. 

But here’s the thing: uncertainty isn’t all or nothing. We know more than enough today to start confidently down the road to net zero. We know about the main forces and factors shaping Canada’s net zero transition. We know enough to lay some smart bets that will pay off in the long run. And we know collaboration between governments, the public and private sectors, and among Canadians is critical to make it happen.

A range of “safe bet” solutions is fundamental to the transition between now and 2030, as we work toward net zero by 2050. These commercially available technologies will contribute substantially to Canada’s net zero transition, no matter how it plays out. Safe bets include energy efficiency in buildings, non-emitting electricity of all forms, heat pumps, electric vehicles, and some forms of carbon capture and storage. New analysis from the Canadian Climate Institute shows these well-established solutions will provide at least two-thirds of the emissions reductions required to reach Canada’s 2030 target.   

Looking out to 2050, however, “wild cards”—and the courage to try them—become increasingly important for unlocking the deeper, cost-effective emissions reductions that can get Canada to its net zero target. Some wild card technologies are still in early stages of development. Some face major barriers to being scaled up. Some will only prove useful under a specific set of circumstances. Wild cards include hydrogen fuel cells, next-generation biofuels, small modular nuclear, and engineered negative emissions solutions that pull carbon dioxide out of the atmosphere. We can’t say with certainty today which ones will play a big role, or how big that role will be. So we need multiple wild cards in our hand to increase the odds that a few of them will pay off. 

To get to net zero, Canadian governments will need distinct policies to drive both safe bets and the potential of wild cards. And for them to pay off in 2030 and 2050, those policies must be implemented now.

Safe bets require clear incentives for their widespread deployment and uptake. The federal government’s new climate plan based on increasingly stringent carbon pricing and flexible regulations, is an important step in the right direction here—and one on which other governments can build. Governments around the world are making major investments, and implementing policies to encourage private investment, in emission-reducing infrastructure. To meet its climate goals, Canada must take note and do the same.

Wildcards need policies and investments that can support their development and advancement, to ensure they’re ready when we need them. Policies such as regulatory and other support for pilot projects and tax incentives for early-stage commercialization can help to mobilize private capital. 

One kind of policy is not a substitute for the other. Using policies that only drive the safe bets will either make our net zero transition more difficult or more costly—there are costs to playing our hand too safely. Going all-in on wildcards could mean overlooking the wins from the safe bets. But sitting on other cards is risky, too. We need a balanced approach and going it alone won’t work. If anything, COVID has reinforced the importance of public-private collaboration.

Here’s the real kicker: if Canada can get comfortable with the inevitable uncertainty ahead, it doesn’t need consensus on exactly what net zero looks like. The whole point is to use policies and investments that help Canada hedge against a range of different potential outcomes in the global net zero transition. In fact, we—the authors of this op-ed—don’t necessarily agree about which wild cards matter most or which pathway to net zero is most likely or most desirable. But we do agree we need clear, decisive, climate policy and private and public investments that set Canada up for success in a net zero world—whatever it looks like.

After all, the stakes couldn’t be higher. 

Martha Hall Findlay is the Chief Sustainability Officer at Suncor Energy, Canada’s largest integrated energy company.

A version of this blog was published as an op-ed in The Hill Times on March 1st, 2021.

Canada’s oil sector faces a precarious future. Here’s why.

Uncertainty surrounding the future of oil and gas has been steadily intensifying, with President Biden cancelling Keystone XL and BlackRock pressing companies to show how they align with a net zero future. And as Canada works toward achieving net zero emissions (alongside major global economies like the United States and China), how is the outlook for oil production in this country changing? Our recent report, Canada’s Net Zero Future, provides insights.  

The future of oil production in a net zero world

In our analysis of more than 60 net zero scenarios for Canada, three distinct paths for Canadian oil production emerge (see Figure 1):

1) production declines significantly over time;
2) current production levels are sustained, or even grow, over the long term; or
3) production continues or grows in the medium term, followed by a rapid decline. 

Which path Canada ultimately follows will depend on a range of factors. Internal policy choices will influence some of those factors, but the major driving forces are outside Canada’s control—or Alberta’s, Saskatchewan’s, or Newfoundland and Labrador’s, for that matter. 

Figure 1: Canadian oil production under low and high global price scenarios for oil across pathways to net zero

Path #1 (green): Production declines significantly over time

One of the most important factors shaping Canada’s net zero future is the global price of oil. If Canada’s net zero transition occurs alongside accelerating global climate action, oil demand—and oil prices—could dramatically decline. In our low oil price scenarios, benchmark global oil prices decline to US$38 a barrel by 2030 and drop slightly further to US$36 by 2050 (based on the Canadian Energy Regulator’s 2018 Energy Futures). Our projections suggest that, under these conditions, Canadian oil production would decline steadily over the next 30 years. 

Factors that Canadian firms and Canadian policy choices can influence don’t substantially alter this result. Deeper cuts in the emissions intensity of Canadian oil sands production would not substantially change this course. Many existing oil sands facilities—given low marginal costs of production—could continue to produce for several years, but new investment would dramatically decline.  

Path #2 (red): Production continues, or even grows, over the long term

On the other hand, our analysis finds that Canadian oil production levels could stay steady or even grow on the path to net zero—but only if four very specific conditions come to pass (see Figure 2). 

  • First, the global price of oil would have to rise above current levels and remain high (high oil price scenarios in our analysis have benchmark global prices rising to US$63 a barrel by 2030 and US$87 a barrel by 2050). This would require either weak global climate policy or widespread global adoption of negative emissions technologies (discussed below).
  • Second, oil companies and their lenders would have to have the expectation of sustained high oil prices, in order to justify continued investment to maintain or grow production capacity. 
  • Third, oil companies would have to make significant investments to further reduce the emissions intensity of their production to remain competitive. 
  • And fourth, demonstration-stage negative emissions technologies (such as direct air capture and advanced forms of carbon capture utilization and storage) would have to prove cost-effective and scalable, and be deployed at scale in Canada. Beyond uncertain technological development, the widespread deployment of these technologies would face significant barriers (including, but not limited to, unprecedented infrastructure build-out, the establishment of a global greenhouse gas accounting and trading system, access to sufficient capital and overcoming public opposition). 

Given these essential conditions, betting on this future is risky. What happens if those highly uncertain demonstration-stage technologies don’t pan out? That brings us to the third path.

Figure 2: Oil and gas production in Canada

Path #3 (blue): Production continues or grows in the medium-term, followed by a rapid decline

With sustained high oil prices, Canada may see continued demand for its oil products in the medium term. But without the successful commercialization and extensive deployment of negative emissions technologies, our analysis shows that production levels would begin to decline rapidly in the next 10 to 20 years—high prices or not. 

Continuing to bet on a future that assumes high oil production risks locking-in emissions-intensive industries, infrastructure, and technologies (while locking-out lower-emissions alternatives). These choices result in “stranded assets,” with significant investments becoming uneconomic. It also risks putting off critical economic diversification in regions whose economies are closely tied to oil production. The vulnerability of Canada’s oil sector to forces beyond our control underscores the importance of having an eye to the future and ensuring that workers and communities have access to supports so that they aren’t left behind.

Betting on an uncertain future

Our analysis concludes that sustained oil production in Canada faces a precarious future (the outlook for natural gas production in Canada is similar). And while it’s possible achieving net zero in Canada could be consistent with a thriving oil sector in the long term, counting on this outcome makes for tricky risk management given the significant drivers outside of Canada’s control.

On one hand, negative emissions technologies such as direct air capture represent the tempting prospect of a silver bullet. And the benefits of big technological breakthroughs would be significant, both for Canada’s oil and gas regions as well as global efforts to reduce greenhouse gas emissions. At the same time, downplaying the risks of betting on sustained, long-term oil production could put workers and communities whose livelihoods rely on this sector at greater risk of economic turmoil and job loss. It could also make meeting our climate targets harder if we put all our hopes in a future technological breakthrough.  

But there are ways to navigate that risk and uncertainty. A net zero transition holds new potential for these regions as demand grows for hydrogen, biofuels, non-emitting electricity, or even developing negative emissions solutions. And many of these sectors require the resources, infrastructure, and skills found in oil-producing regions. The opportunities are there—the key is advancing them now so that workers, communities, and companies can find paths to prosperity in a changing world.  

Snowy Texas is a warning to Canadians

A record-breaking winter storm in the southern US caused widespread power outages in the region. Texas was hit hardest, with millions without electricity days after the storm landed. The cost of supplying electricity in the state spiked 10,000 per cent above normal levels. The grid operator deliberately cut power to customers, through rolling blackouts, to prevent the whole grid from collapsing.

Though the Texas crisis is caused by snowy conditions that most Canadians would take in stride, this is still a warning for us. Canada should pay attention. 

A crisis of cascading impacts

The massive power outages were triggered by an extreme winter storm, causing both demand- and supply-side impacts in a one-two punch. On one hand, electricity demand for heating rose sharply in cold temperatures. Meanwhile, the supply of that electricity was disrupted, with power plants failing throughout the state. 

It’s bad enough that millions have lost heat and light in their homes, but the loss of power has precipitated a cascade of other impacts, underscoring the essential services that electricity powers. Loss of refrigeration and poor road conditions have disrupted COVID-19 vaccination efforts. Impacts on water distribution and treatment have made potable water scarce in certain regions, and boil water advisories have been issued across the state. Food supply chains have been disrupted: millions of dollars worth of milk down the drain because it can’t get processed.

Canada is different from Texas, but we are vulnerable just the same

Sure, Canada is not Texas. The Texan grid is islanded from the rest of the country. Grids across southern Canada are better connected to the main North American grids. Most of Texas’ electricity comes from fossil fuels (natural gas and coal), with a growing minority from wind and solar. In Canada, generation mixes vary across regions, but we tend to rely more on hydropower, which has its own strengths and vulnerabilities. 

But don’t be fooled into thinking because Canadians can hack the cold, the Texas situation doesn’t concern us. Just as Texas was blind-sided by “Canadian” weather, what if “Texas”-style heat waves and drought were to hit here? An upcoming Institute report in fact finds that in Canada, extreme summer weather can both tax infrastructure that supplies electricity and drive up peak electricity demand—sound familiar?

“Long tail” (low likelihood, high impact) events, of various types, will only become more frequent with climate change. Canada has seen its share of such events: ice storms in the east, wildfires in the west, and floods everywhere in between. Climate hazards will vary by region, with more extreme precipitation, changing water availability, and more frequent heat waves, which could each impact Canada’s electricity system. 

“Hardening” infrastructure is just one part of the solution

The events in Texas are showing that infrastructure needs to be built stronger to withstand extreme conditions so that, for instance, gas wells and wind turbines don’t freeze in cold temperatures. But targeted fixes to “harden” infrastructure are just one part of the solution. Since we don’t know where or when disaster may strike, the entire system should be made more resilient, including allowing certain parts to fail but bounce back.

  • Build up reinforcements: Stronger interconnections can act as a lifeline during times of need, the lack of which was the Achilles’ heel for Texas. Our provincial grids are tied to the continental system, though border provinces tend to be better connected to their southern states than with their domestic neighbours. Building out storage is another way of ensuring back-up reserves are on hand when needed.
  • Re-think electricity system design: Supporting decentralized electricity systems based on diverse generation sources would help put our eggs in different baskets. If one plant or energy type goes down, the entire system doesn’t. This is true for off-grid communities too. For instance, Gull Bay First Nation in northern Ontario has set up a solar-based microgrid to become more energy self-sufficient and reduce reliance on diesel. 

It’s also important to re-consider whether market design is working to create the right incentives to build resilience. Whether it’s the (more) deregulated markets in Alberta and Ontario, or the vertically-integrated model in many other provinces, the market should ideally incentivize or at least not create barriers for regulators, utilities, and consumers to build resilience.

  • Don’t forget the demand side: It’s easy to blame the failure of power plants and transmission lines for outages, but improving the efficiency of homes and businesses—such as improved insulation and more efficient appliances—means less demand, and ultimately, less vulnerability to disruption.  Allowing demand to respond in real-time can encourage conservation or load shifting when supply is scarce, but would require greater roll-out of smart grid infrastructure and re-thinking market design in many Canadian electricity systems.
  • Align with low-carbon objectives: As Canada modernizes its aging grids, resilience should be built up alongside the pursuit of other objectives, notably decarbonization. Luckily, many of the measures listed in this blog can help achieve both: greater interconnections and storage can help balance higher shares of solar and wind. Smart grids and energy efficiency promote more efficient use of energy resources. Of course, these will need to be balanced with affordability and public acceptability. No silver bullet exists, but there are win-wins to be had.

Infrastructure should be built for the future, not the past

The events in Texas have shown the dire consequences of how freak weather events—and lack of planning for them—can leave millions of people in the freezing dark. Science tells us climate change will make these “long tail” events more common. As a basic starting point, electricity planning should consider conditions of the future, not the past. As we decarbonize our grids, we should make them more resilient. 

Stayed tuned for an upcoming report on how climate change can impact infrastructure systems,  including electricity demand and distribution, in Canada.

What puts the “net” in net zero?

Next week, the Institute will release Canada’s Net Zero Future, the first comprehensive scenario report to examine more than 60 potential pathways Canada could take to achieve its goal of net zero greenhouse gas emissions by 2050.

One key finding of that work: on the path to net zero, the need to take decisive action despite uncertainty is the name of the game. And maybe the biggest source of uncertainty—and disagreement—is the extent to which Canada can and should lean on the “net” in net zero. 

The net zero equation

Simply put, a net zero Canada means that any remaining greenhouse gas emissions (“gross” emissions) must be offset by efforts to remove carbon dioxide from the atmosphere and permanently capture it (referred to as “negative” emissions). In accounting terms, net zero emissions equal gross emissions minus negative emissions. 

There are three main ways to get negative emissions. Each could contribute to Canada’s net zero goal, but they also come with their own challenges.

Option 1: Natural sequestration

Nature-based solutions” can remove carbon dioxide from the air. In theory, actions such as planting trees, changing agricultural practices, or protecting wetlands can harness nature’s ability to be a net sink for greenhouse gas emissions. Contributions from natural sources to both generating emissions (such as when forests catch fire) and removing emissions show up in Canada’s emissions inventory as land use and land-use changes (LULUCF).

Increasing nature’s capacity to sequester carbon dioxide can have multiple benefits beyond slowing climate change. For example, it can improve resilience to flooding and support biodiversity. At the same time, natural sequestration also raises some tricky questions. How credibly can long-term emissions sequestration be estimated—and how permanent is it? Depending on the details of planting, trees can sometimes be sources of carbon dioxide rather than sinks, and trees planted now can burn or be harvested later. 

Option 2: Engineered carbon removal

Technological approaches to carbon removal are another possibility. Squamish B.C.-based Carbon Engineering is developing new direct air capture (DAC) technologies to remove carbon dioxide from the atmosphere and either turn it into fuel or permanently sequester it using carbon capture utilization and storage (CCUS). Bioenergy combined with carbon capture and storage (BECCs) can be net negative on a life-cycle basis by combining the natural sequestration with geological sequestration. 

Canada might even have comparative advantage in these kinds of approaches. Alberta industry has extensive experience with enhanced oil recovery processes that are similar to geological emissions sequestration. And Western Canada has substantial, even unique, geological storage capacity.

Still, engineered carbon removal faces significant hurdles as well, particularly around their costs and scalability. For now, direct air capture remains very expensive; significant technological change would be required for it to be deployed at scale. And at the same time, widespread scale-up of net-negative DAC technologies would require really significant infrastructure buildouts, both in terms of air capture facilities themselves as well as pipeline networks to transport carbon dioxide to geological storage sites.  

Option 3: International credit trade

Finally, the Paris Agreement also opens to the door to internationally transferred mitigation outcomes (ITMOs). The idea is that countries can choose to transfer “credit” for emissions reductions to another country. If one country is well-positioned to go beyond its Paris goal, Canadian emitters can pay for credit to offset their own emissions. That flexibility can make sense for both sides, and lower overall costs.

There are challenges here, too. The institutional framework for ITMOs isn’t yet complete, though international negotiations continue. Furthermore, demand for ITMOs might quickly outstrip supply. Multiple countries could well be competing for a scarce number of credits. That problem only gets more challenging over time, as all countries start to head toward net zero. As global ambition increases (as climate science suggests it must, to avoid the worst effects of climate change), fewer and fewer credits are going to be available for sale. 

Net benefits

Our forthcoming report finds that negative emissions clearly have potential to play a role in Canada’s net zero pathway. At this stage, Canada should be considering all options to get to net zero in a cost-effective way.

But the optimal and realistic scale of negative emissions is a big, outstanding question. Negative emissions can almost certainly help make net zero practical by offsetting the most challenging, hard-to-reduce emissions in our energy system. It’s possible—but not at all certain—that they could also be scaled up to do even more. On the other hand, it’s also possible that credible negative emissions options end up being expensive and scarce, and will be needed in the long-term to go even deeper than net zero as we try to stabilize our climate, rather than offsetting ongoing emissions generation. 

The upshot? The possibility that negative emissions technologies could come through doesn’t mean we should put all our eggs in that basket and overlook the importance of strong policy. Uncertainty comes with the territory on the path to net zero, and public and private sector decision makers will need to tackle it head on.  

Stay tuned for much more analysis and insight on Canada’s pathways to net zero and how we can design policy to manage uncertainty.

Flooding In Canada & Threats To Real Estate

Climate risks in the financial sector are trending like never before. BlackRock—the world’s largest asset manager—is pushing hard for better disclosure of climate risk from companies. Mark Carney, the former Bank of Canada and Bank of England governor, continued to sound the alarm on climate risks in his remarks at Davos in late January. And the Ontario Teachers’ Pension Plan—manager of over $200 billion—has announced plans to assess physical risks of direct holdings¹.

But while momentum builds for taking action, poor disclosure practices—and the hidden climate risks that come with it—loom large in Canada. Few publicly traded companies or financial instruments currently disclose their physical climate risks.

To illustrate why disclosures matter, this blog pulls back the curtain on a small slice of physical climate risks: flood threats to Canadian real estate.

Real estate: the TSX commodity

Canadians are buying real estate as investments. With access to low interest loans, no capital gains tax, and returns over 20%, it is not news that many retail investors are buying second or third homes. But investors across Canada are also indirectly buying into real estate through the Toronto and New York Stock Exchanges. Known as Real Estate Investment Trusts (REITs), these securities allow investors to buy into a portfolio of buildings while getting a slice of the rental income.

I combed through the financial disclosure documents of 11 of the largest REITs that own property in Canada. These REITs hold a total Canadian real estate value of over $70 billion and have a total market capitalization of about $49 billion.

If you own diversified Canadian mutual funds or exchange traded funds (ETFs) managed by Vanguard, TD, RBC, or BlackRock, chances are you own a few of these. Some of the high value pension funds also own these REITs, including the Canada Pension Plan, Hydro Quebec Pension Plan, and the Ontario Teacher’s Pension Plan.

There were nearly 1,500 building addresses listed in the REIT financial disclosures. These included commercial real estate, residential buildings, and about 230 senior living facilities. Using insurance industry flood maps, I evaluated just how much flood risk these top REITs are exposed to.

Risky Business

Canada has continued to build in high-risk flood areas despite the increasing threat of floods and sea-level rise. Without public flood maps and expertise in risk management, it can be challenging for individuals to make informed decisions about their own home’s risk.

We may assume that with access to proprietary flood maps and risk management expertise, real estate corporations would be better at managing their flood risk than the average person. The data suggest otherwise.

Of the 1,493 REIT properties I analyzed, 17 per cent were located in a 200-year floodplain². Nationally, the average number of buildings in a 200-year flood risk zone is 11 per cent. Further, REITs have an exceptionally large amounts of risk concentrated in Quebec, New Brunswick, and Alberta.

We analyzed flood risk with data used by the insurance industry. These risk maps are developed at large scales and are often not as accurate as flood maps from local authorities. However, local flood maps do not exist for most of Canada. We calculated the percentage of all buildings at risk using the location of about 12 million buildings.

Average of all
buildings in
200-year floodplain
Average of
REIT properties
in 200-year
British Columbia11.6%6.7%
New Brunswick13.0%20.6%
Newfoundland and Labrador9.1%15.6%
Northwest Territories13.5%12.8%
Nova Scotia10.6%15.6%
Prince Edward Island9.6%14.3%
Yukon17.0% *No REIT properties recorded

Climate change is going to increase flood risk for many parts of Canada. Studies have projected that by mid-century catastrophic floods in some regions could happen up to 4 times more often than they do currently. Near coasts, the probability may shift even more dramatically in some places.

Risk managers also look at lower probability and high consequence events—like a 500-year flood (0.2 per cent chance of happening in any given year). There are huge tail risks for REIT properties in Alberta, Ontario, British Columbia, and Newfoundland and Labrador for these extreme floods.

The Jenga tower

Financial risk disclosures are not about five or ten homes flooding. They are about securities being stacked with hidden climate risks.

What if a large tropical storm strikes Atlantic Canada, causing a 200-year flood across southern Quebec and New Brunswick? Yes, homes would flood and families would lose treasured possessions, but pension funds and retirement savings accounts – which are increasingly loaded with real estate securities – could also take on water.

What happens if a 500-year flood hits Calgary and the surrounding areas?³ If physical climate risk disclosures were required, they would show that 15 per cent of one REITs’ properties could be flooded in such an event. Risk disclosures would also show that a 500-year flood event in Calgary will be more likely due to climate change.

Climate disclosures are more than a table-top exercise. Over 60 per cent of the REITs identified physical risks from climate change as a potential financial threat in their 2019 filings. However, in 2019 over 50 per cent of those same REITs acquired property in high-risk flood zones, despite having noted the potential risk.

Clarity through disclosure

Warren Buffet once said that “risk comes from not knowing what you’re doing,” and that sentiment is the simple idea behind climate risk disclosures. Without disclosures, it’s tough to know what risks lurk among the stocks or bonds in our retirement plans.

It comes as no surprise then that better physical climate risk disclosure is exactly what governments and financial markets are calling for (including our Institute). Better disclosure can help investors more accurately appraise the value of trades and reduce the potential of markets becoming disconnected from reality. But Canada clearly still has a long way to go.

Over the coming months, the Institute will be releasing more work on the potential costs that climate change could have on infrastructure in Canada (like homes and buildings), and the economic and social risks for Canada as the world transitions to a low-carbon economy. This work will continue to pull back the curtain and outline ways to ensure emerging risks are more visible so that we minimize future costs.

[1] The Task Force on Climate-related Financial Disclosures has recommended wide-spread disclosures of climate-related risks. There are two categories of climate-related risk: 1) physical risks linked to new or shifting hazards (wildfires, permafrost thaw, floods); 2) financial risks associated with transition to a lower-carbon future.

[2] We analyzed flood risk with data used by the insurance industry. These risk maps are developed at large scales and are often not as accurate as flood maps from local authorities. However, local flood maps do not exist for most of Canada. We calculated the percentage of all buildings at risk using the location of about 12 million buildings.

[3] The 2013 Calgary flood was a 1 in 100-year event.

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