Energy Crisis to Climate Opportunity: Budget 2022 and Beyond

Since 2020, the world has witnessed a sequence of problems so daunting that fiscal policy now seems like an experiment in chaos theory crisis management. RBC senior vice president and former Globe and Mail editor-in-chief John Stackhouse untangles all the angles of the energy and climate change implications and offers a plan for climate budgeting in 2022 and beyond.

John Stackhouse

Russia’s invasion of Ukraine has disrupted global commodity markets, and sent energy prices to alarmingly high levels that are threatening economic growth and posing a fresh challenge to climate policies. The pandemic recovery is only adding to that burden, with enormous household savings built up over the last two years, a pent-up demand for travel and low unemployment providing an unusual resistance to market forces. Despite higher prices, Canadians are set to drive and fly this spring like seldom before. Even those wanting to shift to low-emissions options such as electric vehicles and heat pumps face supply constraints. 

Despite surging prices, Canada may be headed for a record year for greenhouse gas emissions. To bend that curve, budget planners need to tread carefully, to spare the economy from additional burdens such as new taxes and regulations that could add to inflation and stymie growth. But they also have a potential ally in energy prices, through the gusher of revenues that will likely flow through this year and perhaps beyond. 

Properly harnessed, the emerging energy crisis of 2022 could become a
climate opportunity for 2023 and beyond, if Ottawa approaches these novel times with novel policies for climate and energy. 

Those could include:

1. A tripartite commitment  to carbon capture 

There’s general agreement that carbon capture and storage (CCS) is an important part of Canada’s net zero strategy. In fact, it’s essential. The oil sands alone account for about 10 percent of the country’s carbon emissions, which could be cut in half by 2030 with significant investments in CCS. That can start with a sizeable investment tax credit in the upcoming federal budget. Similar policies in the US have led to a significant expansion of carbon capture projects, which the oil sands and other heavy emitting industries such as cement will need. 

But simply leaving it to private industry may leave Canada short. In record time, we will need to design and construct both a range of carbon capture projects and network of storage infrastructure basins that far exceeds anything previously done, and that will require more than tax credits. 

The budget could help by laying out a vision for a new independent body, controlled by government, industry and Indigenous communities, to finance and oversee the design and execution of CCS projects, with particular focus on financing, permitting and regulation. Such a body could have a direct line into provincial and local bureaucracies to work through approvals, and coordinate financings with pension funds, banks and possibly the Canadian Infrastructure Bank. It also would need private sector leadership and discipline to meet the country’s goals, along with public oversight and accountability. 

In the case of oil and gas, where the biggest CCS efforts will be needed, industry and the province of Alberta may even consider new ways to channel some of the current windfalls of cash flow and royalties into a dedicated CCS fund that could drive a return based on a secure carbon price.

2. Securing the carbon price

Canadians are about to come to grips with the reality of carbon ratchet. The carbon price rises to $40 a tonne this year, $65 a tonne in 2023 and reaches $170 a tonne in 2030. The higher it goes, the more politically perilous it may become. And so many in industry are looking for some kind of government guarantee. Budget 2022 could do that, by announcing a legal mechanism to secure the carbon price at least into the 2030s. This could take the form of a guarantee that would allow future governments to freeze or cut the carbon price but be required to pay industrial emitters who have signed CCS commitments based on the current pricing schedule.

3. Declaring natural gas a transition fuel

The world is divided over natural gas and its role in climate. It can help the easy transition of coal-powered electricity plants to gas-powered ones, often keeping them close to their end users. It can also hurt through the harmful methane released by gas. 

Either way, the world will need more natural gas in the decades ahead to ease off coal while producing a lot more electricity, especially in developing countries. So will Canada. If we’re to double our electricity supply in the coming decades, to power new fleets of EVs, among other changes — we may need more gas-powered generation.  

Europe’s energy crisis — compounded by the invasion of Ukraine — further shows how Canada’s allies may need more Canadian natural gas, too. The budget can send a signal that natural gas is again a national priority, not just to help the energy transition but to export to European and Asian markets that want to avoid Russian gas. That will require more than politically supportive words. It will require Ottawa to get behind new infrastructure projects — pipelines and ports, included — to make Canada a leading gas exporter again.

 4. A North American climate and energy strategy 

The emergence of deglobalization is not just about manufactured goods. As the United States distances itself from China and Russia, and looks with more scrutiny on imports from those and other high-emitting countries, Canada needs to align itself even more closely with Washington. America will need more Canadian oil and gas in the years ahead, regardless of politics and protests. American consumers won’t see it otherwise. 

A supply of cleaner oil and gas, supported by carbon capture and other net zero investments, can help address environmental concerns. At the same time, other Canadian exports — grains, metals and manufactured products, especially — need to be sold as climate-positive to the US. That may require more stringent policies, such as a border carbon adjustment for Canada and the US — effectively climate tariffs to punish producers who rely on free pollution to keep their costs down. 

In the meantime, a joint declaration from the two neighbours and trading partners can set the tone for a new era of blended trade and climate policies that could be to Canada’s advantage.

5. Skills for a net zero economy

Canada has one of the most detailed climate strategies anywhere. We also have an abundance of natural resources and financial capital to put to work. But even with those strengths, we may lack the skills to get the job done.

In a recent report, Green Collar Jobs: The skills revolution Canada needs to reach net zero, RBC estimated more than three million jobs, or 15 percent of the labour force, will undergo some form of disruption in the next decade because of the energy transition. It’s not just oil workers. Farmers and engineers, along with architects and risk analysts, will require entirely new skill sets to maintain their relevance in a low-carbon economy. Many more new jobs will be required, too, to help rewire neighbourhoods and retrofit urban cores. 

Unfortunately, we don’t even know where the green jobs or the green skills are in the country. A climate budget could help, by seeding research centres, along with colleges and universities, to begin to map out the labour force we’ll need to get net emissions to zero, across every sector. Key parts of the federal government, such as Employment and Skills Development Canada, could be further mandated to lead the charge. 

On their own, these measures won’t be enough to solve Canada’s energy and climate challenges. But as we’ve seen already this year, the post-pandemic world is likely to be defined by uncertainty, and a good way to address uncertainty is to invest in what we feel sure about. That can start with a people-led climate strategy that harnesses the resources we need in the 2020s to invest in the technologies we’ll need in the 2030s and beyond.   

John Stackhouse is a Senior Vice President at RBC. He is a former editor-in-chief of The Globe and Mail.