The Price Tag for Clean Growth in Canada

The country’s first capital plan for a low-carbon future is “reasonable and achievable”
By: 
Alan Morantz
Toronto streetcar in the distance coming down a street with parked taxis and a row of bike wheels at a rental station.

The essentials

  • A new report by the Institute for Sustainable Finance says Canada can meet its 2030 greenhouse gas emission targets with $128 billion in investments over the next decade.
  • This represents 0.62 per cent of Canada’s 2018 GDP and less than 10 per cent of annual capital expenditures of publicly-traded firms.
  • The building sector is Canada’s “lowest-hanging fruit” in terms of low-cost greenhouse gas emission reductions.
  • Transportation is Canada’s “highest-stakes play.” Reducing emissions in this sector will require an almost $53 billion in investment and the need to address vast amounts of capital tied up in existing carbon-intensive infrastructure.
  • The energy sectors are characterized by relatively high emission abatement requirements and the need for high levels of investment to achieve those reductions.

Even as people come around to the idea that the world’s climate is indeed warming with potentially perilous consequences, we’re still shadow boxing over what to do about it. We either assume that the costs of abatement are impossibly steep or that there’s no need to even quantify those costs—that the existential crisis means we must go madly off in all directions. As a result, the straw man and the bogeyman rule the day.

Into this vacuum comes an evidence-driven report that offers a credible—and unexpected—answer to a very simple question: If Canada were really serious about transitioning to a low-carbon economy, how much capital investment would it take to make the dream a reality? 

The answer: $128 billion invested over the next decade, by both governments and businesses, can ensure Canada meets its 2030 greenhouse gas emission targets. That’s just 0.62 per cent of Canada’s 2018 GDP and less than 10 per cent of annual capital expenditures of publicly-listed firms, according to the report by the Institute for Sustainable Finance (ISF), based at Smith School of Business.

Considering the OECD estimates that $6.9 trillion a year is required up to 2030 to meet global climate objectives, a $12.8 billion yearly investment in Canada seems doable. We can do this.

“I was shocked by how much we talk about climate change and how little we know about how much it will cost,” says Ryan Riordan, associate professor of finance at Smith and ISF research director. “With more information, the easier it is to finance and to get built. And our estimated investment is reasonable and achievable.”

A call to action

These estimates come from the ISF’s first report, co-authored by Riordan and Simon Martin, ISF’s research associate. The ISF picked up on a call to action from the Expert Panel on Sustainable Finance for a well-developed capital plan that lays out Canada’s path to a competitive low-emissions economy.

The report is based on a close study of abatement technologies and emissions profiles for key sectors of the Canadian economy. The story gets particularly interesting when you drill down to see how the costs and opportunities vary substantially across sectors and provinces.

Consider the building sector. It’s Canada’s third-highest source of carbon emissions but has the biggest upside when it comes to low-cost greenhouse gas reductions. New buildings can be designed with proven techniques to perform much better from the outset. Meanwhile, retrofit technologies are improving every day. 

This is the only sector in which reducing carbon emissions is less expensive than maintaining them, so there’s no excuse for inaction. A little over $10 billion spread over 10 years should do the job. “A small financial or behavioural nudge in this sector has the potential to unlock large environmental and economic benefits,” says Riordan.

Transportation sector “highest stakes play”

At the other end is the transportation sector, which accounts for the second-highest emissions. Transportation represents the biggest financial puzzle: it claims the highest abatement costs and requires the greatest amount of capital investment (almost $53 billion). That investment will be relatively hard to raise from private-sector sources because of a very high level of risk. 

Riordan considers the transportation sector “Canada’s highest stakes play” for carbon abatement, and you can see why. First, most of its capital is tied up in carbon-intensive infrastructure such as railways and mass transit systems that can hardly be abandoned. And second, unlocking investment dollars will require some creative public-private partnerships, which is subject to competing interests and therefore hard to count on.

The elephants in the room are the energy sectors, oil and gas as well as electricity. These sectors need high levels of capital investment (more than $26 billion in oil and gas alone) to get their carbon emissions to target levels. But, as Riordan points out, promising low-carbon technology such as methane abatement and carbon capture and storage are already starting to make a difference. As the technology continues to improve and scale, these technologies could become even less expensive to implement.

The ISF report takes a middle-of-the-road approach to its capital investment estimates. It largely avoids bets on which technologies will be true difference makers. The question remains: Will abatement costs increase or decrease? The slow-motion rollout of biodiesel, electric vehicles and charging networks, for example, will eventually drive down abatement costs in the transportation sector. New developments in energy storage and generation should do the same for electricity utilities.

But it’s also true that it’s much cheaper to abate the first tonne of emission than the last one. Riordan likens it to a jar of peanut butter: the first scoop is easy to get out; the last requires a lot of scraping. 

Re-orienting private funds

While the ISF report doesn’t place bets on technology, there are plenty of investors—particularly big institutional investors such as pension finds—that already are. A Canadian political leader may have described sustainable finance as a “flavour of the month”, but there is significant evidence to suggest that private capital is already flowing toward climate solutions and low-carbon assets. COVID-19 hasn’t slowed that momentum at all. Green bond issuance in the second quarter of 2020 totalled almost US$50 billion, the third highest quarterly total on record.

Riordan figures private capital can cover at least half of the required investment if large Canadian firms devoted five per cent of their annual capital expenditure to greenhouse gas abatement projects over the next decade. Given that financing costs are at an all-time low, this should be a realistic target.

“We might not need new money, if we can find new ways to allocate existing investments in the economy towards emission reduction,” says Riordan.

Political balancing act

As for political leaders trying to steer the country to a low-carbon future with minimum disruption, the challenge is balancing on a three-legged stool, represented by capital, technology and policy.

For the capital leg of the stool, government leaders can use mechanisms such as the Canada Infrastructure Bank to share risk with the private sector. And they can catalyze private investment by being the first dollar in on promising, yet untested, technology.

For the technology leg, governments can use their procurement power to drive low-carbon deployment and innovation. As property owners, they can drive large-scale retrofits of office buildings. 

And for the policy leg, government leaders can clearly set out their plans for low-carbon infrastructure and commit to a long-term and stable policy framework, and then stick with it. No flip flopping from one election to the next. No compromising on the economic fundamentals of abatement projects. 

The task may seem daunting if seen as a burden rather than an opportunity. But there is not much choice. The rest of the world is getting on with the transition to low carbon, and Canadian hesitation will only expose us to competitive disadvantage and also-ran status. “The Canadian economy cannot free ride on the carbon-emission actions of other nations,” says Riordan. “Climate-proofing our economy starts at home.”

Smith School of Business

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Kingston, Ontario
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