The Canadian Economy in a Low Carbon World

Sustainable Prosperity Big Ideas ConferenceOttawa, April 28-29, 2014

Andrew Leach

Enbridge Professor of Energy PolicyAlberta School of Business

Canada’s Low Carbon Future

• The science of climate change is becoming increasingly clear

• The politics and policy of climate change may be becoming less clear

• Relationship between global climate change and global emissions levels is becoming better understood

• Relationship between global climate change goals and emissions trajectories and/or policies is remarkably unclear or inconsistent

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Lots of uncertainty about low carbon transitions3

Source: IPCC 5th Assessment Report, Working Group III

No shortage of estimates of the size of the low carbon economy• McKinsey estimates that for 2oC goals, “investments will be

needed of about €475 billion annually: €350 billion per year for 2010–20, and €595 billion per year for 2021–30.”

• The Pembina Institute (via Analytica Advisors) finds that the global clean technology industry is currently worth approximately $1 trillion, and projects growth to $3 trillion per year by 2020.

• The National Roundtable on the Environment and the Economy (NRTEE) estimated that, “global spending (on low-carbon goods and services) could reach between $3.9 and $8.3 trillion by 2050

• NRTEE estimated that for Canada, “annual domestic spending on LCGS could rise from the $7.9 billion estimated for 2010 to $36 billion in 2050.”

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Deployment of low-carbon energy

• The models used to analyse climate change policy all agree on a few basic elements• Significant electrification of the economy will be required to

meet deep emissions cuts• All but complete de-carbonization of the electricity supply

by the end of this century• Significant near-term reductions in coal use• Deep reductions in liquid hydrocarbon fuels and smaller

reductions in natural gas• For the most part, models rely on an important assumption

• Coordinated, or at least reasonably similar policies, applied in different countries and regions

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Low carbon energy will play a key role6

Source: IPCC 5th Assessment Report, Working Group III

Issues for Canada

• Global issues• Policies applied globally will determine prices both for

specific abatement technologies and existing energy exports• Policies applied globally may result in pricing adjustments

affecting production of either from Canada• Domestic issues

• Policies deployed domestically may advantage particular technologies or industries

• Questions of comparative advantage versus political expediency may become very important

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Questions for Canada in a low carbon world

• What are Canada’s comparative advantages with respect to low carbon technologies?

• What will the future hold for those resources from which we are accustomed to harvesting rents?

• To what degree should Canadian policy attempt to create quasi-comparative-advantage through fiscal or other policies?

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Comparative advantage – the Commodore 64

• Commodore was initially headquartered in Toronto, having attracted the founder from the US

• Commodore developed from an operation producing calculators to the makers of arguably the most successful computer of all time

• Sales of the Commodore 64 at its peak were higher than current sales of Apple Macs.

• Shortly before the launch of the Commodore 64, Commodore relocated to California

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What is comparative advantage?

• The ability to produce a particular product at a lower (opportunity) cost than others are able to accomplish

• Policy can influence the cost of production, but it is much more difficult for policy to influence the opportunity cost of production

• Examples of policies which reduce the opportunity cost of production exist – research and development into oil sands, for example

• The speed of technological development may make this more difficult

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Research question #1

• Where are Canada’s comparative advantages (in opportunity cost terms) likely to lie with respect to low carbon technology?

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Canada’s Resources in a Low Carbon World

• Even under low carbon policies globally, significant markets will remains for traditional resources for some time• Natural gas markets predicted to be larger than today’s for

decades• Oil markets expected to decline, but in IEA 450ppm

scenario, only by 15%• Coal markets decline significantly• Other resources (potash, uranium, forestry, etc.) will also be

impacted• This creates significant questions for Canada in two areas:

• Optimal domestic policy and engagement in global policy development

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Oil sands under IEA 450ppm Scenario

Source: Author’s calculations

Why are oil sands resilient to IEA 450ppm?

• The key question for domestic resources is not the global reduction or change in quantity, but the world price

• The IEA 450ppm scenario sees oil prices above $100/barrel plus inflation through 2035

• These prices are higher than any price forecast now used to value oil reserves in Canada

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The future of oil15

Research question #2 and #3

• What are reasonable estimates for the trading prices for key commodities currently traded in Canada, and how are these impacted by changes in policies?

• What does this imply for Canada’s engagement in the development of global responses to climate change?

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Resource rents and climate change policy

• The Canadian economy benefits significantly from resource rents and royalties, although these are concentrated in a few provinces

• The rents associated with the low-carbon economy may more associated to artificial scarcity (patents, etc.)

• The rents associated with resources are associated with both physical scarcity and immobility

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Resource Revenue18

Oil sands under IEA 450ppm Scenario

Source: Author’s calculations

Research questions #4, #5, and #6

• To what degree are rents likely to be earned on the technologies in which we possess comparative advantage?

• To what degree are existing Canadian resource rents likely to be annulled or re-distributed to global and domestic policies

• To what degree can Canada influence global policy to maintain resource rents and/or market share in an altered market

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Conclusions

• Canada faces significant questions in the face of an emerging low carbon economy

• The size of the global low carbon economy is not sufficient for assuring Canada’s success within it

• The key issues for Canada are in determining the areas in which we will, and will no longer, have comparative advantage

• The degree to which existing resource rents can be replaced will be crucial for understanding the impacts of the low carbon economy

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Contact Information

• Email: andrew.leach@ualberta.ca

• Twitter @andrew_leach

• Blog: Rescuing the Frog, http://www.andrewleach.ca

• UofA webpage: http://business.ualberta.ca/aleach

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