To achieve net-zero emissions by 2050, the Government of Canada has invested billions of dollars in practical efforts to lessen the effects of climate change and encourage clean economic growth. Despite this, Canada faces an investment gap of approximately $115 billion a year to transition to a net-zero emissions economy by 2050, as outlined in the 2022 Federal Budget.
Canada’s Sustainable Finance Action Council (SFAC) is trying to spur more private-sector investment to bridge this gap with a made-in-Canada approach to a green and transition taxonomy, as outlined in SFAC’s recent Taxonomy Roadmap Report. But timeliness is essential. It is increasingly argued that moving quickly on this issue, alongside needed data and disclosure requirements, is important to support capital investments in green and transition activities now, especially in high greenhouse-gas-emitting sectors.
Lost in this discussion to date, however, is that a green and transition taxonomy is urgently needed not only to support new private investment. It can also be a critical step to supporting Canadian competitiveness and driving broader clean-growth outcomes while meeting our net-zero targets – thus ensuring we achieve a truly smart economic transition.
An important tool for financing a smart transition
Taxonomies are classification systems that detail the actions and activities that will help to deliver on Canada’s sustainability goals. For climate change mitigation, taxonomies are needed to provide standardized, science-based approaches to identify and define low-carbon or net-zero “green” activities as well as “transition” activities that ambitiously reduce emissions in high-emitting sectors. Together, a combined green and transition taxonomy can support a holistic approach to achieve a low-carbon transition.
Developing Canadian green- and transition-oriented taxonomies was a key recommendation of Canada’s Expert Panel on Sustainable Finance to ensure we expand green investments while setting standards for what counts as transition-oriented financing. Most of the G7 and G20 countries are moving ahead with their taxonomies, which speaks to their importance in a clean-growth toolbox.
The urgent need for these taxonomies was recently emphasized by the large public investments offered to support the Volkswagen and Stellantis battery plants in St. Thomas and Windsor, Ontario. The fact that the government poured billions of dollars of public investment into these two manufacturing facilities highlights the challenge for Canada to keep pace with the large public incentives being made in key sectors by the United States through the Inflation Reduction Act and the European Union through the Green Deal Industrial Plan. Canada will remain competitive only if we have the policy frameworks in place to encourage private-sector investments that help us match the scale of investment being made by our trading partners.
A taxonomy can also drive broader clean-growth outcomes
Finalizing and implementing made-in-Canada green and transition taxonomies will have broader impacts beyond incentivizing investment in green- and transition-oriented activities. Well-designed taxonomies will support existing government policies, regulations and financing programs in driving clean competitiveness for Canada.
For example, green and transition taxonomies can be used to structure credit rates and timelines for clean-technology investment tax credits and help define eligibility for green public procurement of goods and services. They can also sharpen strategic financing tools – such as the Canada Growth Fund and the Canada Infrastructure Bank – by helping to identify and monitor green and transition investments to ensure that the right projects and entities are receiving capital and to evaluate progress.
The taxonomies will help further identify and bring attention to key enabling sectors – those sectors where we must align competitiveness and sustainability in order to facilitate the reduction of greenhouse gas emissions elsewhere in the economy – in addition to the sectors that have higher emissions. For example, Canada must have circular economy standards and policies in place to ensure that production of the critical minerals required for battery manufacturing is done responsibly and sustainably while limiting the environmental impact of exploration and development and meeting the material requirements for a low-carbon energy system.
Similarly, if Canada is to meet its commitments for nature conservation, it could apply the experience gained through developing a green and transition taxonomy to nature financing. This would put Canada on a fast track to a truly sustainable finance system that ensures that climate, circular economy, and nature targets and commitments evolve together.
Completing and applying a green and transition taxonomy for Canada will help knit together different government policies, regulations and funding to amplify their impact while ensuring that green and transition activities are easily understandable and interpretable for the financial sector. However, government support is crucial, and failure to move quickly will not only lead to Canada losing private-sector investment to other countries that are moving ahead of us, but also slow our progress on broader outcomes that will be needed to remain competitive in the future.
Anik Islam is a senior research associate at the Smart Prosperity Institute. Caelan Welch is a research associate at the Smart Prosperity Institute. Geoff McCarney is senior director of research at the Smart Prosperity Institute.
