Public Investment in Low-Carbon Technologies and ...



|DISCUSSION PAPER |

|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 describing operating assumptions and principles needed to inform decisions about how to effectively allocate public resources in facilitating this transition.

The paper is divided into three sections:

1. 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.

2. Operating Assumptions: describes a series of key operating assumptions related to the investment challenge associated with moving towards a low-carbon energy system, both globally and in Canada.

3. Principles: describes a set of potential guiding principles that policymakers should use when 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.

1. 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.

2. 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]

3. 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 themes globally. 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

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Source: HSBC A Climate for Recovery, 2009

Figure 2

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Source: HSBC A Climate for Recovery, 2009

Table 1 Green Economic Stimulus Spending by Technology and Country

| |Canada |UK |Germany |Australia |China |US |

| |$ |% |$ |

|Direct Procurement |Public Building Retrofits |Renewable Energy Standards |Government commitments to |

| |LEED Gold or higher standards in|(RES’s) |procure new clean energy |

| |new public buildings |Renewable Portfolio Standards |technologies. |

| |New public transit |(RPS’s) | |

| |infrastructure |Feed-in-tariffs | |

|Tax Expenditures |Tax Credits for Home Retrofits |Production Tax Credits for |SR&ED Tax Credits |

| |Accelerated Capital Cost |renewable generation, biofuel | |

| |Allowances |production, etc. | |

| |‘Cash-for-Clunkers’ rebates | | |

|Financing Support |Loan Guarantees for Low-Carbon |Public finance support for new |Public Fund of Funds for VC |

| |Infrastructure Projects |renewable projects. |focused on clean energy |

| | | |technologies. |

|R&D Funding |R&D funding for energy efficient|R&D funding for renewable |R&D funding for novel |

| |building technologies, |electricity generation |technologies in all areas, |

| |transportation systems and |technologies, biofuels and |ranging from CCS, air capture of|

| |technologies, community energy |bioenergy, hydrogen fuel cells, |GHGs, etc. to social science |

| |systems, smart grids, etc. |etc. |research on behavioural change |

| | | |and energy conservation. |

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[1] See The Low Carbon Investment Gap, Sustainable Prosperity Discussion Document, December 2009.

[2] The Conference Board of Canada has published several reports on this subject, including How Canada Performs 2008: A Report Card on Canada, September 2008; and Canada’s Pathway towards Global Innovation Success, October 2008.

[3] E3G, Policy Brief: Low Carbon Competitiveness, 2009

[4] Ernst and Young, Renewable Energy Country Attractiveness Indices, May 2009

[5] HSBC, A Climate for Recovery, February 2009

[6] For example, the National Advisory Panel on Sustainable Energy Science and Technology (2006) identified the following priorities in research and development: bioenergy, gasification, carbon capture and storage, electricity transmission, distribution and storage, and fuel cells.

[7] The case for this is explained in a Special Report by TD Economics - A New Normal: Canada’s Potential Growth During Recovery and Beyond. November 10, 2009. A section in that report on carbon pricing concludes that “one may well conjecture that carbon pricing will have a positive longer-run impact on innovation and the efficiency of production with respect to energy inputs” (p. 11).

[8] The International Energy Agency, in the World Energy Outlook 2009, estimates that every year without a global price on carbon adds US$500 billion to the global cost of climate mitigation.

[9] IEA estimates global investment required between now and 2050 at US$45 trillion, equal to 1.1% of average annual GDP over the period.

[10] Both the Waxman-Markey and proposed Kerry-Boxer legislation in the U.S. Congress, for example, stipulate the allocation of auction revenue resources to clean technology and deficit reduction.

[11] Sustainable Prosperity will be examining the institutional component of this issue in future research.

[12] An example of a policy motivated by this principle is Renewable Portfolio Standards, which potentially apply to all modes of renewable power generation, as opposed to subsidies specific to a particular type of renewable (e.g. wind power).

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Using carbon pricing revenue for other fiscal purposes, aside from investment in low carbon technologies or infrastructure, is a rational economic choice.

Proposals vary as to what should be done with revenues from carbon pricing. Offsetting these revenues with personal income or corporate tax cuts is a viable option. In addition, ‘doing nothing’ and using revenues to improve the overall fiscal position of the government and pay down public debt is also a viable option – particularly given current projections of persistent federal deficits. There are also risks associated with investing in emerging technologies. Some of these technologies may not be viable or may be developed more successfully in other jurisdictions. Therefore, there are real, substantive reasons why governments should consider directing carbon pricing revenues to other areas. Most carbon pricing policies, however, such as those currently being debated in the U.S. Congress for an American national cap-and-trade system, propose recycling some, if not all, of revenue raised into additional, targeted investments in clean energy technologies and more energy-efficient capital stock. More fundamentally, of course, the existence of carbon pricing creates – at least in theory – the necessary incentive for private investment in these technologies and infrastructure.

But for reasons explored in this document, some degree of public investment in low carbon technologies or infrastructure is in Sustainable Prosperity’s estimation necessary.

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