Written by Jatin Nathwani, Founding Executive Director of WISE for the Hill Times
WATERLOO, ONT.—Although the final pages on the unfolding human tragedy of the COVID-19 pandemic have yet to be written, the ‘tsunami-scale’ of economic disruption has led to responses by the federal and provincial governments that the most acclaimed of futurists could not have predicted even six weeks ago. If the adage, ‘Do not let a good crisis go to waste’ has any resonance, this is the perfect opportunity to re-set and re-confingure Canada’s energy sector away from dependence on oil and gas. Massive fiscal stimulus packages have become the order of the day and acceptance by citizens that governments have a valuable and positive role to play in our lives is one refreshing outcome. Whether it is income support for individuals, the need for a strong health-care system, education, or a deepening of the social safety nets, it is clear that the present crisis opens the door for a meaningful dialogue across political aisles that don’t look like chasms.
For the time being, the venom in Canada’s political discourse has been neutralized. For over five generations or longer, fossil fuels have played a dominant role in our economic well-being. Weighing against continued use of fossil fuels is a threat to the global climate that could prove to be even more consequential than COVID-19. The sting of climate threat may not be as directly felt as the virus nor as fast moving, but its uncontrolled and pervasive impacts can be worse.
In the tragedy of COVID-19, there is a sliver of hope that we could effect a clean energy transition for the long term. Possibility exists now to turn this hiatus of trust and co-operation into a unique opportunity to redefine the role of fossil fuels and its contributions to our national economic output. The time has come for Canadians to demand that our leaders take the climate threat as seriously as the virus and use the existing fiscal capacity to engage public and private capital to finance a low carbon energy economy. This requires fresh thinking and bold actions.
COVID has introduced a new vocabulary into our households. We need to “flatten the curve” to avoid the “peak” to minimize stress on existing capacity of the health system and ensure it is not overwhelmed. The message is clear: ‘Act now’ or suffer serious consequences later. The same template describes the threat of climate change and the greenhouse emissions trajectory to a T.
Actions now that promote deep de-carbonization and distance us from carbon intensive energy will help to “flatten the curve”; greater intervention now will be more effective in the long run dramatically reducing social costs later.
We identify several options for consideration. The bail out of the oil and gas sector with government purchasing shares in distressed petroleum companies to prop them up is one. This effectively makes the Government of Canada, and by extension Canadian taxpayers, owners of a large number of companies in the oil and gas sector beyond pipelines. This option has little merit. It keeps us on a trajectory of increased greenhouse gas emissions, entirely antithetical to achieving the 2030 emissions targets.
An outright bailout supporting the industry status quo simply maximizes regret, locks us into a high-carbon future, and passes on to future generations debt obligations, create stranded assets, and forecloses on options for creating a cleaner energy system.
Instead, the government could take the opportunity presented by this pivotal moment in history to rethink and reshape the Canadian energy landscape by adjusting the economic incentives around the provision of funds. For example, to maintain viability of current operations, provide interest bearing loans to companies in the oil and gas sector, but at the same time offer interest free or lower interest loans to clean-tech energy companies with large portfolios of wind, geothermal, solar, small modular reactors or bioenergy. Alternatively, buying bonds from gas companies while buying shares in hydro-electric companies. Subtle differences in the method of liquidity injection can impact the marginal costs of operating different assets in an energy portfolio aligning them with policy goals and reinforcing economic incentives like carbon taxes.
For energy investments, financing typically has a high upfront capital cost with a stream of revenues over the life of the asset. Structuring the cost of financing could have crucial implications on which investments companies choose to pursue and could effectively change the economic costs of different alternatives in favour of the desirable ones. Subsidizing the exploration of geothermal, hydro, nuclear—in particular the emerging small modular reactor technologies, wind solar and bioenergy now could lead to consequential developments of these assets in the coming decades, much as public investments in Athabasca Oil Sands in the last hundred years led to its commercial development.
Working together with the industry, the government could consider contracting the oil and gas companies for exploration and development of deep geothermal energy options as these companies have extensive knowledge and expertise in geotechnical engineering. In the simplest sense, this could be a procurement subsidy: purchase the services of oil and gas to build geothermal capacity.
Furthermore, if the government has the appetite to explore creative options for risk sharing with the private sector, thereby assuming additional risk, it could incorporate a crown corporation (or private corporation with significant government ownership) focused on geothermal energy and seed it with scientists and engineers from industry. Entire R&D divisions could bring into the new corporation to build something similar to examples from our energy history like Atomic Energy of Canada Ltd.
Such a bold move would provide rapid cash infusions to oil and gas companies to manage operations while immediately pivoting Canada’s future R&D to a low carbon direction.
The political impasse that now characterizes relations between Alberta and Ottawa is a clear sign that the oil and gas sector is not aligned with the requirements of Canada’s climate change commitments. The sector is all too aware of the “transition risks” that arise not because there are insufficient reserves of oil and gas in the ground—the world’s known fossil fuel reserves are three times greater than what could be allowed to emit to the atmosphere under a 2°C climate target.
Rather, these risks arise from policy interventions intended to ensure compliance with international obligations, such as the carbon reduction goals committed to under the Paris Agreement.
The risk-return profiles of organizations exposed to climate related risks will change as the physical impacts of climate change, climate policy and the competitiveness of new technologies undermine the financial soundness of the companies in the sector. As companies disclose their carbon liabilities, the knock-on effects range from divestment decisions by institutional investors led by changing consumer sentiment, the insurance sector unwilling to underwrite the physical risk of extreme events,and the collapsing financial valuation of a company’s stocks.
Worldwide de-carbonization will remain the core principle to mitigate the threat of climate change. Given that the energy system is the dominant contributor to greenhouse gas emissions, a dramatic decline by 2050 to meet net-zero carbon targets can be readily foreseen. All this will require massive investment capital once we emerge out of the COVID-19 crisis. If we assume that the fiscal capacity of governments around the world will be substantially diminished, this is an important time to pay close attention to flows of public capital and ensure they are directed to non-fossil fuel-based solutions in the long term.
There will likely not be another chance in the near term to deploy billions of taxpayer dollars to the energy industry without considerable political backlash; it is incumbent on the Government of Canada to make the most of this opportunity to launch us forward toward a sustainable energy future.
COVID-19 crisis offers hope for a clean energy transition There will likely not be another chance in the near term to deploy billions of taxpayer dollars to the energy industry without considerable political backlash; it is incumbent on the Government of Canada to make the most of this opportunity to launch us forward toward a sustainable energy future.
To read the original article please open the document below.