Canada at COP 26: Who Was Doing What?

Canada participated at the Twenty-Sixth Conference of the Parties (COP26) to the United Nations Framework Convention on Climate Change (UNFCCC) which concluded this last Saturday, 13 November 2021. Starting in 1995 as the highest decision-making body to oversee the continued development and implementation of the UNFCCC agreed in 1992, the COP holds every year to take stock of the annual and cumulative progress made to solve the problem of global climate change. There were several delegates from Canada at COP26, including the Government of Canada representatives and observers from non-state organizations in the country. The most notable people in the blue zone, where the official negotiations took place, were the Prime Minister, Mr. Justin Trudeau, and the new Minister of Environment and Climate Change, Mr. Steven Guilbeault. I was one of the observers from UBC, alongside seven other experts.

Besides sharing my knowledge about Canada’s climate governance, especially across the side events, social movements, and with press outfits such as CBC and Global News, in pursuit of my key objectives for attending COP26, I also paid close attention to new developments that would impact Canada’s businesses, investors, and fiduciaries. There were several developments across numerous plenaries, panels, side events, consultations, and social movements, making it impossible for any delegate to attend all important activities or be exhaustive in reflections. Nonetheless, I draw on the announcements made by the Canadian government representatives, especially the Prime Minister and the Minister of Environment and Climate Change, to highlight three key climate-related business and financial risks and opportunities that COP26 points us to: increasing transition risks and opportunities; emerging climate stress-testing risks; and new foreign investment opportunities.

Transition Policies Increasingly Create Risks and Opportunities at Home

Canadian businesses and investors face acute and chronic physical climate-related risks. Mr. Trudeau started his plenary remarks at COP26 with the powerful example of physical risks in Canada: heat waves and fire that destroyed Lytton in British Columbia. Besides heat waves, several other physical risks are undermining Canada’s natural and built environment, with implications for real estate, mining, tourism, forestry, fisheries and several other industries. Consider the acute risks of wildfires, droughts and floods already ravaging some Canadian communities, and chronic risks such as rising temperature, rising sea levels, and ocean acidification, which have long-term impacts that we may not yet know. However, since these physical risks are relatively more obvious or at least predictable, I focus more on the transition risks that businesses and investors might not be paying much attention to. COP26 provides hints for really thinking about those risks.

Mr. Trudeau announced that Canada was the first major oil-producing country moving to cap and reduce emissions from the oil and gas sector. Canada’s oil and gas sector is huge. It has produced significant royalties for governments, and has enjoyed abundant subsidies and other forms of support from the government. The essence of the Prime Minister’s announced decision is to ensure that we get to net-zero by 2050. Canada’s definition of net-zero is already backed by law under section 2 of the Canadian Net-Zero Accountability Act 2021, which defines it as when “anthropogenic emissions of greenhouse gases into the atmosphere are balanced by anthropogenic removals of greenhouse gases from the atmosphere over a specified period.” Section 6 of this same law tells us that Canada’s “national greenhouse gas emissions target for 2050 is net-zero emissions.” To achieve net-zero by 2050, emissions should peak by 2030, according to the most authoritative global scientific body studying climate change, the Intergovernmental Panel on Climate Change.

Mr. Trudeau also announced that, by the end of 2022, the government would halt fossil fuel subsidies that help oil and gas companies sustain and grow their business outside the country. This policy move will raise the risk of financial starvation for oil and gas companies operating abroad, many of which benefit from these subsidies. Additionally, he announced that Canada would set five-year targets to ensure that the oil and gas sector makes a meaningful contribution to meeting Canada’s 2030 goals that will put us on the path to achieving net-zero by 2050. The Prime Minister intends to take more steps and get expert advice from Canada’s Net Zero Advisory Body on how to achieve this. With the way things are going, especially the global and domestic pressure to increase ambition and action, Canada’s commitments will intensify in this decade. We can expect to hear future government announcements with increased ambition and transition policies.

Even without putting the speed at which commitments will increase into consideration, what we have seen so far from the current commitments already tells us that Canada’s federal and provincial governments will continue to make transition policies that will impact business and investments. As Canada uses laws and other policies to align with the pressing demands of low-carbon transition, especially the race to net-zero, companies and investors must make and implement plans that align with government priorities. There are several implications, the most obvious of which is that the cost of compliance will increase. Based on a recent analysis, Canada currently has a carbon price of $40 per tonne, but this will rise to $170 per tonne by 2030. It will become extremely expensive to do carbon-intensive business or use fossil fuels. Also, going by recent legislation on carbon pricing, especially the Greenhouse Gas Pollution Pricing Act (GGPPA) 2018, failure to align corporate and financial strategies and actions will lead to loss of money or worse. Loss of money is currently more likely, but it is not far-fetched to think that the government may also deploy criminal sanctions for deterrence if non-criminal approaches are insufficient.

Climate Stress Testing Will Drive the Stakes Even Higher Beyond the Current Transition Risks

Hon. Steven Guilbeault, Canada’s new Minister of Environment and Climate Change, announced at the 1^st High Level Ministerial Dialogue on Climate Finance at COP26 that central banks should demand more from companies when it comes to stress testing. Stress testing involves evaluating the financial position under a possible financially material risk, in this case climate change. The Financial Stability Institute recently compared practices across countries already implementing stress testing policies, meaning that this is not some hypothetical scenario. In fact,  the Bank of Canada has already started working on stress testing as announced through its commitments for COP26.

Climate stress testing means that the stakes will become higher. As any business or financial expert in this country knows, Bank of Canada’s policies will undoubtedly affect Canada’s macroeconomic and financial policies, with implications for the country’s corporate and investment actors. For instance, new rules and processes for accessing credit and doing other banking activities will emerge as the Bank of Canada makes net-zero transition stress testing policies and decisions impacting commercial banks.

As Foreign Assets Will Become Stranded, New Investment Opportunities Are Emerging

Prime Minister Justin Trudeau announced that Canada would stop exporting coal and support developing countries to help phase out coal. While this announcement means business and financial executives with assets tied to coal may need to divest to be safe, Mr. Trudeau also made announcements that point us towards potential new windows of opportunities. First, aligning with Canada’s plan to put coal out of market, he committed the Government of Canada to proving up to $1 billion for the Climate Investment Funds Accelerated Coal Transition Investment Programme to support developing countries transitioning from coal-fired electricity to clean power. Second, he also announced $25 million in funding to the Energy Sector Management Assistance Program, a partnership with the World Bank. Any investment opportunity that comes up through the implementation of these programs will likely bring relatively quick returns.

We can expect the Government of Canada to not waste time in bringing these promises to fruition to meet the urgency of climate change, more so that Canada is gradually becoming an international climate finance champion. At COP26, Canada announced its collaborative efforts with Germany to create a Climate Finance Delivery Plan to ensure that developed countries fulfill their climate finance pledges to developing countries. To find and take advantage of these investment opportunities, now is the time to look out for what the implementation will look like, how to start investing, and where to direct investment.

Acknowledgements

Many thanks to UBC for nominating me as a delegate for COP26. Also, I could not have attended the conference without the financial support from the Government of Canada through the Vanier Scholarship Programme. Thanks to Sonia Li Trottier for reviewing the draft of this commentary.