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Four ways Canada can mobilize capital for clean growth that borrow from international best practices

Canada can benefit from looking to other jurisdictions for inspiration as it develops its own policy.

Economies around the world are racing to attract private investment for decarbonization and clean growth. The U.S. got the ball rolling in August 2022 with its US$369 billion Inflation Reduction Act, and the E.U. is preparing to respond with over €200 billion in spending to support low-carbon technologies. As Canada shapes its own policy response with a new suite of policies to mobilize private investment for clean growth,  four field-tested policy ideas from other countries can provide some of the necessary inspiration. 

Australia’s Green Bank structures its investments to effectively achieve both emissions reductions and financial returns. 

Founded in 2012 with an initial endowment of AU$10 billion, Australia’s Clean Energy Finance Corporation (CEFC) offers debt and equity to low-carbon projects and enterprises at generous, concessional terms to help these projects attract more private investment. The CEFC has generated positive financial returns from its investments, leveraging a total of AU$37.15 bn, and since 2012 its project portfolio has reduced emissions by more than 200 megatonnes of CO2e. The CEFC’s success is driven by its clear, mission-oriented mandate and investment principles that require both financial profitability and emissions reductions. 

Canada’s recently announced Canada Growth Fund, a $15 billion institution for catalyzing low-carbon investments, is an opportunity to apply some of the design features of the CEFC to align investments with clearly defined sustainability objectives. Interestingly, Australia’s Green Bank does not target or measure outcomes related to equity or climate justice, providing Canada with an opportunity to lead the way in linking clean growth funding with Indigenous economic reconciliation. 

The U.K. Contracts for Difference (CfDs) program for renewable electricity generation uses a risk-sharing approach to provide certainty for private investors while avoiding over-subsidization. In CfDs, renewable power producers bid against one another to offer power at the lowest cost. If the market ends up paying power producers for less than the benchmarked cost, the government pays for the difference, which gives power producers stable revenue. If the market ends up paying power producers more than the benchmarked cost, then the power producers pay for the difference, which protects against a scenario where the government is sponsoring risk-free windfall profits. An additional feature of the U.K. CfDs is that the contracts are between power producers and a separate government-owned entity, making them more isolated from political uncertainty and interference. In the U.K.’s most recent round of contracts completed last year, CfDs secured 11 GW of new clean power capacity, a small but significant amount relative to the country’s 69 GW of transmission capacity in 2021. The certainty provided by CfDs has helped mitigate the U.K.’s energy affordability crisis, with spiking energy prices mainly attributable to fossil gas costs and CfD-contracted clean power producers currently paying government the difference in their higher revenues. 

As Canada expands its toolkit of policy instruments to mobilize private investment in clean growth, it can take inspiration from the U.K. CfD program by seeking out opportunities to engage in risk-sharing with private investors rather than through direct payments. Maximizing the use of competitive risk-sharing instruments can minimize market distortions and budgetary pressure. The Canada Growth Fund includes CfDs as one of the investment instruments it will use. An important step for Canada will be to apply CfDs to carbon contracts to reduce carbon price uncertainty. 

The Norwegian Longship carbon capture and storage (CCS) project is an example of both highly targeted and highly strategic government involvement, including policies that provide comprehensive financial, technical and operational support. As the first cross-border open access CCS network in Europe, Longship was launched in 2020 to meet anticipated demand for carbon capture opportunities from European heavy industry emitters. The Norwegian government assumed some two-thirds of total phase-one project costs, valued at over C$3.5 billion, fostered bilateral agreements with interested governments and streamlined regulatory processes for CCS projects. At the same time, the government incentivizes demand for CCS through an increasing carbon price. Once the market for CCS is more established, the project is expected to finance itself in subsequent project phases. This significant, targeted government investment illustrates the strategic value that the Norwegian government is placing on CCS. The Longship project builds on Norway’s resources, strengths, and existing expertise. Norway has invested in CCS research and development since the early 2000s, and the country has an extensive track record of successful public-private partnerships and state ownership. 

While it is difficult and potentially risky to concentrate government resources on high-risk/high-reward projects, Canada can turn to the Longship Project as an effective example of this approach. A key idea to adopt is the holistic nature of government support: funding support alone will often not be sufficient to get low-carbon projects off the ground, and governments will need to address regulatory challenges and support market development in parallel. 

Hydrogen tax credits in the U.S. Inflation Reduction Act follow new standards for linking public investments to environmental and social objectives. For instance, the Act’s production and investment tax credits for hydrogen projects (and other low-carbon projects) increase by five times if a project meets certain wage and apprenticeship conditions. For hydrogen, as an emerging technology, the level of tax credit is also conditional on the carbon intensity of the project but is neutral when it comes to the production process. Canada can look to the Act as an inspiration for designing clean growth policies that target ambitious emissions reductions as well as social outcomes. However, it is crucial to consider Canada’s carbon price in the policy design. Carbon pricing already disincentivizes investment in emission-intense projects and sectors. While imperfect and insufficient, the price takes on some of the work that, in the U.S., is done by technology-specific carbon intensity thresholds alone. For instance, the Canadian carbon price gives green hydrogen production a head start on grey hydrogen as compared to the U.S.. This means that a tax credit to further incentivize investment in green hydrogen rather than grey can be relatively smaller than in the U.S..

These examples illustrate that Canada will benefit from drawing on insights from international examples when designing and implementing policies for driving investment in clean growth. Of course, Canada differs in important aspects from Australia, the U.K., Norway, and the U.S., making a one-to-one transfer of policies impossible and undesirable. Given Canada’s specific set of political, economic, and societal challenges and opportunities on the path to achieving net zero emissions by 2050, there is no doubt that an original “made in Canada” approach is required to mobilize the necessary capital. However, these four case studies show important policy design features that a Canadian approach can pick up and make its own.