Canada energy

Finding a way to harness Canada’s vast resources that delivers both a prosperous and sustainable economy is key to its future, but can the reality live up to the ambition? Marie Kemplay reports.

Canada emits more than its fair share of greenhouse gasses (GHG). Despite representing just 0.5% of the world’s population, it was responsible for 1.5% of global carbon dioxide emissions in 2019, according to the European Commission’s Joint Research Centre.

Energy production and use contributes 80% of the country’s emissions, according to the International Energy Agency (IEA), with oil and gas production and transportation each representing 26% of total emissions. Energy is, therefore, an obvious focal point in efforts to transition to a net-zero economy.

Federal plans

In March 2022, the federal government published its 2030 Emissions Reduction Plan (ERP), setting out a sector-by-sector approach to reducing Canada’s overall GHG emissions by 40% (to 45% below 2005 levels by 2030). This includes an emissions-reduction target of 81 megatonnes for the oil and gas industry. The plan builds on previous climate change initiatives and commitments led by prime minister Justin Trudeau’s administration.

It is the first plan issued following the 2021 Canadian Net-Zero Emissions Accountability Actwhich requires the federal government to set national emissions reduction targets and plans at five-year intervals. The ERP covers a range of areas including oil and gas sector actions, phasing in electric vehicles and further developments in carbon pricing, to mention a few.

While the plan broadly received a positive reception, it does not go far enough for some. For instance, Greenpeace Canada says: “Civil society groups have determined that Canada’s fair share includes reducing domestic GHG emissions to at least 60% below 2005 levels by 2030 … In this light, Canada’s actual emissions reduction target … is not ambitious enough.”

Merran Smith, founder and chief innovation officer at research organisation Clean Energy Canada, says: “It’s the first time we have had a comprehensive climate plan, which clearly identifies some of the key policy pieces like the zero-emission vehicle mandate, clean electricity standard, and the cap on oil and gas emissions.”

Yrjo Koskinen, Bank of Montreal (BMO) professor of sustainable and transition finance at the University of Calgary, suggests that it represents a “reasonable compromise between environmental goals and economic realities”.


There is a lot resting on the plan, especially given Canada’s troubled track record on climate targets. In November 2021, Canada’s Environment and Sustainable Development Commissioner published a stinging report lamenting “30 years of missed opportunities” on climate action and, while Canada has been part of numerous international commitments, as well as issuing nine domestic strategies, how these “have not yielded results” since 1990.

There are big questions about whether things will be different this time. Even the content of draft internal government documents from the period before the publication of the ERP hint at uncertainty about hitting targets, particularly in reducing oil and gas sector emissions, according to reporting in Canada’s The Globe and Mail in June 2022.

In a statement to the newspaper, environment minister Steven Guilbeault said: “Our final analysis gets us to the 81-megatonne emission reduction for the oil and gas sector.” He added that, given the industry’s profit margin, it has “never been better positioned to make the necessary investments”.

Carbon capture 

The investments Mr Guilbeault refers to are technologies to continue reducing the emissions intensity of oil and gas production — in particular Canada’s oil sands sector, which has had 137% emissions growth since 2005, according to the government.

Although the government states in the ERP that it intends to introduce an emissions cap, it also says: “The intent of the cap is not to bring reductions in production that are not driven by declines in global demand.” So, there will also be a major role for technological changes in reducing emissions. In particular, carbon capture, utilisation and storage (CCUS) technology is being singled out, with the government pledging to develop a CCUS strategy and introduce tax credits to incentivise investment. In its April 2022 budget, it announced proposals for CCUS tax credits, although this is yet to be passed into legislation.

The oil sands sector has also been keen to promote CCUS. In June 2021, companies representing 90% of Canada’s oil sands production (subsequently expanding to 95%) formed the Oil Sands Pathways to Net-Zero Alliance. It has put forward a three-phase plan for net-zero emissions from oil sands production by 2050, which it says is already underway. In the first phase, it proposes to reduce emissions by 22 megatonnes, predominantly via creating a carbon capture network in northern Alberta.

“All our oil sands companies are betting on [CCUS], and to be effective it will need to be on a massive scale, which hasn’t been done before,” says Mr Koskinen. “There are already a number of [CCUS] projects. But the expansion in these facilities is going to be unprecedented, and no one really knows what that is going to entail and how expensive it will be.”

Necessary investment

Mr Koskinen questions whether investment is happening with enough urgency. “I think the largest producers are very aware of the issues and are taking it very seriously. But I’m not sure there’s enough sense of urgency around investment. There is capital available as companies have record cash flows. But at the same time, they’re paying back their debts, increasing dividends and engaging in big stock buybacks,” he says.

For the industry’s part, in response to the government’s tax credits proposals in April, the alliance said it would carefully review the details and stressed the importance of collaborative financing with government. It said: “Because of the amount of long-term capital investment required to build carbon capture and storage infrastructure, and the speed we need to move at to meet 2030 targets, the countries that are doing this successfully are all using a collaborative model where governments are co-investing alongside industry.”

However, others question whether the government should be offering tax incentives to “an industry that is hugely profitable and supporting it to survive when it should really be in decline,” says Mark Winfield, professor of environmental and urban change at York University in Toronto.

Cost of carbon

Carbon pricing is another significant policy area in the ERP. Canada has had carbon pollution pricing since 2019, where a carbon charge is applied on fuel (for vehicles or heating homes), as well as an output-based pricing system for industry. Although each province or territory can create its own system, federal pricing applies as a backstop where provincial arrangements are not as stringent as federal levels. Even before the ERP, the government had committed to increasing the federal benchmark price by $15 per tonne every year up to 2030.

In the ERP, the government says it wants to create additional carbon price certainty and is looking at measures such as contracts for differences. These would effectively lock-in carbon pricing via a contract between the government and investors in carbon reduction technologies and projects, de-risking their investment.

“Carbon pricing is going to be an important driver of change, and contracts for difference could really amplify that,” says Jonathan Hackett, co-head, BMO energy transition, and head, sustainable finance.

“Creating a system with a scheduled carbon price, and with government backing to ensure that price and a steady return for carbon reductions, creates a clear incentive for investment into this area. It makes carbon reduction solutions an eminently financeable area, including for debt investors.”

Sovereign sustainable financing

The government has also begun directly raising capital for climate projects. It published its green bond framework on March 3, which includes several eligible expenditure areas that support GHG reduction (among other environmental areas). It issued its first green bond on March 23, raising C$5bn ($3.85bn) and with a final orderbook reaching C$11bn.

Valerie Lemieux, sustainable finance lead and head of the institutional clients group at HSBC Bank Canada, which was a bookrunner and also one of two structuring advisers (along with TD Securities), suggests that part of the bond’s appeal, alongside a high-quality framework, is that it was presented as “part of Canada’s bigger climate story and strategy. It wasn’t a case of here is an isolated framework; it helped investors to understand how it would support that agenda.”

A contentious issue for the green bond framework was its exclusion of nuclear power — even though nuclear makes up a substantive part of Canada’s energy strategy and is a key driver for its already low carbon intensity electricity generation. However, Ms Lemieux remarks that this exclusion was in line with other sovereigns, and internationally accepted principles for green bonds, rather than relating to the Canadian context specifically.

The nuclear question

There is active debate globally about whether nuclear power can be classified as green, and if not, whether it is an acceptable transition fuel.

“I think investors are increasingly understanding the importance of nuclear to the energy transition and its role in decarbonising electricity,” says Mr Hackett. “In time, I would expect to see sovereigns removing it as an exclusion and having a more nuanced discussion about how it forms a part of their energy strategy. I also think a lot of investors already understand that if they don’t want exposure to nuclear power, then there are a number of sovereigns where that won’t be possible.”

Amy West, global head of sustainable finance and corporate transitions at TD Securities, suggests in future Canada is likely to produce a specific transition taxonomy or framework setting out eligible “transition” activities. “At the moment, there is still uncertainty associated with having nuclear within a green bond framework, although investors are starting to ask more questions about this area,” she says.

At the moment, there is still uncertainty associated with having nuclear within a green bond framework, although investors are starting to ask more questions about this area

Amy West

Nonetheless, she reflects that creating the framework and successfully issuing a green bond was an achievement for a resource-based economy like Canada. “There is often a bit of a question mark for resource-based economies about how you can have a large energy industry and also issue green bonds. It is possible, but you have to be extremely focused on how to do that credibly,” she says. “Part of that narrative needs to be about how energy transition is going to take decades, and the importance of accelerating the flow of capital to emerging technologies to support that.”

Short-term squeezes

But while Canada, and governments globally, are grappling with the long-term challenges of energy transition, global energy supplies have come under extreme short-term pressure following Russia’s invasion of Ukraine. This has pushed up oil and gas prices, and reignited debate about Canada’s role in the global energy supply.

As to whether it has dampened transition efforts, Lindsay Patrick, head of strategic initiatives and environmental, social and governance at RBC Capital Markets, believes not. “In the conversations we have had with our energy clients since the war in Ukraine started, there has been no sense of any wavering on the climate agenda,” she says.

“The conversations that we have been having with these clients, some for a number of years, have continued and are becoming very advanced into areas such as how they should be addressing Scope 3 emissions and engaging in further scaling of emissions reduction initiatives.”

Clean Energy Canada’s Ms Smith also stresses the importance of not losing sight of the bigger picture. “The situation in Ukraine has created a short-term energy supply problem, where European demand for non-Russian oil and gas has spiked. But in the long term, we know that the EU has committed to transition to clean energy, and that is what we should take note of when developing energy export infrastructure, rather than thinking about boosting fossil fuel supplies,” she says.

More broadly, she believes, “[Canada] should be competing hard to get a foothold in strategic long-term opportunity areas for exports, such as green hydrogen, low carbon steel or EV batteries. If we don’t build a national consensus now about the importance of that and begin investment in the necessary infrastructure, then we may find it is too late and other countries have already filled that gap.”

The power of nature

Another important, but often overlooked, area that will play a huge role in supporting Canada’s net-zero future is its natural resources. RBC’s Ms Patrick says: “I think something that is often under-appreciated is the nature-based solutions Canada can leverage to protect and improve the climate. We have resources unlike any country: huge areas of wetlands, grasslands and forests that can capture and sequester emissions.”

Sarah Thompson, managing director of sustainable finance at RBC Capital Markets, adds that “by protecting and better managing these resources, such as through regenerative agricultural practices, which will increase the amount of carbon that the soil can sequester, this could make a huge impact.”

Ms Patrick points to a recent paper part funded by the RBC Foundation and led by Nature United (the Canadian affiliate of the international body The Nature Conservancy), which found that better land management practices could lead to a 78-megatonne annual reduction in Canada’s carbon dioxide emissions by 2030.

“If Canada can combine the technological solutions which will transform the climate impact of the energy sector, as well as other areas such as mining and chemicals, with the huge potential of nature-related solutions, I think the country can deliver differentiated solutions to address the climate challenge,” Ms Patrick says.

The right financing

Whatever approach and package of solutions is pursued, it is clear it is going to be a challenging and complex process. And banks too are learning how best to finance and support this area.

“This is a 30-year transformation of the economy that is going to involve major technological developments, which will take years to get to their full scale, and often require complicated adoption curves,” observes BMO’s Mr Hackett. “So, we are going to need different types of capital for different solutions.

“For us as a bank, it’s also important to work with these emerging companies so that we can develop deep expertise not only of the technologies themselves, but in creating the right financing tools. Because over time, that is what will enable us to support the scaling up of this sector and the financing of it.”


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