Climate action and economic growth aren’t mutually exclusive propositions. Bright futures: a prosperous lower-carbon outlook for Canada is possible.
**A prosperous lower-carbon
outlook for Canada**
Canada must play its part in combatting climate change by reducing carbon emissions to achieve our Paris Agreement targets and realize the aspiration of net-zero in 2050.
Most Canadians support this goal, as recent extreme-weather events have raised awareness of the potential damage from climate change. Capital markets are increasingly signalling that funds will be directed toward industries and activities that have lower emissions intensities. Financial-system regulators are starting to require that banks and insurers report their direct and indirect exposures to climate risk, which may alter domestic financing. Environmental, social, and governance (ESG) considerations are progressively being incorporated into consumer, business, and policy decisions. All of this creates a powerful incentive for firms across Canada—particularly those in high-emissions industries such as oil and gas—to have plans for how they’ll curtail carbon output and contribute to government-set goals.
With the right set of policies and investments, our economy can continue to grow at only a slightly slower pace
Make no mistake, meeting our emissions targets will require significant transformation of our economy. A common worry is that Canada’s economy cannot bear the cost of migration to a low-carbon future. However, our work shows that with the right set of policies and investments our economy can continue to grow at only a slightly slower pace. Transformation to a low-carbon economy will require maximizing technology use and investments. Delaying action will likely serve only to increase transition costs and can lead to lesser gains that could otherwise result from being a leader in this green shift. Strong direction, public support, bold action, substantive investment, and significant collaboration between the public and private sectors will be needed to help ensure we make the most of the opportunity ahead.
The federal government’s carbon-pricing plan will be critical for economically efficient change. Part of these revenues should go to consumers to maintain public support, but a greater share will likely need to be allocated to businesses and green investments to accelerate the adoption of clean technology. If revenues from carbon pricing are recycled into the economy, with a greater focus on channeling the revenue to investment, the costs of moving to a low-carbon future can be minimized. Indeed, modelling by Deloitte’s Canadian economics team using its General Equilibrium model show that from now to 2030, Canadian economic growth will be reduced by only about 0.1 percentage point per annum.
Canada needs to go on a carbon diet
A key challenge is that the current public discourse on climate change is focused on the transition to a low-carbon future rather than on the future reality and its benefits. Consider this analogy: No one likes dieting, because it’s difficult—you can’t eat what you want, you’ll feel hungry, your willpower will be challenged, etc.—and thus it’s perceived negatively. However, the final result can be a healthier, more resilient body. In much the same way, Canada needs to go on a carbon diet.
The country’s economy in a net-zero future will no doubt be prosperous. Over the last half-century, there’s been a substantial shift from manufacturing and extraction toward services; over the next half-century, the economy’s industrial and sectorial mix will continue to change, with low-carbon-emitting industries prospering. This research aimed to look beyond 2030 to see what that future could look like. To do this, we relied on results from two additional models to determine first, what technologies will help us achieve net-zero and second, what Canada’s economy will look like as we move into the phase of dramatic emission reductions after 2030.
We can be a market leader in clean-technology areas such as hydrogen and carbon capture and storage
Of course, the path forward is not straightforward or without challenges. Regrettably, there will likely be stranded-assets costs, which is economic jargon that, in this case, refers to replacing some still-productive capital with new investments that lower emissions. And the investments required to get us to net-zero are significant—equal to between 5% to 6% of the economy—and we need to start thinking about how and who will fund that investment. But it’s also possible that these new technologies and investments will create their own innovations that, in turn, enhance productivity.
Adaptation costs will abate over time, and the resulting transformation will create significant opportunities for Canada: We can be a market leader in clean-technology areas such as hydrogen and carbon capture and storage. Our domestic oil and gas sector can be environmentally sustainable. We’ll have a well-developed green-energy sector. Canada will be able to export its newly created environmentally sustainable technology, technical services, and know-how. The country will have climate-resilient infrastructure. We’ll be a more attractive destination for international talent and capital. All of these benefits can support Canada’s sustainable economic growth and, in turn, a rising standard of living from coast to coast to coast.
The time has come for the country to pull together and figure out how we’ll achieve this overall goal.
Canada will be able to export its newly created environmentally sustainable technology, technical services, and know-how
Taking action to slow global warming and combat the negative impacts of climate change is not a new idea. However, despite efforts to date, Canada has been unable to make meaningful reductions in its greenhouse gas (GHG) emissions. Indeed, emissions levels in 2019 and 2006 were unchanged.1
With temperature extremes and severe-weather instances on the rise, the time for more effective action is now. In the research presented here, we outline why Canada needs to do its part to reduce emissions; the unique circumstances we face that make this goal a challenge; how carbon pricing will affect emissions and our economy; the role of technology in reaching our emissions targets; and what the economy will look like in a post-net-zero world. Our aim is to provide businesses, politicians, and households with a clear view of the opportunities, challenges, and economic impacts of moving to a low-carbon-emissions future, as well as to spark conversations about how we as a society can make this future a reality.
Achieving a lower-emissions future requires action now
On December 12, 2015, Canada and 194 other nations adopted the Paris Agreement, a treaty to limit the global average temperature rise in this century to below 2°C, ideally below 1.5°C.
As its contribution to realizing this goal, Canada committed to achieving a net-zero-emissions economy by 2050, formalizing this pledge with the Canadian Net-Zero Emissions Accountability Act, along with a series of interim emissions-reduction targets.2 As an additional step, Prime Minister Justin Trudeau announced at the 2021 Leaders’ Summit on Climate that Canada would seek to cut emissions by 2030 to 40%–45% below 2005 levels, a more ambitious reduction than the 30% committed to in the Paris Agreement.
Most Canadians understand that global temperature swings and more frequent extreme-weather events pose significant risks to our way of life. Political parties also recognize this, which is why all federal party platforms have commitments to address climate change. Economic costs associated with the transition to a lower-emissions future are also widely acknowledged, yet the public discourse is nevertheless often expressed as a trade-off between the environment and the economy. This is a false choice: If sound policy and businesses decisions are implemented, we can achieve our emissions targets while minimizing costs.
There are four key economic reasons for acting now—in big, bold, coordinated ways—to achieve Canada’s net-zero-emissions target:
Recognizing that all nations stand together. With international peers and trading partners accelerating their pathways to decarbonization, Canada must also make investments in mitigating emissions and advancing green industries to support economic growth and increase living standards. Soon, emissions-reduction strategies will be required to attract international capital, as global funds are increasingly dependent on environmental, social, and governance (ESG) strategies in their investment focus. Many pension fund and asset managers—including the world’s largest, such as BlackRock and Vanguard—have made public statements that they’ll be publishing the proportion of their asset allocations that are aligned with net zero and increasing scrutiny of investments in high-carbon-emitting sectors.3 Governments are also involving ESG considerations in their decision-making. US President Biden’s cancellation of the Keystone XL Pipeline Project—which, of course, had an economic impact on Canada—is just one high-profile example.
Seizing the opportunity to lead the global energy transition. As the worldwide economy looks to make significant reductions in GHG emissions, Canada has a unique opportunity to build upon its respected history in the energy industry and accelerate the shift toward low emissions and clean energy. If we move more quickly than other nations to a low-emissions future, we can realize potential economic opportunities to profit from our resulting accumulated knowledge, technology, products, and services. Significant possibilities involve exporting hydrogen and increasing exports of liquefied natural gas (LNG), both of which could lower global carbon emissions. There’s also a potential to increase trade of our professional technical services as we build expertise in areas including carbon capture and storage.
Achieving economic prosperity. Carbon pricing, environmental regulations, and large-scale investments in technologies and infrastructure can lower emissions, all with limited transition costs. Modelling by Canada’s Ecofiscal Commission, the Conference Board of Canada, and Deloitte all show that the country can move to a low-carbon future and maintain economic growth across regions, as long as the affected areas get adequate support during the transition periods. And as noted previously, accelerating progress is essential for economic prosperity, since costs increase if progress is delayed.
Addressing risks sooner to reduce future costs. The COVID-19 pandemic has underscored the importance of prudent planning and risk mitigation. According to the Global Preparedness Monitoring Board (GPMB), an independent body aiming to ensure readiness for global health crises, “It would take 500 years to spend as much on investing in preparedness as the world is losing due to COVID-19.” In its report A world in disaster, the estimated cost of preparing for the pandemic would have been $5 per person, or approximately $39 billion globally. In reality, $11 trillion in economic output has been lost globally thus far.
While COVID-19 has had devastating social and economic effects, the lessons learned present an opportunity to accelerate green investment. As countries around the world look at how they can stimulate economic growth after the pandemic, many are funding green infrastructure including $9.2 billion through the Investing in Canada Plan, the European Union’s Green Deal valued at €1 trillion (C$1.5 trillion)4 and US President Joe Biden’s proposed jobs, infrastructure and green energy bill valued at US$2 trillion (C$2.5 trillion).5
The challenge of reducing Canadian emissions
There are two main obstacles to achieving meaningful carbon reductions: underlying drivers of emissions and likely unequal transition costs across regions.
Underlying drivers include the cold climate (i.e., Canada requires more energy for heating than do temperate climates), large geography and growing population (i.e., more energy needed for transportation across a dispersed infrastructure), industrialized economy (i.e., the source of our emissions), and considerable natural-resources endowments supporting large-commodity industries (i.e., extraction often results in high carbon emissions). These factors are reflected in Canada’s GHG emissions profile (data current as of 2019—see figure 1):
- The oil and gas sector is the largest source of Canadian GHG emissions, accounting for 26.2% of the country’s total.
- The transportation sector is the second-largest source, with 25.4% of total emissions. This reflects freight and passenger transportation, the latter of which has seen rising emissions due to population growth and the shift from cars to light passenger trucks (including vans and SUVs).
- Buildings are the third-largest source, comprising 12.4% of GHG emissions. The shift toward a service-based economy has increased the need for office space; meanwhile, emissions from residential buildings have decreased slightly, despite strong population growth.
- Heavy industry accounts for 10.6% of emissions, reflecting production in areas such as manufacturing and processing.
- The agricultural sector accounted for 10%—barely changed from 2000, as decreased emissions from animal production were offset by increasing emissions related to crop production.
- The electricity sector is responsible for 8.4% of the country’s total emissions output. Although a great example of meaningful reductions—with a 53% decrease in emissions from 2000 to 2019 due to progress in decarbonizing the power sector—more work is still required.
The second major hurdle to emissions reductions is trying to ensure that associated costs are equitably distributed across the country. Provinces with greater reliance on high-emitting industries will face potentially greater transition costs, with the energy sector concentration in Alberta, Saskatchewan, and Newfoundland and Labrador a good case in point. Household GHG emissions also vary across Canada, reflecting a variety of factors such as population densities, average temperatures, and family size and incomes. Still, energy source matters most in determining household emissions profiles. For example, despite a cold climate, Montreal has the lowest average household emissions of all major Canadian cities, because hydro power meets much of its residential energy needs, including home heating. On the other hand, Edmonton and Calgary have the highest average household emissions, largely due to extreme weather, low population density, and coal-fired electricity generation.
As Canada designs and implements policies to cut emissions, reducing the disparity in regional burdens will be paramount, as this is an essential element in building consensus on the best plan to reach our national emissions targets.
Lowering emissions requires carbon pricing
Now that the challenges are understood, the question is how Canada can achieve its emissions-reduction goals—and what the economic implications of doing so may be.
Economic theory is clear that too much carbon will be produced if there are no associated costs—which is why the world faces our current climate problem. Pricing and regulating carbon emissions can both address the issue.
Carbon pricing reduces transition costs, in line with economic theory, because it acts as a financial incentive for consumers and businesses to modify their energy usage.
Carbon pricing changes the relative pricing of goods and services, and lower-carbon producers benefit while higher-carbon producers lose market share
It also raises the costs of goods and services—directly through higher retail prices, and indirectly through higher input costs. In turn, these higher expenses reduce residential and commercial purchasing power, thus decreasing demand throughout the supply chain.
Carbon pricing, too, changes the relative pricing of goods and services: Those that are cleaner to produce are priced lower than those that require larger carbon footprints. As a result, lower-carbon producers benefit while higher-carbon producers lose market share. Without mitigating factors, the impact of this substitution would be severe. However, carbon taxes imposed by governments generate revenues that are recycled back into the economy, offering essential offsets to the previously noted pressures and thus dampening the effects of carbon-pricing on economic growth.
For example, with carbon taxes in effect, drivers will pay more at the gas pumps, which might spur less driving or perhaps a shift to electric vehicles (EVs). However, households are also given a portion of the carbon tax they pay back and can use this rebate to buy other goods and services. Yes, they could continue to purchase higher-carbon goods but because of the carbon tax, their money will stretch further if used for lower-carbon goods and services, an incentive in itself.
Carbon taxes imposed by governments generate revenues that are recycled back into the economy
Other examples involve carbon revenues being recycled into the economy via funding, such as into investments that can accelerate progress toward a lower-carbon future, and into industries as well as toward consumers facing the most significant transition impacts in order to help mitigate associated costs. The latter example also addresses the likely unequal regional outcomes in the absence of policy intervention.
Modelling the impact of carbon pricing
Pricing carbon is central to Canada’s emissions-reduction plan. However, the country hasn’t generally been having productive conversations about energy transition. Opponents often characterize carbon pricing as a material threat to the economy and prosperity, whereas proponents often suggest that emissions reductions can be accomplished without conversion costs to a lower-carbon future, such as claims that carbon-revenue rebates will fully offset any monetary impact on the consumer.
Economic modelling can uncover answers to important questions, including whether the current federally stipulated path of carbon pricing will help achieve our country's environmental targets
Addressing climate change and transforming the economy is exceedingly complex, so one should be skeptical of such black-and-white characterizations. This is where economic modelling can help shed light on answers to important question, including whether the current federally stipulated path of carbon pricing will help the country achieve our environmental targets, and what the impact will be on Canada’s economy, its industries, and its regions.
To help address these and other concerns, we used Deloitte Canada’s CGE model to examine carbon-emissions reductions, macroeconomic effects, and sector performance between 2019 (when the federal carbon price was introduced) and 2030 (when it’s set to reach the current planned peak of $170 per tonne). We analyzed different types of emissions, including those related to: combustion of fossil-based intermediate inputs; land use and animals in agriculture; fugitive emissions in industries; and household and government consumption. To isolate the impacts of carbon pricing, we compared a business-as-usual scenario (i.e., one with no carbon costs) to a policy scenario that had carbon pricing.
The policy scenario, with a forecast period of 2019–2030, introduced a price of $20 per tonne of carbon dioxide equivalent (CO2e) that increases by $10 annually—reaching $50 per tonne in 2022—and thereafter by $15 annually, ultimately reaching $170 per tonne in 2030. We focused solely on carbon pricing as the key policy instrument, excluding other emissions-reduction measures such as phasing out coal and implementing clean-energy standards. Based on historical data (i.e., Canadian average annual changes in emissions intensities), the model assumes efficiency improvements of 1.6% annually throughout the period studied.8
The federal government has indicated carbon pricing revenues will be transferred to consumers, but they should also be used for green investments in infrastructure and to aid business transition
From this, we see that carbon pricing is projected to generate substantial revenues—$63.8 billion annually by 2030. However, a critical point is how this money will be recycled back into the economy. At the moment, the federal government has indicated that these funds will be transferred to consumers, but we believe they should also be used for green investments in infrastructure and to aid business transition. In our model, we assumed roughly 55% would go to households, 21% to government, and 23% to private investments, reflecting the relative shares of these segments in the economy.
Quantifying the impact of carbon pricing
Key take-away: A gradual rise in carbon pricing to $170 in 2030 will drive major emissions reductions—bringing us close to our Paris Agreement commitment.
Overall, modelling indicates that Canadian emissions will decrease in response to our sample carbon-pricing policy, from 730 megatonnes of CO2e in 2018 to 537 megatonnes in 2030 (see figure 2). This represents a 26% drop in emissions, which brings Canada three-quarters of the way to its Paris Agreement target. The largest reductions are expected in the following sectors: electricity generation and transmission (–58%); general services (–43%); and mining, quarrying, and oil and gas extraction and refineries (–30%).
Modelling indicates that Canadian emissions will decrease 26% by 2030, bringing the country three-quarters of the way to its Paris Agreement target
Emissions are expected to increase 20% in the agriculture, forestry, fishing, and hunting sector due to exemptions from carbon-pricing policies. One notable development is that the electricity sector will see projected growth in its GDP share, because need for that energy resource will increase in a lower-carbon future (see figures 3 and 4).
Figure 3: Changes in GDP by industry, cumulative difference compared to the baseline by 2030, percent (%)
Figure 4: Changes in emissions by industry, cumulative difference compared to 2018 by 2030, percent (%)
Key take-away: Implementing carbon pricing involves transition costs, with trend rates of annual Canadian economic growth edging down from 1.7% to 1.6%.
A crucial issue about transition to carbon pricing is whether costs exceed benefits. A gradual rise in carbon prices, as outlined in the federal government’s current plans, will result in a slowdown of real GDP growth per annum by 0.08 to 0.13 percentage points. This translates to an economy that grows at a trend rate of 1.6% rather than our current estimate of 1.7%—still while bringing us just three-quarters of the way to our Paris Accord targets. As a result, by 2030, national real GDP will be 1.4% lower than if no carbon pricing were made. In the same period, as carbon prices rise to $170, overall costs for goods and services (measured by the GDP deflator) are projected to increase 0.9%—or about 0.1% per year.
Key take-away: Household purchasing power and consumption are slightly lower in our carbon-pricing scenario.
Direct price increases in gasoline, natural gas, and electricity will be felt by consumers—serving as an incentive for households to be more energy efficient and reduce carbon emissions. Although part of the carbon tax is expected to be returned to households in the form of tax credits that will offset a significant portion of their lost purchasing power, a loss will nevertheless be felt. Additionally, slower economic growth will lead to a slower pace of job creation with 88,000 fewer positions created by 2030. While that is a large number, put in context it represents roughly four months of job creation at current rates, yet stretched out over a period of almost a decade. The combination of these impacts will result in consumer spending that’s 1.9% lower in 2030 relative to a baseline with no carbon pricing.
Key take-away: Some industries will face more substantial challenges than others, so they’ll have to work hard to adapt to these pressures.
Higher prices will affect each segment of the economy differently, depending on production and consumption-emissions intensities. A few sectors will likely experience above-average declines in output (relative to baseline levels) due to their emissions-heavy activity. For instance, the mining, quarrying, and oil and gas extraction and refineries sector could see a 9% decline in real GDP by 2030, and the transportation sector is expected to decline by 4%. However, the renewable-power sector—among others—is likely to expand, with a projected 6% growth in GDP by 2030, assuming that low-carbon fuels can be substituted in the production process.
Despite carbon prices reaching $170, most sectors are projected to grow annually over the modelling period—though, as previously noted, more slowly than at baseline rates (see figure 5). One exception is the mining, quarrying, and oil and gas extraction and refineries sector, with an average annual economic-output decline of 0.1% between 2019 and 2030, compared with a yearly baseline growth of 0.7%.
Overall, our model indicates that the federal government’s carbon-pricing policy will shift the composition of the Canadian economy. For example, industries such as mining and transportation will contribute less while the utilities sector will contribute more.
Key take-away: The challenge of reducing emissions is different across the country.
As electricity generation moves increasingly toward renewables, some jurisdictions—including Eastern Canada, Alberta, and Saskatchewan—are expected to have steeper adjustment curves, given their reliance on fossil fuels. In contrast, Quebec and British Columbia, where hydro-power resources are plentiful, are likely to have easier paths.
Regional industrial output, including product type and concentration, will additionally affect adaptation across provinces. Although our model does not segment results by region, it’s possible to forecast figures for individual sectors. For example, real GDP in the mining sector is expected to decline by $16.9 billion by 2030. Given that 58% of mining occurs in Alberta—and assuming this share doesn’t change—it can be calculated that Alberta’s GDP in this sector alone will fall by a projected $9.8 billion. Although this figure may not seem large compared with the $334 billion in output produced by the province in 2019, this decline doesn’t include the domino effect on other industries, such as professional services, which rely on mining-sector activity. Still, despite these impacts, Alberta’s economy will continue to grow.
Our analysis shows putting a price on carbon will do the heavy lifting to bring the economy close to Paris Agreement targets but more is needed to meet those goals, and even more effort will be required to achieve the federal government’s even more ambitious target of a 40% to 45% reduction. The challenge, is how to close the gap. While imposing higher carbon prices can help, finding ways to facilitate large-scale funding for technology may have the greatest potential impact over the long run, partly because these technologies can lower emissions while creating considerable economic opportunities.
Technology for going the distance
It’s difficult to model the impact of carbon pricing between 2030 and 2050, given the likelihood of technological changes over that period that would change emissions levels across sectors.
Therefore, in considering Canada’s road map to net-zero beyond 2030, our focus is on technological solutions that can help close the emissions gap. These innovations represent a transformative change, requiring an enormous amount of ingenuity and investment. However, as noted, the federal government will need to move quickly to facilitate this investment, since delaying action allows the challenge and its costs to grow. A swift response is also likely to allow Canadian companies operating in low-carbon areas where we have existing capacity—such as hydrogen as well as carbon capture and storage (CCS)—to capitalize on opportunities that arise as the world looks toward large-scale emissions reductions.
Relying on work done by ESMIA Consultants in their reference net-zero scenario,9 we identified 10 key technologies that could be instrumental in achieving the remaining emissions reductions: Figure 6 details, by sector, the amount of emissions expected to be produced in 2030 (numbers in brackets), after the carbon tax ramps up to $170 and the technologies that could be used to reduce emissions in that sector with a goal of achieving net-zero by 2050. Complete elimination of all the emissions detailed below will not be required due to technologies such as CCS.
Figure 6 explores the specific technologies that will be important in helping Canada reach its GHG-reduction goals:
Figure 6: Emissions levels in 2030* and technologies, by sector, to help achieve net-zero in 2050
Small modular reactors
CCS/direct air capture
Mining and refining
Agriculture, forestry and fishing
Electricity and transmission
*Figures are subject to rounding
1. EVs and charging infrastructure
Electric vehicles emit no greenhouse gases and are a proven option for significantly reducing CO2 emissions worldwide. The current EV market share in Canada is roughly 0.7%, but it’s trending upward: EVs accounted for 3.5% of new car registrations in 2020, versus 2.9% in 2019.10 Still, this barely moves the needle toward Canada’s emissions-reduction targets. In order to spur adoption, manufacturers will likely need to develop more efficient and less expensive passenger EVs. Cities and municipalities would need to shift public transport to electric power to a greater degree. The advent of wireless charging (with the SAE J2954 charging standard) could propel the market forward by making it much more convenient to own and operate EVs. Similarly, more widespread public charging stations—including at shopping centres, hotels, parking facilities, gas stations, and residential buildings—could go a long way toward making EVs the preferred choice for consumers, businesses, and municipalities alike.
How this option can help
If consumers, businesses, and municipalities don’t shift toward EVs and/or vehicles that run on cleaner fuel, the Canadian transportation sector is expected to produce about 170 megatonnes per year of CO2e by 2050. But with advances in EV technology, the sector can reduce its CO2 emissions to fewer than 20 megatonnes per year—the amount necessary for Canada to meet its net-zero target by 2050.
Canada is a world leader in renewable energy. With its large land mass and diversified geography, the country has substantial renewable resources—including hydro, wind, biomass, solar, geothermal, and tidal energy—that can be used to produce electricity. Hydro power is our most significant renewable resource, providing 59.3% of the country’s electricity generation.11 In fact, Canada is the second-largest producer of hydroelectricity in the world. Meanwhile, wind accounts for 3.5% of our electricity generation, followed by biomass at 1.4%.12
Hydro power is Canada's most significant renewable resource, providing 59.3% of the country’s electricity generation
How this option can help
Electrical power is essential to reaching Canada’s emissions-reduction goals. But using it for transportation, heating and cooling, and industrial production demands an unprecedented scale-up of renewable generating capacity, as well as the infrastructure to deliver it. Some experts predict that Canada will need to triple its production of this resource by 2050. The challenge will be affordability; otherwise, governments risk significant backlash from citizens that are trying to decarbonize by using electric power, and risk compromising the competitiveness of industries that are transitioning to using this resource. Modelling shows that, in order to achieve net-zero emissions by 2050, Canada’s electricity output would have to shift significantly toward solar and wind energy—increasing from about 30 terawatt hours (from our modelled scenario) to almost 600 terawatt hours.2
3. Direct contact steam generation
Direct contact steam generation (DCSG) has many environmental uses. Among these, it can greatly improve oil recovery (in the form of bitumen); to achieve this goal, steam from waste water and hot flue or exhaust gases from combustion are injected into a reservoir. This process also has the potential to reduce the need for fresh water in energy generation and, because most of the CO2 created is also captured and recycled, to cut carbon emissions. Among other applications, it’s currently used in oil sands in conjunction with steam-assisted gravity drainage (SAGD).
How this option can help
DCSG can reduce GHG emissions produced during bitumen extraction by up to 85% while minimizing the need for fresh water and eliminating expensive water-treatment processes.13 This ultimately lowers the costs, as well as the environmental price, of bitumen extraction. DCSG has not yet been commercialized at scale, thus questions about true costs and efficacy remain. Nonetheless, since oil and gas comprise a large part of Canada’s GDP and will likely still be required even at reduced capacity, DCSG could play a vital role in the race to net-zero.
This process also has the potential to reduce the need for fresh water in energy generation and, because most of the CO2 created is also captured and recycled, to cut carbon emissions
Hydrogen is a core component of many chemical industrial processes, notably in refining petroleum and producing fertilizer, ammonia, and methanol, so using clean hydrogen helps reduce resulting emissions. Hydrogen can also be a fuel alternative for transportation, including in light- and heavy-duty vehicles, transit buses, and trains. Other applications include power generation and heat production—for which hydrogen can be burned alone or blended with natural gas to heat residential and commercial buildings or provide high-grade heat for industrial processes.
Hydrogen production from natural-gas reformation and coal gasification can be a major source of carbon emissions
Hydrogen combustion doesn’t produce carbon emissions or pollutants at the point of use. However, hydrogen production from natural-gas reformation and coal gasification can be a major source of carbon emissions—i.e., grey hydrogen. Further, the compression and liquefaction processes required to transport and store hydrogen are energy intensive, so if the power needed to drive these operations came from non-renewable sources, the entire chain could adversely affect hydrogen’s global carbon index over its life cycle.
How this option can help
The federal government’s hydrogen strategy, released in late 2020, suggests that this resource could satisfy 30% of Canada’s energy needs by 2030.14 The Minister of Natural Resources at the time noted that expanding Canada’s use of hydrogen could reduce GHG emissions by 2030 by as much as 45 megatonnes per year.
Canada currently produces an estimated three million tonnes of grey hydrogen annually from natural gas without the use of CCS, making it one of the world’s top 10 hydrogen producers. At present, steam methane reforming is the most cost-efficient means of producing hydrogen. However, this process generates carbon emissions and therefore must be coupled with a CCS system.
With existing hydrogen production and transportation infrastructure in Western Canada and opportunities for blending it with other resources for combustion, there are opportunities for further hydrogen development—but government support remains crucial. Green hydrogen could be produced by including CCS systems in existing and future plants. As detailed in this document (see also point 10), CCS has the potential not just to eliminate carbon emissions from hydrogen production, but also to capture additional emissions from the air, which could be critical in attaining Canada’s 2050 net-zero targets.
5. Liquid and solid biofuels
Biofuels can significantly reduce GHG emissions by decreasing or eliminating the need for fossil fuels. They’re generally less carbon intensive than fossil fuels throughout their life cycles, with improvements to their clean profiles resulting from advancements in production, processing, and energy efficiency. Nevertheless, Canada is behind its global competitors in establishing biofuel production capacity and use, with market-adoption rates behind those in the United States, the EU, and other regions. This contributes to our high GHG emissions from the transportation sector, among others.
The need for energy-dense liquid biofuels is anticipated to grow for use in light and heavy-duty transportation in the decades ahead
Biofuels are a proven environmental commodity: they’ve reduced GHG emission as a result of renewable-fuel regulations and low-carbon fuel standards in Canadian provinces. Consequently, the need for energy-dense liquid biofuels is anticipated to grow for use in light and heavy-duty transportation in the decades ahead. In response, the country’s clean liquid fuel sector aims to expand production from three to 8.5 billion litres per year by 2030.15
How this option can help
Expanding use of biofuels and other non-fossil clean fuels from 7% in 2017 to 10%–15% by 2030 would reduce GHG emissions by 15 million tonnes per year.16 Additionally, their use can potentially displace a significant amount of diesel and gasoline use. With reasonable investments, biofuel use could increase from the roughly 6% in our modelled transport-sector fuel mix to roughly 14% in order to reach net-zero.
6. Small modular reactors (SMRs)
Many of Canada’s remote/off-grid communities rely on diesel oil for electricity generation—a highly polluting and costly process. However, we have the potential for one of the world’s most promising domestic markets for SMRs, with conservative estimates valued at $5.3 billion between 2025 and 2040.17 In comparison, the global value of SMR markets is projected to reach $150 billion in that same time period.18
Some SMR designs could be used in the near term, with most becoming available in the next seven to 15 years. For some of the more highly tested technologies, these timeline challenges are more dependent on clarifying related economic, social, regulatory, and waste-management issues than on fine-tuning reactor design. Although the country’s regulatory framework and waste-management regimen are well positioned to respond to an SMR paradigm shift, modernization is needed to reflect the realities of operating these smaller reactors.
How this option can help
SMRs have the potential to reduce reliance on coal and diesel, especially in remote communities, thus helping Canada to reach net-zero by 2050. They could also help to drive deep industrial decarbonization, including green mining, and provide opportunities for new applications for nuclear energy, such as space exploration. With the ability to generate energy on demand, SMRs could also play a vital role in a deeper integration of variable renewable energy sources (e.g., wind and solar) across Canada, especially in regions that lack significant hydro-power capacity. Overall, SMRs could potentially meet about 9% of Canada’s electricity needs at net-zero.
7. Electric heating for buildings
With a highly variable climate, Canada uses more energy than many other industrialized countries to heat and cool buildings. According to stats from 2018, around 47% of Canadians use natural gas to heat their homes, roughly 37% use electricity, approximately 9% use oil, and the rest use wood and propane.19 About 84% of the country’s residential GHG emissions come from space and water heating—mostly from burning natural gas.20 Thus, renovating existing buildings is central to reducing energy demands and associated emissions, as is switching to electric heat sources.
Heat pumps, which transfer thermal energy between two locations, are a particularly promising source of electric heat. They represent a rare technology in which typical efficiencies are well over 100%—i.e., more energy is produced than that required to displace it. In Canada, where winter air temperatures can drop below –30°C, geothermal heat pumps can operate more efficiently because they rely on warmer and more stable ground temperatures rather than the colder air. These ground-source systems can reduce heating and cooling costs substantially, with savings of about 65% compared with electric furnaces.21
In addition to electric heat sources, solar power is a viable, low-emissions alternative for heating homes.
How this option can help
Relative to 2018 figures, electric heating systems could decrease energy demands in Canadian buildings by 2050 by as much as 35%.22 These gains would come without curtailing building services, since about 85% of reductions would stem from heating and cooling savings. A shift to electric-power sources could also potentially reduce resulting CO2 emissions from more than 40 megatonnes a year in the ESMIA model to less than one megatonne a year by 2050’s net-zero target.
A microgrid is a small network of distributed, often renewable, energy sources. It can tie into a central electricity grid as well as operate on its own. In instances such as power outages and severe weather, it can continue to supply electricity to connected homes and buildings.
How this option can help
Microgrids are essential to mitigating GHG emissions. Often powered by smart technologies, they can help to integrate more highly distributed renewable-energy-generation sources into Canada’s main power grid while increasing energy resiliency and affordability, especially for smaller towns and remote communities. In particular, microgrids can provide a vital service for the almost 300 remote communities in Canada, many of which use diesel generators to produce electricity. In addition to being a highly polluting energy source, diesel power is expensive, with remote communities often paying up to 10 times more than those connected to the main grid. In contrast, power companies can often implement microgrids quickly and affordably in lieu of building more costly central generating plants.
Microgrids can provide a vital service for the almost 300 remote communities in Canada, many of which use diesel generators to produce electricity
Battery storage captures excess renewable energy and injects it into power grids for an immediate supply to offset demand peaks; it also balances these grids by regulating fluctuations and managing congestion. In light of these benefits, electricity-system operators and regulators are actively exploring options for increasing integration of this technology into the grid, such as by reviewing market rules in Ontario and Alberta and implementing pilot projects in Quebec and Saskatchewan.
How this option can help
Battery-storage technology is readily available and rapidly becoming more economical. It can convert variable renewable energy sources such as wind and solar power into immediately available electricity. If fully utilized, it could contribute more than 60 terawatt hours of electricity to the grid by 2050 to help reach net-zero emissions.
Electricity-system operators and regulators are actively exploring options for increasing integration of battery storage technology into the grid
10. CCS and direct air capture (DAC)
Canada took a relatively early position on CCS, being among the first to develop operational expertise and intellectual property regarding this technology. Five major post-combustion carbon-capture projects are currently operating in Western Canada: Canadian Natural Resources Limited plant, SaskPower’s Boundary Dam, Shell Quest, Weyburn, and Alberta Carbon Trunk Line (ACTL). In total, roughly 5.5 megatonnes of CO2 emissions are captured annually in Canada. In aggregate, the Alberta government has committed $1.24 billion through 2025 for ACTL and the Shell Quest project, which will help reduce GHG emissions by 2.76 million tonnes per year (i.e., equivalent to the annual emissions of 600,000 vehicles).23
Meanwhile, DAC systems, such as that implemented by West Coast-based Carbon Engineering, remove CO2 from the atmosphere, purify it, and then use only energy and water to produce pipeline-ready compressed CO2 gas. Benefits of DAC include generating limited land and water carbon footprints and being able to build plants close to suitable storage or utilization sites, thus eliminating the need for long-distance CO2 transport.
Regardless of the method of capture, options such as enhanced recovery of oil and of coal-bed methane provide short-term opportunities for storing CO2. Options for longer-term storage, such as saline aquifers, are presently being studied.
As an early adopter of CCS, Canada has attracted considerable attention from other nations that were looking for ways to reduce their GHG emissions. This has led to the creation of the International CCS Knowledge Centre in Regina, a joint venture of BHP and the Government of Saskatchewan.
How this option can help
The US Department of Energy has assessed the potential storage capacity of these technologies across the United States and parts of Canada, determining that there’s sufficient available space for approximately 600 years of CO2 emissions, calculated from total US fossil-fuel production at current rates.24 CCS can also be applied to a number of heavy-emissions industrial activities beyond using oil and gas, including generating power and producing concrete, steel, and fertilizer.
CCS and DAC are projected to be essential not just for attaining Canada’s net-zero goals but for hitting global targets by 2050. CCS technologies could potentially capture more than 150 megatonnes of CO2 a year in Canada by 2050 but would require sizable investments in order to be widely implemented across heavily polluting industries. Additionally, regulatory certainty would be needed to unlock and maintain the technologies’ potential—i.e., legislation that establishes rules for governing CCS and then prevents them from being reversed in future is crucial.
Economic implications of adopting clean technologies
Given these technologies and their potential for reducing emissions, it seems possible for Canada to achieve its 2030 climate targets and ultimately reach net-zero in 2050.
In addition to carbon pricing, the nation will need to incorporate electrical power into the economy and deploy low-emissions technologies throughout industry and society. This will be neither easy nor inexpensive. To successfully make the transition, governments and the private sector will need bold leadership and a mutual willingness to make the required investments. They’ll also need to help ensure those investments aren’t redirected from those reserved for other segments of the economy.
Reaching net-zero will be neither easy nor inexpensive
While cost curves can change, it’s possible to estimate some of the additional decarbonization investments that would be required over and above the status quo of no carbon pricing, as depicted in figure 7. The options presented are not comprehensive, but merely illustrate infrastructure investments that will likely be part of the path to net-zero. With some technologies still under development and not yet fully commercialized, such as CCS and DAC, it’s difficult to closely estimate what the required infrastructure costs might be.
Figure 7: Select clean-technology investment estimates for net-zero
The annual investments required across these four areas total $126 billion over and above what would be needed if carbon pricing were not implemented. In 2020, non-residential business investments in Canada (adjusted for inflation) totalled $197 billion.25 Thus, an extra $126 billion is a significant sum. If costs were to be shouldered entirely by the business community, spending would need to increase by about 65% over 2020 levels.
The combination of carbon pricing and technological investments is poised to shift Canadian energy usage dramatically. Households would be incentivized to switch to EVs and use electricity rather than natural gas for heating. Industry would also be encouraged to shift toward electrical energy, but it’s unlikely that fossil fuels would disappear entirely from the mix, since CCS would allow for their continued (albeit much reduced) use. Overall—and largely due to EVs being much more efficient than combustion engines—total energy consumption should decrease substantially relative to our model (see figures 8 and 9).
Electricity’s share of the energy total is expected to rise, from 27% to 55% at net-zero. Conversely, the share of natural gas and oil products is projected to fall from 60% to 22% at net-zero. The proportion of hydrogen and bioenergy usage is expected to rise considerably, although these resources will account for less than 16% of Canada’s energy consumption once net-zero has been achieved.
Largely due to EVs being much more efficient than combustion engines, total energy consumption should decrease substantially
The discussion up to this point has been about the transition to a low-carbon future.
However, it’s important to stress that once the journey is complete, the headwind on growth from conversion costs will die down—after which, Canada’s prosperity will be fuelled by a more diversified and lower-carbon economy.
The Deloitte Economics Institute has been using its D.climate models to run simulations of economic growth and emissions for countries around the world. Canada is among those covered by this analysis.
This global initiative uses standardized assumptions that show what happens over the next 50 years to countries under a scenario where global temperatures rise 3°C versus one where emissions reduction limits the temperature rise to close to 1.5°C. These scenarios show that climate inaction is no free lunch. A world in which global temperatures rise by 3°C is a world of significantly lower global growth. The institute's modelling suggests the economic damages caused by 3°C of global warming reduces global GDP by 8% by 2070. The costs to limiting emissions need to be compared to an appropriate baseline that considers the cost of inaction.
A world in which global temperatures rise by 3°C is a world of significantly lower global growth
This modelling shows there are transition costs resulting from shifts to lower-carbon emissions. The resulting drag on the economy until 2030 is consistent with the modelling discussed earlier in this paper (i.e., a scenario involving carbon-pricing policy and with a forecast period of 2019–2030). When considering the sheer scale of the economic and industrial transformation that must take place to reach net-zero emissions and the future benefit of avoiding climate change impacts, a transition cost that peaks at 0.9% of GDP would seem manageable. Further, by taking action to limit warming to close to 1.5°C, Canada is helping to reduce the worst effects of climate change and avoiding climate damages.
In the current analysis, transition costs peak around 2037 and decrease thereafter (see figure 10). There’s a positive net economic impact as of 2060, with numbers continuing to climb thereafter. Thus, rapid decarbonization creates structural adjustment costs, but ambitious early action leads to future economic dividends. In this model, the Canadian economy will grow by $30 billion by 2070, compared to a world without climate action.
Rapid decarbonization creates structural adjustment costs, but ambitious early action leads to future economic dividends
We are headed toward a low-carbon future.
The choice facing Canadians is not if we’re getting there, but how we can reap the rewards while minimizing transition costs. Companies around the world are currently competing to enter the clean-technology market, whose value in 2022 is estimated to be in excess of $2.5 trillion.26 Canada has long been a global energy leader; now is the time to redeploy our extensive human capital into the clean-energy market, not just to do our part in reducing global emissions, but also to capitalize on potential business opportunities. It’s imperative that Canada not be left behind in the global push toward net-zero emissions if we’re to continue to have a thriving economy and remain an energy leader. However, as previously illustrated, governments, businesses, and households should be mindful of the associated costs as they progress down the conversion path.
Important aspects of the country's proposed path to a low-carbon future include the following:
- Canada’s economy has been steadily shifting from goods to services, with this trend expected to accelerate as the nation moves toward net-zero. While this industrial transformation will create significant opportunities, it will be disruptive to many firms and workers.
- The demand for employees will shift in line with Canada’s changing industrial mix. New jobs will be created but Canadian businesses and policymakers will need to ensure that workers affected by transitions in energy sources can be retrained or upskilled and moved to new occupations.
- The nation is not alone in pursing net-zero; other countries will need to make similar investments to eliminate their emissions. This presents an opportunity for Canada to become a market leader in emerging clean technologies such as CCS and hydrogen use—where it already excels. Just as the country is the front-runner in delivering mining expertise and services around the world today, it can become a global leader in exporting emissions-reduction knowledge, technology, and services.
- Electricity demands will increase significantly, so cost-effective solutions will be essential, especially since Canadian citizens have previously pushed back hard against electricity price hikes. Not-in-my-backyard (NIMBY) challenges will also need to be overcome in order to build the necessary infrastructure for power generation and transmission.
- Billions in technological investments will be required to get to net-zero. Businesses, households, and the public sector will all have roles to play in facilitating a transition to a sustainable, low-carbon economy—but policymakers must decide how to incentivize these migrations. Canadians should expect a mixture of market mechanisms such as carbon pricing combined with direct support to drive adoption of these new technologies.
- Associated adverse economic impacts can be managed, but they won’t be distributed evenly across sectors and regions. Effective policies must thus address outcome inequalities. Globalization has illustrated that net-beneficial economic policies can create considerable growth and income but can also exacerbate inequality and create public discontent.
- A successful path to a low-carbon future should be part of reconciliation with the Indigenous peoples in Canada.
- All of this will require considerable collaboration and cooperation between the public and private sectors, as well as across all levels of government.
Canada’s carbon diet will be daunting, but it’s important to keep in mind that the journey to net-zero presents an opportunity to drive inclusive and sustainable economic growth that ultimately can improve the standard of living for all Canadians.
The journey to net-zero presents an opportunity to drive inclusive and sustainable economic growth
Dr. Mario Iacobacci
Deloitte provides audit and assurance, consulting, financial advisory, risk advisory, tax, and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries and territories bringing world-class capabilities, insights, and service to address clients’ most complex business challenges. Deloitte LLP, an Ontario limited liability partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.
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Environment and Climate Change Canada
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