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Welcome back. Canada can seem to have an oddly low profile in the energy transition debate considering it’s one of the world’s 10 biggest economies, and the fourth-biggest crude oil producer behind only the US, Saudi Arabia and Russia. During a trip to Toronto last week, I got a window into a national conversation that will have important implications for the global energy picture. And as you’ll read below, I picked an interesting time to visit.
Energy transition
Canadian politicians fan the fire over fossil fuels
The heads of Canada’s big five banks faced an unusually uncomfortable day last Thursday as lawmakers grilled them over their fulsome financial support for the country’s booming oil and gas industry.
The unprecedented parliamentary summons for the bank chief executives reflects the growing political heat around fossil fuels and clean energy in the world’s fourth-biggest crude oil producer.
In last month’s Banking on Climate Chaos report, which assessed fossil fuel financing by major global banks, Royal Bank of Canada, Scotiabank and Toronto-Dominion Bank all ranked among the top 12 by financing commitments in 2023. In terms of fossil fuel financing as a proportion of total assets, four Canadian banks were in the global top 10.
At Thursday’s hearing, the bank heads defended their record. “It’s a complex transition. We are not getting off fossil-based fuels immediately. To just stop is not an option for us,” said David McKay of RBC, the country’s biggest lender.
All of Canada’s biggest five banks signed up to the Net Zero Banking Alliance and have pledged to reduce their financed emissions to net zero by 2050. But a study by the non-profit FinanceMap found that their fossil fuel financing exposure rose between 2020 and 2022, reflecting a wave of new investment by Canada’s oil and gas industry on rising hydrocarbon prices.
Jennifer Livingstone, RBC’s vice-president for climate, told me in Toronto that the bank believed it could do most good by staying engaged with its clients. “If we stepped out of this financing, someone else would step in. That would necessarily happen in this environment,” she said. “These are profitable companies we’re talking about here.”
Livingstone said RBC was stepping up its work on client engagement, and would ultimately consider cutting ties with companies that refused to take action on their emissions.
The bank’s efforts to date have received a sceptical response in some quarters, however. In its latest climate report, RBC said only 2 per cent of its oil and gas exposure was to clients with transition plans aligned with the Paris agreement target of limiting global warming to 1.5C. That undercuts its claim to be making an impact through client engagement, argued Richard Brooks, head of climate finance at the non-profit Stand.earth. “If a teacher had a 2 per cent track record of success with their students, the teacher would be fired,” Brooks said.
Livingstone argued that banks cannot “front-run” government policy, which must drive much of the economy’s progress towards decarbonisation. But in Canada, as in many other countries, that terrain is being increasingly fiercely contested.
The national backdrop
At Canada’s next general election, expected in 2025, Prime Minister Justin Trudeau will face an opposition that has put a rollback of green policies at the centre of its agenda. Canada is one of only a few countries to have introduced a national carbon tax, which is levied on fuel and on heavily emitting industries. Opposition leader Pierre Poilievre has promised to “axe the tax” if elected, claiming that it has contributed to higher living costs at a time of rising inflation.
Rachel Doran, vice-president of policy and strategy at Clean Energy Canada, said there had been a “failure of communications” around the tax. Most of the proceeds are paid out to households, meaning that most Canadians are net beneficiaries from the system. However, many voters are unaware of this, Doran said.
Green investment has also faced challenges at provincial level — notably in oil-rich Alberta, which is blessed with huge potential for solar power, but last year imposed a temporary suspenstion of renewable plant approvals, and then announced new restrictions on solar and wind farms.
The pushback against some green policies has come amid increasingly conspicuous impacts of climate change in Canada, including massive fires last year — Canada’s worst fire season on record — that had dramatic effects on air quality in major cities. “There is a paradox there,” said Jonathan Hausman, head of strategy at the $180bn Ontario Teachers’ Pension Plan (OTPP). “At the same time that the physical evidence of the effects of climate change become more visible, it’s also become a more politicised topic.”
Canada’s giant pension funds, which also include CPP Investments and Caisse de dépôt et placement du Québec (CDPQ), are important figures in the global financial landscape, particularly in private infrastructure assets. OTPP’s green investments range from a renewable energy joint venture with India’s Mahindra Group to Australian carbon and biodiversity credit provider GreenCollar. So far, however, OTPP has not made major green investments in Canada, with the exception of Toronto-based district heating company Enwave.
That reflects a wider concern in Canada about the extent to which it can nurture a new generation of clean tech companies. With the vast US capital markets just across the border, the risk is that innovative companies will head south as soon as they start to gain traction. That risk has grown with President Joe Biden’s Inflation Reduction Act, with its large subsidies and tax incentives for green investment.
Scrambling to respond to the IRA like other major economies, Canada has rolled out tens of billions in funding to be disbursed by various state agencies. And because the IRA favours suppliers from countries with which the US has a trade agreement, some Canadian companies stand to benefit from the green investment surge south of the border, too.
A possible pivot
The appeal of Canada-made goods is likely to grow as customers attach growing importance to products made using clean electricity. Despite its huge fossil fuel production, Canada has a relatively clean grid — notably in Quebec, which has huge hydropower resources.
Even as it works to increase electricity sales to the US, Doran noted, Quebec is now talking up its hopes of attracting green-minded manufacturers. These already include Northvolt, which made its name by producing electric car batteries using Swedish hydroelectric power, and has now announced its first North American plant in Quebec.
With a raft of critical minerals including copper, cobalt and lithium, the prospects for Canada to profit from the energy transition are huge. Meanwhile, because its oil resources tend to be expensive and carbon-intensive to extract, compared with rivals’, they are likely to be among the first to end up as uneconomical “stranded assets” as the energy transition proceeds.
For now, however, Canada’s banks continue to see the fossil fuel industry as a key part of their business, with roughly C$4 lent to that sector for every dollar lent to clean energy businesses. “For the banks’ lending horizon, the risk still looks low,” said Brooks. “Stranded asset risk is not going to really materialise in the next five years.”
Smart read
As the EU moves to slap tariffs on Chinese electric cars, it urgently needs to decide what role it expects Chinese tech to play in the European energy transition, writes Martin Sandbu.