Electric federalism: An idea whose time has come

This opinion piece originally appeared in the Globe and Mail.

Electricity demand is set to skyrocket in Canada as the clean energy transition accelerates, which means the country must embark on a historic build-out of its power systems to ensure continued prosperity. By 2050, we will require a lot more electricity – perhaps two to three times more generating capacity than is currently in operation.

The federal government has been doing much to encourage the clean energy transition; now, it needs to help accelerate the transformation of the electricity infrastructure on which that transition relies. The United States recently did so, with the Inflation Reduction Act putting billions of dollars into the kind of build-out Canada needs to participate in a low-carbon future. But our uniquely Canadian jurisdictional issues could be an obstacle to progress.

Because electricity is provincially governed in Canada, it falls largely on the provinces and territories to act by setting their utilities, regulators and system operators to the task. Unfortunately, most have been slow to step up even though clean electricity gives Canada a competitive advantage in a world desperately trying to reduce carbon emissions.

There are several reasons for this sluggishness. At the top of the list are fears about affordability – that the necessary investment to modernize the system will drive up costs to consumers, most of whom also happen to be voters. This affordability anxiety is a constant of provincial politics in Canada, because consumers have shown a propensity to rebel against increased rates; governments across the country have responded by shielding households from them.

Nova Scotia is the latest example; there, the electric utility argued thata new government cap on electricity rates wouldn’t leave enough money to invest in a more efficient grid. In Ontario, such interventions have long been a fixture of provincial politics.

Letting fears over rates constrain needed investment is understandable. While all the associated investments might only have a small effect on electricity rates, there is a risk they could rise more significantly. Provincial governments are right to be concerned about the risks of consumer blowback, which could potentially even undermine support for climate action. And taxpayers are especially sensitive to potential rate hikes now, as inflation bites into household budgets and the bottom lines of businesses.

Still, this approach is short-sighted. Climate change and extreme weather don’t adhere to economic cycles, and research shows that when we come out the other end of the energy transition, consumers will actually experience reductions in the share of incomes that will be spent on energy.

Ultimately, the worst thing we can do right now is to underinvest in our electricity systems. Policies are required to break the logjam in electricity system planning and investment because, absent a new approach, the necessary and advantageous investments probably won’t materialize fast enough.

Which brings us to what a Canadian Climate Institute report calls “electric federalism:” a made-in-Canada solution where provinces and the federal government join forces to deliver an affordable, reliable, clean and prosperous energy future for Canadians. The federal government would commit taxpayers’ funds in pursuit of essential national objectives. The provinces would manage those funds and invest in transforming their systems in their own particular way while abiding by some high-level principles, as they’ve just done with $10-a-day child care. It would all be very Canadian.

Under electric federalism, provinces would continue receiving federal money, topped up by their own funds, for electricity system investments. In exchange, provinces would require regulators, system operators and utilities to build out a cleaner, bigger, smarter grid. And provincial governments would agree to develop net-zero energy plans that would guide this build-out.

Not only would this approach clear the current logjam, it could also offer a fairer way of bearing the costs of system upgrades. Income-tax systems raise revenues in a more progressive way than ratepayer systems, which treat all households the same. Recent analysis shows that most people come out ahead if investment costs are covered from income taxes instead of electricity bills; low-income households would particularly benefit.

Electric federalism would ultimately benefit provincial ratepayers, reducing political impediments to electricity system transformation. Together, the two orders of government can catalyze the change that Canada needs to undertake to thrive in the 21st century.

Canada’s federal structure, with its large and powerful provinces, sets us apart from other countries navigating energy transitions. Let’s turn that disadvantage on its head by designing and following a uniquely Canadian approach to a cleaner, safer and more competitive energy future.

Ontario’s proposed clean energy credits are hot air.

Originally published in the Toronto Star.

Ontario businesses and investors are hungry for clean electricity. In response, the Ministry of Energy tasked the province’s Independent Electricity System Operator in 2022 with assessing options for establishing a registry to support the creation of a clean energy credit system.

Unfortunately, the proposed system will be little more than greenwashing, making companies’ power look cleaner than it is.

The problem with Ontario’s clean energy credits

Clean energy credits are certificates that represent one megawatt-hour of clean electricity. Ontario’s hydro and nuclear facilities make Ontario’s electricity generation 92 per cent non-emitting; with a mostly non-emitting provincial grid, clean energy credits allow companies to buy and claim credit for this clean generation. Companies that buy clean energy credits would claim to have lower Scope 2 greenhouse gas emissions (indirect emissions from the production of purchased energy), and the revenue from credit sales would help reduce everyone’s electricity rates (as the government has stated is its intent).

But there’s a problem: the proposed system would create two contradictory types of corporate emissions accounting. Those that opt into the program and buy credits for their electricity consumption would claim 100 per cent clean electricity. But those that don’t opt in would report their Scope 2 emissions in the usual way — based on the average carbon intensity of the grid. So, to the degree to which the grid is clean, it would get claimed by both those that have opted in to the system (who would say their electricity was 100 per cent clean) and those that didn’t (who would say that it’s as clean as average generation). The same clean power would get counted twice.

This kind of approach is misleading and illegitimate. For it to work, those companies that weren’t opting in would have to claim in their own corporate reporting that their electricity was only as clean as the generation mix that remained after the clean energy credits were sold and withdrawn from the generation mix. But changing their corporate emissions reporting in this way would require regulation, and would turn this voluntary scheme into a compulsory one.

Building on a bad foundation

The proposed system would formalize an equally questionable one that’s already operating. Ontario Power Generation has been selling similar credits since 2013. In 2022, Microsoft announced it would purchase these credits to offset emissions from its Ontario operations. Microsoft says this will help advance its goal to be powered with zero-carbon energy. But while the company’s emissions will go down on paper, nothing will change in the electricity system itself. It will be greenwashing, plain and simple.

Moreover, these credit sales will be happening while the grid gets dirtier, not cleaner. This is because Ontario is developing 1,500 megawatts of new natural gas-fired capacity to make up for Pickering Nuclear Generating Station going offline soon. So emissions will be rising in the decade ahead, not falling.

Banking on air

Companies increasingly care about their Scope 2 emissions, and there should be ways for them to support clean power as a way of meeting their own climate goals. But a credit scheme of this kind is not a legitimate way to do it.

There are policies Ontario could enact if it wants to expand use of clean electricity, and ways of leveraging corporate support. Alberta’s power purchase agreements and reverse auctions could offer some great lessons.

But selling clean energy credits from a dirtying grid under an accounting framework that double-counts the clean parts is a bad idea.

The credits that result will be hot air — no actual emission reductions will occur as a result of them. And the scheme will undermine larger efforts to decarbonize, by wasting the goodwill and financial capital of companies that are trying to live up to their climate commitments.

Ontario’s clean energy credit scheme should not move forward.

Locking out carbon lock-in (Part II)

No sector in Canada better exemplifies the challenges with carbon lock-in than oil and gas.

(For a primer on the complexities and consequences of carbon lock-in, check out Part 1 of this series.) The sector’s emissions profile, average asset lifespan, and global market and policy uncertainty for its products all combine to make carbon lock-in a uniquely severe risk.

However, there’s a new approach being proposed that gets to the heart of these challenges. If well-designed, the federal government’s forthcoming cap on Scope 1 and 2 oil and gas emissions could put Canada on a path to locking out lock-in in the sector.

Oil and gas’ carbon lock-in conundrum

Even though there have been marginal efficiency improvements over the past two decades, Canadian oil and gas production is still among the most emissions-intensive in the world. Oil and gas projects operate for 20 to 30 years or longer, meaning new projects could stretch to 2050 and beyond. And the sector is among the hardest to transition.

Furthermore, despite recent projections showing that global oil and gas demand will peak in the near future and decline thereafter, even under more conservative scenarios, there is still considerable uncertainty about the exact timing and scale of the transition. That uncertainty generates inertia that encourages the industry and politicians to advocate for and consider expansion in the sector which might not align with the sector’s net zero pathway.

For oil, carbon lock-in risk mostly arises from upgrades to existing assets because few new, “greenfield” oil projects are slated to come online as the energy transition accelerates. While there are promising technologies under consideration that could significantly drive down Scope 1 emissions, Canada’s oil sands heavy crude is currently the fourth most carbon-intensive oil globally, and many of the best available technologies cannot be applied to existing facilities. As multiple large oil sands producers acknowledge, they currently have enough proven and probable reserves to continue producing for almost three decades. That already stretches to 2050—and that’s without including “possible” reserves. Upgrading current facilities to either increase production in the near term or unlock new reserves in the long term could generate more lock-in.

For gas, lock-in risk might be more likely to arise from new facilities. Gas demand is expected to decline at a slower pace than oil in net zero scenarios, and gas can sometimes be a less carbon-intensive energy source than coal and oil. That seemingly makes it an attractive investment opportunity, especially with many European allies expressing short-term interest in Canadian gas. However, gas could be a “dead-end pathway,” delivering short term emissions reductions at the expense of long term net zero goals. It could also carry significant economic risk.

The knock-on costs of oil and gas lock-in

Analysis from the Canadian Climate Institute’s new 440 Megatonnes project shows that the oil and gas sector is out of sync with its net zero pathway under existing policies. Further expansion in the sector would worsen the problem—locking in even more emissions. Additionally, it would force other sectors to make up the difference and perpetuate a status quo that makes other sectors, namely transportation, harder to decarbonize.

Figure 1: Oil sands projected emissions trajectory (Scope 1 and 2) relative to a net zero pathway

Total greenhouse gas emissions for oil sands: the legislated and developing projections will not put Canada on the way to net zero by 2050. The announced projections will.
Source: 440 Megatonnes

At minimum, that raises the cost of the energy transition. At worst, it puts Canada’s climate goals out of reach altogether.

Carbon lock-in also has important global implications, given that Canada’s emissions targets for the oil and gas sector only consider Scope 1 and 2 emissions. Downstream Scope 3 emissions associated with consuming exported Canadian fossil fuels can represent more than 75% of lifecycle emissions. And since Canada exports about 80% of its oil and 40% of its natural gas, the vast majority of the sector’s emissions are not captured by Canada’s emissions inventory.

Putting a cap on it

A new approach being proposed by the federal government offers an answer to this challenging problem: a cap on oil and gas emissions.

By setting an explicit limit on the sector’s Scope 1 and 2 emissions that declines over time, the cap directly addresses the global market and policy uncertainty that is leading the sector to consider expansion. As long as the cap restricts the use of offsets and other flexibility mechanisms, it would preclude the construction of emissions-intensive new assets and facility upgrades that would be out of step with Canada’s emissions reduction goals.

Overall, 440 Megatonnes’ analysis not only shows that a well-designed cap will be necessary for the sector to be in alignment with a least-cost net zero pathway, but it can also support the transformation of the sector into low-carbon business products that are financially viable in the long run. These new business lines would skirt the concerns with lock-in and also help smooth the transition for workers in the oil and gas sector.

Taking a better path

As Canada works toward the goal of net zero by 2050, bending the curve on emissions from existing oil and gas assets is already a considerable challenge. Building new assets or upgrading facilities that extend their lifespan risks locking in even more emissions that makes it harder (or impossible) to achieve net zero.

But there’s a better path.

By implementing a cap on oil and gas emissions, Canada will be able to better address global market and policy uncertainty that exacerbates carbon lock-in while ensuring that oil and gas emissions are aligned with Canada’s climate goals.

Locking out carbon lock-in (Part I)

Avoiding carbon lock-in is crucial to addressing climate change.

At first glance, carbon lock-in is a simple concept: things that we buy, build, or invest in today—whether it’s a new industrial factory or a new household furnace—often come with long lifespans that effectively “lock in” their associated greenhouse gas emissions for years or decades to come. And when all these choices are added together, they can create sticky social, political, and technological constituencies that have a vested interest in extending the status quo, making future emissions reductions even harder.

But taking carbon lock-in beyond the conceptual level—and implementing climate policy to avoid it—is an entirely different beast. It raises complex questions around timing: policies must prevent locking in pathways that make it harder or more expensive to hit Canada’s climate targets, while simultaneously encouraging climate-aligned investments that generate economic prosperity. A project today may align with net zero pathways, but the same project proposed years from now may not.

In the first installment of this two part series, we dig into the meaning of carbon lock-in and the threat it represents to Canada’s climate goals and its economy. In the next installment, we’ll apply these lessons to one sector of the economy that’s at particular risk of carbon lock-in.

Locking in some theory

Let’s start with some brief theory. The concept of carbon lock-in gets thrown around a lot in climate debates, so it’s worth spelling out.

Despite how the term is sometimes used, carbon lock-in is rarely cut and dry. Unless a project generates zero greenhouse gas emissions, carbon lock-in is always a risk.

The size of this risk depends on a few factors. The biggest factors are the emissions generated from a given project or asset, along with its useful life. Projects and assets with big emissions profiles and long lifespans carry a bigger lock-in risk, illustrated by the figure below from the World Resources Institute.

Figure 1: Lifecycle emissions and typical lifetime of infrastructure and equipment

Lifecycle emissions and typical lifetime of infrastructure and equipment: for hydropower, nuclear, coal-PC, Gas-combined cycle, offshore wind, onshore wind and solar PV. Hydropower has the longer lifespan (70 years, 24 gCO2e/kWh), onshore wind and solar PV the shortest (20 years, respectively 11 and 48 gCO2e/kWh).
Source: World Resources Institute

The other big risk factor is the extent to which current emissions from a given project or asset are a predictor of its future emissions. Some projects, for example, can be “future-proofed” when initially built, making it easier or cheaper to reduce emissions down the road. This could include wiring parking stalls in office buildings to handle EV charging infrastructure, even if the full installation of chargers doesn’t happen right away. In other cases, an asset or project could be retrofitted with new technologies that help it reduce emissions, such as installing an electric arc furnace at a steel plant to replace a coal-fired blast furnace. Yet unless these abatement technologies are expected to be widely deployable in the near future, relying on retrofits down the road to reduce emissions is often riskier than “future-proofing” by avoiding carbon lock-in upfront.

Finally, carbon lock-in is not just about risks to the climate. It’s also about risks to the economy. Projects and assets with a higher risk of lock-in also face a greater risk of becoming stranded in the future, which can have adverse impacts on everyday Canadians. Whether its environmental liabilities that taxpayers end up fronting, or the social and economic disruption from a major employer closing in a small community, stranded assets can have significant ripple effects. These risks are particularly high if the global clean energy transition unfolds faster than markets currently anticipate.

Timing is everything

Each of these carbon lock-in risks hinges on timing. On one hand, achieving Canada’s climate goals means staying within a finite carbon budget each year—an amount that must decline sharply over the next 30 years. This means carefully guarding against projects and activities that are misaligned with Canada’s emissions trajectory because of their high emissions, their long lifespans, their limited abatement options in the future, or some combination of all three.

At the same time, however, Canada must rapidly scale up investment to both achieve its net zero target and maintain its competitive edge in the world economy. In the short term, this requires striking a delicate balance between significantly increasing capital to decarbonize Canada’s emissions-intensive sectors while avoiding costly stranded assets in the long term. It also means fully opening the taps for projects that have a low or minimal risk of carbon lock-in (for example, renewable electricity and green hydrogen).

Finding the right key

These temporal dynamics raise complex questions for policy makers and regulators. Transitioning emissions-intensive industries will not happen overnight. It might make sense in some situations, for example, to make a new investment in an emissions-intensive asset today if its lifespan is short enough to align with Canada’s net zero pathway and it will be phased out by a certain date. Making this same investment in five or 10 years’ time, however, may not make sense.

All of this underscores the need for a precautionary approach. Whether it’s a new project or a retrofit that extends the life of an existing project, the risk of carbon lock-in is real. It requires policy makers and regulators to take a stance on how much individual assets—and the economy more broadly—should bet on unproven technologies to reduce emissions in the future. Betting big on fully commercialized technologies makes sense (like the EV charging example), but relying on wildcard technologies like carbon capture and small modular nuclear reactors may not.

The need to minimize carbon lock-in also underscores the importance of developing clear guidelines and policies that incent projects that both drive economic growth and align with Canada’s climate goals. Canadian climate policy, while clearly moving in the right direction, is still not equipped to manage the tricky temporal dynamics of lock-in. The same goes for the financial sector, which desperately lacks standardized terminology and thresholds that would allow markets to see whether individual projects do—or do not—align with Canada’s net zero future. The good news is that help is on the way. Well-designed policies and standards can address the thorniness of carbon lock-in. In Part 2 of this series, we explore how one particular sector—Canada’s oil and gas sector—is at heightened risk of carbon lock-in and what Canada can do to prevent it.

Climate change progress in 2023

It’s a mark of how much momentum the global and national response to climate change now has that—despite numerous domestic and geopolitical headwinds—the past twelve months have resulted in significant progress.

In March 2022, Canada’s first Emissions Reduction Plan set the agenda for future policy development. The Canadian Climate Institute’s detailed assessment of this plan concluded that—if swiftly implemented— it has the potential to deliver on the country’s emissions reduction obligations. Significantly, just five policies are needed to get us most of the way to Canada’s 2030 emissions targets. Of those five, three could be finalized in 2023: the cap on emissions from the oil and gas sector, the Clean Electricity Regulation, and improvements to carbon pricing.  Let’s take each in turn.

Firstly, the oil and gas cap is crucial, since our research confirms that the oil and gas sector will overshoot its 2030 goal without regulation. Between 2005 and 2019, emissions from oil and gas rose by almost 20 per cent. The cap will need to be stringent and implemented well, along with tighter methane controls, in order to make the kind of deep and rapid emission reductions required to bring this sector in line with Canada’s 2030 target. 

Secondly, the federal government has committed that Canada’s electricity generation will be net zero by 2035. This target is ambitious but achievable, recognizing that Canada’s clean electricity production must increase significantly to meet our emissions reduction commitments in 2030 and 2050 and that the creation of a Net Zero electricity grid is a precondition for decarbonizing other sectors. If done right, this new framework for clean electricity has the potential to underpin significant new economic opportunities and actually make the overall cost of energy more affordable for Canadians.

Finally, this past year saw strong traction for policy ideas to provide greater certainty around the future carbon price, without which investors will be reluctant to make large multi-year commitments. An innovative approach, carbon contracts for differences, could be fully realized in 2023. If correctly implemented, these contracts could open the investment floodgates by enmeshing carbon pricing more closely into the financial system and unleashing the creativity of the markets in driving Canada toward net zero.

These necessary new Canadian policies need to be seen against a backdrop of significant global progress. The European Union continues to accelerate its Green Deal, a new growth strategy to transition the EU economy to a sustainable economic model, on the way becoming the first climate neutral continent by 2050. Our biggest trading partner, the U.S., has just enacted by far the most extensive investment in climate solutions in its history in the form of the Inflation Reduction Act. After years of seeing U.S. inaction on climate used as a reason for Canada not to move too quickly, we’re suddenly under pressure to go faster

There’s also pressure to move more quickly in terms of adaptation. Every part of Canada is now feeling the effects of climate change, and every year, multiple climate-fuelled disasters claim the lives of Canadians and drain billions from our economy. Last month, the federal government released its first National Adaptation Strategy (NAS), a first step along the path toward a safer and more resilient Canada. The principles of the NAS now need to be translated into rapid action. 

All of this will require investment. The federal government’s new Canada Growth Fund will seek to use public support to mobilize private capital. And new work with the Sustainable Finance Action Council will make it easier and faster to determine whether potential investments align with Canada’s climate goals and a stable climate internationally, thus helping to attract more green capital to Canada. 

As the federal government moves forward with these big policy pieces, the important role of provinces and territories increasingly comes into focus. There are many levers that provinces can pull to reduce emissions, including carbon pricing, building codes, transit, housing policy, and more. Above all, provincial regulatory commitment and interprovincial collaboration will be essential to achieve Canada’s clean electricity objective. In short, we need to see more leadership on the provincial and territorial level: fast.

Indigenous governments continued to show leadership in the energy transition in 2022, with communities leading the switch to non-emitting electricity. With the right support, Indigenous-led clean energy projects could see exponential growth in 2023 and beyond.

While this past year saw some milestone moments for climate policy, next year will be even more important and tangible as Canada steps up implementation while getting the details of specific policies right. The Canadian Climate Institute will continue to lead the discussion by anticipating upcoming policy needs and reacting with timely analysis. The next twelve months will be packed: with new data insights from our recently launched 440 Megatonnes project, as well as a major building heating study, engagement with the implementation of the NAS, and a renewed focus on oil and gas, as well as clean growth. Our goal remains the same: creating durable, effective climate policy to ensure Canada’s continued prosperity and the safety and resilience of our communities. 

No, Canada cannot get credit for its low-carbon exports

This blog was originally published by Policy Options in June 2019, and remains relevant more than three years later.

The federal government has recently announced that it intends to seek credit toward Canada’s emissions reduction targets for the GHG-reducing effects of Canadian exports. It argues that supplying Canadian clean energy such as liquefied natural gas (LNG) can reduce other countries’ emissions by displacing more emissions-intensive energy sources such as coal. Minister of Natural Resources Amarjeet Sohi has suggested that a provision in article 6 of the Paris Agreement would allow Canada to use these reductions in meeting its own GHG goals.

The low-carbon goods and services that Canada exports do have a role to play in reducing global emissions, but article 6 does not offer a path to getting GHG credit for them. And in any case, low-carbon exports don’t relieve us of the responsibility for cutting our own emissions.

Why we don’t get credit

Countries don’t get credit toward their emissions reduction targets for low-carbon exports because the global GHG accounting system doesn’t work that way. The accounting system used by the 197 parties to the United Nations Framework Convention on Climate Change (UNFCCC) covers “territorial-based” GHG inventories, which measure only those emissions that happen within a nation’s geographical borders.

Here’s an example. When Canada produces LNG, the emissions from production (drilling and extraction, venting and flaring, transportation, leaks and liquefaction) count toward Canada’s national GHG inventory. When we export LNG, the emissions that come from its consumption (burning) count toward the importing country’s inventory. If an importing country’s LNG consumption reduces emissions from what they otherwise would have been (for instance, when LNG displaces coal), the GHG reduction benefit goes to that country since the difference in emissions affects its national inventory, not Canada’s.

A new path to getting credit?

The Paris Agreement provision that Minister Sohi and some commentators have recently been eyeing as a way of getting credit for Canada’s low-carbon exports is called internationally transferred mitigation outcomes (ITMOs). ITMOs are voluntary agreements that could allow one country to get credit for a mitigation (reduction) in emissions in another country. The details are still being worked out.

ITMOs have the potential to drive GHG mitigation projects that might not otherwise occur — for example, because of lack of capacity or funding. They could also open up more cost-effective GHG mitigation opportunities than those that might be available if countries were focusing only on their own emissions. ITMO transfers must be voluntary (both countries must agree) and their size — measured in tonnes of GHGs — is negotiated. In order to avoid “double counting,” a core feature of ITMOs is that no two countries may claim credit for the same GHG mitigation.

A country could be willing to help another to build wind turbines instead of coal plants, for instance, in exchange for an ITMO. This support might come in the form of capacity building, technology transfer, funding or financing, or a combination of these. The two countries would negotiate the size of the ITMO. The host country would then allow the emissions reductions resulting from the project to be transferred to the supporting country, which would get credit for the GHG mitigation for itself.

ITMO’s are probably not the answer

In the real world, it’s unlikely that such arrangements could be made for Canadian export deals.

LNG trade, to follow up on the earlier example, is a business transaction. When a business or utility in another country buys Canadian LNG, it does so because it wants energy that is cheaper or less GHG-intensive (or both) than other options. On the sellers’ side, Canadian companies sell LNG because they want the revenue from the sale. If the sale results in a net reduction of emissions (which will not always be the case), that benefit goes to the host country.

If the government of Canada wanted to turn an LNG sale into an ITMO, it would have to enter into negotiation with the importing country’s government. But there’s a problem: it’s not clear what Canada could offer in such a negotiation. Canada would be asking for a benefit (in the form of a credit toward its GHG reduction target) in exchange for something that the foreign business is already paying the market rate for.

Countries know that reductions in their emissions have value. They won’t let others get credit for them for nothing. If the Canadian LNG comes at a reduced rate or with subsidized financing or capacity-building support, a buyer country might be willing to enter into an ITMO negotiation. However, there’s little chance it would be willing to do so for a straight commercial transaction.

For Canada to have a way of benefiting from such deals, ITMOs would have to no longer be voluntary — the granting of credit for exports would have to be automatic — or the accounting rules would have to change.

Could we change the rules?

ITMOs are still being defined, so perhaps Canada could try to shape them in a way that makes credit for low-carbon exports a built-in, automatic feature. Alternatively, Canada could try to revise the broader GHG inventory methodology in a way that grants credit. But these possibilities are more theoretical than real. [Edited in 2022 to add: The rules of Article 6 were agreed at COP26 in Glasgow last year. Therefore, the changes discussed in this sub-section would involve revising GHG inventory conventions and Article 6 rules, making such changes even less likely in practice.]

While trying to change the rules looks tempting, it probably wouldn’t work. First, there would be a massive pushback from other UNFCCC countries because a rethink would totally derail progress on ITMOs. Going to the next level by changing inventory methodologies would disrupt a hard-won global consensus on how GHG inventories work. In either case, it’s extremely doubtful other countries would ever agree.

Second, even if Canada could get other countries on board, it’s not clear the changes would be in Canada’s interest. A system that adjusts countries’ GHG accounting frameworks for the effect of their exports would have to consider the effect of all their exports. Canada would therefore be credited for its low-carbon exports and debited for its high-carbon ones (e.g., oil sands products). Once we account for Canada’s high-carbon exports, it’s not clear that we’d come out ahead.

Third, either change would amount to a major shift away from the territorial-based inventories now in place. In order to avoid double counting, inventories would have to be adjusted for the GHG impacts of countries’ imports as well as exports. The resulting approach would be methodologically similar to “consumption-based” accounting, which allocates emissions according to where goods or services are used, regardless of where the emissions actually enter the atmosphere. Consumption metrics can provide useful information, but consumption-based accounting is impractical and presents many of the same challenges as the current system. It is not the viable substitute it might appear to be.

There’s no easy way out

None of the analysis here means that Canada should ignore the potential for its low-carbon exports to reduce global GHGs. In fact, it’s critical that Canada look beyond its own GHG inventory. Global GHGs matter, so we should seek to expand our low-carbon exports both for the economic benefits and for the global GHG reduction benefits.

But trying to claim credit against our GHG targets for low-carbon exports as well? That’s another matter. There’s simply no path for that in the global GHG accounting system, even with ITMOs. And the alternative systems are unworkable.

However, there’s an even bigger takeaway here. While ITMOs and low-carbon exports have the potential to reduce global emissions, they do not provide Canada with an excuse for having weaker climate policies at home. In fact, article 6 is explicit that ITMOs should be used to increase “ambition” — to promote greater efforts to cut emissions. To meaningfully contribute to global GHG mitigation, Canada must not only look abroad but also examine its own GHG emissions.

Canada’s low-carbon exports have a role to play. But they don’t get us off the hook.

Why Canada’s economic forecasts must factor in climate change

Originally published by the Ottawa Citizen.

Canada’s Parliamentary Budget Office just did something important and long overdue. For the first time, the country’s official financial watchdog quantified the costs of climate change for Canada’s economy, showing that worsening climate impacts are a drag on economic growth. This is a crucial step in beginning to reduce the economic risks Canada can expect in a warming world.

There’s still a long way to go, however, and recent moves by Australia and the United Kingdom can point us in the right direction.

Continue reading at OttawaCitizen.com, where this op-ed was originally published.

Don Drummond is an economist at Queen’s University, a C.D. Howe Institute fellow-in-residence and an expert panelist with the Canadian Climate Institute. Sarah Miller is an adaptation research associate with the Canadian Climate Institute.

Meet 440 Megatonnes

What gets measured gets managed. 

Despite widespread skepticism about how productive the latest round of global climate talks underway at COP27 in Egypt will be, there is no question that we are in a decade of rapidly accelerating  climate action. Reducing emissions while pursuing competitiveness, energy security, low-carbon growth, and prosperity remains top-of-mind for government and corporate leaders in Canada and around the world. 

Tracking Canada’s progress in reducing emissions—and identifying opportunities to correct course—is necessary for an informed public conversation on climate action and effective policy implementation. But when it comes to measuring the impact of climate policy across Canada, good data has been surprisingly hard to come by—until now. 

That’s why the Canadian Climate Institute has launched a new resource called 440 Megatonnes, a one-stop data shop to help assess Canada’s progress toward its 2030 and 2050 climate goals. The project name refers to Canada’s commitment to reduce emissions by at least 40 per cent below 2005 levels by the end of the decade—or to no more than 440 Mt a year in 2030—en route to net zero by 2050. 

The data we make available will continue to expand. As of its launch this week, the 440 Megatonnes website features weekly expert insights, searchable databases, and downloadable open-source data showing where Canada is on track to meet its 2030 target and where there are opportunities to course correct. It tracks information about national, and sectoral emissions, government policies and spending, and corporate emissions-reduction commitments. 

You can explore the following features now: 

You can also find the first two installments of our weekly expert insights—including new analysis showing that, without new regulations, oil and gas emissions are set to overshoot Canada’s 2030 climate goalSign up for our 440 Megatonnes newsletter to get timely, data-driven expert analysis of the latest climate policy progress delivered weekly to your inbox. You can also follow 440 Megatonnes on Twitter, and join us on Thursday, November 10, 2022 at 1 pm ET for an in-depth look at this new interactive resource.

Responding to the Inflation Reduction Act: What are Canada’s options?

The U.S. Inflation Reduction Act has reshaped the global climate policy landscape, pressuring governments to consider the implications for their own climate policies and their economic competitiveness in a low-carbon world.  

The Act represents the most extensive investment in climate solutions in U.S. history. It includes a wide range of tax credits, grants, and loans for clean technologies, totalling US$370 billion over 10 years to accelerate the nation’s energy transition. Subsidies are available to clean tech manufacturers, consumers seeking to electrify their households, and communities implementing adaptation projects. The Act is expected to reduce U.S. emissions to 40 per cent below 2005 levels by 2030, create green jobs, and reduce inflation. 

Yet the Act has unexpectedly put Canada in a peculiar position. While the lack of U.S. climate action has often been invoked to argue against ambitious policies in Canada, the Act suddenly puts Canada under pressure to catch up with its most important trading partner. Without similar commitments from Canadian governments, investors and project developers may take their business south, leaving Canada unable to attract the necessary private capital to decarbonize its economy and meet its 2050 net zero target. However, the U.S. legislation could also create export opportunities for Canada, specifically for electric vehicles, batteries, and construction materials

How should governments respond to ensure Canada doesn’t get left behind in the wake of the Inflation Reduction Act? Here are three options for a path forward. 

Option 1: Strengthen existing policies

The first option is to rely on policies that are already on the books. In contrast to most parts of the U.S., Canada is not starting from scratch when it comes to setting incentives for investment in clean technologies. Several federal and provincial measures are already in place to mobilize private investment into decarbonizing the economy, including carbon pricing, regulations (e.g., clean fuel standards), and some subsidies (e.g., the proposed CCUS tax credits). The 2022 federal budget also included two new mechanisms for mobilizing private investment in low-carbon technologies: the Canada Growth Fund and the Canadian Innovation and Investment Agency.    

This option requires exploiting existing policies and instruments to their full potential. Carbon pricing is an efficient tool for steering capital flows away from high-carbon assets into cleaner alternatives. Governments can and should strengthen these market signals by instituting carbon contracts for differences, which significantly reduce uncertainty for investors at relatively modest costs to governments. Similarly, implementing the tax credits and finance mechanisms promised in the last budget may boost investor confidence. 

However, these instruments have limitations. In particular when it comes to low-carbon export products, the Canadian carbon price does not help project developers close the profitability gap. Even layered on top of each other, extant Canadian programs may be less generous than those in the U.S. legislation—and more complicated for investors to understand and access. 

Option 2: Go big and broad

Another option is to match the Inflation Reduction Act, with Canadian governments announcing similarly large subsidies for clean energy and technology.

Levelling the playing field may be necessary if Canada is to remain a competitive destination for international transition capital, a key driver of job creation and domestic emissions reductions. This option may also help to address the nation’s cost-of-living crisis by better enabling low-income households to participate in the energy transition through targeted subsidies.

The risks of this approach, however, match its ambition. By following the U.S. example, Canada could over-subsidize some technologies, turning public money into corporate windfall profits—particularly in incumbent industries. Perhaps more importantly is the looming fiscal question: how much more capacity do Canadian governments have after the massive pandemic support programs and ongoing crisis requiring financial support, including the war in Ukraine, and responses to extreme weather events? 

Option 3: Be selective 

Canadian governments could find a middle path, with new public supports, the strengthening of existing policies, and some subsidies for a few, targeted technologies or project types. This approach requires asking hard questions: What are Canada’s competitive advantages that enable success in a net zero future? What technologies have the most value for Canadian society at home (in terms of employment, rural economic development, Indigenous economic leadership, energy security)? And, last but not least: What are the most important technological levers for achieving Canada’s emissions reduction targets? 

To reduce windfall profits and fiscal pressure, as part of this option governments could also choose policy instruments with market driven elements to share risk. 

This approach risks betting on technologies that do not live up to their potential for reducing emissions and/or attracting private capital. International investors may still choose to put their money in U.S. projects where direct government support is abundant and easy to access. 

There is a cost to acting slowly—and a high price to acting in haste 

While the Inflation Reduction Act continues to reverberate across Canada, governments are under pressure from industry and investors to respond quickly. Global capital will not sit around and wait—it will quickly move to where returns are highest.  

At the same time, what investors desire most is certainty. Whichever path governments choose, their response must be transparent and stable over time as investors need to trust that governments will keep promises. Making rash decisions that require a course change is costly and may cause more harm than good. 

To choose the best option, governments need answers: How do current support mechanisms in Canada for clean energy and technology investments compare to U.S. subsidies? What are the challenges that Canadian clean technology developers face when trying to mobilize private capital? What are the implications for Indigenous economic development? And what policy tools other than subsidies have governments worldwide used to support clean technology projects and attract private investment? In the coming months, the Canadian Climate Institute will explore these questions—and the various options—to shed light on the best path forward for Canada. Stay tuned.

The way through today’s energy crisis is with clean energy, not fossil fuels

We are in a global energy crisis. Countries like Canada are under pressure to expand oil and gas production capacity to help alleviate supply crunches, especially in Europe, caused by Russia’s invasion of Ukraine. How should governments in Canada help navigate through this short-term energy crisis, without losing focus on critical global climate goals?

The recent release of the 2022 World Energy Outlook (WEO) from the International Energy Agency provides some welcome clarity. The new WEO shows there is no scenario for the energy system with continued, long-term growth of fossil fuels— including natural gas. The best and most durable solutions to these twin crises lie not in expansion of long-term fossil fuel infrastructure, but in energy efficiency and clean energy.

The writing’s on the wall for fossil fuels

Even in the most conservative scenarios modelled in the WEO, total fossil fuel use peaks in just a few years, and natural gas demand plateaus by the end of the decade. Other scenarios show that in a more accelerated transition, where countries meet their climate goals, fossil fuel demand declines even more decisively: in some cases, natural gas demand would drop 38 per cent by 2050 compared to today. In a scenario in which energy emissions globally drop to net zero by 2050 — consistent with the net zero goals of many countries, including Canada — natural gas demand drops by 78 per cent. 

When it comes to one type of natural gas, however, the picture is more complex. In the STEPS scenario, which is based on only today’s stated policies, demand for liquefied natural gas (LNG) which can be exported overseas, does rise modestly to 2050. Scenarios reflecting faster transitions, however, show a clear decline in demand for LNG. In a world that achieves its net zero goals, any LNG capacity that isn’t already under construction, is not needed.   

The global energy transition is happening, and fossil fuel demand is trending down. The only question is how fast.

Expanding long-lived fossil fuel infrastructure—including LNG—remains a risky proposition

In a world where demand for fossil fuels is clearly in decline, and long term demand for LNG is at best uncertain, betting on the viability of long-lived fossil fuel infrastructure is risky. Even in a world where LNG does grow, Canada could be outcompeted by other suppliers, as argued by Rachel Samson of the Institute for Research on Public Policy. In the WEO outlook scenario that is based on today’s stated policies, 85 per cent of growth in LNG supply to 2030 is from other countries, namely the United States and Qatar, who benefit from low production costs and in Qatar’s case, better proximity to markets. Having the private sector take the gamble on new LNG projects is one thing, but using public money—in essence to bet against an accelerating energy transition— is quite another.

Where does this leave Canada? In a world that’s facing a short-term energy crisis within the context of a climate crisis, the best bets are those with brighter and more certain prospects: clean energy. On this, the IEA is clear as day: ‘The need for [a] clean energy investment surge is greater than ever today. As [we have] repeatedly stated, the key solution to today’s energy crisis–and to get on track for net zero emissions–is a dramatic scaling up of energy efficiency and clean energy.” 

The markets, of course, can decide: if investors want to double down in the hopes they’ll be ones pumping the last drop of oil, that’s up to them. But governments shouldn’t take the gamble.  The safe bets now are all on policy and investment decisions that align with a clearly emerging clean energy future, rather than one based on sustained fossil fuel growth — a future the IEA has now shown will be a dead end.