Canadians and particularly Albertans received the Throne Speech this week with great expectations of problematic issues. Since June, as OECD countries were being urged that for “the economic recovery from the COVID-19 crisis to be durable and resilient, a return to ‘business as usual’ and environmentally destructive investment patterns and activities must be avoided”, Albertans have become increasingly wary of ideological approaches to remaking the economy that are not realistic and have little chance of success. It was not helpful that the current Federal government has been indifferent and even punished the oil and gas industry that has been the lifeblood of the province. One of the many issues with the OECD Build Back Better prescription was an ideological emphasis on Net-zero GHG emissions, a low-carbon transition or green transition, standards for green finance or sustainable finance with what some would call inflammatory references to “environmental crises”, “climate emergency” and “mass species extinction”. The idea of green or sustainable finance is vague and hard to define according to a 2019 article in CPA Canada’s Pivot magazine. Professionals in the world of finance take exception to the hazy concept of green or sustainable finance and claim it is a fallacy. It can be viewed as a flawed attempt to transfer risk from private interest to the taxpayer – flawed because it does not transfer risk and reward effectively.
Greg McLean, MP and newly appointed Shadow Minister for Natural Resources, and 20-year financial professional has perspectives on both sustainable finance and the nature of “Build Back Better” concepts.
“We were anticipating the Build Back Better or Build Back Green plan. At the end of the day, there is going to be some obfuscation over who is really paying for it. The thing about Green Finance is that it changes your risk/return relationship so that previously nonviable projects become more viable because the government (i.e. the taxpayer) accepts some of that risk but gets none of the return from a financial perspective. So, they bear a suitable amount of risk and yet all the returns still go to the project proponents. That is the issue with what we call “green finance”. It is not changing the immutable laws of finance which are that there is the pricing for risk and there is the pricing for time when you are in an investment. That is what determines whether you get a better return or a worse return. If you want to take risk out of the equation by loading it on the back of the taxpayers with the excuse that there’s a whole bunch of taxpayer benefits that come with it, then take the return that’s associated with that risk out of the equation. Make sure that return flows to the taxpayer. That is usually not the way it works. Usually, it is just an excuse to get pet projects built.”
Loading the risk on the back of the taxpayer is particularly troubling to oil and gas and infrastructure projects in Canada since the passage of Bill C-69, changes to the Impact Assessment Act and the NEB/CER, and other regulatory changes that drastically increase the timelines to get project approvals.
This has to do with the time risk premiums companies have to pay for longer-term financing of projects delayed by regulatory complexity.
“Time risk involves the principle that the longer time horizon we have on something, the greater the risk that something goes wrong on it. So as a result. If you think about a short-term bond- say for a two-year bond – you will be paying in this market about one percent on issue. If it was the same risk of that two-year bond but applied over 10 years, there will be an added premium for things that will go wrong either with the project or in the economy generally over that period of time. So, you must pay a premium to lock in the longer term because of the uncertainty that is always there with a longer term. Even if your safe investments don’t look like they have a risk premium, they will have that time premium based on the fact that when you’re locking money in for a longer period you’re paying more for it.”
Another big fear for Albertan and Canadian companies, and not just oil and gas companies is the New Canadian Fuel Standard and intentions to reach Net Zero by 2020. Not only are consumers worried about increases to home heating bills and gasoline prices, but business is also wary that they might experience double-digit percentage increases. McLean’s view is that Fuel Standard cost increases are inevitable and discordant during a pandemic when many have experienced job losses.
“We’re all going to face increased costs due to the Canadian Fuel Standard and when businesses have increased costs, they pass those increased costs directly onto their customers. There is nothing that is an expense for a business that is not reflected in the price of what they offer customers. So, consumers may think they are escaping the extra costs because they will be borne by the business, but in the end, a business must transfer that to the people that they are supplying product to. So, the new Fuel standard costs will be transferred through. We just must look at the effects of what has happened in Ontario as they have attempted to change the environmental footprint of their energy industry. It has done nothing but increased costs for consumers and keep a small group of self-interested people employed. It is the bureaucratization of the energy and it has not accomplished the environmental benefits that were supposed to come from it. None of the jobs in green energy have arrived in Ontario. But the costs have been borne by consumers.”
Consumers and businesses alike are looking to quantify the effect of the New Fuel Standard. For oil and gas companies, financiers like AltaCorp or ATB Financial, RBC, or Barclay’s should have costing on it and how those costs will flow down to the consumers and what it’s going to affect in business along the way. In addition, McLean says his party will be asking the Parliamentary Budget Officer for a complete costing on the Fuel Standard- not only about how much it affects Canadian consumers but also how it affects the government’s costs as he reminds us that the government also consumes a lot of energy.
Another concern for Albertans is that with plans for a sustainable recovery – can we ensure that the climate objectives will not disparage Canada’s affordable hydrocarbon resources. Oil and gas and hydrogen should be included. Canada seems the be the only hydrocarbon-rich, oil-producing country in the world criticizing and over-regulating our industry out of business. Net Zero seems to be another fallacy of the “Build Back Better” concept and Greg McLean has a well-researched understanding of its flaws as well as the danger of Net Negative goals.
“The whole aim about getting to Net Zero is you’re not putting anymore CO2 in the atmosphere. The impetus for Net Negative is that the levels of CO2 saturation are already high and need to be decreased. So Net Negative means we are contributing to pulling CO2 out of the atmosphere that other countries are creating. All these things are costly at the end of the day. The question is; are we going to continue to increase our costs in Canada for doing everything? There is no magic envelope around Canada environmentally or economically so if it is cheaper to set up a plant that uses power just south of the border- that will happen. I think we cannot continue to push business away with increased costs on businesses. If on the other hand, we give businesses a tax credit for the fact that they have to pay more because of those clean fuel standard taxes in Canada – that cost falls on the backs of the individual taxpayers.”
Part of the Green transition is to change over to renewables – too quick a transition to unreliable or weather dependent and costly sources of energy has its dangers. California’s rolling blackouts serve as a cautionary tale of overzealous political motivations without sound economic planning. McLean sees the need for more scientific and economic analysis.
“The agenda is being driven without a scientific or an informed economic outlook. Consultations are not heard. Outside of a new election – how you influence those decisions? This is the question we are facing now. As opposition politicians, without the backing of the other opposition parties in a minority government, we are watching one Party divide the country and tilt towards an agenda that will not have a result that benefits the environment and in time it will be tearing up our economy.”
In addition to the lack of real dialogue, a critical question remains unanswered-“What actually is a renewable resource? “ McLean sees a flaw in the current vague definition.
“If somebody wants to say that electricity is a renewable resource it is because they see that the water is always going to flow, and the sun is going to shine. But these sources have large carbon footprints. Very few countries talk about flooding as much land as we have flooded in Canada for hydro-electric dams, along with the CO2 footprint of the concrete used in construction. There is a huge carbon footprint there. Likewise, with cobalt. People think electric cars are the answer to lower carbon intensity. Look at the footprint of the Cobalt and the Lithium in the batteries. They have a high environmental footprint not just in their disposal which requires sequestration in their concentrated forms, but they also are a much more finite resource (particularly cobalt) than the hydrocarbon resources. So, is it a renewable resource at the end of the day? We have a large, affordable resource in hydrocarbons & natural gas that we are making more energy efficient every year. Why are we switching to something that is at this point in time- uneconomic, highly subsidized, produced elsewhere and produced unethically. In the end, it accomplishes very little for the environment today.
There is also a lot of concern in Alberta over the crisis of capital with funds like Blackrock and KLP, Norway’s largest pension fund saying they will no longer invest in companies that derive more than 5% of their revenue from the oilsands. McLean’s insights into the geopolitics of global investment and competing economies are enlightening. He notes that the funds that are no longer investing in Canadian energy, like the Norwegian Fund, are politically motivated. In his words, “Norway has its thumb on the scale”. He reports Norway has a new oil project north of the North Sea that is effectively going forward and that they are in competition with Canada. Norway has already made over 1.1 trillion dollars in its wealth fund because of the benefits of oil. They want to continue and they cash starve other competitive oil producers. He advises that Canadians need to recognize that Europe is not an innocent player in world politics. He points out that banks that were not here 20 years ago, that came in when the oil boom was happening and have since left were European banks. They are stuck in the European economy; he advises and notes the European economy has had 1% GDP growth per year for the last several years. He also points out Europe is not just net negative on a real basis as far as the returns on bonds go, they are negative on a nominal basis. In his opinion, some great financial laws are being broken in Europe right now and it is about holding the euro together. He cites an example of the economic troubles of Greece.
“ Fifty percent of Greece’s economy was tourism. Greece was not able to pay its bills so money (euros) were printed to make sure that they could continue. They were excused on their repayments and they got relief from the European central bank. The result is they had to sell their ports to China. Their ports are real assets that they could actually make some money with and they had to put those on the line. Now China owns their infrastructure. So, think about where the money is flowing and what they are buying with it. China bought more or less the lifelines of Greece. There is an outcome at the end of the day here that you just can’t keep delaying, Kicking the can down the road just isn’t working for anybody.”
Maureen McCall is an energy professional who writes on issues affecting the energy industry.