More than 100 countries have either set or are considering commitments of carbon neutrality, with most – like Canada – aiming for a 2050 net-zero target date. They are joined by more than 800 cities, including Toronto, Montreal and Vancouver.

The private sector is also stepping up. Financial institutions around the world, including Canada’s biggest banks, are committing to net-zero investment and lending portfolios by 2050. At the same time, we’re seeing an outpouring of carbon-neutrality pledges from leading global corporations, including Walmart Inc., Ford Motor Company, Royal Dutch Shell and Canadian oil sands giants Cenovus Energy Inc and Suncor Energy Inc.

However, as carbon-neutral pledges mount, there are concerns about the credibility of those corporate targets and the strategies being proposed to reach them.

Companies are putting too much focus on the “net” part of the equation and not enough on the “zero.” There is a danger, as one policy researcher puts it, of getting trapped in the net.

Deep decarbonization

Corporate plans often rely heavily on “offset” systems in which they purchase emission credits from other firms or organizations that reduce carbon emissions more cheaply than the corporation can. On paper, such firms will be advancing toward net-zero; in reality, their own carbon intensity will remain stubbornly high.

Critics also worry that corporate strategists are pinning too much of their effort on nature-based solutions when there remains considerable debate about the credibility and permanence of the resulting GHG-reduction credits.

This is not to diminish the critical importance of climate-friendly practices in forestry, agricultural and nature conservation. Or the crucial contribution that will be required from negative emission technologies like “direct air capture” projects, which can suck carbon dioxide from the atmosphere and sequester it.

However, such strategies need to be in addition to not in lieu of deep decarbonization efforts that displace fossil fuel use in transportation, electricity, heating buildings and industry.

“We absolutely need to be focused on the ‘zero,’” says Catherine Abreu, executive director of Climate Action Network Canada. “Human beings are easily seduced by silver-bullet, technocratic fixes. And there is an aspect of the net-zero conversation that lends itself to that kind of seductive thinking, and a tendency in some quarters to manipulate the idea of net-zero and turn it into something that perpetuates the status quo.”

Still, it’s increasingly clear that success in limiting the carnage of climate change will require every mitigation tactic that is available. All the more so because we have failed until very recently to accelerate the low-carbon transition of the mainstream economy.

Safe bets and wild cards

In its groundbreaking 2018 report, the UN’s Intergovernmental Panel on Climate Change (IPCC) embraced the “net” in various scenarios for holding the average global temperature increase to 1.5°C. The IPCC laid out four “illustrative pathways” for achieving the 1.5° goal, and all of them featured some reliance on “negative emissions,” such as nature-based solutions or carbon capture and storage.

The Canadian Institute for Climate Choices (CICC) characterizes many of the negative emissions solutions as “wild cards” that could play an important role but face serious questions about effectiveness and commercial viability.

There is tendency in some quarters to manipulate the idea of net-zero and turn it into something that perpetuates the status quo.”

–Catherine Abreu, executive director of Climate Action Network Canada

In its February report, Canada’s Net Zero Future, the CICC warns that we cannot shirk on “safe bets” – such as energy efficiency, renewable power and electric vehicles – in order to rely on those wild-card technologies. They include direct air capture (DAC) technology and nature-based solutions.

Carbon capture, use and sequestration (CCUS) can play an important role, both in the short-term for highly concentrated emissions of carbon dioxide and, potentially, over the longer term with less-concentrated CO2 sources. Wild-card technologies like hydrogen, DAC and nature-based approaches are high-risk but may be high-reward in the push for net-zero by 2050.

Such technologies could “fundamentally change Canada’s path to net zero,” the CICC report says. “Wild cards are a potential complement to safe bets – not a substitute. They are important for unlocking the deeper, cost-effective reductions that can get Canada to its ultimate net-zero target.”

Offsets as regulatory compliance

Meanwhile, the federal and provincial governments are allowing companies to use offsets to meet some small portion of their regulated emission-reduction requirements. In March, Ottawa published draft regulations for its planned GHG-offset credit system. The proposal details how companies can use offset credits to meet up to 10% of the emission reductions required under regulatory schemes such as the industrial carbon-pricing system or the clean fuel standard, which will force refiners and importers to reduce the carbon intensity of the liquid fuels they sell.

They will have to demonstrate that the emissions reductions are in addition to what would have occurred in the absence of the credit purchase and that the GHGs will be stored permanently, Environment and Climate Change Canada says.

Nature-based strategies for mitigating climate change are increasingly being touted as a key element in national and corporate net-zero plans.

In keeping with accepted United Nations practices, Ottawa includes significant contributions from land-use and nature-based solutions in its plan to achieve up to 45% reductions in GHGs from 2005 levels by 2030. The federal government says it will plant two billion trees as part of its strategy and conserve 25% of Canada’s land mass as part of its climate mitigation strategy. In its April budget, the Liberal government also allocated $185 million over 10 years for an Agricultural Climate Solutions program, which aims to sequester carbon in soil and vegetation.

“There is less incentive for those firms to go after their own emissions because they can instead go after low-cost offsets, which are not always real emission reductions.”

–Nic Rivers, University of Ottawa

An international study funded by the U.S.-based Nature Conservancy concluded that nature-based solutions could provide 37% of the most cost-effective GHG reductions required by 2030 to keep the world on track to limit average temperature increases to less than 2°C.

However, the use of nature-based credits to offset emissions has drawn considerable flak because of concerns about accounting accuracy, additionality and permanence.

In an opinion piece published on CBC’s website in March, three leading climate academics (Nic Rivers, University of Ottawa; Kathryn Harrison, University of British Columbia; and Mark Jaccard, Simon Fraser University) said the use of offsets in regulatory systems “is likely to give the illusion of progress, even as it increases carbon emissions.”

They argue the carbon accounting is unreliable because it doesn’t assess actual emission impacts, but rather measures outcomes compared to some assumed baseline. In many cases, “emission reductions” are created by a change in activity – sustainable forestry practices or capturing methane from municipal waste sites – where business-as-usual baselines assume problematic practices that should be better regulated, they wrote.

Meanwhile, industrial emitters can offset a tonne of real GHG emissions from a smokestack against a tonne of offsets. “There is less incentive for those firms to go after their own emissions because they can instead go after low-cost offsets, which are not always real emission reductions,” Rivers said in an interview. He doesn’t question the importance of nature-based solutions but argues they should be pursued separately from regulatory compliance.

In its net-zero report, the Canadian Institute for Climate Choices says nature-based solutions present “enormous potential for the low-cost sequestration” of carbon and could be useful in offsetting emissions from hard-to-mitigate, emissions-intensive industries such as cement. However, the authors echo the concerns raised by the professors with regard to additionality and permanence.

Save a tree, store some carbon

The Darkwoods Forest Carbon Project in southwestern British Columbia is owned by the Nature Conservancy of Canada and is the largest verified offset project in North America. The Nature Conservancy – which is not affiliated with the international organization – purchased the 63-square-kilometre property in 2008 with plans to improve forestry management and other conservation practices and sell carbon offsets.

The Darkwoods Forest Carbon Project estimates it saves the equivalent of 125,000 tonnes of CO2 emissions each year. Since its inception, it has sold well over a million tonnes of carbon credits in the voluntary market in which corporations like Microsoft, Shell and United Parcel Service buy offsets to meet their own GHG-reduction targets.

The Nature Conservancy has had the emission reductions verified by third parties under the international Sustainable Development Verified Impact Standard. It includes precise calculations of the carbon stored in the various trees that make up the conservation area, as well as a reserve of credits that guard against unexpected losses such as forest fires.

However, the B.C. Auditor General criticized the Darkwoods offset accounting in a 2013 report. The report reflects many of the concerns that have been raised with regard to nature-based solutions. It concluded that the organization had already decided to purchase the property prior to any commitments for offsets, and so the assumed improvements to forestry management would have happened without the carbon credits. As a result, there was no additionality, it said. It also suggested that Nature Conservancy used overly aggressive assumptions about timber harvesting in the region for its baseline, against which it measures the carbon credits resulting from conservation.

Nature Conservancy rebutted the Auditor General’s report, arguing that the organization had always considered the revenue from carbon credits as an important component of its agreement to purchase and conserve the Darkwoods Forest. A letter from Verra president David Antonioli, whose company verifies the credits, complained of a series of errors and misunderstandings about the verification process that had been committed by the Auditor General’s team in preparing its report.

Rob Wilson, director of conservation finance for Nature Conservancy, notes that carbon storage is typically only one aspect of a conservation project that protects species habitat, maintains natural spaces for human enjoyment and, in some cases, provides greater resilience from the mounting impacts of climate change. “The revenue from the carbon credits has allowed us to support other conservation work across the country,” he says.

Other nature-based programs have also faced criticism. Verra’s Antonioli responded in May with charges of bias against a report from Greenpeace and The Guardian newspaper that concluded airlines were relying on “phantom credits” in a forestry project in Peru. A joint report from ProPublica and MIT Technology Review published in late April concluded that California’s forestry offsets program “creates the false appearance of progress.”

Corporate offsets: Financing solutions or paying to pollute?

Certainly, the purchase of offsets – whether nature-based or technological – is a key component in corporate net-zero targets.

In February, Royal Dutch Shell released its plan for achieving net-zero emissions by 2050, with declining crude production, investments in carbon capture and storage, and a hefty portfolio of nature-based offsets that would represent 120 megatonnes per year of CO2-equivalent emissions by 2030. (For scale, that’s equivalent to roughly two-thirds of all the emissions from Canada’s oil and gas sector in 2019.)

Shell’s Canadian subsidiary is purchasing credits from the Darkwoods project and is pursuing a reforestation project with the Tsilhqot’in First Nation in B.C. and a grasslands protection initiative with federal and provincial governments, both of which it says will yield carbon credits.

“At worst, these [portfolio] commitments and investments/divestments risk being a shell game where image-conscious companies shed their high-emitting assets in favour of low- or zero-emitting ones, only for less-visible or image-concerned players to snap them up.” 

–Jason Dion, Canadian Institute for Climate Choices

Similarly, Enbridge is purchasing and retaining renewable energy credits and investing in nature-based solutions and offsets.

Of note, few of the major oil companies in Calgary are pledging to reduce their overall emissions by 2030, despite the reality that oil and gas broadly accounts for 26% of the country’s total GHGs and the federal government has committed to slashing national emissions by 40% to 45% by 2030. On May 26, Suncor said it would reduce its GHGs by one-third by 2030 across its value chain, on the way to net-zero by 2050.

Canadian oil sands giant Cenovus Energy also says it aspires to reach a net-zero target by 2050. However, it’s focused only on emissions that result from its own operations and the electricity it purchases from the grid. International standards, like those put forward by the Task Force on Climate-related Financial Disclosure, urge corporations to disclose and manage all the emissions related to the production, processing and consumption of their products – known as Scope 3 emissions.

In light of its merger with Husky Energy on January 1, Cenovus is reviewing its targets and plans. “We will be completing an analysis to set new near-term targets in 2021 that align with our revised long-term business plan,” says company spokesman Reg Curren.

In the sustainability report Cenovus released last July, the company said it would reduce the per-barrel, GHG-intensity of its operations by 30% between 2019 and 2030 and would aim to hold absolute emissions flat at 8.8 megatonnes of CO2 equivalent. Cenovus said its net-zero aspiration would rely on “technology solutions beyond those that are commercial and economic today.”

It’s unclear whether a rebalancing of Cenovus’s assets to include, for example, more renewable energy would result in a society-wide reduction in emissions.

“At worst, these [portfolio] commitments and investments/divestments risk being a shell game where image-conscious companies shed their high-emitting assets in favour of low- or zero-emitting ones, only for less-visible or image-concerned players to snap them up,” says Jason Dion, author of the Institute for Climate Choices net-zero report.

However, if overall oil and gas supply declines because of shifting capital expenditure decisions, and new investment is plowed into clean energy development, the shift in portfolio would represent substantial progress.

Long-term promises vs short-term realities

The oil companies aren’t alone in making long-term pledges that don’t align with their short-term business plans.

Three of Canada’s big banks – Toronto-Dominion, Bank of Montreal and Royal Bank of Canada – have pledged some form of net-zero target by 2050, either in their lending portfolios or total financing. RBC’s commitment, for example, relates to companies in its lending portfolio being, in aggregate, net-zero by 2050, spokesman Andrew Block says.

The big Canadian banks have also announced increased targets for sustainable financing.

The banks are working with the Canadian Standards Association and various industry groups to produce a standard for “transition financing” – an effort to promote “green” lending to energy-intensive companies for investments that result in emission reductions. The CSA-led committee hopes to release its transition taxonomies by summer, though they have been previously delayed over disagreements about what kind of investments would qualify.

“If you are going to meet those targets, you will have to stop financing fossil fuels very, very soon.”

–Eric Usher, head of the UN Environment Programme’s Finance Initiative

Meanwhile, Canada’s big banks remain major financiers for the global oil and gas industry, including recent oil sands expansion projects. Together, the large Canadian banks provided nearly US$400 billion in financing for fossil fuel companies between 2016 and 2020, says a report from the Rainforest Action Network and affiliated NGOs.

If they are going to meet net-zero lending targets, the banks will have to pivot away from the fossil fuel sector and their financial support for projects that will be spewing GHG emissions for decades, or the pipelines that enable growing oil and gas production.

As of late May, none of the major Canadian banks had joined the UN-convened Net-Zero Banking Alliance, which commits members to a net-zero pathway that includes science-based 2030 commitments and interim targets every five years. While membership in the Net-Zero Banking Alliance doesn’t formally require institutions to stop lending to the fossil fuel sector, the need for them to align with the 1.5°C goal will drive that result, says Eric Usher, head of the UN Environment Programme’s Finance Initiative.

“If you are going to meet those targets, you will have to stop financing fossil fuels very, very soon,” Usher told a webinar hosted by the Canadian Association for the Club of Rome on May 5. The principles for membership in the alliance also require that banks’ climate commitments focus on GHG reductions in carbon-intensive industries and “not rely heavily on negative emissions technology.”

National governments are not going to succeed with deep decarbonization strategies and net-zero targets unless their commitments are matched by global corporations in key sectors. That will require a mix of regulatory pressure and voluntary action.

There must be absolute clarity around the net-zero strategy. That is, we must drive as quickly and aggressively as possible to decarbonize our economies through active transportation and urban planning, energy efficiency and switching away from fossil fuels. Negative-emission, wildcard solutions – whether nature-based or technological – can be relied on to net out the most hard-to-eliminate emissions and, in the case of conservation, can provide important co-benefits that add value.

Offsets can yield some short-term benefits in terms of cost-efficient emission reductions. They are no substitute for fundamental transformation of emission-intensive industries.

Shawn McCarthy is an Ottawa-based writer who focuses on climate change and the low-carbon energy economy.

From Corporate Knights Summer Issue, in print June 30, 2021.

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Some might assume that a higher carbon price reduces the need for other policy approaches. Commentator Andrew Coyne has taken the market-fundamentalist position that a higher carbon price should be Canada’s single climate policy, and governments should do little else. However, the plan to increase the carbon price creates an urgent need for a robust “green industrial policy.”

That’s the approach in which governments actively guide the economy toward net-zero greenhouse gas (GHG) emissions (or beyond). Rather than simply sending signals to the market, industrial policy recognizes that governments co-create development pathways with the private sector through strategies customized to unique regional and sectoral contexts. Green industrial policies include the Energiesprong project to transform building retrofits, the U.S. SunShot Initiative and the role public investment banks play in deploying sustainable energy.

Lack of explicit industrial policy doesn’t mean state direction is absent – it often means incumbents with the greatest political power have captured government decision-making, which maintains a status quo rather than producing activist industrial policy. The persistence of fossil fuel subsidies is an implicit industrial policy, just not a transformative or environmentally friendly one.

A green industrial policy is urgent because without it, the carbon price is unlikely to receive enough political support to reach its 2030 level or to induce the changes required for a net-zero economy. Here are five reasons why.

1. Political support depends on economic security and access to new services

While commentators like Andrew Coyne hope to see right-wing parties propose a market-fundamentalist position with a carbon price higher than $170 per tonne, we are more likely to see conservative movements exploit people’s economic insecurities by directing their anger against carbon pricing (as we’ve seen in Ontario, Alberta, France and the U.S.).

The federal government will issue quarterly “rebates,” promising to put more money in the pockets of average Canadians paying the carbon tax. This does not prevent people from worrying about how they will pay their monthly bills, however, especially if they have precarious incomes.

Inequality and precarious economic situations also make “the average” a poor indicator. For instance, rural and low- to middle-income households can consume more energy because they live in inefficient and substandard housing – or worse, they’ll avoid heating and cooling at healthy levels to make bills affordable.

The ultimate distributional consequences of carbon pricing depend not only on rebate policies, but on the availability of carbon-reducing services – which often are not adequately provided by markets. There is an urgent need for the government to support universal access to a new suite of carbon-cutting services like building retrofits customized for low- to moderate-income earners and public transit.

Consider that supporting large-scale building retrofits will require a transformation of business models in the sector. Rethinking service provision in a low-carbon economy also demands a renewal of the public sector to be more responsive to citizens’ needs and agile in creating new designs. This is the domain of industrial policy.

A green industrial policy should also guarantee that “good jobs” are available for anyone who wants to build a career in the net-zero economy. Market forces or untargeted pricing and subsidy policies do not create jobs for the people and places that need them most. Active labour-market policies that focus on what individuals need to transition to new careers, and customized technological advice and barrier elimination for firms, work best.

We cannot let carbon pricing become the lightning rod for legitimate anger over inequality and economic insecurity. An industrial policy that creates green services and good jobs will promote economic security, which will give people the tools they need to react to the carbon price by reducing emissions. The alternative is political mobilization against the carbon pricing policy.

2. We need more information

The carbon price conveys information to consumers and businesses about what choices to make in existing markets through prices, but economic decisions require more information.

Pricing information is insufficient because a net-zero-emissions economy requires doing things we have never done before. This concerns not only new technologies, but figuring out how to deploy existing technologies (e.g. insulation and electric vehicles) at unprecedented scales. Such an endeavour requires information about local economic structures, supply chains, cultures and transformative combinations of technologies. This information is conveyed by people and organizations sharing complex ideas in networks rather than prices.

Governments provide valuable information to these networks about things like new technological potentials and regulations. And if governments do not actively participate alongside private sector firms and civil society in these networks, they will lose the ability to understand economic change processes and how to direct them toward net-zero emissions.

There is a caricature of “industrial policy” involving an all-knowing state setting rigid directions. A modern industrial policy approach understands that economies are beset by fundamental uncertainty, requiring governments to lead a process of discovery that taps information from markets and society.

While carbon pricing is a great tool to convey important information through markets, we must recognize that it is a one-dimensional signal about what to do (don’t buy or produce things with high emissions). It offers little guidance about the best way to do this. Industrial policy facilitates the sharing of more complex information about net-zero solutions, which will create a stronger reaction to any carbon price.

3. Carbon pricing pushes, while industrial policy steers

Carbon pricing pushes toward reducing emissions, but it does not steer toward the most promising social and technological futures. There is a danger that economic decisions that pass a cost-benefit test with a carbon price (e.g. a pipeline or new highway) are legitimized, when they could pull us toward dead ends that put net-zero emissions out of reach. If we are moving toward a dead end, the political interests dependent on carbon pollution are likely to more strongly mobilize to weaken carbon prices. Industrial policy concerns itself with the direction of economic change – it can navigate and steer while carbon pricing pushes.

An industrial policy approach also gives policy-makers more tools and greater flexibility, which will be particularly useful during unanticipated shocks. Note that governments stalled planned carbon-pricing increases in reaction to the pandemic. But the pandemic also created opportunities to invest in active transportation infrastructure and a green recovery strategy. Future shocks are inevitable, and when they come, we will need public sector institutions with diverse solutions readily available.

Also, while carbon pricing provides a push, we need zero-carbon strategies to take flight – deploying solutions like building retrofits, renewable energy and industrial decarbonization at scales never before achieved. The history of transitions shows that such take-offs are not created by price changes alone. They require new combinations of technologies, changes in regulatory systems to complement new technologies, and a new “common sense” about how to produce things and what constitutes a good life. Such systemic changes are not triggered by risk-averse firms, acting independently. The public sector has the role of monitoring larger systems and creating new societal bargains, and it has the ability to take the risks associated with pushing technological and organizational frontiers.

4. While carbon pricing is broad, industrial policy is targeted

Carbon pricing works best when it provides a broad and uniform price signal; however, the price will have unique impacts on different sectors and regions.

While a high carbon price may create major changes in sectors like electricity, it may have minimal impact in decentralized and less coordinated areas such as housing or agriculture. An industrial policy approach will introduce new technologies and business models in strategic sectors and enable them to react to the carbon price by producing less carbon instead of opposing the policy change.

In Canada, we will also see a variety of regional transitions instead of a national one. Quebec’s history with hydroelectric power creates different net-zero pathways compared to Alberta’s history of oil and gas development. A regionally differentiated policy is important because we cannot escape the politics of federalism, and opposition to carbon pricing is coming from regional political interests. The more a green industrial policy can identify and support promising net-zero pathways that build from pre-existing regional assets, the better the chance of building supportive political coalitions for more climate action in the regions themselves.

5. Industrial policy defines the Canadian role in a net-zero economy

Democratic deliberations about what type of society we want should be more comprehensive than the decision to change prices and let markets figure it out. There are many reasons why Canadians might desire a different bundle of net-zero solutions than the ones induced by a higher carbon price. Perhaps we want to avoid the risks associated with nuclear waste, or we wish to deploy clean energy in a way that also encourages reconciliation with Indigenous Peoples? Good industrial policy considers how societal aspirations should influence the direction and character of economic development.

In addition, market-based policies do little to ensure Canada benefits from a net-zero transition. Finding the areas where Canadians can make the greatest contribution is important for the global transition, and to reinforce political support for the transition at home. While carbon pricing sends a signal for Canadian solutions-providers to search in new directions, an industrial policy leads this search by creating the space for learning, experimentation and scale-up. We should consider, for instance, how Canadian capabilities in areas such as software and battery systems could create a less dependent relationship with international automakers; how Canadian oil and gas capabilities could promote the development of geothermal, advanced materials and green hydrogen; and how to make energy-efficient housing for our cold climate.

There are parallels here to Canada’s free trade debate. Free trade opponents were concerned that market processes, left to themselves, would exacerbate Canadian dependence on natural resources and foreign technology (a trajectory that has strengthened Canada’s carbon lock-in). A proposed middle path (not taken) was to ensure a robust Canadian industrial policy alongside freer trade. Today, we need a green industrial policy to make sure Canada thrives under a carbon price.

An urgent need for green industrial policy

Environment Minister Jonathan Wilkinson described the new climate plan as an “industrial policy.” This seems to refer to building Canadian manufacturing capabilities in low-carbon supply chains. The concepts outlined above are broader – concerning the government’s role in directing and shaping markets, and embedding market processes in society’s need for economic security and democratic participation.

The new carbon-pricing regime will not launch until 2023, and the $170 price will come into effect in 2030. There are several elections and unexpected events likely to occur between now and then.

To reinforce the carbon-pricing commitment, we need action on developing a more robust green industrial policy this year. This means a bold commitment to long-term public investment to support economic security and the green recovery. It also means developing more specific challenges and missions to set the right direction, such as zero-carbon retrofits of all buildings – with specific focus on low- to moderate-income households. Canada also needs to renew its public sector capabilities and institutions to effectively implement an industrial policy.

Carbon pricing and green industrial policy are complements rather than substitutes, and a meaningful rise in a carbon price makes the need for a well-informed, equality-enhancing, targeted and democratic Canadian green industrial policy only more urgent.

A version of this article first appeared at broadbentinstitute.ca.

Brendan Haley is a Broadbent Institute Policy Fellow. He wrote a PhD thesis on low-carbon transitions in the Canadian context and is the author of a Broadbent Institute report on a Green Entrepreneurial State in Canada.

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