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Net zero: scrambling for solutions in a $275 trillion challenge

Natural gas, nuclear power suddenly green as Europe - and much of the world – struggles with an energy shortage
Canada is one of 197 countries with delegates at COP27 in Egypt. | Climate Finance Access Network

For a second year, world leaders have convened to discuss the global energy transition in a luxury resort while in the  midst of an energy crisis – one that has already set back progress on lowering global greenhouse gas emissions.

Global GHGs spiked 6 per cent in 2021 to 36.3 billion tonnes -- the highest ever, according to the International Energy Agency (IEA) – thanks to countries in Asia and Europe being forced to burn more coal to keep the lights on.

If there is a lesson for Canada to learn from Europe, it’s that an energy transition that doesn’t account for energy security poses serious political risks that could derail public support for decarbonisation efforts.

“Even under a relatively gradual transition, if the ramp-down of high-emissions activities is not carefully managed in parallel with the ramp-up of low-emissions ones, supply may not be able to scale up sufficiently, making shortages and price increases or volatility a feature,” warns a recent McKinsey and Co. report costing the energy transition.

“Much therefore depends on how the transition is managed.”

World leaders, environmentalists, bureaucrats and assorted special interest groups from every corner of the globe are either in or on their way to Egypt this week for COP27. The November 6 to 18 Conference of Parties (COP) is a chance for world leaders to talk about cooperating on climate change issues.

Canadian Environment Minister Steven Guilbeault, who is at the conference, will no doubt be recapping Canada’s latest commitments.

Earlier this year, the Trudeau government released its 2030 Emissions Reduction Plan, which aims for a 40 per cent reduction below 2005 levels by 2030 and which includes $9.1 billion in funding commitments.

The Canadian government recently announced a $1 billion commitment to build a small modular reactor in Ontario, and in last week’s fall fiscal update, Finance Minister Chrystia Freeland announced a new Clean Technology Investment Tax Credit.

That credit will cover up to 30 per cent of the capital cost of investments in things like heat pumps, renewable energy and storage, electric or hydrogen fuel cell vehicles for "non-road use" and small modular nuclear reactors.

But whether Canada can compete for private investment against the new Inflation Reduction Act in the U.S. is now subject to some discussion.

The U.S. has been a laggard on climate change policies, but the new Inflation Reduction Act attempts to make up for lost time with US$369 billion in spending and incentives aimed at decarbonisation.

The estimated cost of transitioning the world off of fossil fuels is staggering.

In January, McKinsey estimated the cost, globally, to reach net zero commitments by 2050 to be $275 trillion -- $9.2 trillion a year for 30 years. That’s the cost of capital spending on “physical assets for energy and land-use systems.”

For Canada, the price tag is $2 trillion -- $67 billion a year for 30 years – according to an RBC Economics analysis last year.

“While these spending requirements are large and financing has yet to be established, many investments have positive return profiles… and should not be seen as merely costs,” the report notes.

While the energy transition required to meet net zero by 2050 would result in a loss of an estimated 185 million jobs, for example, 200 million jobs would be created, for a net gain of 15 million jobs, the report estimates.

Globally, the cost of electricity would be 25 per cent higher between 2020 and 2040 than it is today, and 20 per cent higher again in 2050.

Since governments can’t possibly finance the trillions of investments needed, attracting investment from the private sector will be critical to meeting decarbonisation goals, and countries can be expected to compete for those dollars.

For Western Canada, one of the most important pathways for making deep cuts to GHGs will be large-scale carbon capture and storage (CCS), which is not cheap.

In addition to a steadily rising carbon tax, the Trudeau government has offered a new investment tax credit to encourage oil and gas companies to invest in CCS.

The CEO of Carbon Engineering recently told BIV News that he expects most of the contracts his company will land for direct air capture projects will be in the U.S., thanks to new incentives there.

The Inflation Reduction Act raised the 45Q tax credit for investments in direct air capture from US$50 per tonne to US$180 per tonne.

“When the (Canadian) investment tax credit was put out in the spring in the federal budget, we actually stacked up reasonably well vis-à-vis the 45Q in the U.S.,” said Kendall Dilly, president of the Pathways Alliance, which represents six of the largest oil sands producers in Canada.

“But then with the Inflation Reduction Act coming in, it effectively doubled or more their incentives.”

Oil and gas producers in Alberta have committed $24 billion towards decarbonisation, Dilly said, but getting investments sanctioned requires the right investment climate.

“As it currently stands, there is a material gap,” Dilly said. “And we do worry that if it’s not fixed, then the investment dollars will flow into the U.S. preferentially, rather than Canada.”

One group from B.C. attending this year's COP conference are members of the First Nations Climate Initiative. The group will be highlighting the role First Nations can play in clean energy development, including natural gas exports in the form of LNG. The Haisla and Nisga’a are both involved in developing new liquefied natural gas projects in B.C.

Until just this year, natural gas and LNG were not considered by the European Union to be sustainable clean energy, which meant ESG-constrained investors could not include them in “green” funds.

But with Europe now in the grips of a devastating energy crisis, European leaders have reconsidered both natural gas and nuclear power.

Earlier this year, the European Parliament voted to classify both natural gas and nuclear power as “green” and sustainable in their taxonomy, which defines what is green and clean and what isn’t for pension fund managers and other asset managers that have sustainable investment portfolios.

One of the concerns sure to be discussed at COP27 is whether the energy crisis gripping Europe will result in policymakers pulling back on their respective attempts to reduce their fossil fuel use.

“A key question for policy makers, and for this Outlook, is whether the crisis will be a setback for clean energy transitions or will catalyse faster action,” the IEA says in its recent World Energy Outlook.