Conversations on climate are heating up, galvanized by grave warnings from scientists, energy security fears, and the not-too-distant memory of crushing heatwaves and crop-killing droughts. The conversation is no longer a debate about whether the climate crisis is real but a discussion on how to best tackle this problem.
The federal government is spearheading the country’s response and setting its desired pace. Last year, Canada enhanced its greenhouse gas (GHG) emissions reduction target to 40-45% below 2005 levels by 2030 (initially it was 30% below 2005 levels). This is a massively ambitious new target. But there was little in the way of a plan to achieve that target, particularly in such a short timeframe.
Enter the 2030 Emissions Reduction Plan (ERP). This plan, released in March 2022, is a high-level roadmap that outlines the federal government’s assessment of the sector-by-sector reductions needed to meet the overall target and the various policy initiatives designed to get there. Meeting these climate targets will be one of this country’s greatest challenges. The pace and scale at which we need to reduce, eliminate, and offset emissions will require best efforts from industry and from government.
The ERP will indisputably have deep implications for Alberta—home to the largest share of Canada’s total GHG emissions. This analysis provides an overview of how the plan breaks emissions reductions down by sector and some of the challenges facing the federal government’s climate ambitions.
Oil and Gas Sector
Arguably, the sector most heavily impacted by the ERP is oil and gas, with a projection that sector emissions will be 42% below current levels (2019) by 2030. And as Alberta produces the lion’s share of Canada’s oil and gas sector emissions, this effort must largely take place in this province.
The ERP also projects a significant contribution to emissions reductions from the electricity sector—75% below current levels by 2030. And again, many of these reductions will come from Alberta as generation in this province is largely reliant on fossil fuels.
The transportation sector is another large contributor to Canada’s total GHG emissions (25%), second only to the oil and gas sector (26%). The ERP projects that this sector will see a 23% reduction in emissions from current levels by 2030.
Reductions are projected to be relatively small in the agriculture sector—2.7% below current levels by 2030. These emissions reductions will be concentrated in the prairie provinces, with Alberta producing the largest share (21%) of Canada’s total emissions from the agriculture sector.
The year 2030 will be here before we know it. Unfortunately, our current regulatory system and project approval processes are lengthy, clunky, and uncertain. The result is that major projects are decidedly not here before we know it. And this is a problem for Canada’s climate goals.
Proposed major projects spend years in various approval and regulatory processes – far longer than our competitor nations. Some companies have withdrawn projects because of the time and cost of these processes, while others have been unwilling to even begin them, choosing instead to invest someplace else.
Canada cannot afford long delays and roadblocks on our path to 2030. We only have 7.5 years to finance and build an unprecedented amount of low-carbon infrastructure. But as it stands now, even if companies were to announce new emissions-reduction projects tomorrow, most—if not all—of the time between now and 2030 would be spent navigating regulatory and approval processes, never mind actually building anything.
As an example, let’s take a look at the oil and gas sector. To meet the 2030 target, the ERP projects that oil sands operations will need to cut emissions by 35% below current levels, and carbon capture, utilization, and storage technology (CCUS) is one of the key technologies that companies will rely on to meet this target. However, CCUS projects and related infrastructure take 6-10 years between conception and commissioning. While there are some projects under consideration in Alberta, at this speed, it is highly unlikely that enough will be built in time to meet the 2030 target.
A similar story exists in the transportation sector. The federal government intends to mandate that 100% of new passenger vehicles for sale must be zero-emissions vehicles (ZEVs) by 2035, with interim targets of 20% by 2026 and 60% by 2030. However, to pick just one issue, battery production will require significant new sources of minerals like lithium and copper; and it takes an average of 13 years to build copper mines after the initial discovery. This timeline, mapped against massive expected global demand growth, will severely impede our ability to produce enough electric vehicles to meet Canada’s sales mandates—to say nothing of other mandate hurdles like infrastructure buildouts and the fact that 40% of homes in Canada don’t have access to off-street parking to charge their vehicles.
While the ERP announced $9.1 billion in new climate-related investments, this is just a tiny fraction of what’s needed to meet our emissions reduction targets. Currently, annual investment in the climate transition is somewhere between $15 and $25 billion per year. However, as Budget 2022 notes, it will take between $125 and $140 billion in annual investment to achieve net zero by 2050. With an investment shortfall of $100 billion or more, it begs the question: how will we fund, attract, and de-risk the massive amount of investment needed to realize our climate targets?
The 2022 federal budget outlined a number of significant initiatives to address these very issues. First, to de-risk capital investment, it announced the details of a much-anticipated CCUS investment tax credit (ITC). Also of note, Budget 2022 announced the Canada Growth Fund, intended to leverage public investment dollars to attract private capital. Other budget initiatives like the expansion of Canada Infrastructure Bank funding to support clean power projects will also help. While all positive steps, these will not be sufficient to attract the massive amount of capital investment required to get enough projects off the ground.
To realize the kind of transformational changes needed to meet its 2030 and 2050 goals, Canada must become a magnet for capital investment. A recent report by the National Bank of Canada has found that business investment has yet to recover to pre-COVID levels, and private, non-residential capital stock has been on a downward trend for the past five years. This is troubling given that the ability to retain and attract large amounts of capital investment is critical for financing the country’s energy transition.
Uncertainty about the future price of carbon is one challenge inhibiting the deployment of capital. Investment dollars are not afraid of climate policy, only uncertain climate policy. And the threat of removing the price on carbon is one of the biggest barriers to moving ahead with emissions reduction projects.
Some emissions reduction solutions, such as direct air capture and blue hydrogen, currently require a relatively high price on carbon to be economically viable. For example, blue hydrogen (produced by steam methane reforming of natural gas) with relatively high carbon capture rates (85%) needs a carbon price of $130 to be competitive with grey hydrogen. Therefore, having a guarantee that the price on carbon will rise to $170 per tonne by 2030 will help make the economic case for investment today.
As companies make capital allocation decisions, they need to have assurances that larger infrastructure projects with long lead times and lifespans will be good investments when built—and for decades to come. Therefore, enshrining the future price of carbon in instruments such as the proposed carbon contracts for differences will help de-risk private sector investments in low-carbon projects.
Perhaps the biggest challenge is that meeting national ERP targets will impose differing compliance burdens and costs across the country. Alberta is the country’s highest-emitting province because of its geography, resource base, and unique industrial structure. Consequently, Alberta will have the toughest row to hoe when working towards those targets.
To pick one example, the ERP’s headline initiative for the electricity sector is its commitment to developing a Clean Electricity Standard (CES) that will incent the phase-out of all conventional fossil fuel-based electricity by 2035. But unlike in provinces with vast hydroelectricity or other reliable zero-emitting capability, Alberta’s legacy grid infrastructure is largely reliant on fossil fuels for stable and reliable baseload electricity generation. As a result, reducing emissions from this sector will be more challenging and more costly for Alberta than for most other provinces.
As the government consults on the scope and design of the CES, three features of a good electricity grid must be given equal consideration—affordability, reliability, and cleanliness. In our pursuit of the one, we cannot neglect the other two. And the realities and limitations of Alberta’s resource endowments must be considered by CES policy design to prevent placing a disproportionate burden on Alberta’s businesses and ratepayers.
The imperative for reducing emissions is clear. However, the pace and scale of investment needed to achieve Canada’s emissions targets is unlike anything we’ve yet experienced.
Immediate and urgent action is needed to smooth the path to success. Regulatory and project approval hurdles need to be addressed now, and much more needs to be done to attract, accelerate, and de-risk investment spending in this country. At the same time, affordability, security, and reliability need to be ensured for all Canadians as the federal government works to achieve its 2030 and 2050 targets. And finally, government policy needs to reflect the disproportionate burden that provinces like Alberta will face on the path to net-zero.