Céline Bak is the president and founder of Analytica Advisors, Ralph Torrie is the president of Torrie Smith Associates, and Toby Heaps is co-founder and CEO of Corporate Knights.
When oil prices dipped into negative territory in April, it was an early warning that the Canadian economy might be sailing into a perfect storm. Prices have rebounded, but sovereign-bond buyers will be watching the Throne Speech for a clear signal Canada is looking to the future as it charts its postpandemic course. Policy makers must consider three factors as they prepare to address both national and international audiences.
First, focusing on a strong currency, as some have recently suggested, has not been a winning policy for oil-producing countries. In the 1980s and 90s, Britain used its North Sea oil receipts to pay for current consumption, just like Canada is doing now. Today, Britain’s current account deficit of minus-3.8 per cent of GDP is the worst of any developed country. By contrast, Norway took the opposite approach and kept the proceeds from its oil and gas industry in a sovereign fund, thereby forcing the country to live within its means. Since 2009, the Norwegian krone has weakened from 5.1 to 9 against the U.S. dollar, which has spurred productive investment. Norway’s current account surplus of 2.6 per cent today reflects this.
Second, because oil producers are price takers and Canada is a high-cost producer, we should think carefully about what are productive investments as oil prices continue to be pressured because of COVID-19 and international climate policies. We should avoid investments in Canadian oil and gas assets that will be non-performing loans, as is now happening south of the border. In the past eight months, U.S. oil and gas companies with US$85-billion in loans have declared bankruptcy despite the Federal Reserve acting as the buyer of last resort for high-yield bonds.
Third, recent divestments from Canada’s resource sector reflect not so much the “uncertain regulatory environment” advanced by some as the fact that international oil companies are trimming uneconomic reserves to reduce production by 30 per cent to 40 per cent by 2030, as they shift investments to the growing renewable energy sector.
Canada has a wealth of options that build on its strengths. These include an abundance of renewable energy resources, particularly in Alberta and Saskatchewan, excellent universities as foundations for innovation, CETA (the Comprehensive Economic and Trade Agreement), and in the event of a Biden presidency, a supercharged US$2-trillion Plan for Climate Change and Environmental Justice. All this at a time when the U.S. may close off market access for Chinese zero-carbon technology exporters.
As the foundation of a “persuasive growth plan,” we propose a Green New Bill, which will deliver $308 in returns to the economy over the next decade for every $20 the federal government invests today through existing arm’s-length institutions charged with a fiduciary duty to Canadians. The dividends from the Green New Bill will result from productive investments in deep building retrofits, accelerated adoption of cheaper-to-own electric vehicles as a catalyst for a Canadian battery supply chain, a complete decarbonization of the Canadian electricity grid, greening heavy industry in line with international peers, “mining” bitumen for valuable advanced materials, and a renewal of Canada’s forest and agricultural ecosystems. Over 10 years, these investments would create or maintain more than 6.3 million years of employment and would deliver $44-billion every year in energy savings to Canadians. Investing now would also put us on the same path as many of our Group of 7 partners to reduce emissions at a rate of 5 per cent to 6 per cent a year until 2030.
The investments proposed in the Green New Bill could be financed through a sovereign bond at negative real interest rates. Following Germany’s oversubscribed green bond, the EU proposes to do the same to finance €250-billion ($391-billion) of post-COVID-19 economic recovery investments that will be zero carbon. If a sovereign fund is impractical in Canada, we can lead the world with a sovereign bond to help make the transition for Green New Bill investments.
The Green New Bill includes the investments needed to cover costs incurred by COVID-19 and to build the foundation of a prosperous postpandemic economy. The risk of waiting to invest is that we will fall even further behind in spurring productive investment as we use shrinking proceeds from oil and gas to pay for current spending. A new generation of sovereign investors is watching. The time to invest is now. And the Green New Bill is how.
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