July 7, 2020 | The Green Recovery – and some inconvenient truths

Wishful thinking and empty promises aren’t helping with the needed energy transition. It’s time to turn our minds and our will to the hard work of transformation by mid century based on the realities of our society and our economy, writes Mike Cleland.

Canada’s two energy economies

Most Canadians today agree that Canada and other countries need to “transition” their energy systems to greatly reduced greenhouse gas (GHG) emissions by mid century – 30 years from now. Some still believe that Canada must and will somehow meet the 2030 target agreed to in Paris in 2015. This target is – over the next ten years – to reduce our emissions by around 30 percent from the latest reported levels (2018). For comparison, and leaving aside the inevitable COVID-related downtick in emissions in 2020, the trend line shows slow but steady cumulative growth of about 7 percent over the past ten years. We have a tough challenge.

Just how tough is not fully revealed by the numbers, so it is a good idea to recap some of the facts surrounding Canada’s particular circumstances.

It was true before COVID or the erosion of globalization that the well being of Canadians depended in considerable measure on our being competitive, drawing on all our skills and resources and being innovative across the spectrum of the economy and our institutions. It was also true that that well being was at risk for several reasons, such as low productivity growth and an increasingly risky investment environment particularly for resources and infrastructure. Post COVID, this will be even truer and the emerging inward looking and mercantilist trading world will make it even harder for Canada to prosper.

That is the economy as a whole but the focus of this article is the energy economy, or rather economies. We have two energy economies, linked but different – the energy export economy and the domestic energy economy. It is worthwhile reflecting on some pertinent facts about these two economies.

The energy export economy – mainly oil and gas – is Canada’s single largest earner of foreign exchange and is a large contributor to federal as well as provincial tax revenues both directly and indirectly through taxes paid by employees and suppliers. It provides a vital economic base for several Canadian provinces and, in particular, many rural and remote parts of Canada. Just making it go away as many environmental activists apparently wish for seems a bit imprudent at a time of economic recovery, especially since doing so would do no earthly good (pun intended).

The second energy economy is the domestic one where the central issues turn on energy consumption. Like its export counterpart, it too depends on Canada’s huge and diverse sources of supply that contribute to energy affordability as well as security. Some of the energy we use is electricity – about 20 percent on average across Canada, about 80 percent of which is GHG free. The biggest end-use share is refined petroleum products and close behind is natural gas. Canada is an unusually energy-intensive country because we are geographically spread out, with temperature extremes in both winter and summer and an inherently energy intensive resource-based economy in every region.

Canadians expect a lot from both of these energy economies and the systems that allow them to function; they must be safe, secure, reliable, resilient, affordable, and they must meet several expectations regarding environmental and social impacts. GHG emission management is one but only one of those expectations and rarely at the top of the priority list for most Canadians.

All of these assertions are backed by widely known facts. Now that we are talking about a green economic recovery from the effects of the global pandemic, the green recovery needs to be founded on those facts. This doesn’t mean that transforming the GHG profile of our society and economy is impossible, only that it will require serious people willing to do serious things.

So is the post-COVID recovery the moment when Canada “pivots” (a currently fashionable term in Ottawa) to a low-GHG energy system? For sure Canada finally needs to get serious about this matter after 30 years of largely empty promises. But being serious means accounting for the actual circumstances of our energy economies. It also means accounting for other circumstances that will shape the nature, and as importantly, the speed of the transition.

Canada’s available levers for creating change

Start with what are the levers realistically available to the federal and provincial governments in Canada. They essentially come down to three: spending, which is where most of the attention of the advocacy community is focused right now; taxation, which no-one really wants to talk about; and regulation, which most people don’t understand.

Assume for a minute that virtually unlimited sums of money are available to subsidize our way to the “transition”. Given government debt loads and a long list of other priorities, that is a truly heroic assumption even where spending can meet multiple objectives at the same time, often referred to as “double dividends”. But let’s just say that money is no object. One big problem is that spending in the form of programs, aka, subsidies, is well understood, after many decades of experience, to be very inefficient. One reason for this is that subsidies are as likely to support losers as winners. Another reason is what is called “free ridership” – people and firms doing more or less what they were going to do anyway, but doing it on the public dime. In other words, we can spend money but often to only modest effect. Rushed spending in the context of post COVID recovery will be even less efficient.

Governments also spend, and can spend more, on infrastructure, but timelines for engineering, due diligence and approvals will be long and torturous. It would be unwise to get carried away with the possibilities here for either the post-COVID recovery or for meeting targets as little as 10 years in the future.

A more efficient method is to create a carbon price – high enough to be material in an individual consumer or business investor’s decision and escalating over time to accelerate the process of change. Canada has made some progress in that direction but carbon taxes are not exactly politically popular and many economists agree that, in the near term at least, increased taxation could be perverse in its effects on the recovery.

Regulation is another option – of emissions, of technologies, of energy efficiency. Again, Canada has moved down this road. But moving much faster as implied by current objectives for 2030 and 2050 will negatively affect competitiveness unless all of our trading partners do likewise, and it will be economically inefficient because designing regulations to wring out inefficiencies is fiendishly difficult.

Making it harder still is the fact that from a federal perspective the regulatory options are limited. Most of the relevant regulatory authority under the Constitution rests with the provinces and many of them will most often be cautious and tentative. The federal government can set standards for goods in interprovincial commerce (applying to energy-using equipment, for example) but here it is caught between a rock and a hard place since goods in interprovincial trade are also traded internationally and Canada has very limited scope to set standards except in cooperation with our big trading partners.

Governments, in other words, are going to face lots of limitations and many tough choices. It is by no means only dollars and other levers that are limited. One of the big and largely hidden factors will be decision-maker time and capabilities. Governments are rarely able to take on more than a few really big initiatives at any one time and the energy transition, one way or another, will involve several very big initiatives on top of the long and growing list in other realms.

At the end of course it is literally millions of individual consumer and investor decisions that will make most of the difference, but even with heavy government actions including subsidies most individual decision makers will be constrained by debt, by uncertainty about the shape of the post-COVID world and by approval processes that grow slower, more expensive and riskier with each passing year. Just as governments are facing badly unbalanced balance sheets and multiple other priorities, so are consumers and investors. And even with possibilities for double dividends it is well known that priorities such as getting jobs back, reducing debt, rebuilding shattered businesses and demands for improvements in health and education systems will rank ahead of greenhouse gas reduction.

But again, let’s assume that Canadians truly are committed to dealing with GHG emissions even though thirty years of experience has shown – so far at least – that we are at best only rhetorically committed. In that case we still need to ask how much time, realistically, does any of this take to bear fruit.

The questions to ask about how we live today and in future

It is well known that energy use is price inelastic in the short term. Put another way and getting away from economist-speak, no matter what the price we have little choice but to heat our homes, run our businesses and get ourselves to work. There may be some important behavioural changes such as new commuting patterns, but most big change will depend on the availability of affordable low-emission technologies, and the speed of change will depend on the speed of capital stock turnover. Again, getting way from economist-speak we have to ask how long an automobile lasts, how long a piece of machinery lasts, how long a building lasts. The answer is often a decade or much more. To put it in perspective, most of the buildings that we will be using in Canada in 2050 already exist.[1] And in a post-COVID world where dollars are scarce and other priorities come first it is easily imaginable that capital stock turnover in energy systems (energy sources, delivery infrastructure, and energy using capital) will be slower than we have become used to in the relatively fast growing economy that is most likely now behind us.

But let’s assume that we have the will to really push this. There are still more questions that we need to ask.

Who is going to actually do all of this work? To take one simple example, if we seriously contemplate a massive program of building retrofits then that will require many more reliable, certified contractors than we have today and those businesses will have to be staffed by appropriately skilled people. None of that will come about overnight but it could, if pushed imprudently, result in many fly-by-night operators leading to consequent consumer backlash as we have seen in the past with rushed attempts at things like building insulation.

But let’s assume that we somehow develop the skills and organizational capabilities. Then let’s talk about capital mobilization and approval processes – for big projects in particular.

For perspective, most people talking about “net zero” GHG emissions by 2050 are assuming that most energy use at that time will be in the form of electricity (compared to around a fifth today) and all of that electricity production produces zero GHG emissions. Under one credible but optimistic scenario (to be found in the Trottier Energy Futures project) we are looking at replacing the 20 percent of power that today comes from emitting sources and on top of that more than doubling the size of our existing power systems – the ones that we have built over the past century – and doing all of that in thirty years.

One critical question of course is how we think Canada can mobilize the massive capital investment entailed, whether from public or private sources but even with the capital at the ready there will remain the question of how things get approved. Typically today, developers assume for a big new project such as a hydro facility that the time frame from planning to in service will be more than a decade. (British Columbia’s Site C dam, now under construction and set to open in 2024, entered the regulatory approval phase in 2010.) As public expectations for engagement and consultation continue to grow and as serious political opposition to things like new power projects emerges these time lines will get longer.

None of this is to suggest that we shouldn’t act and do so decisively. It is to suggest that we should also do so seriously and that means doing it based on answers to the questions posed here along with many others. It will take time. We should be focused on building the capabilities required to put Canadian emissions by 2050 on a steep downward trajectory and even approaching net zero. It is the trajectory that matters.

What might that entail?

A carbon pricing conversation

We should be focusing on what can be called “weight of effort”, not targets. No less a climate luminary than William Nordhaus has suggested something like this for a renewed international emissions management framework and there is no reason why it could not be applied domestically in Canada. Weight of effort would be no more difficult to estimate than it is to estimate how we are doing relative to targets, essentially through assessing the carbon price equivalent of all direct measures. It would be a leading indicator of our (real) commitment unlike targets which are a lagging indicator. And, importantly, it would reflect a realistic understanding of how little of this complex undertaking that we can be guaranteed of being able to precisely control.

We need to restart a calm and rational carbon pricing conversation. Carbon prices covering all energy production and use are the essential foundation for any meaningful effort at GHG reduction. They are not popular and they are not easy to push when we are facing the many uncertainties around post-COVID recovery but any economically literate person who believes in the power of prices and markets will understand that they are fundamental. Canada needs broad based, steadily escalating carbon prices across the whole country and the whole economy, and we need to bring Canadians into a real conversation on this – soon and with facts and analysis not ideology.

We need to focus more on building and rebuilding the institutional capability to better manage the renewal of all aspects of both the export and domestic energy economies. That means addressing policy making, regulatory systems and the roles of actors such as Indigenous communities and municipal governments. That means more resources for decision making from data to analytical capacity to stronger consultation and engagement to better decision making systems within governments.

If anyone is serious about the massive electrification of the economy called for by many climate change commentators then we need to confront what may be the most inconvenient truth of all. Electric power is a sector where provinces typically exercise jealous control and an all-electric Canada will require that to change, perhaps radically. It will entail a degree of province to province and federal-provincial cooperation which would be unprecedented in scale. Equally pressing is the need for a serious assessment of the challenges of actually changing our energy using systems. That conversation will take years and it has hardly begun after 30 years of climate debate.

We need to transform our communities as energy-using (and producing) entities. That will mean provinces (mainly) working with communities to rethink the way we develop land, build buildings, transport people and goods and run industrial and commercial operations. It will mean hard political choices that neither consumers nor businesses will easily embrace but, as with carbon pricing, we need a measured, fact-based discussion with all Canadians and that is something we continue to avoid because it’s just too hard.

Provinces (mainly) need to reflect more on whether, and if so where, they need stronger regulations whether it be on buildings or transportation systems or big industrial GHG emitters. This will have impacts on affordability for consumers and competitiveness of businesses so it needs to be approached fully mindful of those costs. Serious carbon pricing should do most of the heavy lifting but if faster transformation is needed then at least some regulatory levers will need to be more fully deployed.

Governments should spend money on research and development in partnership with private investors. This sort of expenditure has its own hazards, but it can be effective. What it cannot be is certain or fast in its effects.

Governments could spend more money on low-GHG projects as many activists are urging. But without attention to the limitations, we risk simply blowing money out the door. We know that governments are notoriously bad at picking technological winners; infrastructure needs to be built or renewed primarily to meet other human needs with GHG reduction as a side benefit; and subsidies of private choices will most often be inefficient and often ineffective. Spending money is the side of things where governments and advocates like to focus because it sounds popular. But it should be approached with caution and a realistic understanding of just how much or how little it will actually achieve and how long it will take to achieve even that.

Toward a mid-century transformation

How long “it” will take is the really hard question. All of the measures outlined above are essential for any serious look toward a low-GHG 2050 and all of them will take time as well as effort far beyond what is being talked about today. Above all, it will require Canadians to finally be honest with themselves about what we are really committed to.

Speaking of which, what about our Paris commitment for 2030? If we are serious we will all begin to acknowledge that we have no chance of reaching that target. It is a physical impossibility short of an economic collapse and rushing to try to meet it will have all sorts of perverse social, economic and political effects. Instead, we will need to turn our minds and our will to the hard work of transformation by mid century based on the realities of our society and our economy, rather than wishful thinking and empty promises. The 2030 commitment may seem politically important but it is little more than that and the risk we face from many proposals for the green recovery aimed at 2030 is that we will distract ourselves from the real issue, which is the transformation by mid century.

Lots of truths may be inconvenient but that doesn’t make them less true.

Mike Cleland is Executive in Residence with the University of Ottawa’s Positive Energy Project, past chair of the Board of Directors at the Canadian Energy Research Institute, Chair of the Board of Directors of QUEST (Quality Urban Energy Systems of Tomorrow) and a Fellow with the Canadian Global Affairs Institute.

[1] To cite one example, many of the approximately 2,000 residential high-rise towers built between 1950 and 1980 in the Greater Toronto Hamilton Area are old and inefficient, but are still expected to be in use in 2050. Source: https://www.nrcan.gc.ca/energy-efficiency/energy-efficiency-buildings/energy-management-resources-buil/heads-building-energy-efficiency/heads-building-energy-efficiency-current-issue/19854

Stewart Muir July 7th, 2020

Posted In: Resource Works

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