Canada falling $60-billion short annually on investments needed to hit climate change targets: report – Financial Post

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Canada must make it more profitable for investors to back transition to low emissions in large polluting industries such as oil and gas if the country is ever going to hit its greenhouse gas targets, according to a new report.

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Investors remain wary of higher risks for returns in long-term transformative projects to reduce emissions, which could have a demonstrable impact on achieving climate change-thwarting goals, than in renewable energy where three quarters of the country’s green investment dollars fund projects, the Royal Bank of Canada says in the report.

There needs to be about $70 billion a year spent on green technologies in Canada to meet carbon neutral targets by mid-century, but only about $10 billion is being invested annually, RBC economist Colin Guldimann said in the report released Monday.

“Large-scale projects that could create meaningful change, for instance in heavy-emitting sectors, are often costly, come with higher investment risk, and don’t provide significant near-term financial returns,” Guldimann says.

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“With a relatively large share of industrial emissions, including from the oilpatch, Canada faces a challenge in ensuring that sustainable finance reaches all parts of its economy.”

As a season of deadly wildfires and floods around the planet shows the urgent need to tackle greenhouse gases, there is more investment than ever in funding to fight climate change. But too often it chases quick returns on investment (ROI) in renewable energy instead of broad structural changes to reduce emissions in industries such as oil and gas, and cement.

Part of the problem is that many industrial processes rely on fossil fuels to produce the very high heat they require, Guldimann says. Substitutions may not be effective nor generate sufficient returns for investors.

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Part of the solution lies in boosting sustainability-linked finance allowing businesses in those sectors to pay lower interest or utility rates if they cut emissions below targets, Guldimann says. Contracts guaranteeing carbon prices or government carbon price subsidies would also draw investors to a type of funding that has so far been limited, he says.

Tom Rand, a co-founder and managing partner of Toronto-based ArcTern Ventures, says carbon prices are child’s play. Rand says what’s needed is radical capitalism in the form of a massive investment intervention to save the planet from the breakdown in civic infrastructure — millions of climate refugees triggering far-right politics, for example — that he says international security experts forecast will accompany climate change.

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“There are trillions and trillions of dollars just sitting in money market accounts doing nothing, earning nothing,” Rand says in a television interview about his book The Case for Climate Capitalism. “So if we put the right signals in place, the private sector will shovel that money into solving this problem because they will be motivated by making money on those trillions of dollars.

Canada will need to attract investors with greater risk appetite … to help fund this slice of the transition

Colin Guldimann, RBC economist

“The resources are there, the technology is there, they have big engineering companies capable of executing on this stuff. We just need to have a policy framework that puts rules into place that enables that money to flow in that direction, and lo and behold, we’d all be better off in the long term economically and environmentally.”

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Guldimann says there’s already an abundance of capital that companies have marked for engineering. It just needs the policy framework, like Rand mentions, for an increased ROI to boost investor interest.

Canadian investment in engineering structures and industrial equipment averages nearly $120 billion annually while corporate after-tax profits add another $130 billion, he says. The funding should be funnelled through sustainable finance models to increase ROI, he says.

“Canada will need to attract investors with greater risk appetite, and those willing to wait longer to get their initial investment back, to help fund this slice of the transition,” the economist says. “It should ensure that rules for green and sustainable finance allow for these projects to be labelled as such, so emissions-intensive sectors can access the capital they need to transition.”

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Higher costs due in renewable energy could push some investors in that industry to longer-term projects. Rising steel, copper, aluminium and fibre prices plus a four-fold increase in logistics costs have increased wind turbine prices over the last six months, and they’re expected to rise 10 per cent in the next 12 to 18 months, according to consultant Wood Mackenzie.

There could also be a push by some Canadian pension funds to divest from some fossil fuel activities, or perhaps redirect funding to industry emission transformations, after a report this month criticized their investment portfolios.

The Ottawa-based Canadian Centre for Policy Alternatives found the Canada Pension Plan, while calling itself a climate action leader, had actually increased shares in fossil fuel companies by 7.7 per cent between 2016 and 2020. The centre said it couldn’t determine how the investments had been allocated, but said Canada’s pension funds had declared the need for a quick transition to a low-carbon economy.

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The centre’s report followed a United Nations report this month saying the planet is on an “irreversible” path of climate change impacts including lethal heatwaves and extreme hurricanes. UN Secretary General António Guterres said the report “must sound a death knell for coal and fossil fuels, before they destroy our planet.”

Alberta Premier Jason Kenney said an abrupt transition is out of the question for Canadians because they need fossil fuels to survive the northern climate.

“It is a utopian notion that we can suddenly end the use of hydrocarbon based energy,” he said. “The challenge is to shrink carbon and CO2 output, and Alberta is increasingly a world leader in that respect.”

Kenney cited provincial funding of carbon capture and storage, and a proposed Edmonton plant to make hydrogen fuel, as efforts to control emissions.

Financial Post

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