Wednesday, June 29, 2016

The Three Amigos and the Next Phase in Clean Energy and Innovation Policy

At today's 'three amigos summit' North America's leaders announced an ongoing partnership in addressing climate, clean energy and environment. In many ways this is welcome news, marking a unique moment in North America's history in which the leaders are leveraging their mutual concerns for continental integration and climate change in order to embark on a 'new era' of clean energy development. At the same time, this partnership must be understood as just the beginning of a broader political economic transformation upon which we must embark if we are going to have any hope of meaningfully confronting climate change. In the spirit of today's announcement here are three questions which might help us think about this new era in clean energy and innovation policy:

1) Why do we need to embark on 'new era' of clean energy?
The short answer is climate change. A longer answer is that North Americans (and in particular Canadians and Americans) are disproportionately contributing to the problem of climate change and therefore we have a greater responsibility to help with its mitigation. The World Resources Institute notes that Canada, the U.S. and Mexico are all amongst the top ten per capita emitters of GHGs in the world (when land use change and forestry is included), with Canadians holding the distinction of being the worst per capita emitters. Historically Canada has contributed about 2% of global GHG emissions, and yet its population is equivalent to less than 0.5% of the world's population. Since 1990, the three North American nations have contributed nearly one third of the entire world's GHGs.

Add to this the pledge that G7 leaders made last year to completely phase out fossil fuel use by the end of this century, and another pledge that G20 leaders made in 2009 to phase out subsidies to the fossil fuel sector. Decarbonizing the global economy is a gargantuan task and if we hope to truly accomplish this within the next 8 decades we need to take steps now.

2) What are the 'signposts' of the new era?
For one, in Canada a key signpost of the new era is a demonstrated political commitment to addressing climate change. This includes the creation of a new governmental approach to climate change, including express participation at the Paris Climate talks last year, a new high profile Cabinet position with an enhanced climate portfolio, and renewed dialogue between the federal and provincial governments.

A second signpost involves the recent 'Memorandum of Understanding Concerning Climate Change and Energy Collaboration' signed in February of this year between all three North American partners, aiming to enhance energy information sharing and building new markets for clean energy and low carbon innovations (a sort of precursor to today's agreement which has been dubbed 'green NAFTA').

A third signpost involves the shift in thinking about the centrality of Alberta's oil sands to North American energy security. This is driven by a number of factors, including renewed emphasis on US shale operations, the US decision to reject Keystone XL, and the declining price of oil, but also the emerging acceptance of a growing scientific consensus about the need to curtail oil sands growth, as evidenced by a recent call for a moratorium on oil sands growth signed by 100 leading scientists in the US and Canada. The idea of 'leaving oil in the ground' is no longer the heretical notion it was in the recent past.

A related signpost involves changes to the supply, demand and price of both oil and renewables. Not only has the price of oil faced a dramatic downturn since its record highs only a few years ago, but as the Wall Street Journal has noted, the price of oil has become increasingly volatile, with the price swings much larger that in previous years. At the same time, the cost of producing electricity with both solar and wind has decreased dramatically in just the last five years (with a 58% decrease in levelized cost for wind over that time, and 78% decrease for solar), meaning not only that these technologies are more affordable, but also that the profit margins for solar and wind investment are greater than ever. These factors combined signal to investors that renewables are a better bet than fossil fuels.
Source: Lazard, 2015.

Along these lines, the overall trend of investment in clean energy (including wind, solar, hydro, biomass and biogas) has been tremendous, with Clean Energy Canada reporting that over the last five years spending on clean energy has totalled $45 billion.

3) What are some of the key challenges facing this transformation?
Despite impressive momentum behind North America's clean energy transition a number of challenges remain. Among them is the politics of defining clean energy in the first place! The case for solar and wind might be a slam dunk, but all forms of energy have their 'dirty' sides, and various jurisdictions naturally want to make the most of the resources available to them. For instance, in British Columbia there is a major push to brand Liquified Natural Gas as 'clean', when others note it is merely a slightly less polluting fossil fuel. Then there is nuclear energy, which has been embraced by various environmental groups (moreso in the US), and which is specifically mentioned within today's agreement, and all of the difficult politics surrounding whether or not atomic energy should be part of the climate change solution. Large hydro is not off the hook here either - since it too presents environmental challenges relating to flooding, and alterations to watersheds and wildlife habitats.

Another challenge involves a lack of consensus about what are the best economic tools to promote clean energy markets and innovation in the context of climate change. Is the answer to shift the tremendous value of subsidies from polluting industries to clean ones? If so, how does this occur in a fair and equitable way without political interference and corruption? Does part of the answer lie in taxing carbon (as British Columbia and Alberta have done), or setting up a 'cap and trade' system (as Quebec and Ontario have done)? The good news is that there are plenty of ideas out there on using economic policy to transition to a green economy; the bad news is not everyone agrees on which of those ideas is best!

A third major challenge facing the clean energy transformation is that thus far the overwhelming focus of the effort has been on 'greening the electrical grid', without the commensurate attention that needs to take place on electrifying those sectors which currently are primarily running on fossil fuels (and hence won't benefit at all from a low carbon grid). Another way of thinking about this problem is this: Even if we were to completely green Canada's electricity grid overnight, GHG emissions would only drop by 12%. This is because a number of big emitting sectors like agriculture, transportation, oil and gas, and the so-called 'emissions-intensive and trade-exposed industries', are dominated by technologies which are not powered by electricity. This all suggests that in addition to the revolution required within the way we produce electricity, we additionally need a revolution in the technologies we use across all sectors (which in turn signals major innovation required in electrical power storage and technologies like electric vehicles and construction and mining equipment). This is only tacitly mentioned in today's partnership.

To sum it all up, today's partnership is a step in the right direction, since the three amigos do need to embark on a new era of clean energy development in order to reverse the bad habits of the past and to help the world achieve its international climate change commitments. This ‘new era’ emphasizes eventual decarbonization through encouraging innovation, investment and international cooperation on developing low carbon energy and green technologies. But challenges remain, including the very problem of defining ‘clean energy’, inter-jurisdictional policy coherence, pricing carbon and encouraging innovation, and revolutionizing the way we use energy (not just how we make it).

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