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January 25, 2021

Shaping a successful economy with much lower GHG emissions will be an ever-present challenge for the next three decades. The low-carbon transition has begun, but is still at a very early stage; we have only a broad idea of what the transition might look like in the years ahead. Nevertheless, legislative assemblies, including here in Canada, have charged ahead and declared the ambition of attaining an economy with no net GHG emissions by 2050.

There will not be a single common pathway – many already exist or will emerge, and they will compete for market positioning for consumers and businesses. Rather than referring to pathways, it would be more accurate to refer to an evolving energy-transition road map, with many interconnected possible routes that become more fully formed as the journey proceeds toward net-zero emissions.

Three key drivers will define the road map: technology and investment, market forces, and policy choices. Let’s briefly examine each.

Known technologies with low or no GHG emissions already exist in a number of important areas – technologies that are either well established or are quickly becoming commercially viable alternatives. For example, reliable hydro electricity production is a well-developed and mature technology. Electricity production from renewable sources such as wind and solar has quickly become technologically and commercially viable. Similarly, carbon-capture and storage technology and management systems are growing in use in the conventional energy sector.

In terms of energy use, viable low-emissions technologies are already in commercial use for electric and hybrid light vehicles, with further improvements to come. Similarly, electricity-based commercial technologies exist for public transit, home and commercial heating. Zero-emission homes and buildings, and electric medium and heavy trucks, are entering the market.

In many other areas, however, technology with low or no emissions is either not yet commercially viable, not well developed, or still an aspiration. Significant improvements to electricity storage will be critical if electricity from renewables is to increase significantly. The production and use of geothermal energy and hydrogen is technically viable, but has yet to attain convincing commercial use at significant scale. Aircraft and shipping are among the priority areas facing significant technological and commercial viability challenges. Technology innovators have work to do in order to reach a net-zero target in these and other areas.

The transformation in technology will need to be facilitated by large-scale investment by business and government. There is no consensus among researchers on the scale of investment required, but it will be significant – hundreds of billions of dollars in Canada alone over the coming decades.

Next, market forces matter fundamentally to the choices we make on what to produce and consume. In energy production, options with low or no emissions are quickly gaining a price advantage over many traditional sources of energy. Wind, solar and hydro electricity production are generally cheaper than thermal and nuclear power generation, and the share of renewables in the electricity production mix is therefore steadily rising.

Similarly, coal is being crowded out by cheaper natural gas as a feedstock for thermal electricity production, especially when the cost of carbon capture and storage is added. The share prices of coal producers have collapsed and investment in new coal thermal power capacity is coming to an end in North America.

Price signals play an equally important role for energy consumers. For example, electric and hybrid vehicles are generally more expensive to purchase than comparable vehicles with internal combustion engines, but recharging is much cheaper than refilling and maintenance costs could be lower, too. As electric and hybrid vehicle production expands, unit production costs and purchase prices can be expected to fall and market share would rise accordingly.

Public policy is the third key element defining the road map to net-zero emissions. A policy decision to close coal-fired power plants, such as in Ontario and Alberta, is one direct way to use policy to reduce emissions. In terms of sustained climate policy, putting a price on carbon is by far the most economically efficient option for reducing GHG emissions. Economic modelling shows that Canada’s interim 2030 target can be met with a steadily rising carbon price, with limited effect on the economy’s long-term growth potential. The federal government’s decision to gradually increase the price to $170 a tonne goes a long way to meeting that interim goal.

Complementary regulations (such as building codes) can be useful to accelerate the low-carbon transition and regulations can fill a gap where carbon pricing is not effective (such as for methane emissions). However, extensive use of regulations would have a more severe effect on economic growth.

Public spending, including tax incentives and subsidies, could also be used to nudge consumption and production toward lower GHG emissions. However, such spending comes at a cost to the public purse. Indeed, sufficient carbon pricing would reduce the need for subsidies and incentives.

In sum, the impact and interaction of three elements – technology and investment, market forces, and policy choices – will ultimately provide the transition road map to net zero. Defining and articulating an evolving net-zero road map would provide improved clarity and stability for consumers and business, which in turn would help the economy to perform at the highest possible level.

Published in the Globe and Mail 

Glen Hodgson is a senior fellow at the C.D. Howe Institute.

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