Key Points

  • At the Globe Forum in Vancouver, the Prime Minister unveiled a comprehensive plan for reducing Canada’s emissions on a sector by sector basis.
  • The plan outlined $9.1 billion in new spending aimed at deploying electric vehicles, retrofitting buildings, improving electrical infrastructure and supporting farmers. With more expected in the federal budget on April 7, the challenge will shift from designing new programs, to aligning future policy with emissions goals across government and deploying capital to meet the moment. All this in the midst of a global energy crisis.
  • While light on details, it set an ambitious target to cut oil and gas sector emissions by 42% from 2019 levels.
  • Beyond major funding announcements, the plan includes efforts to develop new technologies and attract investment in emissions-cutting projects. It was quiet, however, on how international emissions credits could help Canada meet interim targets while providing the energy and agricultural products the world needs.
  • The government will explore measures to guarantee future carbon pricing for large emitters, to add certainty to cash flows for major decarbonization projects, attracting both private sector investment and financial sector funding.

  • In its unveiling, Prime Minister Justin Trudeau called the Emissions Reduction Plan the “boldest and most specific step yet” in Canada’s path to Net Zero. The government laid out ambitious sectoral targets and added significant new funding in several areas to drive towards its goal of cutting emissions by 40% by 2030. It aims to achieve half those cuts by 2026, just four short years from now.

    Canada last upped its ambition in December 2020, releasing a plan to cut emissions to 503 Mt. Tuesday’s release added another 64 million tonnes in projected cuts, nearly half from Canada’s carbon-intensive oil and gas sector. Buildings, industry and transportation accounted for the next largest cuts with the balance spread across remaining sectors.

    The government will also explore options to guarantee the future price of carbon, including contracts with industry and legislative means to keep the carbon price on its current path. This measure is targeted at removing uncertainty around the future benefits of investment in abatement, and, if advanced, could be key to unlocking significant demand for major decarbonization projects and the financing structures that will make them possible.

    The plan projects major emissions cuts in oil and gas production, with sector wide emissions falling 42% from 2019 levels. It relies heavily on methane cuts in conventional production, but despite projecting big cuts in oil sands emissions, leaves out critical information on core tools like investment tax credit for carbon capture. The government is expected to release more details on ICT in the federal budget.

    The planned cuts are a call to action for producers, since 2030 oil sands emission are 7 million tonnes lower than those proposed by the industry.

    Notably, the plan also projects Canadian oil producers will raise output by as much as 1 million barrels per day by 2030. It underscores Canada’s challenge of balancing climate-change commitments with a pledge to raise oil and natural gas production to rein in runaway energy inflation.

    In his speech, Trudeau warned Canadian consumers of higher energy prices amid the fallout from Russia’s invasion of Ukraine–a sign that the government is walking a delicate tightrope. With the oil industry expected to be further challenged with a forthcoming cap on emissions, the bill for increasing climate action may yet fall to government in the form of increased support for decarbonization projects. That would be a difficult manoeuvre for Ottawa, given the industry’s high profitability on the back of surging commodity prices.

    Ambitious zero-emission vehicle targets

    Efforts to green Canada’s buildings require a rapid scale up of retrofitting, and command an additional $1 billion in funding. While small, an effort to retrofit buildings at the community level could provide learnings on how to deploy retrofits more effectively. More effort will be needed to alleviate labour supply challenges in construction.

    The plan added interim mandates for zero-emission vehicle sales, requiring 20% of light duty vehicles sold by 2026 to be ZEVs, 60% by 2030, and 100% by 2035. It also added effort on EV chargers, tapping the Canada Infrastructure Bank in a nod to the bigger role crown corporations will play in transition.

    We expect these near-term mandates to be challenging, given supply chain snarls that have affected the auto industry in recent years. The plan also sets sales targets for medium- and heavy-duty vehicles, aiming for 35% of sales to be ZEVs in this segment by 2030. Given the growing role of freight in driving transportation emissions, this is welcome news. But technology in this segment remains nascent, and more effort to develop this market is needed.

    A significant investment will be made in nature-based climate solutions, with $780 million allocated to programs focused on cutting emissions by leveraging Canada’s wetlands, peatlands, and grasslands. Funding announced for agricultural emissions cuts also relies on farmers to harness the power of nature, using cover crops to sequester carbon in Canada’s soils. Agricultural emissions remain roughly constant over the forecasted horizon, highlighting just how difficult this sector will be to green.

    Previous plans have largely been an exercise in funding new programs to accelerate emissions cuts. While those program announcements continue— to the tune of $9.1 billion in additional spending with more coming in next week’s budget—effort will now shift to ensuring all government policy aligns with planned emissions cuts, and fosters innovation and collaboration between various levels of governments and with industry.

    Efforts to develop new technology and fund its deployment will be led by the private sector, with financial support from government. The plan tripled funding for the Agriculture Clean Technology Program and allocated funding for “transformative” research into on-farm sustainability. It committed to developing an innovation hub for low carbon building materials, developing a strategy for carbon capture deployment and will fund a tax credit to do so in the forthcoming budget. It also signalled openness to bioenergy and carbon capture as a technology that can remove historical emissions from the air.

    But this collaborative spirit does not yet extend past our borders. While discussions at COP 26 In November laid out a framework for international emissions trading, the current plan mostly ignores the role it could play. Particularly for Canadian natural gas that facilitates coal phase-outs elsewhere, or for traded goods such as steel and aluminum where major decarbonization investments have begun to take shape domestically. As Canada leads, the potential to offset emissions elsewhere can help reduce the cost of meeting our interim targets.

    Overall, the plan is detailed and comprehensive, provides greater transparency into how the government sees emissions reductions occurring, and in some key ways provides regulatory clarity. While the devil will be in the details of implementation and regulation, the plan represents an important first step, highlighting the large-scale systems change that must be accelerated. But to meet these ambitious targets we’ll still need more: more investment, more financing, more collaboration and more innovation.

    Colin joined RBC in 2019 as an economist. He holds a Bachelor’s degree in Economics from the University of Ottawa, and Master of Arts in Economics from the University of British Columbia. Prior to joining RBC, Colin worked on mortgage, housing, and economic policy at the Department of Finance Canada.

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