Canada’s Clean Energy Sector Can Help Drive Economic Recovery From COVID-19

The outbreak of Covid-19 and the lockdown measures to slow down the spread of the pandemic have had a significant impact on the Canadian economy. In April, the International Monetary Fund (IMF) published its latest economic update that predicted Canada would face the largest economic recession since the great depression. The Canadian economy is expected to slow down by 6.2% in 2020—worse than the United States, which is projected to see a 5.8% reduction in economic growth. Meanwhile, the IMF also expects the global economy to fall into a recession, with growth declining by 3% this year. The fallout from the Covid-19 crisis has also negatively impacted Canada's financial health and employment figures. The Parliamentary Budget Office (PBO) estimates that the 2020-21 federal deficit will increase to C$252.1 billion, or 12.7% of GDP. Compared with previous federal deficits, the Covid-19 downturn is expected to result in the largest budgetary deficit on record. In May, Statistics Canada reported that the economy lost nearly two million jobs in April, and the unemployment rate soared to 13% compared with 7.8% in March. The government has attempted to support the economy by providing financial assistance to businesses and workers affected by the crisis as a way to help the economy recover quickly and enable critical sectors to resume their normal operations. But, leading experts have warned that the pre-pandemic economy may not return and that future growth would require structural economic changes. 

For Canada, these structural economic changes will have significant implications because the oil and gas sector plays a vital role in the national economy and accounts for 5.6% of nominal GDP. However, given oil's future outlook and negative externalities associated with consuming fossil fuels, the Canadian government needs to structurally steer the economy away from its carbon-intensive energy sector and take the opportunity to push for a green recovery from Covid-19's economic crisis. Even during the economic downturn, we see the resilience of the clean energy sector compared with other energy sources. The International Energy Agency (IEA)'s World Energy Investment 2020 report highlighted that renewables would be the only energy source likely to experience demand growth for the rest of 2020. Alongside this, in the United States, the Energy Information Administration (EIA) expects renewables to surpass coal's share of power generation for the first time this year.

In May, the European Union announced a robust green recovery package as a central component to its growth strategy that leverages private sector investments to scale development and create jobs in clean energy. Canada needs to follow suit and introduce similar measures because the clean energy sector's contribution to GDP is expected to grow to 3.4% per year over the next decade—nearly four times faster than the national average. To capitalise on the growth opportunities and limit the exposure to the volatility in the energy industry, the government needs to align on the following three policies to generate funds, accelerate investment and develop a globally competitive workforce in the clean energy sector. By doing so, the government would not only create highly skilled jobs but also fast-track the transition toward a low-carbon economy.

1) Increase carbon pricing to build funds for clean energy solutions

As mentioned above, the Covid-19 crisis has a significant impact on Canada's financial health. We know the federal deficit will be the highest on record, but even at the provincial level, every province will see a material deterioration in its fiscal position with combined deficits surging more than six-fold this year to almost C$63 billion. For provinces that depend on oil royalties, namely, Newfoundland and Labrador as well as Alberta and Saskatchewan, RBC Research projects a decrease of at least 40% due to the plunge in oil prices. At the municipal level, cities are also facing significant financial constraints as their primary revenue stream from property taxes and service fees have dried up. As the Canadian economy slowly looks to restart operations, leading experts have mentioned that the current situation is tailor-made for investment in climate-friendly infrastructure and solutions that boost growth and create new jobs. To finance these investments in the present scenario, the government should increase the national minimum carbon price from C$20 (US$14) to US$40-80/ton this year and US$50-100/ton by 2030, as per the recommendations from the World Bank and the International Monetary Fund.

The proceeds would not only generate much-needed revenue for the deficit-heavy government but also create an efficient way for consumers and firms to cut their emissions and support growth in the economy. Canada's key trading partners have already started to leverage carbon-pricing schemes. Europe's new green deal plans to expand its carbon-pricing system, and South Korea is looking to put a price on carbon as well. The upcoming election in the United States could also lead the way for the adaptation of a carbon-pricing system in the region, as Joe Biden, the presumptive nominee for the Democratic Party, has backed a price on carbon, either through a tax or a cap-and-trade program. Given the trend toward eco-friendly solutions and green policies recommended by leading economists to boost economic growth and stop climate change, Canada needs to increase its carbon price to support investments in clean energy.

2) Accelerate investment in clean energy solutions to create jobs 

In a recent article, The Economist highlighted that to drive structural changes, carbon pricing is only part of the solution; it needs to be backed up with complementary policies at all levels of government. In Canada, the oil and gas sector accounts for 26% of total emissions and receives C$2.8 billion per year in federal and provincial subsidies. The IEA has suggested that the recent drop in oil prices creates a great opportunity to lower or remove subsidies for fossil fuel consumption. Both the federal and provincial governments should take up this suggestion and fast-track the phasing out of inefficient fossil fuel consumption subsidies in the country. The money saved from these subsidies would be better used, along with the revenue from carbon pricing, to scale up production and infrastructure for electric vehicles (EVs), increase electricity supplied by renewables and implement robust energy efficiency measures. The government's support for these initiatives would also help create long-term jobs and attract additional capital from the private sector for investment in clean energy. 

Research and study have backed up the strong potential for growth opportunities in clean energy. In April, the Pembina Institute and the International Council on Clean Transportation found that Canada, with its established history of automaking, is well-positioned to lead in EV production and create jobs. The report does, however, recommend that the government should provide policy support in helping fuel both the supply and demand of EVs in the country. The report further suggested more support for EV manufacturing and attracting investments to build up supply chain networks and charging infrastructure. In addition, the government should look into the implementation of a national zero-emission vehicle (ZEV) mandate and subsidy program to further grow the industry. Based on a study from Navius Research, a national ZEV policy could help the ZEV economy reach C$152 billion GDP by 2040, up from C$43 billion under the current system. The study also found that ZEV-related jobs could reach 1.1 million by 2040, up from 342,000 when compared with the current policy. 

Similarly, the potential for job growth in the electricity sector from renewable energy is also promising, according to Robert Hornung, the founding president & CEO of the new Canadian Renewable Energy Association. In a recent interview, he mentioned that both wind and solar are significant job creators, and investment in the sector can create a lot of jobs in Canada. Mr Hornung went on to add that Canada is also well positioned to make the transition to a 100% renewable electricity grid. However, he highlighted that policy intervention will be needed from both the federal and provincial governments to restructure electricity markets and allow renewable technologies to compete on a fair basis with existing energy sources. On energy efficiency, the IEA recently highlighted the job creation potential of implementing more robust energy efficiency measures in the buildings sector as a way to boost employment in key labour-intensive industries. Their analysis found that 60% of expenditure on home energy efficiency retrofits goes toward labour which helps deliver strong employment growth and generate significant economic benefits. In Canada, the impact of energy efficiency is also projected to have a substantial impact on Canada's GDP and employment levels. Back in 2018, a joint study by Efficiency Canada and Clean Energy Canada found that by adopting measures laid out in the Pan-Canadian Framework, the energy efficiency sector would create 118,000 annual jobs and boost the GDP by 1% between 2017 and 2030.

3) Build a globally competitive workforce for the clean energy industry

In 2019, Clean Energy Canada published a report that projected strong growth and jobs for the industry over the next ten years. The report stated that clean energy jobs are expected to grow from 398,000 in 2020 to 559,400 in 2030. The jobs growth will create valuable, highly skilled and knowledge-based employment opportunities across the country. A large portion of these clean energy jobs will require skills upgrading and training. For this reason, the government will need to collaborate with the private sector to facilitate the upgrading of skills and transitioning of workers from existing sectors to clean energy jobs. This process will likely involve developing a holistic reskilling and learning program by partnering with education and training institutions. The OECD has also mentioned that training programs will play an essential part in filling gaps between workers' existing competencies and the skill requirements of newly created jobs in emerging sectors. By building out these training programs over the next ten years, the Canadian government will be able to facilitate the expansion of the clean energy sector and ensure that a lack of skilled workers does not become a drag on the economy. In the medium and long run, the development of a highly-skilled clean energy workforce will further boost Canada's economy by enabling products and services to be sold in global markets. Canada has a well-established trading relationship with some of the largest economies in the world, such as the United States and the European Union. As these partner countries also transition to a low-carbon economy, Canada needs to position itself as a leading centre for clean energy so that the industry will not only develop value-added products but also take a higher market share of this sector in the global economy. Therefore, the government needs to look at this economic crisis as an opportunity to scale the clean energy industry and drive a sustainable economic recovery in Canada.