Stimulating The Green Economy

If Canada wants to compete in the clean energy industry, the federal government needs to start investing in it now.

I wrote last month in The Mark that climate change policies, and the new economic paradigms they are creating, were making low-carbon energy assets more attractive.

Recent news continues to bear out the proposition that climate policies, most often characterized as pure costs to the Canadian economy, are in fact generating new economic opportunities. A recent feature article in the Financial Post described how Ontario’s new Green Energy Act – and the set of subsidies and market access provisions it creates – was prompting a new class of entrepreneur to enter into the green energy sector.

A story in The Toronto Star (by Tyler Hamilton, who authors the always-ahead of the curve Clean Break blog) provides more direct evidence of the economic impact of the Act, telling of the decision of a U.S. wind turbine manufacturer to open a plant in Windsor. The most compelling part of the story is the fact that the new plant will employ 200 people in a town and region particularly hard hit by the implosion of North American automobile manufacturing. The fabled “green jobs” do exist, and in manufacturing no less!

What we are witnessing is the beginning of an investment boom in clean technology and clean energy that is largely the product of new public policies and – in particular – new public investments. As detailed by HSBC, the various stimulus packages that governments around the world have put together as a response to the financial and economic crisis of the past year have devoted considerable resources to the green economy. South Korea leads the pack, in percentage terms, with over 80 per cent of its stimulus package devoted to greening the economy. China’s number, according to the HSBC analysis, is 34 per cent and the United States’ 13 per cent. Canada’s percentage is estimated to be 8 per cent.

The bugbear of the clean tech/energy sectors has always been that they are highly dependent on such public policies and investments to create conditions in which they can compete with incumbent technologies. Those policies have been – to be charitable – inconsistent, and so the typical private investor has always assessed the political risks attached to the sector as being very high.

With the scale and nature of the commitments that have been made over the past year, that political risk is starting to evaporate. The effective result is that private investment is following the public commitments ... and the public dollars. A recent New York Times article quoted an executive from a Spanish wind power company:

The public policy that’s in place now has certainly been a big factor in our business planning in the United States.” Ms. Johnson added that Iberdrola Renewables, which is investing $1.8 billion in wind power in the United States in 2009, plans to invest an additional $6 billion in the sector over the next four years.

There is starting to be a very active and aggressive competition for those private dollars. The stimulus packages have in fact kicked off a flow of “hot money” that is pouring into renewable energy (particularly solar), battery technologies, and smart grid applications. China and the U.S., in particular, are racing to establish supremacy over solar PV technology and electric vehicles, and are using the package of subsidies and grants financed by stimulus money to lure private investors.

And where is Canada in all of this? Well, as the story of the U.S. wind turbine manufacturer’s interest in Windsor demonstrates, there are some positive stories out there. But on the whole, more work needs to be done, particularly at the federal level.

The devil, as they say, is in the details. And in the details is where we see some of the key distinctions that will affect Canada’s ability to compete for the new private investment. Private money – in this case – is attracted by two things: (i) subsidies and tax instruments that change the basic economics of a particular technology or sector; and (ii) the predictability and longevity of the legislative package creating those instruments.

The U.S. stimulus package’s green component – which is of most direct concern in relation to Canada’s competitiveness – represents a 10-year commitment, and is a combination of tax rebates and subsidies that are perfectly aligned to the needs of private investors. The Canadian package is a five-year commitment, is focused largely on program spending, and is devoted largely to big ticket items like the development of carbon capture and storage technology, and next generation CANDU nuclear reactors. That kind of program spending will have an impact on bringing those technologies closer to reality, and both are necessary parts of a low carbon energy system, but it is unlikely to leverage the kind of private sector investment that long-term tax and subsidy initiatives will.

The private sector investment is important for two reasons: first, it is absolutely necessary for filling the gap that exists in financing between what governments can provide and the scale of the transformation that is required. Public money alone won’t get the job done, particularly in the Canadian context where a well-deserved antipathy to structural deficits exists.

Second, the true economic promise of transitioning to a green economy lies in its pervasiveness. Program spending on major technology barriers will have some multiplier effects; but it is not likely to translate into the kind of large-scale employment impacts that will be driven by the emergence of a large number of small- and medium-scale enterprises filling the thousand of technology and service niches that broad-based private investment will create.

What explains the Windsor success story is the fact that the Ontario government has begun to follow that formula. For that success to be replicated across our national economy, however, the federal government will have to do so as well.

This article does not necessarily represent the views and positions of Sustainable Prosperity or of its Steering Committee members.