As the December 12 anniversary of the 2015 Paris Agreement nears, Sylvan Lutz and Kevin Page argue that the government of Canada must build on its new net-zero emissions legislation and begin incorporating climate change mitigation more seriously into its spending plans, as other G7 governments are doing.

 

Sylvan Lutz and Kevin Page

Institute of Fiscal Studies and Democracy, University of Ottawa

 

December 3, 2020. 

On December 12^th, 2020, the world will mark the fifth anniversary of the signing of the Paris Agreement on climate change. In any normal year, world leaders, diplomats and climate policy experts would be busy celebrating this accomplishment and negotiating the next steps for global climate governance at what was to be COP 26 in Glasgow, Scotland. However, this is no normal year. International climate negotiations, like so many plans, have been put on pause due to the continuing spread of COVID-19.

Despite a restricted holiday season and the lack of climate negotiations, 2020 has given climate watchers some positive news to celebrate.

Climate policy objectives are being set. Leaders from around the world are recognizing the urgent need to take climate action. Recently, South Korea and Japan committed to going carbon-neutral by 2050, with China making a similar pledge for the following decade. Across the pond, the European Union and Britain, already committed to climate neutrality, have been stepping up ambitions for the next decade and announcing plans to build back better from the pandemic.

Even our neighbour, the United States, is expected to legislate climate neutrality by 2050 and former Secretary of State John Kerry has been appointed President-Elect Joe Biden’s climate envoy.

Prime Minister Trudeau’s government introduced the Canadian Net-Zero Emissions Accountability Act on November 19^th. The new bill formalizes the government’s commitment to climate neutrality by 2050 and introduces legal obligations for future governments to meet their climate ambitions every five years from 2030, or immediately explain to Canadians why they could not meet their targets.

The bill represents an important step on Canada’s path to climate responsibility, but now that we have the accountability framework, we need something to hold the government accountable for.

The U.K.’s Conservative Government recently laid out their Ten Point Plan for a Green Industrial Revolution to support the economy and reach carbon neutrality by 2050. Canada has no such plan.

If Canada does not want to become the laggard of the developed economies, it must quickly follow the Net-Zero Emissions Accountability Act with a new policy strategy of its own. Canadians need to be ready for a real change in the way we organize our economy.

No one is saying the transition is going to be easy, but the Covid-19 pandemic points to the severe consequences of under-preparedness. Had governments around the world stockpiled PPE, dedicated ICU beds and maintained their systems for tracking and containing new infectious diseases, the costs of COVID-19 would have been much lower, in terms of both lives lost and of life support for their economies.

The pandemic is an epic, cautionary, preparedness tale. Climate change threatens even greater human and economic costs. It is also an opportunity for a social and strategic reset. An opportunity for a new economic strategy to turn wounded economies from petrostates into electrostates.

The Organisation for Economic Cooperation and Development (OECD) estimates it would take only a 10 percent increase in yearly infrastructure investment to develop infrastructure aligned with the goals of the Paris agreement.

Other experts suggest the required investment is 5 to 8 percent of annual GDP in high-income countries. These are big numbers but less than the direct fiscal supports provided by Canada to lock down the economy in 2020 and slow the spread of the pandemic.

If we in Canada fail to invest in the essential infrastructure to make our communities more resilient to extreme weather events and transition to a climate-neutral economy, climate science and recent experience show we will pay dearly. Large infrastructure projects embed massive carbon emissions released over decades. The next round of investments is our best shot to stay below 2-degree celsius warming and avoid risks of exponential climate change.

While it is true that Canada’s electricity production has a high ratio of renewables and nuclear energy (about 82 percent in 2018), end-use energy consumption is still primarily fossil fuel-based (41 percent refined petroleum productions, 36 percent natural gas, 17 percent electricity, 6 percent biofuels in 2017). That means to limit emissions, Canada must focus on transitioning the oil and gas sector (26 percent of 2018 emissions), the electrification of transport (25 percent), as well as funding building retrofits (13 percent) as we phase out the final fossil fuel power plants.

 

The pandemic is an epic, cautionary, preparedness tale. Climate change threatens even greater human and economic costs. It is also an opportunity for a social and strategic reset. An opportunity for a new economic strategy to turn wounded economies from petrostates into electrostates.

 

How can we do this in the next 30 years?

First, according to experts such as Mark Carney, UN Special Envoy on Climate Action and Finance, we need governments to set the objectives and policy and regulatory frameworks so that good information and strong signals are provided to the private sector. We must create an environment that supports private investment in R&D for clean technologies as well as green and digital infrastructure. Fortunately for the economic recovery from the pandemic, the estimated multiplier effects of well-designed green infrastructure investment are 2.5 to 3 (for every dollar spent on a project the economy gains $2.50-$3.00).

Second, we need capital investments to go to a green economy and limit new capital investment in fossil fuels. For these investments to be economically efficient, Canada needs to eliminate fossil fuel subsidies and to set a carbon price that accurately reflects the social cost of pollution (considered to be between US$50-100/tCO₂ by 2030; significantly higher than Canada’s CA$50 limit in 2022).

Without taking these actions, the fossil fuel industry will remain an outsized drain on the economy and will prevent an efficient transition to less carbon-intensive jobs. An International Monetary Fund (IMF) report estimated that fossil fuel subsidies cost Canada a total of US$43 billion in 2015, 2.7 percent of GDP or US$1,191 per Canadian (these estimates reflect tax breaks, subsidies, government investment and the social and environmental costs of production). The same 2019 report estimated that global GDP would be 1.7 percent higher if all fossil fuel subsidies were eliminated.

Third, Canada can follow other Western economies that harness the power of public and private finance through a combination of green infrastructure banks and government incentives. For example, in New York State, the NY Green Bank takes on projects that are exposed to market risk and aids large-scale renewable deployment through capital and liquidity provisions. The Green Bank signals to investors that there will be continued, stable opportunities for higher-yield returns. The Canadian Infrastructure Bank (CIB) must quickly get its investment dollars out the door and should expand its current support for clean power ($2.5B), zero-emission busses ($1.5B), and building retrofits ($2B) to encourage private sector investment.

Fourth, we can learn from China’s rise as an electrostate. Its competitive advantage in photovoltaic (PV) solar and wind turbine capacity and manufacturing is owed to state-owned enterprises (SOEs) and state banking systems that have created markets that benefit from economies of scale. Chinese SOEs now include the world’s biggest wind turbine manufacturer and five of the six largest solar module manufacturers. Following China’s example, the Canadian government could heavily invest or even create crown corporations (similar to Petro-Canada, founded in 1975) in key renewable and building retrofit industries to create new and stronger markets for renewable generation and storage.

Fifth, new battery and electrification technologies require copper, nickel and other mineral resources that Canada has in relative abundance. New mines will create jobs, and government support can create processes that will make our mines “greener” and our mining technology a green export.

Success stories from around the world show that the government must play a key role in supporting nascent or risky industrial development. The Canadian government should invest in R&D and support knowledge mobilization, creating highly skilled human capital. If the right signals are given by the government, companies will realize they can no longer only consider short-term profits when making long-term investments but must plan for a future where net-zero is a legally mandated constraint. It would be misguided and expensive to plan the current industrial strategy without taking net-zero production into account.

How can we pay for it? Canada must ensure a significant portion of its medium- term fiscal stimulus supporting the post-COVID economic recovery is dedicated to addressing climate change. When the Canadian economy returns to its full potential, our political leaders will need to discuss raising taxes and limiting other government spending to ensure long-term sustainability. Central banks in Canada and around the work must do their part in promoting climate change stress tests on bank balance sheets. Our allies in the U.K. are using public investment to leverage the private sector into committing more funds.

The Canadian government’s Fall Economic Statement, released on November 30^th, is a promising start, but it is still not aggressive enough to meaningfully limit global warming. It promises $4.7 billion between now and 2026 towards home energy retro fits, zero emission vehicles, nature-based carbon sequestration and other sustainable financing tools a more detailed plan is promised in the coming weeks.  We hope this is a sign of growing ambition .

As we prepare for impending adverse ecological shocks, we must remember the lessons of the past 10 months. Adaptation and mitigation save lives and livelihoods, yet nothing is cheaper than early prevention. A wide-ranging green infrastructure investment plan will help Canada mitigate climate change, recover from the pandemic, and boost macroeconomic growth in the long run. Let’s mark the fifth birthday of the Paris Agreement by stepping up Canada’s climate ambition and creating a framework that will benefit the planet and Canadians for generations to come. We have the accountability framework, now we need a green policy plan and budget so we can hold the government to account.

Sylvan Lutz is an undergraduate economics student at the University of Ottawa.

Kevin Page is the President of the Institute of Fiscal Studies and Democracy at the University of Ottawa, former Parliamentary Budget Officer and a contributing writer for Policy Magazine.