December 2009
Public Investment in Low-Carbon Technologies and Infrastructure
Operating Assumptions and Principles
Paper Objective and Contents
Sustainable Prosperity is an organization dedicated to making markets work for the environment. One of our primary interests is in exploring the role that carbon pricing can play in promoting the development and deployment of low carbon technologies in Canada. More specifically, we want to build the knowledge base for how carbon policy can be used to promote Canada’s economic and environmental interests.
We believe that Canada can begin to make the necessary transition to a low carbon economy, using carbon pricing as a primary policy vehicle. To do so in a manner that maximizes the environmental and economic benefits to Canada, however, it will need to make a public investment in low carbon technologies – above and beyond what it is already doing. The fiscal space to allow for that investment can come from auctioning allowances under Canada’s proposed national cap-and-trade system.[1]
The objective of this paper is to lay out a framework for evaluating public investments in a transition to a low-carbon economy and low-carbon energy system. In particular, the paper focuses on identifying and describingoperating assumptions and principles needed to inform decisions about how to effectively allocate public resources in facilitating this transition.
The paper is divided into threesections:
- The Low-Carbon Investment Context in Canada: highlights key factors that define the context of public investments in low-carbon technologies and infrastructure in Canada.
- Operating Assumptions: describes a series of key operatingassumptions related to the investment challenge associated with moving towards a low-carbon energy system, both globally and in Canada.
- Principles: describes a set of potential guiding principles that policymakers should usewhen making public investment options in low-carbon technologies.
The Context for Low-Carbon Investment in Canada
Despite early leadership and international engagement on climate change issues, domestic public policy to date has failed to both mitigate Canadian GHG emissions and to support the emergence of robust, world-leading Canadian industries built on clean energy technologies. Compared to other countries, Canada is increasingly falling behind in attracting the necessary clean energy and low-carbon investment.
The following are key contextual factors that Canadian policy-makers should consider when evaluating new public investments in low-carbon technologies.
- Canada’s GHG emissions continue to rise. According to the latest data from Environment Canada, Canada’s GHG emissions in 2007 were 26% above 1990 levels, and 33.8% above Canada’s Kyoto target. Over the same period, GHG emissions in the UK declined 17.3% and emissions in Germany declined 21.3%. Canada’s domestic policies, both on the federal and provincial level, have so far failed to meaningfully mitigate domestic GHG emissions, or introduce substantial policy incentives for widespread development and adoption of low-carbon technologies.
- Canada is not seen as a global leader in the commercialization of low-carbon technologies[2]. A recent research report by the clean-tech research organization Clean Edge identified 21 global cities with vibrant clean energy technology clusters; none of the cities identified were Canadian. A recent report by the UK organization, E3G, benchmarked the low-carbon competitiveness of selected countries, and placed Canada well behind the world leaders of Germany, the UK, France, Japan, and South Korea.[3] According to the an index published by Ernst & Young measuring the attractiveness of selected countries for investment in renewable power generation and technologies, Canada ranks 9th overall – again well behind the world leaders of the US, China, Germany, the UK, Spain, and various others.[4]
- The level of public investment in low-carbon technologies in Canada is also low. The level of public investment in low-carbon technologies in Canada is also comparatively low. Many countries used recent economic stimulus packages to advance the transition to a low-carbon economy. According to HSBC analysis, approximately USD $430 billion in stimulus spending has been committed to climate change investment themesglobally. The United States has committed approximately USD $112 billion of stimulus spending towards investment in green infrastructure and clean energy technologies (12% of the total US stimulus package). China invested over $220 billion in fiscal stimulus towards environmental investments, 38% of their total package. In comparison, Canada invested under $3 billion of its stimulus spending towards low-carbon investments, approximately 8% of its total.[5]
Figure 1
Source: HSBC A Climate for Recovery, 2009
Figure 2
Source: HSBC A Climate for Recovery, 2009
Table 1 Green Economic Stimulus Spending by Technology and Country
Canada / UK / Germany / Australia / China / US$ / % / $ / % / $ / % / $ / % / $ / % / $ / %
Renewables / 32.78 / 33.9%
CCS/Other / 1.08 / 43.2% / 6.55 / 6.8%
Building EE / 0.24 / 9.6% / 0.29 / 13.9% / 10.39 / 75.1% / 2.48 / 100% / 30.74 / 31.8%
Low Carbon Vehicles / 1.38 / 66.3% / 0.69 / 5.0% / 1.5 / 0.9% / 4.76 / 4.9%
Rail / 0.39 / 15.6% / 0.41 / 19.7% / 2.75 / 19.9% / 98.65 / 58.0% / 9.92 / 10.3%
Grid / 0.79 / 31.6% / 70 / 41.1% / 11.92 / 12.3%
Totals / 2.5 / 2.08 / 13.83 / 2.48 / 170.1 / 96.67
Source: HSBC A Climate for Recovery, 2009
*% = percent of total green stimulus spending
- Private investment in low-carbon technologies in Canada is moderate, but recent trends show a growing lag. According to data published by Deutsche Bank, private investment in clean energy technologies is below that occurring in other international jurisdictions. In Canada, between 2000 and 2008, private investment in clean energy technologies was just over $8 billion. This compares to figures of $17 billion in the UK, $37 billion in Germany, and $52 billion in the United States. These numbers predate the various stimulus and regulatory measures around climate change, particularly in the United States, that are promoting new private investment flows into low carbon technology sectors such as renewable energy or battery technology. More recent analysis seem to confirm that public investment in the U.S. is translating into private activity, and that Canada is falling behind. The CleanTech Group has released numbers showing that year-to-date venture investment in clean tech (admittedly a broader category than low carbon technology) totaled more than US$ 3billion in the U.S., compared to just US$ 77million in Canada over the same time period.
Figure 3
Source: Global Climate Change Policy Tracker, Deutsche Bank, 2009.
- Canada has unique opportunities and strengths in key clean energy technologies. Canada is not without assets in the development of low carbon technologies and infrastructure. Canadian firms and researchers are world leading in areas such as hydrogen fuel cells, biofuels and bioenergy. Canada is also widely recognized internationally as having a strong post-secondary educational system and a vibrant and productive community of researchers and scientists. Canadian policymakers should take these strengths into account and focus new investments in areas of key strategic opportunity.[6]Finally, Canada’s innovation and research and development record on clean and low-carbon technologies is considered globally significant, and the Toronto Stock Exchange is a leader in listing clean technology companies. Similarly, the existence of Sustainable Development Technology Canada has proven quite beneficial to the funding of post-R&D and pre-commercial technologies. But the absence of supporting or complementary institutions or policies has muted the overall impact of the SDTC “clean effect”.
Operating Assumptions
The objective of this paper is to define principles for policy-makers faced with decisions about how to invest public funds with a view to most effectively and efficiently facilitating the transition to a low-carbon economy. The overall analytical framework presented here builds, in particular, on the following operating assumptions:
1.A public investment in low carbon technology and infrastructure is needed.
Our starting assumption, obviously, ison the need for a public investment in low carbon technology. That assumption is itself built on the belief that a defining characteristic of the global economy in the 21st century will be its “carbon competitiveness”, and that Canada’s sustainable prosperity is predicated on competing in this world.
The need for a public investment is based on a need and on an opportunity. The need is a function of the necessary transformation of energy (oil, gas, electricity) and energy-intensive (transportation, buildings) systems in our economy to allow Canada to meet its national climate change mitigation goals, and to prepare our economy for a higher energy cost world as well. The opportunity is based on the economic and environmental case for the rapid development and deployment of these low-carbon technologies and infrastructure.
The economic case is built on: (i) the growth in demand for low carbon technology and the economic benefits – in the form of employment and investment – attendant with meeting that demand; (ii) the need for innovation-driven productivity gains in Canada as the engine of future growth[7], to which innovation in energy production and use can play a significant role; (iii) the fact that the cost of mitigation rises over time, and that investment in emission-reducing activities today helps avoid those costs;[8] and (iv) the need for diversification of export sectors for Canada, if only to hedge against possible future carbon trade barriers.
The environmentalcase is straightforward: cumulative emissions (i.e. the actual “stock” of GHGs in the atmosphere) matter as much as much as emissions “flow”, and earlier mitigation – through the development and deployment of low carbon technology and infrastructure – translates into a lower emissions profile for Canada. On the point of diversification raised above, a wide range of technology and infrastructure choices are required for Canada to match its emissions profile, which is quite diverse (i.e. our growth in emissions may come from the oil and gas sector, but manufacturing, other industry, and services still account for the lion’s share of Canada’s emissions).
2.Massive public and private investment is needed to build a low-carbon energy system, both in Canada and globally.[9]
A corollary assumption flowing from this one is that the scale of the investment requires resources substantially beyond those of governments and other public sources. The implication is then that public policy and public investment should have as an objective to create the basic conditions through which private investment into low carbon technology and infrastructure can be made. These conditions include, but are not limited to, direct public investment in technology development, demonstration, and deployment and in infrastructure.
3.Carbon pricing is key, but additional government policy, including direct public investment in low-carbon technologies and infrastructure, is called for, particularly in the short term.
Carbon pricing policy, either as a carbon tax or as a cap-and-trade system, is not likely in its early stages to yield a carbon price high enough to “move the needle” in terms of individual or corporate behavior. Furthermore, there are and will continue to be sectors of the economy that are relatively insensitive to the impacts of carbon pricing, and for which complementary policies (i.e. regulations, etc.) will be required. And finally, promoting the short-term uptake in emission reduction technologies and infrastructure translates into avoided higher mitigation costs in the future, and conversely reduces the cost of future, more stringent, reduction targets. In other words, we want every part of our economy – from the oil and gas sector to the services industry – to have access to technology and infrastructure that make it cheaper to reduce GHG emissions.
This points to a larger truth: just as it is important for every part of the Canadian economy to have access to low carbon technology and infrastructure, the degree to which reducing emissions actually benefits the Canadian economy will be a function of how much those technologies and infrastructure are based on “made-in-Canada” solutions. A company faced with the need to reduce its emissions will either choose an offshore solution, or a Canadian one. Right now, that choice will largely default to an offshore one because of the relative lack of Canadian options. Ensuring, through a public investment, that the solutions will be Canadian translates into direct economic benefits in the long-term for Canada.
4.Carbon pricing revenues in Canada could be substantial. The amount of fiscal revenue raised from carbon pricing in Canada could be large.
A major constraint to making a public investment in low carbon technology and infrastructure would seem to be Canada’s current fiscal and political situation. Although our current federal deficit is, in relative terms, no great aberration; it does nonetheless limit fiscal options. The conventional political interest is against increasing that deficit, but rather in reducing it. Add to that that new taxes are political dead letters, and one can conclude that we simply cannot afford to make such an investment.
But there is a solution – one that many other countries and jurisdictions are starting to employ – to create the fiscal space required to invest in a low carbon transition (and also to address other fiscal needs, including deficit reduction)[10]. That solution lies in auctioning the allowances created and allocated by government under a cap-and-trade system. The National Round Table on the Environment and the Economy has estimated that $18 billion in annual revenue could be raised from a national cap-and-trade system in 2020. Some portion of that could be dedicated to low carbon technology and infrastructure.
5.Government needs to ensure that an effective and objectiveinformation and decision-making framework is in place to allocate these public resources, and that this framework is defined by its transparency and accountability.
Making effective and efficient public investments in this area is complex. It requires weighing diverse criteria against each other, from GHG reduction potential to macroeconomic impacts to localized economic impacts to secondary social and environmental benefits. A solid understanding of the issues involved, the risk factors associated with these types of public expenditures, and the evaluation criteria that best illuminate critical tradeoffs will be crucial to making smart public policy and investment decisions, and successfully building a low-carbon energy system.
At the end of the day, it will be incumbent on government to demonstrate the public rate of return on these investments. For the public to be confident that these substantial investments are being made on the basis of the best information and decision-making processes, a degree of transparency and accountability needs to be ensured. This will require an institutional framework involving the provision of independent advice, and independent decision-making in investment decisions.[11]
Principles
Analyzing investments of public resources in new energy technologies and new infrastructure requires assessing the comparative costs and benefits of various policy options and investment choices against each other. It also involves comparing different kinds of costs and benefits. For example, decisions about investment in new public transportation infrastructure must take into account not both GHG reductions and travel-times for the users of the system. Newincentives for renewable electricity generation must take into account both environmental concerns and local or regional economic impacts, such as jobs created and industries developed.
A wide range of principles are relevanttopublic decision-making in this context. The following is a list of such principles, presented here for the purposes of discussion. Not all will be applicable in every circumstance. However, they point to important issues which policy-makers should be aware of in considering policy options in this area.
Principles for Public Low-Carbon Investments:
- Pricing carbon should be seen as the foundation for long-term investment in low-carbon technologies.
Introducing a significant, comprehensive, and economy-wide price signal would provide the best foundation for long-term investment in low carbon technologies. For public investment, it provides a source of revenue, and for private investment (both corporate and individual) it provides a long-term forward price signal.
Another way to think about this is to take the earlier point – about the economic benefits to Canada of having home-made solutions to climate change – and turn it around. Carbon pricing, and the impact it will have on the economics of energy production and use, will provide the “demand pull” for those technologies and infrastructure in the marketplace, while investment in low carbon technologies and infrastructure ensures the “supply push” that is required to establish the virtuous cycle that we are looking for.
- A “Systems Approach” is Required
Given the complexity and interconnectedness of the issues involved, a broad and multi-layered “systems” approach to public investment is required.
At a first level, public investment must be rooted in a larger policy framework that is predicated on the pursuit of a low carbon economy. As discussed earlier, the elaboration of this framework must be clear about its ultimate driver (i.e. emission reductions) while allowing room for other objectives to be pursued through the various tools at government’s disposal. Another way to think of this is to consider the relationship between the cap-and-trade system, which is designed to deliver cost-effective emission reductions, and the public investment, which may have a variety of other objectives. In the same way, the use of tax policy, direct procurement, or regulations by the government can – all while being part of an overall framework – work to deliver on other objectives.
At a second level, just where the public investment should go – in terms of the innovation chain – can be a difficult decision, given the variety of needs that exist, and the variety of objectives to be served. One way a systems approach can assist in that decision is to consider public investment as a series of overlapping short-, medium-, and long-term objectives. That would allow the policy to (i) maximize the economic benefits of the investment (and so serve an important political need) and (ii) track what is happening in the economy in relation to a carbon price that is increasing over time. In the short-term, then, public investment could be dedicated to those projects that create employment (through manufacturing of mature technologies or infrastructure). In the medium-term, investment would be channeled to undertakings that increase the uptake of technologies and so drive productivity improvements in the Canadian economy. And in the long-term, investment would go into basic research-and-development for continuous innovation. Of course, the exact allocation here is artificially drawn to make a point. Investment in all three potential areas could (and should) be made across these various timelines.