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Calibrating for Climate Change: BMO Climate Institute

Sustainable Finance June 22, 2022
Sustainable Finance June 22, 2022

 

We have the right ingredients to achieve the $275 trillion transition to net zero by 2050, but they are not calibrated to the realities of the economy; we have strong alignment around the need for action, but the economic agents of change are gun shy; we have financial institutions willing to help fund the transition, but we are still awaiting strong, long-run policy and regulatory roadmaps to provide guarantees.

Those were some of the key takeaways from one of a series of panels hosted by Her Honour, Ontario Lieutenant Governor Elizabeth Dowdeswell, and curated by the BMO Climate Institute and the Long Run Institute. Titled The Energy Transition in the Prism of Long-Run Experience, Present Realities, Future Imperatives, the panel saw speakers unpack some of the key challenges that lie before Canada as a resource-based economy, and the planet more broadly, to mitigate the physical impacts of climate change and concomitant collateral crises, from energy security to a potential wave of mass migration of climate refugees.

The panel, moderated by Globe and Mail Editor-in-Chief David Walmsley, was part of an intimate, day-long symposium to discuss how a convergence of factors ranging from geopolitical conflict to inflation are driving a debate around the balance between sustainability and security, prosperity with social impact. The day of discussion, which also saw keynotes from William A. Downe, former CEO, BMO Financial Group and Dr. Geoffrey G. Jones, Isidor Straus Professor of Business History, Harvard University, delved into ‘how’ to get the energy transition right.

“I think we are at a bit of a fork in the road as the events of the past two and half years unfold, and they set the stage for the climate agenda to either be set back or to accelerate a hopefully more orderly transition,” Sonia Baxendale, president and CEO, Global Risk Institute, told the gathering of industry leaders and senior scholars drawn from disciplines including history, economics and crisis management.

Panelists agreed that recognizing the interconnectedness of the world will be essential to moving forward with the climate transition agenda. That will be especially true as the world starts to pivot toward regionalization, sourcing goods and services that are closer to home, and backs away from systems that were developed over some 30 years of free trade and globalization.

“We are seeing a massive global shift taking place today and so much of our decision-making is predicated on a world that may not exist in the future, and so I think we need to start thinking differently with that context in mind,” said Baxendale.

“Our current global energy system is unreliable, unaffordable, inaccessible, and unsustainable,” BMO Climate Institute Chair Simon Fish said to open the day of talks. “Together, we need to move to a new one that supports both climate stability and a thriving, inclusive economy.”

Trade-Offs, Tough Decisions

Complicating the need for a global, collaborative approach to climate change is the human condition that sees kindness and altruism prevail only up to the point where it does not contradict national interests, perceived and real.

It’s a condition that is already coming into play and driving disagreements between developing and developed nations as they weigh the need to avoid the impacts of climate change AND assure energy security and economic growth.

For example, academics are predicting a “North America 2.0” movement that will see the region shift to a focus on energy and energy security after decades building free trade.

“NAFTA was really about trade and North America 2.0 is really about energy,” said Prof. Juliette Kayyem, Belfer Senior Lecturer in International Security, Harvard University, noting how societies around the world are going to have to make some difficult decisions about what they want the world to look like in the transition to a third energy regime and away from the 19th century adoption of fossil fuels that drove a century of prosperity and wealth at the cost of environmental degradation.

“There is this tendency to think in either/or terms, and I think if you actually thought about, what is the safest kind of society?” said Kayyem, who specializes in disaster management and risk mitigation. “If you could start all over, we (should) talk in terms of not building a system that has a single point of failure.”

As important as the direct impacts of climate change are, are its concomitant, second- and third-order effects and Kayyem predicted a key pain point in coming years will be the potential for millions to be displaced by climate change as parts of the world simply become unlivable. To manage and mitigate migrations of what she called “climate refugees”, Kayyem said new, global legal frameworks must be developed to place populations in host countries and help them adapt. The risks of not doing so, she noted, will include social unrest and a greater potential for radicalization.

Rich nations will also have to manage displaced populations inside their borders as rising sea levels and other climate events force populations out of long-established, low-lying urban zones, for example in California. Kayyem called for government, industry and the investment community to work together to facilitate “managed retreats” of communities in the most vulnerable areas with incentives like cheaper home insurance.

“We can’t just wait for the transition,” she said, noting that there are some places that will simply no longer exist in the future as climate change makes them unlivable. “The damage that we’ve done to the climate is already making people very, very vulnerable and very, very susceptible to environmental damage.”

Policy Driven

While banks, financial services and industry can provide the capital and innovation to drive the transition, they cannot lead it, panelists agreed. Rather, change will only be successful if it is driven by consensus-based public policy.

“We’re talking about getting people to move from a cheaper form of energy to a more expensive form … so policy has to drive that change,” said Paul Rochon, former Canada deputy minister of finance and an executive advisor to Deloitte Canada.

In quantifying the challenges ahead, Rochon drew parallels to economist John Maynard Keynes and the dynamics of the political economy, saying that current government policy is not built to deal with the massive systemic shift required in the transition.

“The good news is that we have the elements of the system, and the bad news is that they are not entirely calibrated to the realities of our economy … The thing isn’t broken, but the alternator is busted.” said Rochon, an allusion to the part of the automobile engine responsible for converting mechanical energy into electric energy.

In the case of Canada, where up to ¾ of our 730 megatons of emissions come from the business sector -  in oil and gas, in agriculture, in heavy industry, in commercial buildings and in commercial transportation - Rochon said clear policy roadmaps are critical to driving innovation and investment.

“What we’ve put in place in Canada is actually a rational system, it’s just not entirely attuned to the structure of our economy,” he said, adding that he is encouraged by recent Canadian government pronouncements, for example the commitment to investigate approaches to de-risk investments by guaranteeing the price of carbon as well as recent announcements around tax credits.

The Canadian case has some of unique challenges of its own. As a commodity-based economy, the country produces much of the natural resources required for a sustainable transition, but it also makes it a particularly high emitter of green house gases.

As one of the world’s largest agricultural producers, Canada will also have to make decisions about land use as it shifts to renewable sources of energy production, like wind and solar that require the use of large swathes of land, said Dr. Ruth Sandwell, a professor of history at the University of Toronto, on the reality of finding new sources of renewable energy to replace fossil fuels.

“I think the question is how to replace the sheer amount of energy that we need,” she said, drawing parallels to the duration and unintended consequences – social, political and environmental – of past transitions, like the move to coal from wood in the 1800s.

“If we use things like wind and solar, how much land will be required to do that? And what are the consequences of suddenly having to depend more on local production of food on local land and dividing up the land for those purposes?” she said.

Carrot AND Stick

Sonia Baxendale said the financial system is willing to fund transition activity, but without policy certainty, neither they nor industry will have the conviction to act, especially amid pressure from some corners for banks to divest from harder-to-abate industries, before viable solutions are established at scale.

The risk is that, instead, many will wait and fly under the radar, even as the clock tics and time runs out in the race to net zero.

“That is where we get into some of these partnerships. We need to have policy makers and government supporting industries in getting there,” she said. “And that is a carrot AND stick, frankly. We need a bit of both and there is going to be pain for everybody along the way.”

Disclosure rules, for example, need to be a supportive mechanism in the early days of the transition, especially if we are to make the move from planning to action. Later, they can become punitive.

“We are going to make mistakes along the way, we’re going to have to make them, we’re going to then have to course correct and we have to be open to those kinds of mistakes, and I think you get there by increasingly having meetings like this one, where people continue to use their influence and energy to affect change,” said Baxendale.

“Understanding from history what we are facing, be it progress, setbacks, hard choices, technological breakthroughs, points to the conclusion that our future is yet to be written,” said Dr. Laurence Mussio, chair of the Long Run Institute and co-chair of the symposium. “Understanding where we’ve been, where we are and where we’re going, realistically, is the starting point.”

 

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Simon A. Fish Chair, BMO Climate Institute

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