Transcript The Canadian Economy in a Low Carbon World

The Canadian Economy in a Low
Carbon World
Sustainable Prosperity Big Ideas Conference
Ottawa, April 28-29, 2014
Andrew Leach
Enbridge Professor of Energy Policy
Alberta 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 transitions
Source: IPCC 5th Assessment Report, Working Group III
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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 role
Source: IPCC 5th Assessment Report, Working Group III
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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 quasicomparative-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?
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• 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
The future of oil
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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 Revenue
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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: [email protected]
• Twitter @andrew_leach
• Blog: Rescuing the Frog, http://www.andrewleach.ca
• UofA webpage: http://business.ualberta.ca/aleach
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