Energy Archives

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The federal government’s latest Clean Electricity Regulations update shows it’s softening its position on sharply cutting emissions from natural gas-fired power plants by 2035.
Ottawa has demonstrated that it’s receptive to the provinces’ and utilities’ concerns about their ability to meet 2035 Net Zero targets.
We see this as a major win for Ontario, and it also gives Alberta and Saskatchewan more leeway in how they manage their transition to cleaner sources.
The proposed changes are not expected to compromise the 2035 Net Zero target set for the electricity sector if the regulations for offsets are included.
The devil will be in the detail, as the white paper does not provide any details on what the regulations could look like when finalized.
In terms of next steps, comments on potential changes to CER are due to be submitted by March 15, and final regulations are set to be released by the summer.

Ottawa’s draft Clean Electricity Regulations (CER) has sparked significant debate among provinces since its release in August 2023. Various stakeholders, including provinces, industry, and utilities, have raised concerns about the draft’s strict approach to phasing out natural gas from the grid. Most provinces worry that achieving the federal target of a Net Zero electricity grid by 2035 across the country will be challenging while ensuring system reliability and affordability. There were particularly large backlashes from Alberta and Saskatchewan, which are currently phasing out coal in favour of less emitting generation like natural gas.

The federal government responded last Friday with an update on the consultations and design options that are being considered for the final regulations. It comes several months after the consultation period for the draft regulations closed.

The feedback that the federal government received from the consultation raised concerns about the effectiveness of carbon capture and storage (CCS), potential operation of inefficient units, short end-of-prescribed life, challenges for existing cogeneration facilities, provisions for greenhouse gas offsets, and post-facto emergency exemptions review. These concerns could impact units under development and how existing units are operated.

In last week’s update, the federal government proposed major changes to its draft to reduce carbon emissions from Canada’s electricity sector by 2035. The new design options show more pragmatism in the federal government’s approach, indicating that it is softening its position on sharply cutting emissions from gas-fired power plants by 2035.

What’s in the update?

The updated design options for the regulations would provide electricity system operators more flexibility to continue operating their natural gas power plants past 2035. This includes setting annual emission limits rather than performance standards, allowing plants to operate longer without constraints, and permitting the purchase of offsets when emissions from natural gas generation exceed those limits.

The improvements to the regulations currently being considered are a significant win for provinces that will still need to rely on natural gas generation past 2035. This ensures that provincial electricity system operators can continue to provide reliable and affordable electricity while maintaining Canada’s ability to achieve its emissions reduction goal.

Flexibility for provinces

The federal government is considering several options to provide more flexibility to provinces, utilities, and other electricity regulators and providers, while still ensuring significant emissions reductions. One such consideration is changing the approach from a performance standard, which is a fixed emissions intensity standard, to a possible emissions limit. This limit would be tailored to each unit’s capacity, replacing the current “performance standard approach.”

This new approach could potentially incentivize efficiency improvements and provide flexibility. However, it could also eliminate the “peaker provision approach” that was included in the draft regulations, and was an area of concern for Ontario.

We see this as a major win for Ontario, and it also gives Alberta and Saskatchewan more leeway in how they manage their transition to cleaner sources.

Additionally, the regulations could permit a unit to exceed its emissions limit by a certain amount, provided it compensates for all excess emissions with greenhouse gas (GHG) offsets. In this scenario, the federal government will be faced with the task of ensuring a reliable supply of high-quality GHG offsets. Additionally, they need to establish effective market mechanisms to manage potential increased demand for offsets within Canada.

Other considerations include extending the “End of Prescribed Life” beyond the current proposed level of 20 years and allowing responsible parties, such as utilities and crown corporations, to pool the emissions limits of their multiple existing units in the same jurisdiction.

Regulatory treatment of cogeneration is also under review, potentially shifting to an emissions limit. The approach under consideration would also differentiate between “behind the fence” electricity emissions and the emissions associated with electricity provided to the grid.

The federal government plans to continue engaging with stakeholders, including provinces and utilities, before finalizing the CER later this year. Ottawa has stated that continued collaboration will be essential to ensuring the regulations can provide significant emissions reductions while supporting electricity system reliability and affordability. Comments on potential changes to CER are due to be submitted by stakeholders by March 15.

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Cleantech is in correction mode. Last year’s CleanTech Forum, in Palm Springs, was brimming with measured optimism, although there were whispers of some impending corporate failures wafting down the halls. Clean technology fortunes between the commercially viable and the questionable had already begun to diverge in 2023, a trend that will only deepen.. At this year’s forum in San Diego, there was a full-throated acknowledgement of a much-needed cleantech shakeup in the offing. This year will almost certainly see further retrenchment from the US$40 billion capital flows into clean technology companies and national and corporate climate commitments of 2023, according to BloombergNEF. Companies with weaker economics or technical fundamentals are struggling, while venture and growth dollars for new industrial technologies are waning. Dozens of cleantech companies have seen their values drop and financial flows dry up as financing becomes more difficult to obtain. Further declines and eventual consolidation in the industry seems inevitable. Still, that’s in Silicon Valley’s DNA: test, crash and burn until a unicorn rises. On repeat. To be clear, there’s plenty of optimism, too: project financing and job creation for clean technology manufacturing facilities have never been stronger. Meanwhile, government measures, such as the U.S. Inflation Reduction Act, and climate-focused investors will sustain the best companies as they commercialize.

North America’s manufacturing renaissance is underway with technologies graduating from demonstration to deployment. Factories for electric vehicle batteries, electrolyzers, carbon dioxide pipelines, and low-carbon steel, cement, and ammonia plants are coming online across the continent. Other bright spots are the opportunities in emerging economies, especially in Asia Pacific. Highly susceptible to climate change’s impacts as they raise their standards of living, India, South Korea, and China, for example, are bucking the Western downturn and are happy hunting grounds for clean technology investors and entrepreneurs. By the end of the year, the role of politics, another key variable in forward climate trajectory, will also become clearer. Electoral unease has already manifested in the rollback of climate policies around electric vehicles and strengthened oil and gas licensing in the U.K., and calls for axing the carbon tax in Canada. In the conference halls of San Diego Bay Mission Resort there were whispers of further headwinds with a potential return to a Donald Trump presidency. But with Red States securing most of the capital flows emanating from IRA incentives, climate policies may yet not be dumped by Trump. Of course, another Joe Biden term could cement climate policies in the American economy.

Vivan Sorab is Senior Manager, Clean Technology, at the RBC Climate Action Institute.

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The global energy system is in the throes of a generational shift. Population and economic growth spell a demand for much more energy. Climate pressures spell an imperative for a different mix. And new technologies mean new opportunities for both. Looking out a decade, to the mid-2030s, can that changing world of nearly 9 billion people power itself into a new age of sustainable growth? And where can Canada, a global leader in all forms of energy, create the most value in a Net Zero economy? To map out the expected courses for both energy demand and supply in the 2030s, RBC Economics & Thought Leadership and RBC Capital Markets, including Global Research, developed global and national datasets, and new projections. The estimates are based on current assumptions of population growth, economic growth and distribution, technology adoption and government regulation. The highlights of that research are laid out in this report, and its six major conclusions which are designed to help inform policy discussions at COP28, the UN Climate Conference in Dubai, and subsequent energy policy conversations. We know energy is fundamental to every part of our economy, while our management of energy emissions is also fundamental to progress on climate change. Balancing those needs will require an informed public discussion, which this research is meant to contribute to.

1. The world will need to supply another United States worth of demand

Global population growth may be slowing, but the world still needs to generate more exajoules in the next few decades to power emerging economies’ growing needs. Global population is set to rise by 1.7 billion to 9.7 billion by 2050, adding the equivalent of another China and United States in one generation. More imminently, world population will rise by around 834 million by 2035, which is the equivalent of another Europe. That will require another 93 Quad BTU of energy, or close to what the United States consumes now. When it comes to energy-intensity growth, the world appears to be on a two-track trajectory. In advanced economies, efficiency gains are lowering per capita consumption, which has contracted 13% over the past 20 years in Europe and North America, or about 0.7% per year. Population growth is also easing, but not declining outright in most advanced economies. Still, efficiency gains on a per-capita basis aren’t yet large enough for total energy demand to decline outright, even among advanced economies, especially in Canada. Emerging markets are on a faster track and still in the early stages of adopting passenger vehicles, home appliances and advanced manufacturing. In India, the world’s most populous country, energy consumption rates are still relatively low. A slowing population growth rate will help contain emissions growth but not sufficiently enough to offset a growing demand for intensive energy sources, including coal. Indeed, India’s population growth remains concentrated in the north where coal-dependency remains significant for industrial and urban demands.

Global energy demand growth by region

Per-year percentage contribution to world energy consumption growth

Source: U.S. Department of Energy, RBC Economics

Elsewhere, the pace of growth is uneven across the developing world. Per-capita energy consumption rates in China, the world’s largest market, are approaching advanced economy levels and will begin to level out. The pace of energy demand growth is set to slow after rising by 2% per-year over the past decade. And decades of low birth rates from the one-child policy mean China’s population is outright declining, which (all else equal) lowers total energy demand. By our count, growth in total energy consumption will be half the pace of the last decade in China – with risks of further decline if its economy weakens. The populous countries of Africa, rest of Asia and Latin America are facing their own unique challenges to build their economies while managing energy demand and climate pressures. Capital will be critical. Developing countries account for only one-fifth of investment in clean energy, despite making up two-thirds of the world’s population. Middle income countries, such as Brazil, Mexico and South Africa, are home to 75% of the global population and 62% of the world’s poor. Their rising disposable income, and aspirations to buy motorbikes, homes and electronics, will require all forms of energy. Eventually, the massive gap between energy consumption rates in emerging markets will close as their economies mature — but we are not there yet.

Energy consumption per-capita

MMBtu/person, 2021

Source: U.S. Department of Energy, RBC Economics

2. Renewables will account for 20% of global energy needs

While total energy demand will continue to increase, a rising share will come from production of zero emissions and renewable power. Renewable power is set to grow at five times the rate of conventional energy by 2035, which would push the share of total energy consumption globally from renewables to about 20% from 12% in 2022 and 8% a decade earlier in 2012¹. The cost competitiveness of renewables versus conventional energy has improved greatly, and government supports are encouraging a faster transition than otherwise would occur. Thanks to the Inflation Reduction Act, U.S. renewable energy growth is set to more than double by 2035, rising at a 7% per-year rate, or double the growth rate for renewables over the past decade. In virtually all regions, renewable power is set to rise as a share of total energy consumption. One key reason: between 2010 and 2020, the cost of solar and wind power fell 56% and 85%, respectively. Much of that growth could displace coal and other high-emissions sources. Coal consumption outright declined by about 0.5% per year globally over the last decade, and is expected to decline annually at twice that pace through 2035. That would still leave coal accounting for about 20% of total global energy consumption in 2035, down from 27% currently and over 30% a decade ago. Still, renewables are not without their challenges. Countries that have rolled out ambitious clean grid plans worry about the reliability of grids that depend primarily on wind and solar. A surge in installations is leading to cost inflation, at least in the medium term, while scaling up battery storage remains a challenge, although rapid advances are being made. Global co-operation is also crucial to ensure a smoother roll-out of renewables and a level playing field across countries. The patchwork of global regulations, such as a carbon border adjustment tax, and different carbon pricing mechanisms, need further refinement, robust common standards, and general acceptance across jurisdictions to speed up the transition. Political calculations could also change the trajectory of renewable adoption in many counties. There are signs of political resolve weakening on climate policies as the electorate around the world struggles with high cost of living, especially inflated energy bills. As many as 3.2 billion people in 40 countries (including the U.S.) with a combined GDP of US$44.2 trillion, will head to the polls in 2024. Climate policies are set to come under scrutiny and the prevailing public mood could well shift momentum in either direction. Meanwhile, worries around China’s control over metals and minerals and technologies vital for the energy transition have led many countries to develop parallel, and costlier, supply chains. But new mines will take at least a decade to build and renewable supply chains could easily become more complicated and costlier in a trade-restricted world. While these frictions are unlikely to slow the pivot to renewables, they could delay it.

Global energy consumption by source

Source: U.S. Department of Energy, RBC Economics

3. Peak oil demand is coming—but not yet

Discussions around “peak oil” can miss the bigger picture: An industry can remain dominant for decades even if it never surpasses some past high point. We assume global oil demand will continue to slow as a share of total energy consumption, but volumes consumed will not outright peak before 2035. Total petroleum consumption is already declining in major advanced economies (including the United States) but will continue to grow in emerging markets as population and energy use per person rises. There is substantial uncertainty around those estimates, with near-term risks both on the downside (slower global growth, notably in China) and on the upside (rapid technology adoption, also notably in China). Still, the direction of travel is clear: Over 60% of total global oil consumption is from the transportation sector, where the EV transition is well underway. China alone accounted for almost two-thirds of total global petroleum consumption growth over the last decade, and is now shifting rapidly to EVs. Full electric and plug-in hybrid vehicles have increased to 40% of total retail vehicle sales in China – more than 10 times the roughly 3% share in 2019.

Expected petroleum consumption growth by region

Per-year percent change, 2022 to 2035 (expected)

Source: UN, U.S. Department of Energy, RBC Economics

In Europe, electric vehicles already account for 44% of total car sales in 2022. The U.K. plans to fully end the sale of fully internal combustion engines by 2035. Canada plans to increase zero-emission vehicle sales to 60% of the new car market by 2030 and 100% by 2035. Those plans can change, and governments have a long history of delaying green energy objectives. The turnover of vehicle fleets is another key factor. Internal combustion vehicles are staying on the road for longer than ever as reliability and durability improves (the average age of a vehicle in the U.S. is 12 years), suggesting a longer shelf life for existing stock even as EVs make up a greater share of sales. Still, per-capita petroleum consumption rates have already been declining for decades across advanced economies thanks to fuel efficiency increases, and that trend will likely accelerate as the market share of EV sales grows.

Per-capita petroleum consumption

Index = 100 in 2011

Source: UN, U.S. Department of Energy, RBC Economics

4. Natural gas faces a more uneven transition

The phasing down of coal power is expected to boost demand for natural gas as a transition fuel on an eventual pathway to renewables and battery storage—at least in advanced economies. The pace of that transition will vary significantly by region, and with levels of government support. In the U.S., heat pump subsidies in the Inflation Reduction Act will help accelerate the transition to renewable fuels for home and commercial heating. Elsewhere, coal remains a core energy source, which gas could displace over time. China, the world’s largest emitter of greenhouse gases, is continuing to invest in nuclear power, but also permitted the equivalent of two large scale new coal power plants per week in 2022, despite pledges to reach Net Zero by 2060. In India, there is an estimated 65.3 GW of proposed, on-grid coal capacity under active development, equal to a third of its current coal generation capacity. Globally, natural gas demand growth is expected to be driven primarily by increased demand in emerging markets — enough to ensure total demand for natural gas is not likely to peak until after 2035. But the pace of growth will average about half the 1.8% annual rate of growth over the last decade, and the share of natural gas in the total global energy mix will edge lower with renewable power sources growing more quickly. In Canada, natural gas demand will be underpinned by strong demand from industrial sources – including high demand from the oil & gas sector. The expected launch of LNG Canada by mid-decade will signal Canada’s first major gas export foray beyond the United States, as major markets look for secure energy supplies. In Europe, since Russia’s invasion of Ukraine, plans for 26 new regasification terminals have been announced or launched, totalling 104.5 MTPA—a fifth of the current global LNG capacity, according to the International Gas Union. In Asia, Japan, China and South Korea remain among the world’s top three LNG importers. Their new long-term deals with multiple LNG exporters underscore their desire to secure and diversify energy supplies.

5. Oil Investments: Capturing value, capping emissions

Petroleum remains an important source of energy – still accounting for around 30% of total energy consumption by 2035. That would remain true even in the International Energy Agency’s more optimistic scenario in which global oil consumption peaks before the end of this decade. And the nature of Canadian oil production – heavily weighted to long-lived projects with very large initial sunk capital costs, and a relatively small share of global production – means that domestic oil production is relatively insensitive to near-term market dynamics².

Canadian oil & gas capex spending still low

% of GDP

Source: Statistics Canada, RBC Economics

Still, the sector remains constrained by insufficient pipeline capacity to get Canadian production to market. The government-owned Trans Mountain Pipeline expansion will boost takeaway capacity significantly once it enters service likely in 2024. The 590,000-barrel-per-day expansion will fetch tidewater prices and reduce the discounts on Canadian benchmarks. Additionally, oil sands production is well-capitalized and may not need significant further investments. As a result, total oil and gas investment has declined to 1.5% the size of annual Canadian GDP – less than half the share (3.7%) before the oil price collapse of 2015. Even without new projects, the domestic industry can increase production over the next decade if global demand grows. We expect Canadian oil production to rise by 16.5% by 2030, primarily by increasing capacity of existing production rather than new investments. The Federal government’s proposed framework for an oil & gas emissions cap could change that outlook. There is still no certainty of what that the final regulations will look like. The framework envisions a (soft) cap at 35%-38% below 2019 emissions from oil & gas production to be phased in from 2026 to 2030 and with options to produce above caps for a price. But details are still to come and will be influenced by feedback from industry, legislative pressures, and potential court challenges. Decarbonization strategies may present the most significant capital need for oil and gas producers heading into the 2030s. The oil sector has already lowered emissions per barrel by roughly 20% since 2010, although increased production led to an absolute growth in emissions over that period. Plans and proposals for decarbonization projects, including carbon capture and sequestration, will require tens of billions of dollars of new capital, including from the federal and provincial governments. The sector believes such investments could secure its export markets for years, perhaps decades, to come.

6. Canada’s strong population growth will require a broad energy mix

Canada has one of the highest per-capita energy consumption rates in the world thanks to cold winters, hot summers, and a widely dispersed population. In addition, high levels of immigration are now the key driver of population growth, and added energy demand. Will Canadians shift to climate-friendly technologies fast enough to offset the addition of five million newcomers over the next decade? The transition to EVs is one signal it might—the share of hybrid and full-electric vehicles in total autos sales has more than doubled over the last decade, to 16% from 7% a decade ago. And the volume of gasoline sales is running ~3% below 2019 levels despite a 6% population increase over that period.

Canadian gasoline sales growing slower than population

Index = 100 in 2019

Source: Statistics Canada, RBC Economics

The pandemic reset consumer behaviour with possibly long-term consequences. Work-from-home policies have also dented public transit traffic and fuel consumption. Plus, a new generation of Canadians, and younger immigrants, living in more urban settings, may further cut fuel consumption over time. More people will likely mean more buildings to heat, too. Over the longer-run, alternative heat sources like heat pumps can help displace traditional natural gas and fuel oil as primary home heating sources. But cold winters mean energy demand for home heating will continue to grow and keep a floor under natural gas consumption—for now.

Canadian population growth bucking a slowing global trend

Average percent change per year

Source: UN population projections (Statistics Canada for Canada), RBC Economics

Canada’s share of renewable power is still relatively high (25%) compared to other countries, mainly due to the availability of abundant hydro power. But the impressive figure masks a weakness: Canada is one of the few advanced economies that failed to increase that share significantly over the past decade. That could change in the decade ahead with renewable power growth expected to accelerate, as envisioned in the proposed federal Clean Electricity Regulations. The rules aim to create low- or zero-emission electricity grids across Canada by 2035 and are part of the federal government’s overarching goal for the economy to get to Net Zero by 2050. The eventual shape and success of those regulations, which are opposed by several provinces, will be significant to the trend-line of natural gas consumption. Canada is also expected to rely on growth in nuclear energy, led by Ontario, to boost the share of total energy consumption from the zero-emission source. As the industry regains acceptance as a reliable and safe zero-emissions energy source, we assume a 9% increase in nuclear energy consumption in Canada by 2035.

Canada energy consumption by source

Source: U.S. Department of Energy, RBC Economics

More broadly, the right policy levers and industrial innovation can transform Canada into an all-round global energy player, and taps its sun, wind and timber, in addition to its strategic fossil fuels. Canadian resources and ingenuity can be a force in the world and help us deliver our Net Zero target, as we stated in our $2 Trillion Transition report.

Some provincial grids will find it harder to hit Net Zero targets by 2035

GHG emissions in electricity sector by jurisdiction

Jurisdiction	Electricity Total Greenhouse Gases (Megatonnes)	Electricity Sector Emissions as a % of Total Emissions	Share of clean/renewable electricity (%)
British Columbia	0.4	1	97.5
Alberta	32.7	13	15.1
Saskatchewan	13.9	21	14.1
Manitoba	0	0	99.8
Ontario	3.7	2	92.3
Quebec	0.3	0	99.7
New Brunswick	3.5	28	73.4
Nova Scotia	6.3	43	26.6
Prince Edward Island	0	0	99.3
Newfoundland and Labrador	1	10	97.8
Yukon	0.1	9	72.8
Northwest Territories	0.1	4	68.7
Nunavut	0.2	25	0.2
Canada	62.1	9	82.6

Source: Environment & Climate Change Canada, Canada Energy Regulator, RBC Climate Action Institute

A Role For Natural Gas

The CER consultations launched last year had sparked tensions between Ottawa and fossil-fuel reliant provinces such as Alberta—which recently announced a six-month moratorium on renewable energy projects. Other gas-powered provinces such as Saskatchewan, Ontario and Nova Scotia had also expressed concerns. Provincial utilities worry that as more power comes from wind and solar power, it will be harder to reliably match supply and demand of electricity, risking blackouts. Ontario’s Independent Electricity System Operator (IESO) noted that 40% of severe weather events that could cause renewables outages exceeded the length of time it can store power in batteries. Rising demand and higher costs of alternatives such as energy storage or nuclear power makes the case for gas a lot stronger. The proposed rules offer some flexibility to help alleviate those concerns and ensure natural gas has a role to play, albeit diminishing, in provincial grids:

The draft regulations require that grid-connected electricity generating units online as of 2035 with a capacity of 25 megawatts (MW) or more meet an annual average emission threshold under 30 tonnes of CO₂ per gigawatt-hour (GWh) of electricity produced. An unabated gas-fired generator produces 400-500 tonnes per GWh.
For reliability, unabated peaking gas turbines can fire for up to 5% of the year without meeting an emissions performance standard. Ottawa considered allowing peakers to run more but found it decreased costs by only 2% while increasing emissions.
Natural gas turbines already in service before 2025 have 20 years of uncapped emissions before being subject to the rule (this likely will not apply to any gas units not already planned, which won’t be commissioned before 2025).
Natural gas-fired generators that install carbon capture can apply for exceptions to the emissions threshold (increasing allowed emissions to 40 tonnes/GWh on an annual average basis) for up to 7 years after commissioning the unit, to allow for capture system downtime.
“Behind-the-fence” (i.e., own-use) power generation is exempt, as are emissions associated with the heat element of combined heat-and-power systems (e.g., those used in the oil sands). They are still covered under the large emitters carbon price.

That gives gas-reliant Alberta and Saskatchewan some breathing room before they need to reduce their dependence on fossil fuels. Still, incentives are firmly nudging the provinces to transition natural gas out of the grid over time.

Provinces Take Charge

We think these are material concessions in response to provincial and industry feedback, without sacrificing the core intent of the regulations. We expect the regulations will have a significant impact on the role of unabated natural gas in the grid. The 5% threshold for peaking is restrictive (many peakers operate above this capacity factor) but existing transition gas (e.g., Alberta’s recently grow in gas to get off coal) will be allowed to operate for at least 20 years, enough time for operators to be paid out for their investments. Future gas baseload plants will likely be significantly challenged in areas without access to carbon storage. If the regulations come into force as proposed, gas baseload power is unlikely to offer a solution for eastern Canada without significant work to develop a carbon, capture and storage (CCS) strategy and studies of storage opportunities. Indeed, the federal government’s model sees little role of emitting generation under the regulations even with the peaker provisions, with natural gas providing somewhere between 0.5% and 1% of Canada’s electricity after 2035. The sum of the regulations and investment tax credits from Budget 2023 would help move the needle. Teasing a forthcoming clean electricity strategy, Ottawa suggested federal funds would be restricted to provinces that “take concrete action to achieve Net Zero.” Indeed, provinces will likely need to publicly commit to the 2035 Net Zero Electricity goals and start cutting emissions beyond electricity. Supporting the required permitting for transmission lines, power storage projects, and carbon capture equipment will also be critical for provinces to move at an accelerated pace.

Contributors:

Lead author: Colin Guldimann, Senior Economist

RBC Climate Action Institute Myha Truong-Regan, Head of Climate Research Yadullah Hussain, Managing Editor Shiplu Talukder, Digital Publishing Specialist Caprice Biasoni, Graphic Design Specialist

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Ontario’s clean grid strategy, released this week, has the “all-of-the-above” vibe to it

The province is doubling down on its nuclear power prowess, keeping natural gas in play and eyeing more hydro even as it plugs in more solar and wind into the grid.

There’s a lot to like in the provincial government’s plan to meet rising long-term electricity needs. The plan to invest more in nuclear will add certainty that Ontario’s electricity grid would facilitate Net Zero goals by 2050. But its reliance on natural gas in the near term could threaten short-term climate targets.

Ontario’s “Plan For A Clean Energy Future” signals the government’s recognition that the province’s economic growth depends on more clean electricity: a greener grid would help the province attract billions of dollars in transition energy investments such as electric vehicle supply chains, decarbonizing industries, energy storage, and critical minerals.
But the plan falls somewhat short in putting much of the focus on the 2040s. The province’s decision to maintain natural gas-fired power in the energy mix could set up a potential political dust-up with the federal government, which is poised to finalize its Clean Electricity Regulations.

Our key take-aways from Ontario’s clean energy plan:

Demand Surge

By 2050, Ontario’s electricity capacity—how much power the province can produce at one time—is expected to more than double to 88,000 megawatts. The province will also have to replace power generation capacity of 20,000 megawatts over the next three decades. Coupled with rising population over the next few decades, Ontario will be challenged to power the grid without raising its emissions.

The province is also attracting unprecedented investments in electric vehicle battery manufacturing, clean steelmaking and other sectors, partly as a function of subsidies, which would strain capacity. Five major investments in the new energy economy alone will increase industrial demand by 21% once online.

Nuclear Renaissance

Ontario is going big on new nuclear reactors to meet that demand. Plans to make Bruce Power Generating Station the world’s biggest nuclear site with a 4,800-megawatt expansion, announced last week, were augmented to add three innovative small modular reactors to one announced at the Darlington nuclear site in 2021.

Stand-by Source
It’s what the province calls its “insurance policy.” Natural gas will continue to play a role as the Darlington and Bruce sites undergo refurbishment over the next decade (at its peak four nuclear units representing 9% of Ontario’s capacity will be offline). To that end, the province is in search of 1,500 MW of new gas generation capacity (growth of about 15%, if met). But that could upset the province’s plans to cut emissions: a recent Independent Electricity System Operator (IESO) estimate foresees nearly tripling electricity sector emissions by 2030 as gas plants stand-in for nuclear power generation in the short-term.

While some gas will be needed to meet rising peaks as hot days become more frequent, there are other options that could be explored as we noted in our recent report, Power Shift, How Ontario Can Cut Its $450-Billion Electricity Bill.

Facilitating Renewablese
The province is procuring electricity storage, which is critical if it’s to deploy more cost-effective wind and solar power. It’s current procurement of 2,500 MW of clean energy storage is the largest battery procurement in Canada’s history. The Oneida Energy Storage Facility and Marmora Hydroelectric Pumped Storage Project are also positive developments.

But as the province’s grid integrates more renewables, a buildout of transmission lines will be critical to plug in power from remote sites. The province has not yet outlined a strategy to address that looming transmission challenge.

What’s Missing

The province has the long-term plan mostly right in our view: nuclear and hydro firming up a lot of new renewables, with some questions around peaking power from gas with carbon capture or hydrogen. Efforts to expand hydropower capacity and exploring promising low-carbon technologies such as renewable natural gas and renewable diesel will also ensure the province remains a clean-tech hub.

But a lack of near-term focus on key infrastructure is concerning. Transmission will be critical to integrate renewables, investments to facilitate electrification of households by local distribution companies will be needed to ensure the grid can handle EVs and heat pumps, and smarter technology can help facilitate more limited natural gas peaking in the near and medium term.

The plan takes some good first steps in facilitating a more flexible electricity system, by allowing consumers to access their utility data via Green Button, an energy efficiency tracking program, and considering more use of distributed energy (like rooftop solar) or energy conservation.

Ontario’s long-term nuclear investment will secure a visible path to 2050 climate goals. But the province will need to move quickly and make costs more visible to consumers if it’s to avoid major investments in emitting infrastructure over the next few years.

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Ontario faces a $450-billion investment bill by 2050 to meet surging demand and emerge as a green-grid hub that’s attractive to industries looking to cut or eliminate their emissions.
Rising electricity demand could strain the province’s grid as early as 2026 and even trigger chronic shortages by 2030.To meet pressing short-term needs, Ontario is eyeing more gas-fired power generation, which, unabated, could clash with the federal government’s forthcoming Clean Electricity Regulations.
The province can avoid making expensive decisions on its future energy mix by pursuing robust policy measures and incentives to save power.
Timely action to conserve energy could save enough electricity to power 3 million homes by early 2040s—a little more than half of the province’s residential electricity demand.
Readily available technologies such as smart thermostats, electric panels and AI-enabled HVAC systems that can substantially improve grid efficiency and sustainability would give Ontario the room to manage demand peaks without building new gas plants.
The measures could save Ontario ratepayers at least $500 million annually in avoided generation costs over that time.

Smart homes can unlock grid efficiencies

Tech-savvy homes could save Ontario ratepayers $500 million annually

1

Smart thermostats
2

Solar panels
3

Smart HVAC
4

Distributed battery storage for EVs
5

LED light bulbs for conservation
6

Insulation and air sealing
7

Smart electrical panel
8

Wi-Fi enabled plugs
9

Energy-efficient appliances
10

Heat Pump Water Heater

Ontario is bracing for a wave of electricity demand

The province’s rapidly growing population, electrifying industry, and aging nuclear reactors will shift the province’s electricity grid from decades of comfortable surplus to critical shortages in just a few years. By 2026, the province’s grid could strain to meet demand during peak hours; by 2030 soaring demand could outpace generation capacity. Clearly, building more power generation is going to be unavoidable in the coming years. The Independent Electricity System Operator (IESO), which runs the province’s power market, plans to import power (primarily from Quebec), expand renewables, store power in batteries, and dabble with new nuclear reactors to meet demand. But IESO is also seeking bids for new gas-fired power plants that are vital to manage near-term capacity pressures.

The strategy could clash with Ottawa’s expected Clean Electricity Regulations (CER) that will prohibit unabated gas-fired power plants to ensure a Net Zero electricity grid by 2035. Electricity generates 7.7% of Canada’s greenhouse gas emissions—the 6^th largest source of emissions in the nation. The country boasts one of the cleanest grids in the world, but that label is threatened as provinces such as Ontario, Alberta and Saskatchewan remain heavily dependent on natural gas and see it as a critical and reliable source to meet future demand. The expected CER builds on federal coal regulations that stipulate phasing out unabated coal-fired electricity units by 2030, and aims to avoid grid emissions as other sectors electrify. Rising demand for electric vehicles and heat pumps, electrified steelmaking, and battery manufacturing, among other segments, will cause the grid to expand rapidly over the next few decades. Left to their own devices, some provinces have planned to add natural gas power, partially offsetting emissions cuts from these sectors. The federal government believes recently announced electricity tax credits should offset the cost of taking gas out of the power mix or fitting it with carbon capture, but several provinces say building enough non-emitting power to meet Ottawa’s timeline is going to be difficult. Alberta and Saskatchewan who are rapidly phasing out coal as a power source, are reluctant to shut the door on natural gas without ensuring the reliability of other sources. The CER’s rollout in its current form and timeline could set up a federal-provincial fight. Ontario, the country’s largest economic engine and most populous province, faces the most immediate challenge. But investing $450 billion in generation, transmission, and distribution by 2050 without knowing the scale of demand is risky. To ensure an accelerated but orderly transition, Ontario will have to do both: boost supply, but also find other ways to manage demand in the interim. RBC’s $2-Trillion Transition report estimates annual investment of $5.4 billion in renewable and batteries are needed to save around 11 million tonnes in electricity emissions, but natural gas will have to play a stabilizing role in ensuring an orderly energy transition. As Ontario’s reliable generators such as nuclear plants get refurbished and coal power shuts down, more natural gas generation is the province’s preferred route. But that strategy is at odds with federal Net Zero targets: A recent IESO estimate foresees nearly tripling of emissions by the end of the decade, as gas plants meet increasing demand and declining nuclear production.

Stepping off the gas

What can the province do to bide its time and avoid making an early call on costly natural gas generation? One way is to use policy levers to delay demand. Energy conservation can buy the province time to build large-scale, cleaner power sources such as hydro and nuclear instead of gas, saving money long-term, as we wrote in Price of Power last year. Deferring hefty financial commitments will keep electricity affordable and gives Ontario time to redefine itself as a low-carbon manufacturing hub that attracts companies involved in electric car supply chains, green metal production, and clean-tech. The good news: technology exists that Ontario can use to navigate the looming demand rush and delay committing to natural gas-powered generation. Changing consumer attitudes and behaviours to promote flexible demand and energy efficiency will also be key to unlocking significant savings and alleviating grid pressures.

By 2040, Ontario could meet nearly 20% of its electricity demand growth via economically viable conservation

Electricity conservation is often overlooked, since it has done little to cut emissions in Ontario’s already-green grid, but it could emerge as a vital policy lever to avoid new gas plants. By 2040, Ontario could meet nearly 20% of its expected demand growth—or 28 terawatt-hour (TWh)—via economically viable conservation. Doing so could save Ontario ratepayers at least $500 million annually by 2040. It’s worked before. Over the past two decades, albeit against slowing demand growth, IESO’s conservation programs have outpaced demand. By funding retrofits and LED lighting, among other actions, electricity conservation doubled between 2014 and 2021, from 11 TWh to nearly 22 TWh. Demand grew just 7 TWh in comparison. To maximize potential, Ontario will need to leverage technology to shift peaks to avoid building more capacity now.

Smart tech to the grid’s rescue

Ontario can build on its reputation as a leader in grid innovation to support smart energy use. It’s one of the only jurisdictions globally that has a smart meter installed in nearly every home. That’s allowed the province’s widespread time-of-use pricing policy to manage peak demand. Flexible demand can also respond better to variable zero-emitting sources, like wind and solar. Given the right financial incentives that inspire attitude change, consumers may be prompted to install home solar panels, smart thermostats and smart electrical panels that can improve grid efficiency. Currently, Ontario’s centralized grid system is underutilizing these technologies. Here are a few ways the province can leverage new technologies.

Make it pay: EV owners save money when they charge their cars overnight. But what if they could use it themselves when they turn on their induction stove or sell the leftover power in their car back to the grid? Our research suggests EV owners could earn as much as $100 per month. Those payments could offset distribution upgrade costs for households, although infrastructure upgrades will be needed to facilitate the new vehicle-to-grid technology. Set right, they can save the province money, too, since storing power in EVs may be cheaper than single-use utility-scale batteries. Giving consumers the right price signals can facilitate more responsive demand.
Make it smart: Home monitoring systems attached to electrical or smart panels can combine with Wi-Fi-enabled plugs and smart thermostats to remotely control appliances, lights, heating and cooling to avoid electricity peaks. In Montreal, start-up Brainbox’s artificial intelligence software cut electricity use 10% in a major office tower by weeding out inefficiencies in the system.
Make it responsive: With smarter systems in place, electrical panels can alert consumers that the dryer they just turned on is more economical to run in an hour. Or when the system predicts new peaks, smart water heaters could pre-heat and store hot water for later in the day. This could be key to managing a grid that’s increasingly reliant on variable renewable power.
Make it accessible: Ontario’s current demand response programs focus on paying industry and large buildings to cut demand during peaks. Finding ways to encourage widespread, distributed adoption of these technologies can help consumers benefit (and get paid) for the services they can provide to the grid, easing the cost of electrification.
Make it cost-effective: Traditional energy efficiency can also ease the strain on Ontario’s grid. Think analog solutions like LED light bulbs, energy-efficient appliances, efficient pool pumps for homeowners. Retrofit programs will also need to be scaled up, with support from IESO.

Actions for a green & efficient grid

Ontario is in an enviable position to get electricity consumers to change behaviour. Adjustments to time-of-use pricing are already set to shift demand away from peaks. But with overnight set as the cheapest rate, consumers may not be willing to alter behaviour beyond EV charging. A well-established track record of successful efficiency programs does not mean consumers will invest in retrofits without education or financial incentives. The key will be to help consumers understand the cost of their actions and price them sufficiently to change behaviour. We’ll need to support household investments in technologies to get there faster and assist lower income households through transition. The action points below should ideally be pursued together to maximize benefits for consumers, industry and the province. Ideas to move forward

Ontario’s Ministry of Energy should direct IESO to ramp up and expand cost-effective energy efficiency programming.
Energy efficiency programs should finance low-income households’ adoption of smart technologies such as panels, thermostats, and water heaters to ensure they can benefit from new rate structure.
Economic incentives in existing time-of-use pricing structure are not large enough to nudge consumers to shift their energy consumption to off-peak and mid-peak hours. After supporting tech adoption and real-time pricing feedback, the Ontario Energy Board should introduce higher on-peak rates and set time-of-use pricing as a default, with financial support for low-income households.
Utilities should take a more consumer-minded approach to pricing that clearly communicates to ratepayers the pricing consequences of their electricity use patterns.
As a policy default, allow homeowners and building operators with onsite renewable power generation capacity to sell surplus power back to the electricity grid during peak demand.
Future electricity subsidies from all levels of government should not be focused on subsidizing more generation, regardless of cleanliness. Rather they should support adoption of new technologies to make the grid smarter and accelerate behaviour changes.

For more, go to Climate Action Institute (rbc.com).

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Contributors:

Lead author: Colin Guldimann, Senior Economist, RBC Climate Action Institute

RBC Climate Action Institute Myha Truong-Regan, Head of Climate Research Yadullah Hussain, Managing Editor Darren Chow, Senior Manager, Digital Media Shiplu Talukder, Digital Publishing Specialist

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Scaling down Canada’s emissions rapidly to 440 Mt by 2030 will require cuts equal to around four times the drop seen during the pandemic. Canada’s latest National Inventory Report highlights the progress made on curbing greenhouse gas emissions but also the distance that needs to be covered to reach climate targets. Canadian GHG emissions stood at 670 million tonnes (Mt) in 2021, a 54-Mt contraction from pre-pandemic levels, but 1.8% above the 2020 lows. Scaling down Canada’s emissions rapidly to 440 Mt by 2030 will require cuts equal to around four times the drop seen during the pandemic. While emissions were 8.5% lower from the 2005 benchmark, achieving the federal government’s target of 40% lower emissions by 2030, as set out in the Emissions Reduction Plan (ERP), would require greater effort.

Encouragingly, existing policies have moved the needle: the coal phase-out triggered the largest cuts in the country, while methane reduction policies appear to have a lasting impact, pointing to policy efficacy. Spearheaded by the ERP, further cuts could be driven by recently announced climate policies such as investment tax credits for cleaner fuels, the proposed Clean Electricity Regulations and Oil and Gas Emissions Cap. Carbon pricing remains the cornerstone of the government’s emissions drive, and its continued rollout will be critical to hitting 2030 targets.

Here’s a look at how some of Canada’s most carbon-intensive sectors are managing their emissions:

Oil & Gas

Oil & gas is charged with cutting emissions by 73 Mt—the single largest cut in terms of volume among sectors to meet Canada’s 2030 targets.
A relatively cheaper fix for methane leaks combined with stringent government policies will help in cutting another 23 Mt.
Carbon capture, utilization and storage (CCUS) capacity is projected to reach 30 Mt CO2e per year by 2030, consistent with ERP expectations. If realized, the technology will deliver half the cuts needed to reach the target.
New oil and gas related projects valued at $200 billion would require additional heavy investments in abatement technologies such as CCUS to manage emissions.
Industry would need to quickly develop and deploy more abatement technologies and identify electrification opportunities across the value chain.

Path to 2030: The proposed oil and gas emissions cap policy is designed to slow and limit emissions, while investment tax credits could potentially bolster additional CCUS capacity.

Transportation

Canadian car fleet, accounting for half of transport emissions, grew 30% in past 15 years to reach 24 million. That’s pushed emissions higher despite improved fuel efficiency and exhaust systems.
Zero-emission vehicle (ZEV) registration is growing, but at a 1% market share (in 2021), the stock has yet to make a dent in emissions.
At current pace, Canada is expected to achieve 40% ZEV sales of the total market by 2030—short of its stated 60% target. ZEVs would make up 17% of the total Canadian car fleet.
Pandemic lockdowns saw a 27 MT drop in emissions in 2020, but traffic levels returning to pre-pandemic levels would likely see sector emissions rebound.

Path to 2030: Auto makers will need to accelerate EV development and offer consumers more choices to comply with ZEV sales target of 60% of total car sales by 2030 and 100% by 2035. Boosting the stock of emissions-free cars could tip the emissions scale later in 2030s.

Electricity

A major coal phase-out drove emissions lower in Ontario and Alberta over the past decade. Ontario’s emissions fell rapidly as it expanded its clean energy infrastructure, but maintaining a low-emissions grid is a challenge as its economy and population grows. Meanwhile, Alberta’s electricity emissions declined largely due to a switch from coal to natural gas. Expanding its promising renewables infrastructure will be key in bringing emissions down further.
Nationally, continuing coal phase-out will provide just under half of the required 38 Mt reduction (assuming coal-to-natural-gas transition).
Additional challenges lie in meeting rapidly increasing electricity demand, grid upgrades, and dependence on stable sources.
Meeting new demand entirely with natural gas could potentially push the progress back by 30 Mt.

Path to 2030: The proposed Clean Electricity Regulations could facilitate the deployment of cleaner energy sources to curb emissions from rising demand, and lay the foundation of a low-emissions infrastructure to replace retiring plants.

Buildings

Population growth and expanding floor space is driving building emissions faster than energy efficiency can offset. Housing demand is also unlikely to relent any time soon.
In half the provinces, the sector is emitting at above 2005 levels. Many regions remain highly reliant on fossil fuels as a heating source and require heavy investments to switch to cleaner fuels.

The sector requires a massive 33 Mt reduction to meet 2030 targets, a 39% decline from current levels.

Path to 2030: Retrofit grant and loan programs have struggled with low pick-up rates. Retrofitting 30% of existing real estate—, an immense challenge and expensive endeavour,—would take us only halfway to our target. Complex set of measures, including but not limited to stronger incentives and stringent regulations, could lead the way past 2030.

Conclusion

Emissions in half the provinces are trending either at above or close to the 2005 stating point, as each region grapples with its own set of unique challenges. Despite higher emissions in carbon-intensive provinces, they will likely see relatively faster cuts in the near term as current policies continue to deliver results, mainly due to methane reduction. Ontario and Quebec made headway in cutting emissions over the past two decades but will enter a slower reduction phase as they tackle the more challenging transport and buildings sectors.

A few key measures drove emission cuts over the past two decades, but further reductions will require greater provincial and federal focus—and co-operation. Emissions rising in tandem with an economic recovery could also prove to be a headwind. However, the emerging trend of economic growth decoupling from emissions and Canada’s willingness to implement tough climate policies are grounds for some optimism. Farhad Panahov is an economist at RBC. He holds a BSc in Economics from the University of British Columbia, and Master of Applied Science in Data, Economics, and Development Policy from the Massachusetts Institute of Technology.

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Natural gas currently presents one of Canada’s biggest climate choices

Expansion of the abundant resource could unlock a fresh wave of economic activity and help cut global emissions. But we risk missing our Net Zero targets without major investments in abatement technologies. As major energy importers Japan and Germany eye Canadian natural gas, federal and provincial policymakers are wrestling with a conundrum: Turn them away and risk more global energy volatility or tap British Columbia and Alberta gas and leave Canada’s economy more exposed to shifts in the global gas outlook. The Japan-led G7 Summit in May will struggle with this twin challenge of managing energy and climate security. The group of the world’s richest countries are still debating natural gas’s role in ensuring market stability. A strategic energy alliance that protects the group’s long-term economic prosperity and climate ambitions would bring some clarity to the path forward. Here are three roles Canada can play:

The Gulf Coast Gas Exporter: Ramp up natural gas exports to the U.S. Gulf Coast liquefied natural gas producers, which is developing a number of gas-exporting projects. The strategy may raise Canada’s upstream gas sector emissions by up to 7%.

The Strategic Exporter: Carve a niche in global LNG markets as a strategic supplier of stable, low-emissions gas. A handful of projects could potentially reduce global emissions by a net 105 MtCO2e—roughly equivalent to Qatar’s total GHG emissions, but would also raise Canadian gas sector emissions by a third assuming current technologies. However, most of the upstream gas emissions and nearly a third of LNG terminal emissions could be abated with electrification and other technologies. The strategy would attract a projected $133 billion in capital investment into the Canadian economy over 40 years.

The West Coast Hub: Build out LNG capacity to its full potential, taking a more assertive role in global natural gas markets. The strategy could reduce net global emissions by as much as 211 MtCO2e but raise the Canadian sector’s emissions by 66%. The strategy would attract more than $200 billion in investments.

Each path carries economic and climate risks that Canadian policymakers and industry must weigh. And fast. Global LNG markets are restructuring, opening fresh opportunities for West Coast projects. But that window won’t be open for long.

Canada’s Choices for Supporting Global Energy Security

Chart: Canada’s Choices For Supporting Global Climate & Energy Security

Asia Key To Long-Term Demand As LNG Investors Eye New Investments

Getting to Net Zero requires the world to cut fossil fuel consumption, including natural gas. But we’re not there yet. Even as wind and solar farms spring up around the world, LNG—natural gas cooled to -162°C to 1/600th of its original volume to ship over long distances cheaply—is gaining fresh momentum. A key reason: cleaner-burning natural gas often means lower emissions than oil or coal. Europe has demonstrated LNG’s value with its frantic dash to replace piped Russian gas, importing the equivalent of 10% of LNG trade in 2021, mostly from the U.S. Though the EU remains intent on transitioning to a clean energy economy, for now it’s rushing to build new regasification terminals. Meanwhile, natural gas is part of the EU taxonomy for sustainable activities—albeit under strict conditions including no unabated natural gas in power generation beyond 2035. If carbon capture technology for gas abatement evolves constructively, gas could be a player in European energy for longer. While gas will remain in the mix in Europe and other advanced economies for some time, it’s clear that future demand will decline as these economies build cleaner energy infrastructure.

Natural Gas is a cleaner-burning fossil fuel

Asia, on the other hand, will have a harder time turning away from natural gas. As one of the world’s biggest LNG importers, Japan is alarmed by its dependence on Russian and Middle Eastern countries as well as new export limits proposed by major LNG supplier Australia. It’s encouraging the development of nuclear energy, hydrogen and natural gas as part of this year’s G7 agenda. LNG will also remain an essential fuel in China, India and other populous countries of South Asia and Southeast Asia as these countries seek to meet growing energy demand while reducing a strong reliance on coal to meet climate commitments. China, India and Southeast Asia will see gas demand grow by around 44% by 2050 in the International Energy Agency’s base case scenario. LNG would take the bulk of the growth with declining local pipeline-based production. But it’s hardly a full-blown bull case for gas. Stunned by last year’s five-fold jump in LNG prices, many Asian countries raised their coal consumption, while others pivoted to renewables, especially as the economics of switching directly from coal to clean energy in Asia improved dramatically. Non-emitting energy rollout may take a while to gain traction in Asia, but it’s still a cloud hanging over the long-term gas outlook.

Emerging markets driving gas demand

Global LNG markets remain tight. But gas exporters are responding to high price signals with a raft of proposed projects from LNG heavyweights, including the U.S. and Qatar.Globally, more than 100 megatonnes per annum (MTPA) of new LNG supply could be approved before 2024, adding 17% to the global LNG market. Another 1,035 MTPA are in pre-final investment decision stage, but the International Gas Union believes “a fair portion” are unlikely to proceed given investor focus on capital discipline and a reluctance to invest in long-term projects in an uncertain global energy market. There are also question marks hovering over Russia’s new planned LNG capacity, given the spate of Western sanctions and departure of oil and gas majors from the country.With a strong market outlook in the medium term but possibly much weaker in the long-term, would 25 to 40-year Canadian LNG liquefaction capacity investments be profitable?

Canada’s Proposition

LNG Canada Phase I, a large B.C. export facility backed by Royal Dutch Shell, Malaysia’s Petronas BHD, PetroChina Co., Japan’s Mitsubishi Corp. and Korea Gas Corp. will mark Canada’s first meaningful entry in global LNG markets by mid-decade. The project’s capacity of 14 MTPA will place Canada among the top 10 largest LNG exporters in one fell swoop. Woodfibre LNG and Cedar LNG, with a combined capacity of up to 6 MTPA, are advancing toward development. Global majors are certainly taking another look at new West Coast projects, drawn by the demand for diversified gas suppliers and some compelling advantages:

Canada is the world’s 4^th largest natural gas producer, and home to a huge concentration of conventional and unconventional natural gas reserves.
The Montney shale basin straddling Alberta and B.C.—about the size of New Brunswick and Nova Scotia combined—can potentially produce 449 trillion cubic feet of natural gas, nearly six times Canada’s conventional gas reserves. And Montney reserves are relatively cheap: a 2018 study found 200 years supply in the basin below $2.50 per million British thermal units breakeven.^[1]
B.C. projects are about 10 shipping days from Asia, compared to 20 for U.S. Gulf Coast exporters via the tolled Panama Canal, reducing both costs and emissions. The only major active U.S. West Coast LNG project is the federally-approved US$39-billion Alaska project.
Canada’s world-leading methane regulations, naturally low formation CO₂ in the Montney, and promise of clean electricity supply is prized by global producers eager to reduce their greenhouse gas emissions. Two proposed Canadian LNG projects are majority-backed by Indigenous groups, suggesting strong local support.

Distance To Asia

Nautical miles

Source: Oxford Energy Institute

Still, several challenges cloud the cost and profitability picture. Canada’s capital costs for greenfield projects are relatively high and it’s unclear whether foreign consumers are willing to pay added costs for diversified energy supplies. While Canada has existing attributes that can drive a lower emissions profile for its LNG, new oil and gas climate policies requiring rapid industry-led decarbonization could add significantly to costs.

How Canadian LNG projects stack up against rivals

CAD/Mbtu

Here are three ways Canada can support global energy and environmental security.

Scenario 1: The Gulf Coast Gas Exporter

The U.S.’s expeditious LNG buildout serves as an opening for Western Canadian natural gas producers. Canada’s low-cost, plentiful gas resources and investment grade companies are attractive to many U.S. LNG projects competing for stable gas supplies. Canadian companies have secured supply agreements of 0.3 billion cubic feet per day (bcf/d) with U.S. LNG exporters. Growing these agreements to 1 bcf/d would give Canadian companies exposure to global pricing with limited capital risk.

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The Gulf Coast Gas Exporter
New Capacity		Economy			Climate
LNG capacity	Gas production	Investment	Jobs	Royalties	Canadian Emissions	Global Net Emissions
–	1.0 bc f/day	$10B	6,200	$4.7B	3.4 MtCO2e	–

Climate and economic considerations

Given the abundance of Western Canadian natural gas, higher U.S.-bound gas exports may not raise production. But if it did, Canadian emissions would increase by 2% relative to current oil and gas sector emissions. That’s directionally opposite to Canada’s stated goal to cut emissions from the sector by 42% by 2030.
Being a Gulf Coast exporter is not a growth strategy. U.S. LNG could be well supplied with domestic gas reserves over the long-term, new cross-border and interstate pipelines to the Gulf Coast will be difficult to build, and pricing premiums could be captured by other players.
Without sufficient pipeline capacity to the U.S. or Eastern Canada, or LNG to international markets, the value of Canadian gas resources will continue to be diminished. The result of flooded local markets: Canadian natural gas benchmarks priced at a discount to U.S. and international benchmarks.

Canadian gas priced at a discount to major benchmarks

USD/Mbtu

Chart: Canadian gas priced at a discount to major beachmarks

Scenario 2: The Strategic Exporter

Canada could take a more deliberate role in stabilizing global energy markets, with new LNG capacity of 40 MTPA, or about 7% of current global supply². Exporting gas could ramp up trade and investment ties with strategic Trans-Pacific economies. Proposed LNG facilities or those entering the environmental assessment process must demonstrate a credible Net Zero plan by 2030, according to new B.C. rules. Canada’s low emissions and relatively high environmental, social and governance standards would differentiate its gas for markets willing to pay premium prices.

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The Strategic Exporter
New LNG Capacity	New Gas Production	Investment	Jobs	Royalties	Canadian Emissions	Global Net Emissions
40 MTPA	4.8 bcf/day	$133 B	95,400	$22.7B	16.6 MtCO2e	-105 MtCO2e

Climate and economic considerations

Global emissions could fall. Canadian West Coast LNG shipped to China can produce less than half the lifecycle emissions per unit of electricity generated compared to the Chinese average, if it displaces coal fired generation. ³
The Paris Accord’s Article 6 international centralized emissions trading system—which would verify LNG’s displacement of coal and give Canada credit for global emissions reductions—is years away.

Major decarbonization of Canadian gas and LNG is technologically feasible and able to abate up to 90% of upstream gas emissions, while full electrification of LNG terminals can cut emissions by 63% compared to electrification for only non-compression systems (as in LNG Canada Phase I). This could add at least $0.7 per Mbtu to producer costs, raising Canadian supply cost.
Electricity demand for low-emissions LNG terminals and gas supplies would require major new generation and transmission infrastructure. Estimates of terminal electricity demand vary, but could translate into about 10% of BC’s current total electricity generation for every 20 MTPA of LNG—enough to power up to 2 million electric vehicles.⁴While BC will require new LNG projects entering the environmental assessment process to be Net Zero by 2030, BC Hydro has not yet set out clear provincial electrification plans, leaving a narrow window for new LNG investments.

What is Article 6?

Article 6 of the Paris Agreement establishes a global carbon market to enable least-cost emissions reductions and increase climate ambitions globally. At COP 26 in Glasgow in 2021, countries agreed on a package of rules governing the nascent instrument. A key concern has been to ensure that Article 6 facilitates climate action and is not an excuse for missing national targets. The challenge is how to verify that lower emissions energy like LNG displaces coal-fired power generation, as opposed to non-emitting generation. Internationally Transferred Mitigation Outcomes (i.e., the credits) can trade under a centralized mechanism through the United Nations or under bilateral state-to-state governance frameworks. Japan and Switzerland are developing frameworks, while Canada is exploring the idea with Asian partners.

Governments could collect substantial royalty and tax revenues from new LNG projects, but with the uncertain long term gas outlook, governments may be asked to pitch in with fiscal incentives to attract new projects, effectively subsidizing allied consumers to ensure energy security.
Exporting gas to Trans-Pacific economies would strengthen Canada’s Indo-Pacific investment and trade strategy.

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How Natural Gas Producers Can Cut Emissions
Emissions source (share of emissions)	Technology	Technologically feasible abatement share	Producer Cost (CAD/bcf)
Combustion 63%	Electrification	100%	$514,000
Methane Venting and Leaks 17%	Various – leak detection & repair, blowdown capture, replace pumps, etc.	68%	$1,900
CO2 Venting 17%	Carbon capture	70%	$158,000
Flaring 4%	Collection & compression of gas into pipelines	90%	$5,700
Total upstream gas sector emissions = 50 MtCO2e

Source: 2022 National Inventory Report, B.C. Ministry of the Environment, IEA methane tracker, RBC’s $2 Trillion Transition, industry consultation

Scenario 3: The West Coast Hub

By building up to 13% of current global LNG capacity and increasing natural gas production by 60%, Canada could become a global LNG player. But Canada’s high greenfield development and major decarbonization costs would make building clean, competitive LNG supply at scale a tall order.

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The West Coast Hub
New Capacity		Economy			Climate
New LNG Capacity	New gas Production	Investment	Jobs	Royalties	Canadian Emissions	Global Net Emissions
80 MTPA	9.7 bcf/day	$236 B	169,000	$45.5 B	33.2 MtCO2e	-211 MtCO2e

Climate and economic considerations

Gas sector emissions would rise 60%, assuming current technologies. Canada would likely need to provide leeway in domestic sectoral emission targets, given steep decarbonizing costs and difficulty finding sufficient international buyers willing to engage in bilateral emissions trading.
To keep supply costs competitive and reduce sectoral emissions, new projects could require major fiscal incentives or taxpayer investment in electricity infrastructure. Governments could participate more in the financial upside of new projects, earmarking royalty and tax revenues in this high-risk, high-reward strategy for aggressive domestic decarbonization of non-gas sectors.
A massive buildout of natural gas could hurt Canada’s reputation as a climate champion. Without consent of Indigenous groups on whose lands most of Montney straddles, upstream gas supplies may have difficulty expanding sufficiently.

Blueberry River First Nations & Montney

In a landmark 2021 ruling, the Supreme Court found that Blueberry River First Nation’s rights were infringed upon by the cumulative impacts of industrial development on its land. These lands include the shale-gas rich Montney. This set off a process with the B.C. government to develop a framework for land management, respecting Treaty 8 Nations’ rights, remediating land, and providing a way forward for industrial development. With a framework agreement recently announced by both parties, industry has more certainty and a basis to move forward cautiously with further activity in Montney. A more significant or sudden change of trajectory without buy-in from local First Nations would erode agreements and tie up increased Montney production in legal battles.

A larger natural gas sector provides a partial hedge against Canada’s oil sector. However, Canada’s economy would be exposed to transition risk if pessimistic natural gas forecasts play out, as more economic activity is exposed to fossil fuels. Stranded gas assets would cease to generate public economic benefits despite historical emissions allowances or taxpayer supports.

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Active Canadian LNG Projects
Project	Owners	Location	Status	Capacity (MTPA)
LNG Canada Phase 1	Shell/Petronas/Petrochina/Mitsubishi/Korea Gas		Commercial start mid-decade	14
LNG Canada Phase 2	Shell/Petronas/Petrochina/Mitsubishi/Korea Gas	Kitimat (Haisla Nation territory)	Economic feasibility underway	14
Cedar LNG	Haisla Nation/Pembina	Kitimat (Haisla Nation territory)	Environmental Assessment permit received	3 to 4
Ksi Lisims LNG Project	Nisga’a Nation, Rockies LNG (Advantage, Birchcliff, Bonavista, NuVista, Paramount Resources & Peyto) and US based Western LNG	Pearse Island, NW coast of BC (Nisga’a Nation land)	Environmental Assessment Decision in progress	12
Woodfibre LNG	Pacific Energy Corp. (Singapore)/Enbridge (30%)	Squamish, BC	Approved	2.1
Tilbury Phase 2 Expansion	Fortis BC	Tilbury Island, BC	Environmental Assessment Decision in progress	2.5

Under construction; all other projects pre-FID (final investment decision) Source: Project websites, RBC Economics

Ideas to Move Forward

LNG is one of the toughest economic and climate choices for Canada – tremendous upside and downside risks abound on both sides. The country has historically avoided definitive moves on LNG, which led to a rash of abandoned projects a decade ago. The stakes are only higher now, so Canada cannot dither and be locked into a future decided by chance. Canada needs to set clear guardrails for its domestic LNG industry, finding the right roles for industry, government, electricity ratepayers, and foreign consumers to best manage its preferred balance of climate and economic risks. Regardless of the outcome Canada aims for, there are key elements missing in the policy framework and industry playbook that will compromise Canada’s ability to move forward at all. This is where we could start.

Canada should drive high standards in bilateral emissions trading agreements under the Paris Accord’s Article 6, with the federal government leading the development of robust frameworks through the G7. Canada’s forthcoming sustainable finance taxonomy could include flexibility for long-lived LNG transition assets where tied to verified global emissions reductions.
The federal government should deliver on promises to fast-track major project approvals and streamline regulatory assessment processes, including working with provinces on assuring a single process per project.
Industry should seek to expand gas takeaway capacity with existing infrastructure, including investment-grade Canadian operators securing more long-term supply agreements with U.S. LNG developers, investments by midstream companies to optimize pipeline capacity, and gas majors working with pipeline companies to resolve their frequent contract disputes.
Sponsors of new LNG projects should improve their cost profile by leveraging pipeline or scale efficiencies, leaning on more modular technologies, and proactively managing skilled labour and supply chain constraints.
Federal and provincial governments should set clearer decarbonization targets for the gas and LNG industry. Their support for sectoral decarbonization should be made clear and scale with Canada’s view of how the sector supports global energy security. The industry needs to deliver on emissions reductions.
BC Hydro should quickly establish a clear electrification strategy and timetable that helps guide private sector investments in electrification of the sector. Review of the pricing framework for industrial users should appropriately distribute the costs of grid expansion.
Federal and provincial governments should roll out broad-based supports for Indigenous communities to purchase equity in major projects, including LNG infrastructure, addressing a historic gap in access to capital that has eroded project support and slowed development.
Industry and government actively communicate Canada’s framework for LNG development internationally, so global investors understand Canada’s relative advantages and openness to investment.

Cynthia Leach, Assistant Chief Economist, Thought Leadership, Royal Bank of Canada Yadullah Hussain, Managing Editor, RBC Climate Action Institute, Royal Bank of Canada

LNG capacity in mtpa is converted to gas production in bcf/day by assuming a capacity utilization of 80%, multiplying by the LNG-to-gas (bcf) conversion factor of 48.0279, and then dividing by 365. This value is then grossed up to account for fuel use of the LNG terminal, assuming the specifications of LNG Canada Phase I . Capital investment for LNG liquefaction terminals, upstream gas production and transmission, excludes operating costs. Estimated based on a range of sources, including LNG project proposals. Total (direct+indirect+induced) jobs impact of capital investment (excludes operating costs), using Statistics Canada multipliers for oil and gas construction. Weighted average construction period is 10 years. Current gas sector jobs based on total (direct+indirect+induced) jobs from CAPP. Royalties estimated using 15% rate on revenue, based on one month AECO forward rate. Canadian emissions are calculated using emissions intensity for upstream BC gas production from the Pembina Institute Shale Gas Tool (historical values, not counting planned emissions reductions) and implied emissions intensity of liquefaction, based on the specifications of LNG Canada Phase I. Global net emissions reduction based on midpoint of the range of lifecycle emissions savings estimates of Canadian LNG delivered to Asia versus Chinese coal in power generation, based on: Nie et al. 2020, Greenhouse-gas emissions of Canadian liquefied natural gas for use in China: Comparison and synthesis of three independent life cycle assessments, Journal of Cleaner Production Abatement potential based on IEA methane tracker, RBC’s $2 Trillion Transition, and various discussions with industry and academics. Electricity requirement for LNG terminal compression and auxiliary power used from: https://www.rbc.com/en/wp-content/uploads/sites/4/2025/03/Roda-Stuart_Thesis_Final.pdf. BC Hydro system energy balance taken from: https://www.rbc.com/en/wp-content/uploads/sites/4/2025/03/integrated-resource-plan-2021.pdf ¹ Microsoft Word – 19-0156-Letter Report Revised Nov 8 2019 (gov.bc.ca) ² Operating, under construction, or approved FID LNG liquefaction capacity of 598 MTPA, as of April 2022. https://www.igu.org/resources/world-lng-report-2022/ ³ https://www.rbc.com/en/wp-content/uploads/sites/4/2025/03/Roda-Stuart_Thesis_Final.pdf ⁴ https://www.rbc.com/en/wp-content/uploads/sites/4/2025/03/Roda-Stuart_Thesis_Final.pdf. At 80% capacity utilization, this translates into 328 GWh/ MTPA.

rbc_toc_for_mmm_action

The New Climate Bargain is the latest report in RBC Economics and Thought Leadership’s climate series, building from the team’s flagship report, The $2 Trillion Transition, which was launched in October 2021. This climate series is designed to inform and inspire Canadian prosperity, while advancing RBC’s ongoing commitment to speak up for smart climate solutions, a key pillar of RBC’s Climate Blueprint.

Climate change, meet energy security

Russia’s invasion of Ukraine is a cataclysmic moment for global energy markets. As governments and consumers grapple with energy shortages and high gas and power bills, climate change policies are being thrust into competition with energy security.

The old energy order is giving way to a new, disorderly one as Europe and Asia seek alternate supplies to replace Russian exports. Moscow’s ploy to exploit Europe’s energy vulnerability will not be forgotten in a hurry, and has accelerated two contradictory responses: rapid decarbonization and a scramble to raise fossil fuel production at least in the short term.

The dichotomy underscores a hard truth: short of major additional action, oil and gas will likely remain critical and contentious energy sources for longer than some think.

This poses some critical questions for the West:

Should Canada and the U.S. raise production significantly in the short term to cool prices?

How does higher output square with their ambitious emissions reduction plans?

If governments fail to balance climate action and energy security, will high energy costs and emissions erode public trust?

Canada can still reach its 2050 Net Zero targets, but it may not be a linear journey.The Canadian government has called for more oil and gas production to help ease the global crisis in the short run, while maintaining a firm commitment to competitive and decarbonized oil and gas in the long run.

Our research shows both goals are within reach—but at significant cost. Canada can still reach its 2050 Net Zero targets, but it may not be a linear journey. There isn’t a moment to lose. Policy action over the next 24 months must chart Canada’s climate-and-energy path to Net Zero by 2050.

Key findings

Canada’s oil and gas sector can support near-term energy security while advancing climate action, but will need regulatory certainty and support at all levels of government.

Oil sands and conventional producers could raise production by up to 500,000 barrels per day from 2021 levels.

This could add 9 million tonnes of greenhouse gases per year, costing at least $1.5 billion annually to abate—but bringing potential net benefits of $10.5 billion annually. Critically, if Canadian barrels displace those of other producers, there would be no additional global emissions.

Meeting climate targets despite new production will demand significant investment in methane reductions, as well as electrification and carbon capture across industries.

Cutting emissions 40% from current levels in the oil sands by 2030 will likely require $45 billion to $65 billion in capital spending between 2024 and 2030, peaking at about $9 billion per year mid-decade.

Full upstream decarbonization with carbon capture, utilization and storage (CCUS), a critical emissions-reduction technology, will require oil prices averaging roughly US$50 WTI through 2050.

A deliberate approach to deploying decarbonization technology in the oil sands is needed to avoid over-investing in costly solutions. CCUS should be viewed as just one tool at Canada’s disposal.

CHAPTER 1

Oil is here for the long haul

The journey to decarbonization was never going to be smooth. But it’s turning out to be a highly disruptive economic and political event.

While energy security and climate change have long been on a collision course, Moscow’s aggression has brought the conflict to a head. Early indications suggest at least 3 million barrels per day of Russian oil could be shut in as buyers stay on the sidelines. In the longer term, a bigger portion of Russia’s 11.7 million bpd production could be challenged in the face of oil majors’ exits and as Moscow becomes an international pariah.

The Russian invasion has prompted calls to cut oil and gas demand by accelerating investments in clean energy technologies, a move that could blunt bad actors’ ability to hold energy markets hostage. But most countries would struggle to switch their energy sources rapidly over the next decade.

For example, zero-emission vehicles (ZEVs) accounted for just 5.6% of Canadian light vehicle registrations in 2021¹. Given this modest starting point, it would take a Herculean effort to reach the ZEV mandates set out in Ottawa’s recently announced Emissions Reduction Plan (ERP). The mandate requires at least 60% of all new light-duty vehicle sales be ZEVs in 2030. Even if Canada meets that ambitious target, 84% of light vehicles will still run on gasoline by the end of the decade

Russia’s actions in Ukraine have shocked energy markets but it’s still too early to know if the world will double-down on investments in renewable energy or lean on fossil fuels to manage the shortages. Most likely, both will see a wave of new investment.

Early estimates suggest global oil and gas capital expenditures will increase 11.6% year-on-year to US$533 billion in 2022. They’ll rise another 4% in 2023, before returning to pre-pandemic levels in 2024, according to Fitch Solutions.

So far, high fossil fuel prices have done little to curtail demand, at least in North America. While renewable energy investments are expected to rev up too, in Canada, there’s a renewed push for more oil production and a call for more pipelines. In the U.S., shale basins and Middle East oilfields are preparing to bring back mothballed rigs.

And the world may be falling back into old consumption patterns. Germany plans to build LNG terminals even as it accelerates investments in renewables, while the IEA has recommended a temporary switch to coal and oil-fired electricity to wean the European Union off Russian gas. Both would add to, rather than cut, emissions.

The hurried response is aimed at protecting consumers from price spikes. Persistently high energy prices are cascading across energy-intensive industries, raising prices of staple commodities and denting the budgets of vulnerable households and small businesses. In such an environment, energy accessibility and affordability usually trump climate considerations for consumers.

There are already signs that government resolve is weakening: Germany, California, and British Columbia, usually climate leaders, are offering subsidies to offset high gasoline and power prices.

So far, high fossil fuel prices have done little to curtail demand, at least in North America. Consumers have room to absorb higher prices, since US gasoline costs are still nearly a full percentage point lower as a share of personal consumption expenditures than early in the 2000s, and Canadians have amassed major savings stockpiles during the pandemic.

While there is regulatory and investor pressure on energy suppliers to rein in direct emissions (Scope 1) and indirect emissions from purchased electricity (Scope 2), governments have tiptoed around the equally significant challenge of altering consumer behaviour.

Globally, explicit and implicit fossil-fuel subsidies primarily focused on the consumer stood at US$5.9 trillion in 2020, or about 6.8% of GDP. And they’re expected to rise to 7.4% of GDP by 2025, according to the International Monetary Fund. Consumer behaviour trends also suggest preference continues to take precedence over climate considerations: sales of SUVs soared 10% and accounted for 45% of all car sales last year, adding 120 million tonnes of CO2 annually.

Taken together, these indicators suggest oil demand will rise rather than fall in this decade. The IEA’s short-term forecast pegs demand for oil at 104 million barrels per day in 2026, compared to around 99.7 million this year. Production growth over the next few years will be led by the United States, Saudi Arabia, UAE, Iraq and Brazil.

Absent greater action, rising investment in clean energy doesn’t necessarily mean a decline in traditional energy sources.Canada’s contribution to higher output is also baked into the pie. The Canada Energy Regulator expects domestic production, led by the oil sands, to peak at 5.8 million bpd by 2032, before falling to 4.8 million bpd in 2050, assuming action to reduce GHG emissions continues at its current pace. If that’s the case, emissions would mostly rise, despite improvements in oil sands efficiency (which has fallen by a third since 1990.)

Surging global energy demand

Energy demand over the past four decades has grown around 1.75% annually.
With global population set to rise by another 2 billion people by 2050, expect that demand to surge again. As a base case, the IEA projects energy demand will grow 1% annually over the next three decades.

While renewable energy consumption is forecast to lead growth with a 3.2% annual increase between 2020 and 2050, oil demand is expected to rise by 0.5% and natural gas by 1.3% annually. Absent greater action, rising investment in clean energy doesn’t necessarily mean a decline in traditional energy sources.

Still, a bullish scenario for oil markets is far from certain. The IEA’s less optimistic scenario pencils in a 25% decline in oil demand, with prices averaging US$64 per barrel. However, if a greater push emerges to get to Net Zero, prices drop as low as US$24. Net Zero production will be a prerequisite to sell into that shrinking oil market.

The trouble is, this base case for fossil fuel demand is at odds with climate goals.

To have a 50% chance of meeting a 1.5°C warming target (the stretch goal for the Paris Agreement), the world will need to leave 60% of the world’s remaining oil and gas, and 90% of its coal in the ground².That’s twice as much as a 2° scenario, and suggests we’ll need to hit peak global production soon—certainly within the decade.

Compared to 1.5°, 2° could be even more destructive for the planet, with twice as many plants and animals seeing their habitats diminish, large swathes of sea coral becoming extinct, and millions more people facing heatwaves, floods, and water scarcity³.

Against that bleak backdrop, Western oil production should not continue unrestricted no matter how acute the energy security imperatives. To resolve that tension, new Western production must displace other sources, to stabilize global emissions (including Scope 3 emissions that include an organization’s upstream and downstream emissions), and policymakers must redouble efforts to drive down oil demand.

Canada has the tools and technologies needed to rapidly deploy renewable power, electrify buildings and transport infrastructure, and, in some cases, industry. But managing the impact of intermittent renewables and the high cost of some alternatives will require careful planning, too.

But displacing development of fossil fuel resources elsewhere will be more challenging. Western economies need to be on the same page, targeting a growing Western share of oil production and falling overall oil demand. And they’ll need to agree to pay a premium for oil from climate-compliant producers.

Canada and the U.S. should pursue a North America energy security alliance that secures both conventional energy, and the underlying resources for energy transition. Elements of such a strategy include long-term contracts with U.S. refineries that provide certainty for Canadian oil producers to invest in decarbonization, maintenance of existing pipelines and support for power transmission lines.

Canada must ensure it receives consideration for its stability and energy decarbonization efforts. Long-term contracts could seek to put a floor on oil prices at levels that support decarbonization investments in Canada, and reduce the impact of extremely high oil prices for US consumers.

CHAPTER 2

Canada’s role in ensuring energy security

Energy is a critical sector for Canada. Oil and gas extraction and support activities, refining, distribution and transportation, could account for close to 10% of Canadian GDP in 2022. In addition to directly employing 178,500 Canadians, the industry supported 415,000 indirect jobs in 2020.

Resource-rich provincial governments benefit from royalties, which are expected to total at least $18 billion in 2022, up 50% from 2021 due to high energy prices and fully paid-down projects. ⁴

Given its sizeable resources, Canada can play a critical role in ensuring global energy security—that both addresses short-term energy shortages and burnishes Canada’s status as a soft power whose resource wealth can neutralize non-democratic forces. The challenge is to do so without threatening our climate goals.

First, the good news. Canada can boost oil and gas exports to the U.S., which, in turn will raise the U.S.’s ability to expand energy supplies to the rest of the world.

We estimate that Canada can raise production by as much as 500,000 barrels per day through a combination of oil sands and conventional oil production to overcome supply deficits over the next year.

While Canada’s exports are already at near record levels with an average of 3.76 million bpd in 2021, U.S.-destined pipeline capacity stands at more than 4 million bpd.

Over the past few years, Canadian pipeline operators have invested in decongesting their systems to optimize capacity, but further notable increases may require new lines, according to industry.

But under a realistic production forecast, that may not be necessary. The Canada Energy Regulator’s latest forecast of 5.3 million bpd of pipeline and rail capacity by 2050 should be sufficient to handle Canadian production.

Around 1 million bpd of total rail loading capacity suggests that, in a pinch, current oil export capacity can support near-term expansion. However, railway companies will be challenged to supply specialized rail cars and juggle demand from agriculture, food and minerals producers already struggling with supply chain challenges in order to accommodate higher oil shipments.

Canadian takeaway capacity is sufficient

Source: Canadian Association of Petroleum Producers, Canada Energy Regulator

The bad news: rising production could challenge Canada’s recently-announced ERP target to cut oil and gas sector emissions by 42% as new production adds as many as 9 million tonnes of additional emissions.

Laying the Foundation for Emissions Cuts

Required under Canada’s Net Zero legislation, the Emissions Reduction Plan (ERP) and the subsequent federal budget marked a tone-shift for climate policy. The document outlined emissions targets at the sectoral level, and provided significant new funding for transportation, carbon capture, and nature-based climate solutions.

But when it comes to the all-important energy sector, it was short on details. Mindful of a war in Ukraine and a full-blown global energy crisis that is still unfolding, the ERP underscored the dilemma of setting aspirational climate goals at a time of structural disruption in energy markets.

The ERP assumes rising Canadian oil production. But recent announcements pay more attention to new projects’ emissions rather than their economic benefits. The message from Ottawa is, increasingly, that only the lowest-carbon operations will be given social license to produce.

It will be a challenge, but we believe Canada can accelerate oil production and achieve its stated goal of reducing greenhouse gas emissions by 40 to 45% by the end of the decade.

There are no guarantees. The industry may not respond to the call to raise production without resetting emissions targets and obtaining social licence. Investors have prioritized dividends and buybacks over ploughing back profits to generate more barrels, while labour shortages and stringent ESG targets are further discouraging a push to raise production.

Should oil prices rise further, that may not be the case. But to secure more energy supplies, Canadian policymakers should signal greater comfort with a short-term rise in oil emissions—as long as emissions start to fall in other areas, or oil production starts coming offline beyond 2030.

At the same time, policy makers can pull other levers to ensure we remain close to our 2030 emissions targets. Rising oil sector emissions can be offset with cuts elsewhere, such as by accelerating renewable power infrastructure and building decarbonization, and improving energy efficiency. The economic benefit of rising oil production can help offset the cost of accelerating other sectors’ decarbonization, especially buildings and electricity, where supply chain bottlenecks may be less severe than transportation.

Overall, there’s no need for near-term energy security challenges to threaten the world’s commitment to Net Zero. But cross-sector trade-offs won’t work in the long term. Canadian oil producers will need to cut not just industry-average emissions, but overall emissions in each type of production. Making the long term investments needed to do so requires clarity, and there’s no better clarifying moment than an energy crisis.

CHAPTER 3

The need for CCUS

While supporting near-term energy security and meeting future climate targets will be challenging, our report $2 Trillion Transition: Canada’s Road to Net Zero found that technologies to achieve deep cuts are readily available for transportation, buildings and electricity.

The ERP already targets 42% emissions cuts in the oil and gas sector, nearly 40% of which come from the oil sands, where cuts are costly and technically difficult. This will be challenging to achieve, given the industry’s reliance on capital-intensive carbon capture projects for deep cuts.

Development of the recently-approved Bay du Nord oil field off the coast of Newfoundland, which may only start producing oil in the late-2020s, could add some 4.5 million tonnes over the life of the project.

But conventional oil and natural gas producers appear well placed to cut emissions over the next decade. For one, their emissions are lower per barrel, due to lower energy input. For another, about 40% of upstream natural gas emissions, and two-thirds of conventional oil emissions come from methane releases and leaks. These are slated for a 75% reduction by 2030 via widespread leak detection and vapour recovery units, making up nearly the entire contribution of cuts in the ERP.

More effort to electrify facilities near B.C.’s clean electricity grid to address combustion could deepen cuts and make room within the sector for rising production. In the medium term, with greater effort by utilities to bring electricity to more parts of B.C. and Alberta’s oil and gas fields, deeper decarbonization is possible.

Types of bitumen production

Mining: Shovel-Ready
Only a fifth of the oil sands deposit can be extracted by mining. Massive shovels scoop out the bitumen and ship it on large trucks to cleaning facilities where it is separated from sand, water and clay, or tailings. The waste material is sent to tailings ponds.
Current production (2020): 1.49 million bpd

Production forecast (2030): 1.70 million bpd
The separated oil is processed in two ways:

Synthetic Crude Oil
Synthetic crude oil (SCO): Once stripped of the waste, the bitumen is converted to a sweet, synthetic crude oil (SCO), in upgraders, or complex heavy oil refineries. While the process adds to the oil’s emissions at the upstream stage, the lighter, sulphur-free end product can be sold to a conventional refinery.

Average emissions intensity (2014-18): 95 kg/bbl

Froth treatment
Mined dilbit or paraffinic froth treatment (PFT): Two new oil sands projects, Imperial Oil’s Kearl Oil Sands Project and Suncor Energy-led Fort Hills, use the PFT method. The process removes the bitumen’s heaviest components and is diluted with lighter blends to produce dilbit. PFT uses a paraffinic solvent as diluent, producing a clean end product that can be transported without the need to upgrade, thereby reducing upstream emissions.

Average emissions intensity (2014-18): 46 kg CO2/bbl

If Canada is serious about cutting oil sands emissions by 2030, the first move is to bring down emissions intensity—the CO2 emitted per barrel—with production efficiencies. But this isn’t likely to bring emissions on track to meet our climate goals.

Without new facilities dragging down average carbon emissions⁵, oil sands emissions per barrel could improve about 6 to 7% by 2030. Some of these improvements would come at high costs⁶. Others are only economical for new facilities, or those not yet past the prototype stage.

Over the long term, breakthrough technologies that provide low- or no-carbon steam, like hydrogen boilers and small modular nuclear reactors, could revolutionize oil sands production, as both provide zero-carbon sources of heat and power. Unlike conventional producers, who consistently need to drill new wells, and move emissions-controlling equipment each time, the stationary nature and slow decline rate of oil sands may improve the economics of costlier equipment like reactors.

Until then, carbon capture is the key technology for cutting emissions deeply. The IEA and UN’s Intergovernmental Panel on Climate Change have both identified CCUS as a technology that can help cut emissions with conducive policies, public support and innovation.

Most CCUS projects to date, in Canada and elsewhere, have been heavily subsidized by tax credits or government investments. But the technology is not without significant drawbacks: it’s pricey, slow to build, adds costs, relies on complex engineering, and sometimes fails to capture or store emissions effectively. The technology also needs to be tested in large- scale settings. As yet, there are no major plants that capture CO2 from the combustion of natural gas, which is the primary application for the oil sands. And with just 40 million tonnes per year of existing capturing capacity globally, a near-term buildout of 20 to 30 million tonnes in Canada appears ambitious.

What’s more: CCUS projects don’t inherently have financial returns. The product they make, CO2, has minimal market value, so returns need to be engineered from government policy, like carbon pricing or fuel standards. And in many cases, the avoided taxes or regulatory payments are highly uncertain.

Accordingly, most CCUS projects to date, in Canada and elsewhere, have been heavily subsidized by tax credits or government investments. Or have required corporations to voluntarily pay very high carbon prices. To justify government investment, we need to be sure oil sands production at scale is competitive in the long run.

To justify government investment, we need to be sure oil sands production at scale is competitive in the long run.

Emissions Catchers: Carbon Capture Utilization & Storage Projects in Canada

CCUS projects in operation, under construction and proposed

CHAPTER 4

Can Net Zero oil sands compete in global markets?

The Oil Sands Pathways Initiative, an industry group aimed at getting the oil sands to Net Zero, is targeting targeting 22 million tonnes (Mt) in emissions cuts by 2030. To accelerate investment in CCUS, the recent federal budget announced a refundable investment tax credit totaling a little less than 50% of project costs to 2030. This is a significant step in the right direction, and should help spur studies of, and investment in, the best CCUS sites.⁷

But for widespread deployment—government modelling implies some 15 to 18 Mt of installed capacity by 2030—more effort from provinces will be needed. This could include a top-up on the credit, but also improvements to non-financial parts of CCUS projects like permitting, liability, and storage rights. The government’s commitment to explore carbon pricing certainty could also help de-risk cash flows from CCUS projects.

And to make an equal contribution to Canada’s 2030 target, we think the overall ambition needs to grow, deploying around 30 Mt of carbon capture in the next eight years.

Doing so would require between $45 and $65 billion in total capital spending between 2024 and 2030, totaling $9 billion per year at its peak. This would be a significant draw relative to the industry’s current investment levels. Assuming the government continues to absorb half the bill, total taxpayer costs would be significant, too.

While previous rounds of high oil prices have led to investment booms, the short-term landscape has changed. After a turbulent few years, oil sector investors prefer to see firms focus on dividends and share buybacks rather than invest in expensive carbon capture projects.

The long-term outlook also challenges major investments in oil sands projects, especially as most forecasts have oil demand falling in the coming decades, as drivers switch to electric vehicles. A major push for decarbonization to reduce demand for Russian oil and gas in Europe may accelerate this trend.

In that context, Canada’s challenge rests in removing carbon emissions from the oil sands without making them uneconomical to extract.

We estimate full decarbonization of the oil sands⁸ could cost between $6 and $14 per barrel for mined bitumen and $17 and $23 for in situ bitumen. Overall, WTI would have to average about US$50 over the life of the project to meet investor expectations. While that has largely been the case since 2005, uncertain future demand means that may be a high bar.

That said, oil sands wells decline more slowly than conventional ones, making them more suitable for site-specific and immobile CCUS. If CCUS remains a key technology for decarbonizing oil, that may be a structural advantage for oil sands producers. Ignoring sunk capital costs, steam assisted gravity drainage (SAGD) facilities with CCUS could run profitably at prices as low as US$40.

These relatively high abatement costs mean Canadian producers should take a pragmatic approach to CCUS. Deploying investments gradually through the 2020s and 2030s would allow for cost efficiencies and leave room for future technologies to potentially lower costs. A slower approach is at loggerheads with deep emissions cuts this decade, but a measured, realistic approach to decarbonizing heavy oil production will be critical to maintain Canada’s economic competitiveness in the sector.

In the long term, given a majority of emissions from oil consumption come from burning the fuel, industry will need to invest in developing uses for bitumen that don’t require combustion. IEA forecasts put non-combustion demand near 15 million barrels per day in 2050, for things such as lubricants, waxes and asphalt. Opportunities to take the heaviest parts of Canadian barrels and make value-added products like carbon fibre are in the early stages of innovation, but could be a key for diversification and transition in the oil sands.

Of course, this may yet be challenged by emissions reduction mandates levied by government and the significant uncertainty around future oil and carbon prices. We’ll need a coordinated effort by industry and government to address these challenges.

CHAPTER 5

Managing volatility in the investment cycle

The oil sector is highly cyclical, which makes long term investments difficult especially when coupled with the uncertainty of returns for decarbonization projects. For one, it’s likely oil production and emissions will fluctuate through 2050 as prices encourage or discourage investment. Investing billions of dollars in CCUS during periods of price weakness will be challenging, and boom-and-bust weary investors may be reluctant to fund large-scale, long horizon projects even when prices are high.

At the same time, record cash flow of an estimated US$150 billion for Canadian oil and gas producers this year, and expectations that high prices will persist for some time, make allocating public funds to decarbonize the oil sector a greater political challenge amid high corporate profits.

Against this backdrop, a key goal for Canada should be to help smooth volatile investment cycles in the oil patch, and ensure consistent investment in the industry’s decarbonization. Federal and provincial governments should spread out the significant windfall revenues they accrue during high price periods to help sustain investment when the industry is struggling. And firms should commit to funding decarbonization even if oil prices falter.

The Canada Growth Fund is an important shift in the government’s approach, promising new investment structures and formalized involvement in emissions-cutting projects. While co-investing with industry in abatement projects improves financial returns, there are still significant roadblocks to large decarbonization projects. Policy uncertainty, permitting and regulatory snarls, sub-surface rights for carbon storage and liability if it leaks, and the risks associated with early stage technologies can still delay investment.

To deliberately deploy enough investment to meet rapidly approaching targets in the sector, an energy-focused stream within the Growth Fund needs to bring the right stakeholders around a single table to streamline and expedite project approvals.

Resource-rich provinces, the energy and financial industries, regulators, utilities and outside experts can partner with the Growth Fund to jointly address these roadblocks.

To reduce uncertainty, investment in oil and gas decarbonization during low price periods could see higher public contributions than during periods when industry cash flow is high, demonstrating government support when times are tougher.

Crucially, it must have some independence from the political cycle. Rather than additional budgetary allotments, public funding should be directly segregated from existing royalties and federal corporate taxes to ensure funding stability.

Canada Growth Fund’s energy stream: Who does what?

Federal government: can ear-mark windfall corporate tax revenues from high commodity prices to major industrial decarbonization in the Growth Fund, and provide long-term carbon pricing guarantee contracts to de-risk cash flows from specific CCUS projects.
Provincial government: should earmark a portion of the royalties for decarbonization of provincial economies, and commit to proactively reducing the free allocation of credits in provincial pricing systems to support the backstop carbon price.
Provincial and federal regulators: would need to work with ministries industry, and local stakeholders to fast-track permitting and approvals for strategic decarbonization projects.
Indigenous groups: which are at the forefront of both climate change and resource management, should be equity partners and have a voice in how resources are deployed.
Private sector financial institutions: will be key partners to help industry use leverage to hit desired rates of return. Non-recourse financing supported by carbon pricing guarantees from the federal government should be explored.
Utilities: will be key partners to help industry use leverage to hit desired rates of return. Non-recourse financing supported by carbon pricing guarantees from the federal government should be explored.
Industry: will allocate capital as projects are approved, but will also provide expertise on how to direct investment. They must commit to making decarbonization a priority throughout the investment cycle.

Key ideas to move forward

To ensure energy and climate security, the federal government and key provinces, the private sector and Indigenous communities will need to take critical steps in the near future. Some ideas:

ACTIVELY PARTICIPATE IN OIL MARKET STABILITY

Avoid emissions policy that restricts or cuts near-term domestic production at a time when Western Canadian oil is addressing current market disruptions. Beyond 2030, significant efforts should be made to curtail and even wind down projects that are not aligned with Canada’s Net Zero goals. Decarbonization technologies and processes should be embedded in business models of all new projects.

Leverage the Canada Growth Fund to smooth investment cycles in the oil and gas space. Spending could incorporate larger public contributions in periods of lower oil prices and more private funding at high prices.

Ensure any emissions cap is forward-looking. Seek greater effort in natural gas and conventional production than oil sands, and aim for falling emissions over the medium term.

ACCELERATE & DIVERSIFY EMISSION CUTS

Offset slower progress on oil emissions with other decarbonization efforts, including building retrofits, ZEV subsidies, and electrical transmission infrastructure.

Develop new abatement technologies that maintain cost efficiencies. The Canadian Innovation and Investment Agency, introduced in Budget 2022, should also include a stream for the most promising early-stage abatement technologies and non-combustion uses for oil.

Diversify energy investment. While oil and gas will be key fuels for climate transition, electricity and new energy technologies such as hydrogen are gaining momentum. Canada’s energy firms should aspire to broaden their asset portfolio and develop expertise in low-carbon and sustainable technologies that would complement fossil fuel exports.

TAP INTO INDIGENOUS EXPERTISE

Continue to ensure Indigenous groups are key partners in new energy systems. Equity participation in new infrastructure and energy projects would foster support from partners with local expertise, speeding development. Ensuring Indigenous communities receive upside and ownership, as well as the economic benefit of projects, are key pathways to advance meaningful economic reconciliation and inclusion.

FORGE ENERGY ALLIANCES

Resolve key energy trade issues with the United States at the highest political level to overcome state and provincial hurdles. Develop a North American energy alliance with a high-level summit that broadly aligns U.S. and Canada on market access issues including cross-border pipelines, alignment of fuel standards and border carbon adjustments.

Work with international partners to create demand certainty. Aim for long-term oil contracts with the U.S. and Europe to price in environmental efforts, governance and geopolitical stability to ensure the most stable producers remain key suppliers of Net Zero oil. Similarly, cultivate deeper energy ties with Asian economies such as Japan, South Korea and Taiwan to bring energy market stability. Greater trade ties could also open the door for export-focused liquefied natural gas and hydrogen joint ventures with Asian countries.

1. https://ihsmarkit.com/research-analysis/automotive-insights-canadian-ev-information-analysis-q4-21.html
2. https://www.nature.com/articles/s41586-021-03821-8
3. https://climate.nasa.gov/news/2865/a-degree-of-concern-why-global-temperatures-matter/
4. https://www.arcenergyinstitute.com/meet-the-new-boom-different-from-the-last-boom/
5. e.g., new mines built with paraffinic froth treatment, new or expansion SAGD facilities with solvents or lower SORs; derived from IHS markit estimates
6. e.g., petroleum coke boiler replacements, which industry may avoid in favour of CCUS if project economics improve
7. Costs of CCUS are highly process- and site-specific, meaning the tax credit may be sufficient for some projects, such as capture on hydrogen production facilities, and not others such as steam generation in oil sands facilities.
8. Large scale deployment of CCUS, methane-sparing processes, and offsetting residual emissions using highly credible nature based offsets or technological carbon dioxide removal
9. https://www.rbc.com/en/wp-content/uploads/sites/4/2025/03/220307-Energy-Charts.pdf

Contributors

Yadullah Hussain, Managing Editor, Climate and Energy, Thought Leadership Strategy
Colin Guldimann, Economist
Naomi Powell, Managing Editor, Economics and Thought Leadership
Darren Chow, Senior Manager, Digital Media
Zeba Khan, Manager of Publishing, Economics and Thought Leadership
Aidan Smith-Edgell, Research Associate, Economics and Thought Leadership

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There is perhaps no sector more imperative to Canada’s Net Zero journey than oil and gas. The industry is Canada’s single biggest source of GHG emissions, at nearly 10% of the national total. For Alberta, and the country as a whole, the stakes for a successful transition are especially high. Oil and gas accounts for 5% of our GDP and supports hundreds of thousands of jobs across the country. The recent global energy crunch has only deepened the challenge. Demand for oil has spiked by 500,000 barrels a day, according to the International Energy Association (IEA). Coal demand is set to exceed 2019 levels this year and rise through to 2025. How can a sector so ingrained in our economy and daily lives make a full transition to Net Zero? Progress is well underway. Oil patch giant Suncor announced this past June that the company is moving to a carbon neutral model by 2050. Suncor’s CEO Mark Little and Clean Energy Canada’s Executive Director Merran Smith joined us for the third episode of The Climate Conversations, a special miniseries. “I sit here today, obviously having made the commitment [to Net Zero by 2050], and you know, I actually have turned my thinking that this is an opportunity for our Canadian oil sands, for us as a company and for our country,” said Little. Demand for Canada’s oil, gas and plastics isn’t likely to wane significantly for a while, Little said. It will take years to phase out the internal combustion engine, transform natural gas-burning furnaces and develop alternatives for jet fuel. “Will oil demand go down? I fully believe oil demand will go down,” he said. “Do I think it’s in the next year or two? No, I don’t.” But Canada’s energy sector is aiming for a clean overhaul, with the integration of alternate energy sources like wind, solar and hydrogen. “Currently we have technologies that are ready for prime-time—things like electric vehicles, and we’re seeing the uptake of businesses building batteries for those electric vehicles, green and clean hydrogen coming on board,” said Smith. Little and Suncor spearheaded the formation of the Oil Sands Pathways to Net Zero, which also includes Canadian Natural Resources, Cenovus, Imperial Oil, ConocoPhillips and Meg Energy. The companies, which together account for 90% of total oil sands production are collaborating to develop the technologies that will speed the transition to Net Zero. “I think the path forward for us is to figure out how quickly do we get to Net Zero and we’re investing in hydrogen and wind farms and all of these types of things—but the world needs energy and it’s going to need more energy,” said Little. Change will also impact our country’s 500,000 oil sector workers, whose jobs are likely to be disrupted by a clean energy transition. “It’s key that while we make this transition, that we also need to provide support for Canada’s oil and gas workforce to go through retraining and move into industry,” said Smith. “We want to be moving people into industries that are going to be growing in this Net Zero world.” “Their skills will be directly transferable to renewable energy, things like geothermal, and there’s opportunities in hydrogen production and others for the oil and gas worker skills to transfer,” she said.

Speaker 1 [00:00:02] Hi, it’s John here, Speaker 2 [00:00:04] and it’s Theresa. Speaker 1 [00:00:05] Theresa, I remember you telling me about a cross-country trip you took this past summer with your partner, and as our astute listeners will know, you have an electric vehicle. How did that go? Was it hard finding places to charge, especially when you’re in the great wilderness stretches of Canada? Speaker 2 [00:00:22] I actually created a whole spreadsheet that mapped out all of the chargers along our route, the length of time between chargers, how long it would take us to get to each charger. And then I learned when we started actually driving off towards Sioux Saint Marie that Tesla actually has that automatically for you when you enter your destination. But yeah, infrastructure is still lacking. There’s a patchwork of chargers, so it’s expensive and it’s inconvenient. The cool thing about it was I met people along the way in Manitoba, Saskatchewan and Alberta who like all came up to our car and we’re like, Hey, so is that electric vehicle? Like, how are things? What’s the range like? And they were very interested in switching, but many of them are super anxious about unreliability of charging and battery performance compared to gas in the wintertime, even despite volatility in gas prices. So huge learning experience for me. Speaker 1 [00:01:14] You’ve touched on a couple of incredibly important forces out there. One is consumer demand. How do we build demand for the technologies, be they electric vehicles or heat pumps for our homes that will allow businesses and innovators to scale, to sell to lots and lots of people so they can get the costs down? That’s one of the challenges of disruption. And the second point and these are interconnected, is infrastructure you can’t scale, usually without infrastructure or the internet was built on infrastructure, and it’s going to be the same with the net zero economy. It’s going to require new kinds of infrastructure, including electric vehicle charging networks across the country. And these are a couple of key points that we get at in our report. The two trillion dollar transition that people can find at RBC dot com or on our social channels. And in that report, we not only look at these new technologies, we try to come to grips with some of the consumer shifts that are underway, but kind of going slower than we really need to. Speaker 2 [00:02:15] Consumers definitely have a part to play, and that’s part of the reason why James and me, we chose to drive an electric vehicle. But consumer involvement, that’s only part of the picture. You can’t rest the entire climate burden on individuals. Industrial energy users from mining to oil and gas pulp and paper, they are huge emitters of greenhouse gases. But the good news is that industry is moving toward a solution, and we’re going to talk about that later in the show. Speaker 1 [00:02:41] Exactly. There is a lot of innovation happening right now in the energy sector, and that’s going to be critical if we’re going to meet our ambitious climate targets and hit net zero emissions by 2050 or even sooner. On the last episode, we talked about agriculture and its carbon footprint, but the reality is that Canada’s energy sector is the big hurdle. Canada has to clear as we move toward a net zero future. The sector is the single biggest source of greenhouse gas emissions, and the stakes are especially high in Alberta as productive oil and gas patch, which accounts for 10 percent of our GDP and supports hundreds of thousands of jobs across the country. Energy producers are realizing that they have to step up to the carbon challenge or risk being left behind and the fate of their industry. Indeed, our planet may hang in the balance. This is Disrupters, an RBC podcast. I’m John Stackhouse Speaker 2 [00:03:46] and I’m Trinh Theresa Do. Welcome to the climate conversations in this week’s installment of the Climate Conversations, our special multi-part series on disruptors. We talked to several influential players in the energy sector, each with a unique take on how Canada can meet its climate goals. Speaker 1 [00:04:09] After the break, we’ll hear from one of the business innovators who has developed technology that takes carbon dioxide straight out of the air. We’ll also speak with a clean energy advocate who argues that our energy future will not be found in fossil fuels or even try to mitigate their impact. But first, my conversation with the CEO of one of Canada’s biggest oil and gas companies as it transitions to becoming a net zero producer. Though five years ago, I was in Fort McMurray and traveled around the oil sands and a few things really still stick in my mind. One is the enormity of it. It is vast, but it’s not just the geography, it is the human ingenuity. There’s an enormous amount of human ingenuity around Fort McMurray. In fact, the biggest engineering projects I’ve seen in this country. Technology that should inspire every Canadian. And there’s that enormous challenge of emissions as well, which are hard not to see when you’re traveling around Fort McMurray. The oil sands is roughly 10 percent of our emissions as a country. So when we talk about pathways to net zero, when we talk about Canada’s net zero challenge, we all know the road to net zero goes through oil and gas and it goes through the oil sands. But we also have to come to grips with the opportunity to harness that enormous ingenuity that has built the oilsands to what it is and to talk about that. I’m excited to welcome our next guest to disruptors. Mark Little is the CEO of Suncor Energy, a company that traces its roots back more than 100 years and which was the first to develop the Athabasca oil sands back in the late 1960s. And earlier this year, he pledged to make his company a net zero emitter by 2050 and to position Suncor as a sustainable energy company for Canada’s low carbon future. Mark, welcome to disruptors. Speaker 3 [00:06:06] Thanks, John. It’s a pleasure to be here with you. I always like the opportunity to talk about this. It’s a big topic. Speaker 1 [00:06:13] It’s a big topic and you’ve made some big commitments in it. And I want to step back more and get a sense of when you first realized you needed to make this kind of bold commitment. You’re a major oil producer and now you’ve declared you’re going to be a net zero company. When did you realize you needed to make that transition? Speaker 3 [00:06:32] So my position and thinking on this evolved significantly over three decades. But one of the things that I’ve loved about Suncor and one of my great attractions to come to the company is that they were willing to engage with people that disagreed with them and to try and understand what is the element of truth that we need to deal with. And if there was a big problem or a challenge that we faced, then what are we going to do about it? Literally. For twenty five years, Suncor has been publishing reports on sustainability and climate. We’ve been investing in things like biofuels and wind farms for two decades. But it’s just really in the last several years where we’ve been trying to figure out, Wow, how would you get to net zero? What does it mean? What are the technologies? What approach would we take where we’ve really tried to wrestle with it? It took me a while to try and figure out is is there a hope to get to net zero? Can we see our path forward? And I sit here today, obviously having made the commitment. And you know, I actually have turned my thinking that this is an opportunity for our Canadian oil sands and for us as a company and for our country. Speaker 1 [00:07:46] One of the things about the oil sands that many Canadians may not appreciate is how much energy is required to get energy out of the ground. It is an amazing feat that requires a lot of steam to get that bitumen out of the ground and to turn it into something that’s economic and usable and that that generates a lot of the emissions. And now you and others are figuring out ways to capture those emissions and keep them or put them back in the ground or keep them in the ground. You formed something called the oil sands pathways to Net Zero Alliance. This is five big companies Suncor, Canadian Natural Resources, Cenovus, Imperial Oil and Meg Energy, which I think account for 90 percent of total oilsands production in this alliance. What are you setting out to do? Speaker 3 [00:08:33] We operate 90 percent of all of the facilities, and so there’s some other owners, but so this is a huge part of the industry. I think this collaboration, John, is literally unprecedented globally, certainly in our industry. But I think also in many industries associated with it and because we are a big emitter, you said we’re about 10 percent of Canada’s emissions associated with that. And so this really started as a conversation, not so much about how we would physically get there and how we could work together. A lot of this was like, OK, the last thing we need to do is all go out and define it differently and communicate at different and just cause absolute chaos and confusion when it be great. If we could at least get on the same page around how we talk about this. And then from that, we started realizing that, OK, wait a minute. So if you did this and we talked about this commitment, how would we get there? And we started talking about different technologies and different mechanisms that could apply across the whole industry. Then we started realizing, like some of their approaches, like carbon sequestration, we would be much stronger if we worked together and we could drive down the cost, which means that we can increase the value of oilsands to the country and to our companies and such. And so it ended up being a really exciting opportunity around, well, wait a minute, we could we could literally create an organization, a cooperation, a joint venture where we work on this together and we can go faster at a lower cost. And you kind of think, OK, this is a very good thing for all the all the various stakeholders. And that’s what eventually led to our announcement of pathways to net zero by 2050. Speaker 1 [00:10:23] You mentioned carbon sequestration. Can you explain, especially for a layperson like me, what that what that means here? I guess grabbing carbon out of the air, doing something with it. But how does that work? Speaker 3 [00:10:34] So we’re emitting 70 million tons of CO2 into the atmosphere every year out of our facilities. And so we went through and looked at all sorts of different things, some of its fuel switching, some of its energy efficiencies and such. But about half the solution for oilsands is around carbon sequestration. Essentially, what we do is instead of amending it from the stacks into the atmosphere, we take the emissions and we separate out the CO2 from the other emissions and then we compress it all and inject it back into the ground. And so a lot of these emissions came from hydrocarbons that were in the ground and then we put the CO2 back into the ground, so it doesn’t have an impact. We think that this technology will be able to take something like 35 to 40 megatons. Of our emissions, and we’ll put them back in the ground, and Alberta is a fantastic world class location for putting this back into the ground because we’ve been producing oil out of that same underground reservoirs and stuff literally for decades and decades. And so there’s lots of space to be able to do this. And so not only do we have a great oilsands resource, but we also have a great place to put this CO2 into the ground. The challenge with this is not putting it in the ground, and it’s not necessarily transporting at the real challenges. How do you capture it from the facilities? And that’s where there’s a massive part of the focus on. Speaker 1 [00:12:12] How do you think about the economics of this to make these very significant investments to capture carbon and put it back in the ground and still get oil to market at a competitive price? Speaker 3 [00:12:23] Well, it’s one of the reasons that we see this as a collaboration with governments, as an industry. Over the next 30 years, we’re expecting to generate about three trillion dollars of gross domestic product for the country over that period of time. Of that, about 500 billion dollars goes to governments. So we’re generating 15, 16, 17 million dollars a year that are going to fund the provincial and federal governments in those sorts of things. The cost, we think, is about two and a half billion dollars a year, or it’s about somewhere in the neighborhood of seventy five billion dollars to be able to make this happen if the industry just went and did this ourselves. We’re not competitive. And the reason why is in Norway as an example, two thirds of the capital to actually physically build the project that’s coming directly from the government, and they’re also paying for two thirds of the operating costs for the first 10 years. So if in one particular case, they actually are getting government support and because they’re co-investing to achieve this and we’re not, we have to fund it 100 percent. We don’t we don’t make. In fact, I would say our margins are actually lower than what you would see in Norway as it is. And so if we don’t have a competitive model in Canada to be able to figure out how to put this together, you know, the industry won’t be competitive. Speaker 1 [00:13:54] We’ve been talking largely about fossil fuels, and you’re changing Suncor. You’ve made significant investments in low emission energy sectors, biofuels, natural gas powered hydrogen, as you mentioned clean hydrogen. How do you see the energy mix, not just for Suncor, but for Canada evolving over the next the next decade or so? Speaker 3 [00:14:16] I do think you’re seeing significant investment going in to some of the other alternative energy sources, which is very exciting. You’re seeing wind and solar getting implemented. We’re an investor, at least in wind, and we’re considering some solar investments associated with that. And so I think you’ll see us increasing the use of hydrogen. And so you’re going to see a lot of new energies put forward. But, you know, I really do believe if you look at any of the forecasts going forward out to 2050, no matter how aggressively people think oil demand is going down, they’re still depending on what forecast you look at somewhere between 20 and 80 million barrels of oil being used in 2050 versus the 100 million we’re using today. And it’s kind of like, OK, this doesn’t go away overnight. We use oil for asphalt and synthetics and clothing and plastics and medical supplies and food. It’s amazing all the things it’s used for. Speaker 1 [00:15:17] What do you say to those folks who think we need to really stage down? I think was your expression by dial down our production and dial up other sources? Speaker 3 [00:15:28] I think the path forward for us is to figure out how quickly do we get to net zero and we’re investing in hydrogen and we’re investing in wind farms and all of these types of things. But the world needs energy and it’s going to need more energy. And what you’ve seen is even with all of the money that’s been poured into wind and solar and all the various technologies, and it is accelerating, there’s no question it’s accelerating. And will oil demand go down? I fully believe oil demand will go down. Do I think it’s in the next year or two? No, I don’t. These two forces one force of population growth and people coming out of poverty and stuff is overtaking that. The drive on efficiency and fuel switching. And so what? It’s not really fuel switching. It’s actually supplementing. We’re just adding to the energy diversity, which is which, you know, I get the fact that we would have lower emissions faster if we just shut off all the energy, but then look at what’s happening in Britain and you kind of think we’re trying to find this balance. Speaker 2 [00:16:33] One of the leaders who’s helping to find that balance is J.P. Gladu, a former CEO of the Canadian Council for Aboriginal Business, who also happens to serve on the Suncor board. For J.P., there’s a clear connection between indigenous led conservation efforts and economic reconciliation in Canada’s oil patch Speaker 3 [00:16:52] for a long time. We’ve been shut out of the Canadian economy, and for a long time we had the fur trade which sustained our communities, and then our communities were told that the harvesting furs was not appropriate anymore. OK, well, we don’t want to live in poverty. We don’t want government handouts. So what’s next? Well, a lot of our communities are in the north, so we’ll look to the extraction sectors to generate revenue, to generate income, to generate an economy when we talk about economic reconciliation. It means that we’re generating wealth and we’re managing that wealth and we’re empowering our communities. We know that we can actually find a better balance between extraction and indigenous protected conservation areas and sustainable development and more trees, because our natural service ecosystems provide billions, trillions of dollars that we don’t even think about when it comes to clean air, clean water. You know, think of all the health impacts that occur if you don’t have a clean environment. But we also, as an indigenous community, are having these tough conversations around, well, we’re going to transition. It’s going to take time. There’s still so much poverty, not only in Canada but around the world, 700 million people in abject poverty because they don’t have access to energy. So oil and gas is going to be a part of our economy for years to come. That doesn’t mean that we shouldn’t be putting time and effort and resources and research into actually improving that technology. So there’s a balance to be struck, and that balance is going to be we’re not going to find that balance without the indigenous voice. We need to be at the table every step of the way from any kind of development to any kind of protected area and developing economies around those protected areas. Speaker 2 [00:18:35] So a lot of what JP was talking about is something that Mark Little shared in this interview with you, John. Speaker 1 [00:18:40] That’s right. I asked Mark about his conversations with indigenous leaders, many of whom Suncor has partnered with in the oil sands. And he says there’s a similar urgency in securing a path to net zero, as there is with the. Slapping a new economic relationship with Canada’s First Nations. Here’s part of what he had to say. Speaker 3 [00:18:58] It’s not like we started talking about indigenous reconciliation yesterday, and it wasn’t like we started talking about climate yesterday. And so the chance of us solving this by tomorrow is zero. And I actually felt like the context of, OK, we’ve been talking about this for a long time, but now these are real actions that are happening in the context of this is a path forward. We are making these investments. We are entering these joint ventures. These are real actions versus just talking about it. And I do think that people are getting frustrated about us talking about these issues literally for decades. And then we go, OK, well, nothing really changed. I think that’s a contrast. And if I actually felt like we were just talking about it but didn’t have real plans or weren’t taking real actions like that joint venture with Indigenous, it’s kind of like, OK, well then this is just all a bunch of gibberish. And people have said that to me. They’re going to go, OK, well, it sounds great, but like anybody can say that, and it’s true. Unfortunately, collectively, as a country, often we get caught in the platitudes and talk about it versus real action. And so people might not like the path, they might not like what we’re doing, but at least we’re doing, and our focus is making the future far stronger than it is today. Speaker 1 [00:20:25] Coming up after the break, we talk to the leader of a BC based organization who believes that Canada’s energy future lies far beyond the oilsands. So stay right there. Speaker 2 [00:20:38] You’re listening to Disruptors and RBC podcast. I’m Theresa Do, RBC Economics and Thought Leadership recently released a report called The Two Trillion Dollar Transition Canada’s Road to Net Zero. It explores the costs and benefits of Canada’s shift to a carbon neutral economy and how it can fuel a new generation of Canadian innovation, from carbon capture technology to sustainable agriculture to the full potential of super charging electric vehicles. We look at all the ways for Canada to take a leading role in the fight for climate action and the economic opportunities they create. To learn more. Check out the link in the show notes of this episode and visit our bbc.com. Net zero emission a lake and follow disruptors wherever you get your podcasts. Speaker 1 [00:21:29] Welcome back. We just heard from Mark Little, the CEO of Suncor on one of Canada’s top energy producers, is doing to help Canada across the finish line in the race to net zero and how indigenous leaders like JP Gladu will be watching to make sure that Canada’s First Nations have a seat at the decision making table. But a lot of the innovation happening in the energy sector right now is on the bleeding edge of technology. Take Carbon Engineering, which is based in Squamish, B.C., whose direct air capture machines are giant fans combined with a complex chemical process suck CO2 from the atmosphere. It might sound like it’s straight out of a science fiction novel, but carbon engineering has some big financial backers, including Bill Gates, Chevron and BHP. We talked recently to its CEO, Steve Oldham, on how his technology works and whether it’s a viable solution to the energy sector as emissions challenge. Speaker 4 [00:22:23] Fundamentally, when you think about a climate problem, we have a situation where every year we add more and more and more CO2 into the air. We have 150 years of excess CO2 already in the atmosphere to solve that problem. We have to stop every single emission on the planet quickly and at an affordable cost. That’s extremely challenging to do so. Our simple proposition is if you can’t stop every emission on the planet, the other way to solve the problem is to remove emissions once they’ve occurred. When trying to get to zero one plus minus one is also zero. CO2 in the atmosphere is 400 parts per million. That’s not very much. It’s one drop event in the Olympic swimming pool that gives you a sense of how difficult it is to remove. The challenge for us was how do you do that at very large scale, at a reasonable cost? So we use PVC filters and we drip a chemical across the PVC filter and then we suck air across that mix using a fan. We do that in a very similar piece of equipment to the air conditioning in your house. It’s the same fundamental principle of cooling the air, except we pull the air across a chemical. The chemical reacts with the CO2 in the air and strips the majority of that CO2 out. We then have three more steps in the process which pull out the CO2 completely and regenerate the chemicals that we use to capture the CO2. So think of that part as being like a sponge, but you can use to mop up over and over and over again as we talk about the energy transition. We’re going to have an ongoing need for energy. We have to be conscious of the fact that many economies, many people, many companies are built upon the existing energy business director. Capture done in those locations offers an alternative industry using exactly the same skills, exactly the same locations. And just reversing the process, putting carbon back in its place. Speaker 2 [00:24:29] That is fascinating stuff. And as technologies such as carbon capture have grabbed the attention of many in the oil and gas patch, as well as Bill Gates. Others argue that now is the time to make bold investments in renewable energy and leave fossil fuels behind. Our next guest has spent decades fighting for a new economic model, one that embraces public policies and private actions that not only promote environmental sustainability but also spur economic innovation. As the former program director for Forest Ethics, Marian Smith allowed the campaign to protect Canada’s Great Bear Rainforest, which culminated in 2006 in one of North America’s largest conservation agreements. She did it by uniting a diverse coalition of stakeholders in the negotiations, including First Nations, corporations, government and environmentalists. Two years later, she founded Clean Energy Canada, a climate and clean energy think tank within the Maurice Jaworski Center for dialog at Simon Fraser University. Its aim is to accelerate Canada’s transition to renewable energy sources and clean technology. Marin is a much sought after adviser to leaders across Canada and currently serves as co-chair of the B.C. government’s Climate Solutions Council. Marin, welcome to disrupters. Great to be here. Thank you. You made your name as an environmentalist working for the Sierra Club and Forest Ethics before founding Clean Energy Canada in 2008. But you’ve also said that clean energy isn’t just about fighting climate change, it’s also about using Canadian innovation to create better and cheaper solutions for everyday life. Why is the economic argument about renewables? The pocketbook approach so important? Speaker 5 [00:26:15] Canadians are experiencing climate change. We all understand the urgency, but we’ve seen the floods, the fires, heat waves. But what we need is an energy transition, and the energy transition is really about economic benefits. It’s about gain, not pain, which was the narrative of the past. But currently we have technologies that are ready for prime time, things like electric vehicles, and we’re seeing the uptake of businesses building batteries for those electric vehicles, green and clean hydrogen coming on board. So we released a report earlier this year that looked at the jobs in Canada’s clean energy sector and how they would grow if Canada follows through on its commitments for the healthy environment, healthy economy, climate plan that we have right now. That sector is set to grow 50 percent by 2030. The number of new jobs will far exceed jobs that will be lost in our fossil fuel sector. So we’re looking at gaining 280000 new jobs in the clean energy sector. Yes, we will be losing jobs in the fossil fuel sector. It suggests about one hundred and twenty five thousand would be lost. But many of those will transition to these new jobs, and we’re set to have 80000 roughly more jobs as we transition to clean energy here in Canada. Speaker 2 [00:27:35] I’d like to pull on the jobs threat that you had mentioned earlier. As you said, our clean energy sector currently employs a little under 500000 people, and by 2030, that number is going to grow by 50 percent to just over 600000 people. Can you elaborate on where and what exactly are those jobs or types of jobs? Are they? Speaker 5 [00:27:56] One thing to note is that jobs in the renewable energy sector, like those in the oil and gas sector, they tend to pay better than the median. There are studies that have been done both in Canada and the US that show that clean energy workers earn more than your average worker. They’re good paying jobs. We found in Canada, they’re going to be across the country, they’re going to be rural and urban. There’s blue collar jobs, there’s white collar jobs, so lots of opportunity and potential for transition. I’d say some of the areas that we see for jobs there is going to be potential for existing workers in the oil and gas sector. Their skills will be directly transferable to renewable energy, things like geothermal, and there’s opportunities in hydrogen production and others for the oil and gas worker skills to transfer. But I would say it’s key that while we make this transition, that we also need to provide support for Canada’s oil and gas workforce really to go through retraining and to move into industry. And my focus, my framing is we want to be moving people into industries that are going to be growing in this net zero world. Speaker 2 [00:29:14] Part of the challenge in transitioning to a clean energy economy, as you know, is infrastructure. You had mentioned electric vehicles earlier. So the transition to widespread adoption of EVs requires a nationwide network of quick charging stations. And to make it a viable option for most people, so along those lines, what else should we be doing? Do we need to be doing to lay that groundwork for a broad based clean energy economy? So the good Speaker 5 [00:29:38] news is that Canada’s got an eighty three percent emission free grid zero emission grid right now. You know, we have the cleanest grid in the G20, and we have lots of potential to produce more clean renewable energy in Canada. So that’s great because that’s step one. We’re going to need to double or potentially even triple the amount of clean electricity that we produce in order to then use it to, as you just mentioned, to plug into cars and trucks to reduce the emissions from our transportation sector, to plug in to industry where that’s possible and to plug in to heating and cooling buildings and homes. So there’s a huge infrastructure piece of it. You know, I’ve got to say this is not rocket science. What we need is a one collaboration between all levels of government and province and cities with the utilities and with industry to map out that clear pathway, including the infrastructure, which will be around things like EV charging, hydrogen infrastructure for that and for hydrogen fueling electric grids, et cetera. We can look at two other countries, you know, Denmark, South Australia, there’s other nations and some nationals who are ahead of us on this, and we can look to them about how to align all these pieces. Once we do that and prove that we are committed to this, that there is a vision of where we’re going and there’s clear pathways that’s going to provide the clarity for investors to come in and help fund the right activities at the right time Speaker 2 [00:31:14] while we’re casting our eyes outward into the world. You know, this fall there has been a global energy crunch. Demand for oil has been boosted by 500000 barrels a day, according to the IEA, and coal demand is set to exceed 2019 levels this year and rise through 2025 as global economies, especially in the global south, come back to life post-pandemic. What are the limitations of clean energy to meet the needs of a growing economy and a growing global population? Speaker 5 [00:31:44] Well, I guess I want to make it clear that there’s a tendency for people to look to the energy shocks that are happening right now and for people to be quick to blame for renewables as the problem, as the reason why there’s been this energy crisis in Europe, for example. And it just isn’t true. If you look at places like South Australia, they demonstrate how renewables not only can make grids cheaper, but they can make them more reliable. And if we look at some of the energy shocks going on right now, fossil fuel prices are spiking, but that is not an indicator that therefore we can’t afford renewables. Like, are you kidding me? The new renewables are cheaper and they’re cheapest than the cheapest fossil fuel projects. They’re precisely how we get away from these volatile fossil fuel price jumps. You know, I’m not suggesting that there’s not going to be some hiccups on the way to this massive energy transition and the infrastructure transition that’s needed. But let’s be clear about what the problems really are and be clear about the opportunities of very cheap, clean renewable electricity and the opportunities that it provides. Speaker 2 [00:33:04] Merran, as we start to wrap up this conversation, you were part of a delegation which included Prime Minister Trudeau that went to COP21 in 2015, where the Paris Agreement was born. By the time we released this podcast, COP26 in Glasgow will have just concluded. What is your hope coming out of this very important climate conference? Speaker 5 [00:33:26] I hope that we come out of COP26 talking about the opportunities, talking about the gain that we can make, not the pain. The second thing is is I want to be hearing about actions. We already have many of the solutions that we need to get to net zero. I’m hoping our leaders are really going to realize that climate action is going to be the engine of wealth creation over the next decades. And because of that, they are going to commit to move forward quickly, urgently with these solutions, these solutions that are ready today. Speaker 1 [00:34:05] Theresa, that was a fascinating conversation, and as I listened to it, I kept thinking about the word balance. How do we ensure that the supply of energy and demand don’t get out of balance? How do we ensure that the needs of different parts of the country, even of different people in our own communities, don’t fall too far out of balance? Because that leads to social, economic and other disruptions that are not going to be healthy and may even undermine the transition that so many people want. We’ll hear a lot more about that in our next episode on cities and how we can energize them in the decades ahead. Speaker 2 [00:34:42] Yeah, John, over 80 percent of us live and work in cities now, and all that activity comes with a massive carbon footprint. But as we discover next time, some smart planning combined with innovative technology might just help us to tread a little lighter. Until then, I’m Theresa Do. Speaker 1 [00:35:00] and I’m John Stackhouse. This is Disruptors, an RBC podcast. Talk to you soon. Speaker 5 [00:35:12] Disruptors, an RBC podcast is created by the RBC Thought Leadership Group and does not constitute a recommendation for any organization, product or service. It’s produced and recorded by Jar Audio. For more Disruptors content, like or subscribe wherever you get your podcasts and visit rbc.com/disruptors.

CER Update: Ottawa’s Flexibility On Natural Gas Gives Provinces Major Win

What’s in the update?

Flexibility for provinces

1. The world will need to supply another United States worth of demand

2. Renewables will account for 20% of global energy needs

3. Peak oil demand is coming—but not yet

4. Natural gas faces a more uneven transition

5. Oil Investments: Capturing value, capping emissions

6. Canada’s strong population growth will require a broad energy mix

Related Reading

For more, go to RBC Economics & Thought Leadership.

Download the Report

Contributors:

Some provincial grids will find it harder to hit Net Zero targets by 2035

A Role For Natural Gas

Provinces Take Charge

Contributors:

Ontario’s clean grid strategy, released this week, has the “all-of-the-above” vibe to it

Smart homes can unlock grid efficiencies

Ontario is bracing for a wave of electricity demand

Stepping off the gas

Smart tech to the grid’s rescue

Actions for a green & efficient grid

For more, go to Climate Action Institute (rbc.com).

Download the Report

Contributors:

Oil & Gas

Transportation

Electricity

Buildings

Conclusion

Natural gas currently presents one of Canada’s biggest climate choices

Canada’s Choices for Supporting Global Energy Security

Asia Key To Long-Term Demand As LNG Investors Eye New Investments

Natural Gas is a cleaner-burning fossil fuel

Emerging markets driving gas demand

Canada’s Proposition

Distance To Asia

How Canadian LNG projects stack up against rivals

Scenario 1: The Gulf Coast Gas Exporter

Canadian gas priced at a discount to major benchmarks

Scenario 2: The Strategic Exporter

Scenario 3: The West Coast Hub

Ideas to Move Forward

Climate change, meet energy security

Key findings

CHAPTER 1

Oil is here for the long haul

Surging global energy demand

CHAPTER 2

Canada’s role in ensuring energy security

Canadian takeaway capacity is sufficient

Source: Canadian Association of Petroleum Producers, Canada Energy Regulator

Laying the Foundation for Emissions Cuts

CHAPTER 3

The need for CCUS

Types of bitumen production

Emissions Catchers: Carbon Capture Utilization & Storage Projects in Canada

CHAPTER 4

Can Net Zero oil sands compete in global markets?

CHAPTER 5

Managing volatility in the investment cycle

Canada Growth Fund’s energy stream: Who does what?

Key ideas to move forward