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How to avoid the stranded-assets trap

Don’t miss the real point of the new Strategic Assessments framework.

Last week, the federal government released its Strategic Assessment of Climate Change, which provides a framework to determine how proposed big infrastructure projects contribute to Canada’s climate change commitments. Among other things, it requires projects operating beyond 2050 to provide concrete plans for how the proponent will achieve net zero emissions by mid-century. 

That requirement only applies to projects in areas of federal jurisdiction, and the details are still forthcoming. Yet the prospect raises some big questions: Should net zero for Canada mean net zero for every major project? Are project decisions even the right tool for getting Canada to net zero? How will this be enforced? 

These are good questions. But they miss the most important function of the Strategic Assessment.  

What’s strategic about the Strategic Assessment?

The Strategic Assessment’s release prompted a wave of reactions. Some expressed disappointment that the new guidelines do not establish an adequate “climate test” for assessing whether a project aligns with Canada’s climate targets. Some wondered how net zero emissions could be enforced at a project level.  Others questioned whether net-zero requirements at the project level are even the right policy tool to support achieving net zero overall.  

But maybe those questions overlook the real value of the Strategic Assessment. These project plans are not meant to be binding, enforceable regulatory instruments, let alone the government’s ultimate climate policy test for infrastructure and resource development. Rather, their purpose is to provide decision-makers with an additional layer of information as they determine whether a project will hurt or help Canada’s chances of meeting its climate change objectives. 

They also have another—perhaps more important—purpose: they send a signal to project proponents to start planning for a net-zero future. 

The challenges of policy certainty

Allow us a quick aside that matters in this context.  

High-emitting, high-cost projects have a common problem: future climate policy will have big impacts on their long-term profitability and viability. Aggressive future climate policy and shifts in investment priorities—within Canada or globally—might render some projects uneconomic, “stranding” the asset and wasting value. That risk of stranded assets can make stringent climate policy more expensive. And vocal opposition from industries and owners whose assets are at risk of being stranded can make stringent climate policy harder to implement.  

Proponents of major projects benefit directly from increased policy certainty, but getting there is hard. Future governments can change their minds, reversing the policy decisions on which existing business strategies are based. In addition, governments are often reluctant to commit to steady increases in policy stringency (such as the price on carbon pollution or regulatory requirements) because the sticker shock from ambitious future policies can create a barrier to public support.  

Yet in the absence of certainty, businesses and investors don’t have clear expectations regarding the future of climate policy. This increases their vulnerability to sudden changes in policy and makes it riskier and more challenging to plan medium- and long-term investment decisions.

Net zero signals

As we noted, the federal Strategic Assessment isn’t binding. It requires project proponents to have a credible plan to achieve net zero, not a guarantee they will deliver. 

Yet by requiring a net zero plan for major projects, the federal government is sending a clear message to proponents: more stringent policy is coming, and it’s up to you to show government and investors how your project is compatible with that future policy.   

Is requiring such a plan enough to prevent stranded assets? Probably not. Some proponents may well pay lip service today and defer substantially addressing concerns about future competitiveness or compliance until that hypothetical future policy materializes. And as others have noted, the Strategic Assessment only requires net zero plans for projects with lifespans post-2050.  Yet a credible pathway to 2050 will require steadily more stringent policy and deeper emission reductions over time.  Setting expectations on the path to net zero is as important as expectations about the destination.  

Fortunately, strategic assessments aren’t the only tool in Canada’s tool-belt to bring more certainty to our emissions pathways and our investment environment. As we have argued previously, a climate accountability framework can connect long-term climate objectives to short-term policy actions, using interim emissions reduction milestones to guide the way and create clearer expectations about the policies—whether carbon pricing or regulations—required to achieve Canada’s long-term targets.  

“Not perfect” may be good enough, for now

While project-by-project net zero plans may not be the perfect climate test or the ideal policy approach, we shouldn’t let perfect be the enemy of the good. In the absence of more certain and stringent policy, these plans can help ensure that longer-term climate commitments are factored into decision making now—especially for projects with a long lifespan. They also nudge project proponents to plan for more ambitious policy down the line so that firms can avoid unexpectedly facing stranded capital, steep emissions reductions, and high costs. In this way, the new requirements in the Strategic Assessment of Climate Change can help bring greater certainty to Canada’s investment environment and lay the groundwork for a suite of future policies to guide Canada to major emissions reductions by 2050.