Canada 'awash in green capital', but lags on green projects: RBC

·3 min read

Canada is "awash in green capital" but falling short on funding projects needed to meet its net-zero goals, according to a report from RBC Economics Research.

Economist Colin Guldimann wants Ottawa to follow European regulators with clear standards for labelling investments green. He also suggests green government subsidies and contracts that provide "certainty on the future carbon price" will boost funding for expensive projects with riskier returns.

Ottawa's carbon tax in provinces without their own emissions reduction plans is set to hit $170 per tonne by 2030. The federal government aims to hit net-zero carbon emissions by 2050, and recently upped its goal from 30 per cent below 2005 emissions levels by 2030, to 40 to 45 per cent below 2005 levels.

RBC projects it could cost Canada $70 billion per year to meet its targets. The bank pegs sustainable investment today at $10 billion annually.

"Despite leadership on carbon pricing, Canada is devoting less effort to sustainable finance than its European peers. As a share of GDP, it funds half as many green projects. [That's] in part because there's less policy clarity from Ottawa," Guldimann wrote in a report on Monday.

"Growing commitments by the U.S. and China will likely start to accelerate their green finance efforts, too, meaning Canada could fall even further behind."

According to RBC, access to capital has "never been easier," evidenced by a tenfold increase in global green bond issuance between 2010 and 2020. The report notes Canadian firms raised $38 billion in green financing in those years.

The problem, according to Guldimann, is that few emissions-reducing projects generate "sizeable near-to-medium term financial returns." And some, he says, struggle to pay off for investors in the long run.

"Building retrofits, among the least controversial of climate actions, can take 20-plus years to reach positive cash flows. That's a problem in attracting investors," Guldimann wrote.

"The projects that do provide nearer-term returns, like renewable power (where returns from selling electricity generated with no fuel costs are beginning to rival or outpace traditional power plants), are already being funded."

According to RBC, 75 per cent of Canada's existing green financing has gone to renewable energy projects.

(RBC Economics)
(RBC Economics)

Other categories of net-zero investments tend to be expensive, and don't generate the same kind of cash flows or returns without government supports like tax credits or carbon pricing, the bank says.

"Financing the broader transitions needed to reduce emissions in upstream oil and gas production and the manufacturing of cement and steel is proving more challenging," Guldimann wrote.

"Canada will need to attract investors with greater risk appetite, and those willing to wait longer to get their initial investment back, to help fund this slice of the transition. It should ensure that rules for green and sustainable finance allow for these projects to be labelled as such, so emissions-intensive sectors can access the capital they need to transition," he added.

"Direct subsidies or contracts that provide certainty on the future carbon price can help generate returns where none exist today."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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