The Energy Transition is Happening – Will Canada Notice?
At the recent UN climate negotiations in Egypt, Canada received international criticism for its refusal to commit to the managed phase-out of fossil fuels. A common reason given for this reluctance is the need to balance economic competitiveness with environmental concerns.
This trade-off is fundamentally false. As is becoming increasingly clear, Canada’s dangerous dependence on fossil fuels is not only bad for the environment, but also economically dangerous. Canada is deeply unprepared for the pace and scale of the low-carbon transition, as outlined in a recent report by Re_Generation, Canada’s largest youth organization advancing sustainable business.
“The transition to a global economy powered by clean energy has gone from being impossible to being inevitable.”
Over the past decade, the transition to a global economy powered by clean energy has gone from being impossible to being inevitable. In the most recent World Energy Outlook, the International Energy Agency (IEA) forecast for the first time that fossil fuel demand will peak in all future scenarios. The rate of deployment of renewable technologies is now growing in line with the pace required by the IEA’s Net Zero by 2050 scenario. New research from Oxford University’s Institute for New Economic Thinking demonstrates that a rapid transition to 100% clean energy is the cheapest of all possible futures, yielding $12 trillion in savings by 2070.
“Solar power is now the cheapest form of electricity in human history and electricity has overtaken oil as the world’s primary carrier of useful energy.”
The main reason for these surprising results is that the cost declines associated with renewable energy adoption have been significantly underestimated. Like many new technologies, clean energy sources benefit from steep learning curves (also called ‘S-curves’) that create a virtuous cycle of declining costs and improved performance, leading to rapid scaling towards market dominance. Until recently, climate models have been unable to account for such nonlinear trends; according to the Oxford study, most models predicted an annual cost decline of 2.6%, while in reality costs fell by 15% per year. Solar power is now the cheapest form of electricity in human history and electricity has overtaken oil as the world’s primary carrier of useful energy.
The transportation sector, which represents 44% of global oil demand, is being disrupted by these trends. Combustion vehicle sales peaked globally in 2017 and are now in permanent decline, while Bloomberg predicts that electric vehicle (EV) sales will increase 2000% by 2030. According to BNP Paribas, a $100 billion investment into renewables used to power EVs would produce six to seven times more useful energy than a similarly sized investment in oil. Given this disparity, gas prices would need to be $9 to $10 a barrel and $17 to $20 for diesel for fossil fuels to compete with new wind and solar projects built to power electric vehicles. The economic rationale of electrifying transportation has never been clearer, and according to the Rocky Mountain Institute, 50 countries are now planning to ban internal combustion engines, up from just five countries in 2015.
“Investing in clean energy is now the best way to promote energy security and affordability while also safeguarding the environment.”
The energy crisis of 2022 caused by the invasion of Ukraine has only served to accelerate the clean transition. Investing in clean energy is now the best way to promote energy security and affordability while also safeguarding the environment, helping resolve the age-old “energy trilemma.” Policies adopted around the world to deal with rising inflation, including the Inflation Reduction Act in the United States and the RePowerEU plan in the European Union, will further cement this shift. The Inflation Reduction Act alone is expected to increase solar and wind capacity additions by 2.5 times over today’s levels, while also growing EV sales by 700%. This will put a significant dent in US fossil fuel demand, which is of great concern for Canada as the US accounts for 99% of the demand for Canadian energy exports.
Considering these trends, Canada’s economy is disproportionately vulnerable to the risks posed by the low-carbon transition. According to a study in the journal Nature, Canada is likely to face $100 billion in stranded assets as soon as 2036 as a result of changes in the global energy mix and the acceleration of climate policy ambition. This figure represents 35% of the book value of oil and gas properties for all TSX-listed oil and gas issuers, or 31% of the $325 billion market capitalization of those same firms. Crucially, the $100 billion figure was determined using one of the only climate models with the ability to account for renewable learning curves and carbon lock-in dynamics leading to stranded assets (also known as a ‘non-equilibrium model’). The Bank of Canada predicts that the Canadian economy could suffer an 8% to 10% decline in GDP as a result of declining demand, leading to an 80% to 90% devaluation of equity assets in the oil and gas sector.
“Poor decision-making is common among incumbent firms in industries experiencing disruption, in which dominant players underestimate the scale of the threat.”
Canadian energy and financial firms have not woken up to the pace of this change. Canadian energy companies do not believe that their assets will be stranded on the pathway to a low-carbon world, and they are planning to expand fossil fuel production by 30% by 2030. Such poor decision-making is common among incumbent firms in industries experiencing disruption, in which dominant players underestimate the scale of the threat until it is too late to profitably pivot. Canadian oil will not be the last barrel remaining; in fact, given that it is comparatively expensive and emissions-intensive, it will be among the first to go.
Canadian and international energy majors are moving in opposite directions when it comes to investing for the transition. Where European firms predict future oil prices of between $25-45 per barrel by 2050, Canadian firms project prices of $80 a barrel into the indefinite future. While Canadian firms are expanding production and spending negligible sums on clean energy, European firms like BP, Total, and Eni have made public commitments to cut production, adopted net-zero targets inclusive of Scope 3 emissions and are drastically increasing capital expenditures on renewable power and EVs. Rather than preparing for a clean energy future, Canadian firms are promoting carbon capture technologies in a way that will simply raise the industry’s costs of production and prolong fossil fuel dependence, making Canadian energy less competitive in the long-run while increasing stranded asset risk.
Despite the explosive rise of ESG investing in recent years, Canadian capital market participants are also not adapting to the risks and opportunities created by the energy transition. While the largest five Canadian banks are all signatories of the Net-Zero Banking Alliance, they have provided $700 billion to the fossil fuel sector since 2015, and doubled their year-over-year financing in 2021. The size of the sustainable loan books of the major Canadian banks pales in comparison to the scale of their fossil fuel financing, and they chronically overstate the size of their investment in climate solutions (when evaluated according to the Corporate Knights Sustainable Economy Taxonomy).
“By investing in electrification, green power, public transit, deep energy retrofits and more, Canada could create five million quality job-years and save the Canadian public $39 billion annually.”
This gap creates enormous risks for Canada. Over $2 trillion in capital expenditures is needed over the next two decades to prepare Canada for the transition, representing around $126 billion per year until 2030. Canadian players must adjust to where markets are headed; while carbon-intensive sectors will diminish in size, the global EV market will exceed $1 trillion by 2026, and the green building sector is expected to reach $2 trillion per year throughout the 2020s. By investing in electrification, green power, public transit, deep energy retrofits and more, Canada could create five million quality job-years and save the Canadian public $39 billion annually at the gas pump or on power bills. Rather than deepening our resource curse, Canada must build a world-class domestic cleantech sector that will prepare us for a climate-safe future.
The multitude of greenwashing lawsuits and broken net-zero pledges demonstrates that Canadian companies will not make this shift without guidance. In reality, Canadian firms need policy certainty and the ongoing support of public investment to create guardrails that will prepare them for the transition. There are a number of ways to help create this kind of regulatory certainty. In particular, Canada must implement measures to align our financial system with a 1.5 degree future, such as by passing the Climate-Aligned Finance Act proposed by Senator Rosa Galvez. Canada could also combine green central banking tools, such as greening the collateral framework and introducing new reserve requirements, with a coordinated green industrial strategy in order to drive investment towards key growth sectors. To complement this, Canada should pass a federal Just Transition Act to ensure that the majority of Canadians benefit from the green transition while being protected from its risks.
The climate crisis presents a multitude of threats for Canada, including the physical damages caused by climate destabilization and also the economic risks posed by a disorderly transition. If managed correctly, however, it could provide a much-needed opportunity to build a more sustainable and just economy that will create millions of new jobs and improve the livelihoods of all Canadians.