The federal government’s 2023 budget has drawn praise for its C$80 billion in investments in a “clean” industrial strategy to meet Canada’s climate change goals and to enhance its competitiveness.
But rather than backing high-risk energy transition options in its climate strategy, Ottawa needs more rigour to define clean energy and decide what projects to support, energy transition veterans Mark Winfield of York University and Johanne Whitmore of HEC Montréal wrote in a post last month for Policy Options.
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In some ways, the budget represents a culmination of the federal climate change strategy set out in the December, 2020 statement, A Healthy Environment and a Healthy Economy. Some key elements—including a cap on oil and gas sector emissions and a clean electricity standard—remain incomplete, but the Trudeau government has shown a remarkable degree of follow-through on its core directions.
At the same time, it’s becoming clear that some mid-course corrections are now necessary. In particular, a more rigorous approach is needed to define what constitutes “clean” technologies and projects worthy of federal support. The apparent focus on increasing “clean” energy production versus improving Canada’s energy productivity and efficiency raises important questions, as well.
The budget moves subsidies for the development and deployment of “clean” technologies to the centre of the government’s strategy. Much of this is seen to be driven by necessity—particularly the need to respond to nearly US$400 billion in similar subsidies in the U.S. Inflation Reduction Act.
In assessing these subsidy-focused approaches, it is important to recall that the U.S. emphasis on expenditures was a product of political circumstances. It was not an optimal policy for decarbonization and a post-carbon economy. Key tools for such a strategy—including a system for pricing carbon and additional regulatory measures—were ruled out due to a lack of congressional support, leaving spending as the only significant way to address these issues.
In Canada’s case, the 2023 budget provides generous funding to “clean” technologies. But what seems to have been avoided are the difficult questions about what should be considered “clean” or whether some investments will deliver significant greenhouse gas emission reductions within the required timeframes.
This is particularly telling in the government’s support for small modular nuclear reactor (SMR) projects. The Canada Infrastructure Bank is putting nearly $1 billion into an SMR project in Ontario, while federal support is flowing to another controversial project in New Brunswick.
Both projects are high-risk, involving technologies unlikely to deliver significant results within the required time frames. They also run the risk of long-lasting consequences that may cost billions to clean up. The New Brunswick project at the Point Lepreau site has been excluded from review under the federal Impact Assessment Act. And the Canadian Nuclear Safety Commission is considering the Darlington SMR in Ontario under a more than decade-old assessment procedure that wasn’t specific to the reactor design now being proposed for the site.
The subsidization of the hydrogen economy, another major feature of the budget, falls into a similar category. Green hydrogen will be useful for sectors that are difficult to decarbonize through direct electrification, such as fertilizers, steel, and glass-making. However, the reference to “clean” hydrogen in the budget encompasses hydrogen produced using fossil fuels coupled with carbon capture, utilization and storage (CCUS). The high level of uncertainty surrounding “clean” hydrogen has led the office of the commissioner of the environment and sustainable development to conclude in its 2022 report that the federal government’s projections for hydrogen’s role in the large-scale decarbonization of the economy are unrealistic ,given the technical and economic barriers it faces.
All of this points to a need for a more rigorous approach to assessing “clean” investments. The definition of “clean” must be compatible with the Paris agreement’s 2050 net-zero goal. High-risk projects need to be subject to substantive and independent reviews before they are allowed to proceed. Transparent evaluation and accountability mechanisms are needed to ensure that resources are reallocated to measures that will deliver real reductions if CCUS, hydrogen and other “clean” energy investments fail to show significant results toward reaching Canada’s 2030 and 2050 climate goals.
The federal government’s investment strategy raises some deeper questions, as well. The focus has been on increasing “clean” energy production. That underwrites its investments in potentially high-cost, high-negative impact, and high-risk options such as new nuclear and large hydroelectric projects. Investments in CCUS and fossil fuel-based “clean” hydrogen are intended, in many ways, to facilitate and even expand fossil fuel production and use.
Missing, by comparison, is any clear focus on increasing Canadians’ energy productivity and efficiency—the ability to provide the same goods and services while using less energy. The cheapest, lowest-risk, and lowest-carbon energy option is the energy that’s not used. Decarbonizing the economy needs to be about more than creating clean energy markets and electrifying everything. Rather, it needs to be about how to better use all energy sources to create wealth, heat buildings, produce and transport goods and services, and meet the needs of Canadian businesses and citizens.
The potential for Canada in this space is enormous. The country has one of the worst track records for energy consumption per capita and the lowest energy productivity (wealth creation per unit of energy consumed) in the world, according to International Energy Agency data. Energy efficiency and productivity should be at the forefront of the government’s strategy to support the resiliency and competitiveness of our economy in a net-zero world. This should include measures to improve the management, productivity, and efficiency of energy used in Canada.
The level of consistency and focus on decarbonization and clean industrial strategies on the part of the federal government is commendable. But the budget highlights the need for some built-in backstop mechanisms in the government’s approach. A more transparent and rigorous analytical lens needs to be applied to the investments in terms of their likely costs, risks, upstream and downstream consequences, and their ability to deliver real reductions in GHG emissions within the required timelines.
Conceptually, the government needs to shift from its focus on expanding energy production to addressing the country’s weak energy productivity. That element will be essential to building an economically and environmentally sustainable pathway to decarbonization and competitiveness for Canada.
This post was first published by Policy Options on April 24, 2023.
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