Four issues continue to be responsible for private capital’s underinvestment in clean technology companies and projects.
Case study: carbon capture
Technology risk: Carbon capture is a proven technology, but has been less effective with non-concentrated emissions sources. There can also be risks of carbon leakage in sequestration. Most of the capital costs relate to point source capture where there is integration risk with existing systems.
Carbon price uncertainty: Future carbon credit prices can form a significant component of the revenue stream needed to underwrite a major capture project.
Demand risk: Carbon capture could be used in industrial applications like steelmaking or cement, where a high share of the product is exported and differentiated pricing for low-emissions products is niche.
Regulatory risk: Pour space availability, liability for potential escape of sequestered emissions, and environmental assessment or right of way for carbon pipelines are sources of regulatory uncertainty.
With $369 billion in broad-based and time-limited incentives, IRA will address key cleantech technology and market risks and improve project economics. While the bill’s provisions face medium-term political risk from the Republicans, it provides enough certainty to spark major U.S. decarbonization investment in the power sector and among other green technologies. Incentives for domestic manufacturing will also help establish U.S.-centric green supply chains.
It’s a big push for climate action, global investment in emerging technologies, and economic opportunities for Canada. Indeed, Canadian cleantech companies will have opportunities to sell their products into the U.S. market and Canada’s proximity to the U.S. improves our potential as a key location for new energy investment in areas like critical minerals. But to rely on U.S. investment to improve green technologies is to risk falling behind on our climate targets. Despite IRA’s size, U.S. public and private investment in key technologies will still only be a fraction of what’s needed globally. And delaying our own decarbonization efforts could render Canadian industry increasingly uncompetitive as the U.S. and Europe steam ahead.
Competition for investment will be most fierce for new energy assets. These include finite hydrogen hubs, critical mineral mines, cleantech company labs and factories, or battery assembly plants that are currently shopping for the best locations to build. The subsidy-based approach engrained in IRA—rather than regulatory incentives—is likely to be a much bigger draw for these firms.
Canada’s best response to the current environment is to continue to advance decarbonization across economic sectors. Canada already has a core carbon pricing system and almost $15 billion in annual net-zero aligned federal spending.2 To succeed, we’ll need to do even more. This doesn’t mean mimicking the U.S. subsidy-first approach. But Canada’s system can be bolstered in a few areas with more regulatory certainty and a stronger public sector role in addressing clean tech risks and poor project economics.
Address carbon pricing uncertainty through carbon contracts for differences
Canada should make carbon contracts for differences (CCfD) a focus of the Canada Growth Fund. In these bilateral contracts, the government would compensate project sponsor counterparties when carbon prices deviate from those announced. This would help commit the government to taking the actions necessary to uphold carbon prices that support projects. The Netherlands leads the world in employing CCfDs, with a budget of €13 billion in 2022.
CCfDs are not without challenges. Some elements of carbon pricing are easier for the government to control, like raising the fuel charge rate at which heavy emitters can purchase carbon credits from the government. Others may involve greater tradeoffs. Raising the market-set carbon credit price for heavy emitters for instance, could involve imposing stronger performance standards across sectors—including those less prepared to meet them. If governments can’t follow through on actions to raise carbon prices, fiscal liability of CCfDs could be significant. These risks can be limited by focusing on the fuel charge risk the government controls, partial coverage of carbon credit prices, providing greater support to strategic projects or more uneconomic technologies, or providing shorter term contracts until 2030 to bridge to the development of better carbon markets. As sophisticated financial contracts to structure and price, the government will need to move quickly to be able to execute contracts in time for private investment to flow into emissions reductions for 2030.
The federal government can further boost the regulatory system by finalizing regulations like the Clean Electricity Standard, methane regulations, the oil and gas cap, and the heavy emitters’ system review. There should also be concerted efforts to address permitting and other regulatory hurdles to project development, in conjunction with provinces.
New tools to address technology and market risks
Technology risk is deterring investors from taking on large-scale projects involving technologies like carbon capture, direct air capture, or hydrogen. What’s needed is an entity to provide guarantees that the engineering, procurement, and construction of these technologies work as planned. This is a common feature in project finance, where the risk allocation helps to both draw in debt investors and improve project returns. The Canada Growth Fund should address this risk, which is too large for most entities to self-insure against. In the U.S., the Department of Energy’s Loan Programs Office provides this type of commercialization support through loans and guarantees, and was given an expanded funding envelope in IRA.
Market risk can be dealt with through offtake agreements, where a customer agrees to take a certain amount of product at a set price for a period of time. Major corporate entities are looking to secure stable supplies of critical minerals, clean hydrogen, or other materials, but may be challenged to fully bear the risks or they may have insufficient regulatory incentive to do so. Government is needed to help bridge the gap and speed the development of enabling infrastructure and technologies enabling critical minerals supply and clean hydrogen production to further decarbonize a range of sectors.
More tax-based support for maturing technologies
Major investment is needed now to promote innovation post-2030 to improve technologies and commercial models for decarbonizing hard-to-abate sectors. The government should make it an explicit focus for the Canada Growth Fund (CGF) and Canada Infrastructure Bank (CIB) to support innovative or first-of-their-kind projects in strategic sectors.
Tax-based incentives like the cleantech investment tax credit are equally important. When proven technologies are at an earlier commercialization phase and winning models are unknown, the tax system engages as many private actors and approaches as possible. They’ll be faster and broader-based compared to concessionary finance tools like CGF or CIB, which can complement tax incentives by covering additional project risks in strategic sectors. Concessionary finance tools should emphasize transparency so they can operate like tax tools in firming market expectations, such as around future prevailing carbon prices or market development.
Encouraging the provinces to step up
The provinces have an equally important role to play as taxing authorities and direct beneficiaries of their competitive industrial sectors. Yet provinces have been looking to the federal taxpayer to take the lead in decarbonization or for green industrial policy. For instance, the federal taxpayer is being called upon by Nova Scotia and New Brunswick to meet regulations ending coal use in the power sector, Alberta for carbon capture incentives to meet the oil and gas emissions cap, Ontario for development of a battery supply chain, or Newfoundland and Labrador to encourage east coast green hydrogen production. Federal incentives should smooth disparate decarbonization burdens, but provinces need to step up with their own incentives or revenue models and play a larger role in supporting industrial policy projects.
Federal incentives should encourage explicit provincial matching funds and get further traction for advancing regional economic tables. An overarching federal-provincial dialogue should advance discussions around coordinated and politically-saleable approaches to consumer and industry-pay models for decarbonization investment.
Strategic prioritization
With so many areas for investment, the federal government will need to prioritize. A key choice is between decarbonizing existing production and pursuing production opportunities in the new energy systems. The first could run the risk of spending too much money to decarbonize early in sectors that could have a diminished role in the future, such as fossil-fuel based industries. The second is a bet on an uncertain energy future: investments in an export-driven sector that may facilitate decarbonization globally at the cost of the Canadian taxpayer, or that doesn’t result in direct cuts in Canadian emissions or long-term economic benefits.
The federal government will need to support the private sector in decarbonizing the current energy system while also building a new one. But it will need to be clear-eyed in pursuing focused industrial policy opportunities, while supporting broad-based decarbonization strategies. Decarbonization investment can advance economic opportunities and Canada’s primary objective: to meet the emissions targets necessary to avoid climate catastrophe. The government should articulate an overarching strategy, with more specific policy objectives across the suite of government policy tools, including programs, procurement, and regulation.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
