In the global shift to renewable energy, Canada risks being left behind

Canada’s economy is facing a carbon emissions squeeze. Even as it makes progress in meeting its carbon reduction goals by 2030, Canada is not moving fast enough.

To get there, Canada needs to vastly amplify investments in renewables to cut emissions while enabling economic growth. Failing to do so risks being left behind in a global economy that is rapidly moving to a more competitive economy based on renewable energy.

Part of the reason for Canada’s lag lies on the cost side. On Monday, the federal carbon tax went up from $65 to $80 per tonne. The carbon price is designed to make carbon emissions expensive, encouraging businesses and consumers to switch to low-carbon alternatives.

To an extent, the tax is working. It’s part of the reason that Canada’s greenhouse gas emissions have fallen 10 per cent below the 2005 level and are on track to meet up to 90 per cent of emission reduction goals by 2030.

But the carbon tax, even when combined with some of the promising investments that have already been made in renewables, isn’t enough.

That’s where incentives come in. A more aggressive program of favourable regulations, subsidies and tax credits to spur what John Maynard Keynes called the “animal spirits” of Canada’s thriving energy sector would act as the pull force that draws in public and private investments and complements the push force of the carbon tax.

Besides reducing emissions and the cost burden of carbon tax, these incentives would help businesses and consumers be less vulnerable to the volatility in oil and gas supply and prices. 

Canada’s energy picture

Over the years, power capacity and generation from carbon-intensive sources like oil and coal have been declining. Notably, the use of coal has plunged to the point that today it contributes less than 5 per cent of total capacity. In its place, other sources have risen:

• Natural gas has grown to become the second-biggest source of power, behind hydro, as its lower carbon intensity and abundant domestic supply make it the ideal transition fuel.
• Hydroelectric power accounts for more than half of total capacity in Canada. Its capacity has grown slowly because dams, for all their benefits as a renewable source of power, still have significant environmental drawbacks including habitat destruction and deforestation.
• Onshore wind has grown to account for 10 per cent of total capacity, despite a challenging macroeconomic environment with high interest rates and regulatory challenges from provincial governments.
• Solar still accounts for less than 1 per cent of total capacity. The growth of renewables has slowed a lot, at a time when other countries, especially the United States and those in the European Union, have significantly ramped up their investments in renewables.

Carbon pricing

Canada’s federal carbon tax came into effect in 2019 at $20 per tonne. Its price is set to steadily climb until it hits $170 per tonne in 2030. Some provinces also have their own carbon pricing programs that preceded the federal tax and are more restrictive.

Since the tax’s implementation, the carbon price on consumers accounts for between 8 per cent to 14 per cent of emission reductions, while the industrial carbon price is the single biggest driver behind Canada’s emissions cuts, contributing to 20 per cent to 48 per cent of total reductions.

Despite the tax’s detractors, the tax is working. Canada’s carbon price could slash emissions in half by 2030.

But there is a notable drawback: It is expensive.

While consumers receive annual carbon rebates that often more than offset the amount they pay, businesses bear the higher costs of operations because of carbon pricing.

When businesses face higher costs, they earn lower profits, which translates to reduced investments, including those in renewables, clean tech and other aspects of the energy transition. 

Regulations to stimulate investments are needed

While carbon pricing acts as the stick that curbs emissions, more regulatory tail winds are needed as the carrot to propel investments in renewables.

Although Canada’s investments in renewables and the energy transition have increased over time, businesses would benefit from a more favourable regulatory landscape that helps ease the costs of transitioning.

A focus on research and development (R&D) would help. Investments in clean technology as well as renewables capacity, generation and storage help spur innovation.

Government incentives are another way to foster the transition. The Greener Home program provided $15 billion to help make Canadian homes more energy efficient through installing home insulation, installing home solar systems and switching from oil heating to heat pumps.

For businesses, the Clean Electricity Investment Tax Credit and the Clean Technology Manufacturing Tax Credit are designed to spur clean technology investments.

But these pale in comparison to other countries’ efforts.

Canada’s total investments in the energy transition rank 12th in the world. For investments in renewables specifically, Canada ranks 17th, far below other countries in the G7 and less than 4 per cent of renewable energy investments in the United States.

This is far behind the U.S. in particular, as well as the European Union, the UK and even China.

Take the Inflation Reduction Act in the United States. The law has realized hundreds of billions of dollars in public and private investments in renewable energy and clean tech. The largest climate investments in history are slashing costs of renewables and driving renewables deployment across the country.

The Inflation Reduction Act is the kind of sweeping change that Canada needs if it wants to fundamentally shift the landscape in the energy transition.

The outlook

At a time when Canada’s global peers are making significant investments in decarbonization, Canada risks being left behind if it continues its current course. Couple this with an increasing carbon price and one gets an economy that ends up being expensive and not competitive.

Investments in renewables yield returns in more than one way, besides alleviating the burden of carbon pricing.

With technological advancement, the prices of renewables have been falling, in many cases below those of fossil fuels. Expanding renewables will allow businesses and consumers to take advantage of these lowering costs.

In addition, investments in R&D can boost productivity and growth. Canada’s productivity has been faltering since the 1990s and, even worse, falling since 2017.

Renewables and clean tech investments can be part of the productivity-enhancing suite of investments that Canada needs to remain competitive in the global economy.

The good news is that Canada has a robust supply of oil and especially natural gas to bridge the gap in the energy transition until the country builds up a sufficient renewable energy infrastructure. But Canada needs to speed up.

The takeaway

A low-carbon economy will lower costs for businesses and nullify the need for the consumers’ carbon rebates, making it a winning equation for the government, businesses and consumers. 

A dual approach that retains carbon pricing while aggressively incentivizing investments in renewables will help Canada stay competitive in a global economy that is rapidly moving toward decarbonization.