Kevin Yin is a doctoral candidate in economics at the University of California, Berkeley. He was previously a research fellow at Yale University.
Rich Kruger, the CEO of Suncor, has signalled a retreat from energy transition projects to refocus on its core oil sands business. These comments are the latest indicator that Canada’s incentives for companies to develop their green capacities are insufficient.
Mr. Kruger’s remarks come on the heels of many large oil and gas companies recentering their strategies around non-renewables. Shareholders applauded British Petroleum for walking back their environmental, social and governance (ESG) objectives this year. Shell capped its low-carbon expenditures and stated it will not accept sustainability alone in exchange for lower returns. Suncor itself sold off many of its wind and solar assets last year. One can bemoan their lack of altruism but the fact is these are private companies with responsibilities to their shareholders. Fossil fuels remain much more lucrative.
Wind and solar are becoming cheaper. However, it is a leap of economic logic to argue that falling costs necessarily beckon a speedy transition. Production can be low cost without being profitable because there is still revenue to consider. How much you can sell for has as much to do with your competition as it does with your production costs. The hydrocarbon industries – i.e. oil, natural gas and coal – require a level of initial capital and infrastructure far beyond that of renewable energy, for exploration, drilling and processing. This keeps competitors out, and thus profits high, particularly in a climate of high fuel prices. The same is not true for renewable electricity markets. As a result, the internal rates of return on fossil fuel investments are 10 to 15 per cent, around double that of renewable investments.
The existing incentives are laudable but neither broad enough nor generous enough to address this gap. On many metrics, Canada still falls well behind the United States. Current Canadian tax credits reward investment in better tech but they do not reward production. Not only does such an omission leave our existing green producers at the mercy of U.S. competitors, which are buttressed by the Inflation Reduction Act’s production subsidies, it also fails to incentivize precisely the kinds of investments that hydrocarbon companies are willing to make.
As oil and gas executives have explained in the past, their expertise is better suited to purchasing existing farms and selling the electricity, not for developing cutting-edge windmills and solar panels. Ottawa feels that production credits would not make production more efficient over time. But it would make present methods more economical and both initiatives are important. We have large companies with deep pockets that are positioned to be producers rather than inventors, a crucial role our policies do not seem to value.
Nor has the Canadian business environment been a fertile ground for green energy development as of late. Alberta’s processing of applications to construct solar and wind farms, which once took months, has now been paused altogether. Such a volatile and confusing policy regime is a surefire way to spook investors in an industry already hobbled by unattractive profits. Other provinces lack the sensible power purchase agreement contracts (PPAs) that only Alberta offers, where companies can buy renewably sourced electricity directly from producers and offset their energy bills from other sources. It is another area where the United States excels and Canada is playing catch-up. Such a minor contractual innovation would unleash significant demand on the market for renewables and add a customer base for renewable-curious oil companies.
These policies would bring Canada closer to being on par with the United States but even par may not be enough. After all, British Petroleum and Shell, which have significant operations in the U.S., shifted away from renewables despite more generous offerings south of the border. More painful adjustments may be necessary.
Canada might consider slowly shifting the billions it provides in explicit and implicit oil and gas subsidies toward more generous clean credits. The government could double down on demand-side incentives that drive consumers toward solar and wind, which would be more politically marketable than taxes and economically equivalent. Another option is to allow for greater market concentration in renewables in exchange for enforceable transition commitments. Most of these would not be desirable under normal circumstances but the alternative is a Faustian bargain.
As long as green energy remains less profitable than oil and natural gas, Ottawa and the provinces will have to make up that shortfall with strong financial and bureaucratic incentives. This is critical both to preserve the competitiveness of our energy sector in the long run and to reduce carbon dioxide emissions.
The fact that Suncor is refocusing on its traditional oil sands operations should not be thought of as a company reneging on its green commitments, but rather a failure of the incentive ecosystem to bring those commitments to fruition.