We’re hearing a lot about uncertainty. Looming elections in the US, EU and Canada, coupled with the precarious nature of the current economic environment, have cast a pall on the future direction of climate action. However, there are some developments that provide certainty in Canada in the near term, including the federal budget announced on Tuesday as well as other longer-term trends. In this blog we demonstrate why taking a wait-and-see approach on climate action might not be in your best interests and provide tips on navigating climate strategy in the current political landscape.
The federal budget provides some certainty around federal environmental priorities for 2024-2025, including:
- Delivering clean economy investment tax credits
- $93 billion has been allocated to implement a suite of clean technology and clean energy Investment Tax Credits (ITCs).
- The budget reaffirms the commitment to deliver the following five ITCs (which were announced in the 2023 budget) by the end of 2024: Carbon Capture, Utilization, and Storage; Clean Technology; Clean Hydrogen; Clean Technology Manufacturing; and Clean Electricity.
- A new 10% Electric Vehicle Supply Chain ITC was announced. Eligible investments include building costs in a number of supply chain segments: electric vehicle assembly, electric vehicle battery production, and cathode active material production.
- Proposed details on the 15% Clean Electricity ITC were released, including design, eligibility, and labour requirements. For provincial and territorial crown corporations to access the Clean Electricity ITC, specific conditions must be met. These include a public commitment by the province or territory to work towards a net-zero grid by 2035.
- Advancing measures to provide carbon pricing certainty
- The Canada Growth Fund will develop an expanded range of Carbon Contracts for Difference (CCFD). CCFDs are contracts between the government and businesses that require compensation from the federal government if the carbon price or carbon credit prices don’t reach specified levels. CCFDs provide certainty to businesses and de-risk investments to reduce emissions. With a $6 billion remaining budget, the Canada Growth Fund will issue CCFDs tailored to the different carbon credit markets within Canada (i.e. the TIER market), prioritizing provinces that are delivering significant greenhouse gas (GHG) reductions.
- The Canada Growth Fund will also consider a broadened approach that could include off-the-shelf contracts in certain jurisdictions.
- Environment and Climate Change Canada (ECCC) will work with provinces and territories to improve the functioning of carbon credit markets and ensure the marginal carbon pricing signal (that is, the cost that applies to covered emissions under large emitter pricing systems — such as the federal Output-based Pricing System or Ontario’s Emissions Performance Standard program — is maintained). This could entail making large-emitter systems more stringent and increasing transparency in the markets.
- Expanding biofuel production, specifically renewable diesel, sustainable aviation fuel and renewable natural gas
- Up to $500 million annually from Clean Fuel Regulation compliance payment revenue will be reinvested in supporting biofuel production. Additional details will be released in the Fall Economic Statement.
- The Clean Fuels Fund has been extended out to 2030 and a call for project proposals will be issued later this year.
- $500 million has been allocated to the Canada Infrastructure Bank to invest in biofuels production.
- Supporting small- and medium-sized businesses
- $2.5 billion in carbon-pricing proceeds will be returned to approximately 600,000 small- and medium-sized businesses under the new Canada Carbon Rebate for Small Businesses.
- Direct payments will be issued to businesses with less than 500 employees operating in jurisdictions where the federal fuel charge applies, proportional to the number of employees.
While it was hoped that Budget 2024 would advance efforts to mobilize climate-aligned finance through a net-zero taxonomy, an announcement on this has been deferred to later in the year.
Four Key Takeaways for Business
The next federal election is currently scheduled for October 2025 and a change in government would undoubtedly bring about a change in priorities. However, there are some areas where we anticipate continued momentum regardless of who forms government:
- Net zero continues to accelerate
Canada’s economy does not exist in isolation. Pressure to decarbonize supply chains is coming from within and outside of Canada. Globally, 88% of emissions and 92% of GDP are already covered by net-zero targets[1] and a change in government won’t remove public and supply chain pressure to maintain progress on corporate targets. To remain competitive and secure their place in the net-zero future, businesses need to keep up with the global transition.
- Some form of industrial carbon pricing is here to stay
Political debate around Canada’s carbon tax has heated up substantially. Requests for exemptions, demands for a pause on the April 1 increase, and calls to cancel the tax entirely (including through a failed non-confidence motion) have brought carbon pricing to the political battlefront in new ways. While the campaign against the consumer carbon tax will wage on, we anticipate industrial output-based pricing systems will quietly and effectively continue.The policy has a long history in various provinces, a track record of success, and has been praised across political parties.[2] Recent analysis by the Canadian Climate Institute indicates that market-based industrial policies are having the greatest impact on emission reductions and will be the largest driver of progress between now and 2030, contributing between 20-48% of total reductions[3]. As Canada’s key trading partners, including the EU and US, implement carbon border adjustment measures and apply tariffs to embedded emissions of imported goods, industrial carbon pricing can protect the competitiveness of Canadian businesses. Pricing emissions domestically keeps this revenue in Canada where funds are potentially accessible for reinvestment through return of proceeds programs.
- Mandatory disclosures are happening, and companies must demonstrate real progress
The reporting landscape continues to move towards greater transparency and standardization of sustainability and climate-related information through regulation to make disclosures mandatory. Last month, the Canadian Sustainability Standards Board (CSSB) released proposed Canadian Sustainability Disclosure Standards (CSDS) to establish a benchmark for sustainability reporting in Canada. The Canadian Securities Administrators will utilize feedback from the consultations to inform their proposed rule for mandatory disclosures set for release later this year.The Office of the Superintendent of Financial Institutions (OSFI) also recently updated its B-15 Guideline to align disclosures from federally regulated financial institutions (FRFIs) with international standards[4]. Our recently published Guide to North American and International ESG and Climate Disclosure Programs details the significant advancements in the disclosure landscape over the past year.
- Pressure from investors and other stakeholders remains
Blackrock CEO Larry Fink’s highly influential annual letter may have pulled back on the use of terms such as “ESG,” but climate change and energy transition are still a key part of his narrative. Fink calls energy transition a “mega force” and a “major economic trend being driven by nations representing over 90% of the world’s GDP.”[5] Highlighting the necessity for a fair and affordable transition, he suggests that the power of capital markets can be unleashed to contribute to these goals by directing private investments into innovations and technologies to help reduce costs, scale up deployment, and help countries decarbonize. Companies not addressing decarbonization are at risk of losing market share to those that are.Meanwhile, the European Court of Human Rights has sided with a group of citizens that accused the Swiss government of violating human rights by failing to sufficiently address climate change[6]. This landmark victory will set a precedent for climate-related litigation and the legal duty to mitigate climate change.
How Businesses Can Prepare for the Future
While we are facing potential political shifts, many drivers for climate action remain. There are a number of business-critical measures that companies can act on with full confidence that they will yield benefits:
- Undertake scenario analysis: Scenario analysis can be a useful tool to understand potential business impacts under different climate policy possibilities. By illustrating costs and paybacks in different political pathways, you can stress test projects or evaluate how your strategy might change under different political scenarios. Scenario analysis can also help you understand the extent of uncertainty and potential range of impact on investments.
- Refine your climate-action inventory: This is a good time to refine your climate-mitigation project list to ensure you have a comprehensive, consolidated inventory of potential emissions reduction and cleantech project opportunities. Conduct your opportunity identification workshops, refine your cost estimates, and complete economic assessments so that you understand which ones are highly dependent on climate policy to be cost-effective. Develop a prioritization framework so that you know how you will sequence your projects.
- Progress low-risk, high-return initiatives: One approach to rebalancing your project portfolio is to prioritize projects that are economic regardless of carbon pricing or other policies. Many initiatives, especially energy efficiency initiatives, are likely to be cost-effective and have other co-benefits. For instance, reducing energy consumption will help protect operating costs from future energy price fluctuations.
- Double down on disclosure: Ensure your climate and sustainability programs are ready for CSDS/other relevant standards. Double check your boundaries, think about data collection and business process, and build relationships with key internal data providers. Understanding these elements now will empower your team to tackle whatever additional investments the evolving landscape demands of you.
- Progress climate adaptation planning: With climate impacts accelerating, climate risk assessment and climate adaptation work is a no-regret endeavour. It is vital to have a climate risk and vulnerability assessment that is in line with the latest climate science and scenarios. With an up-to-date vulnerability assessment, you can start to think about how to build resiliency into your business plans, operations, and supply chains.
Even as we face political and economic uncertainty, climate change is not pausing and global momentum to address it is not slowing down. Businesses that delay risk missing out on key opportunities. We’ve outlined some no-risk activities in this blog, and if you’re interested in more insights, join us for our complimentary webinar on April 30th.
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Melissa Harris is the Senior Director of Policy and Laura Robertson is a Senior Consultant at Delphi. Interested in more information on how your organization can reach its corporate sustainability, net-zero, and ESG goals? Contact Melissa at mharris@delphi.ca or Laura at lrobertson@delphi.ca.
[1] https://zerotracker.net/
[2] https://www.nationalobserver.com/2024/04/11/news/poilievre-ducks-industrial-carbon-price-question#:~:text=Poilievre%20said%20Alberta’s%20TIER%20program,most%20advanced%20in%20the%20world.%E2%80%9D
[3] https://440megatonnes.ca/insight/industrial-carbon-pricing-systems-driver-emissions-reductions/
[4] https://www.osfi-bsif.gc.ca/en/news/osfi-continues-building-climate-resilience
[5] https://www.blackrock.com/corporate/investor-relations/larry-fink-annual-chairmans-letter
[6] https://www.reuters.com/sustainability/climate-activists-seek-breakthrough-human-rights-court-ruling-against-european-2024-04-09/
