October 7, 2020

Guest post by Michaela Pedersen-Macnab and Matthew Hoffmann

Calls for a green recovery are bombarding the Canadian federal government as the governing Liberals work to craft post-pandemic plans. Fortunately, there are signals coming from Ottawa that the federal government is listening and that the recovery will be structured to align with its principles and goals for addressing climate change. While this is welcome news, few concrete plans have been announced yet.

As the government considers how to align the recovery with climate action goals, those working on it would do well to correct a serious void in the Pan Canadian Framework for Clean Growth and Climate Change. The national plan and policies are discussed mostly for what they do—put in place carbon pricing, address large emitters, and seek to catalyze innovation in clean technology sectors. What is less discussed is what the Framework leaves out—transformation in a key sector of the economy, namely, Small and Medium Enterprises (SMEs).

Why it’s crucial to get SMEs on board

Getting SMEs on board with emission reduction will be essential for Canada to meet its Paris Agreement target. Canadian SMEs comprise 98% of Canadian businesses, employ 70% of the Canadian private sector workforce, and currently produce approximately 30% of national emissions--which total more than the combined annual emissions of Quebec, Manitoba, Saskatchewan, and the Atlantic Provinces. Yet out of the 99 federal policies and programs aimed at promoting climate action and growing the low-carbon economy we identified in a recent study, only 5 are oriented towards SMEs in particular.

We cannot afford to exclude SMEs in pandemic recovery work. A transition to a low-carbon economy will require a change in the business culture of Canadian firms; SMEs occupy a pivotal role in the supply chain of large emitters and may be able to significantly influence the behavior of larger emitters. As Sharon Coward, Executive Director of the EnviroCentre suggests, “It’s great if you get the top emitters in Ottawa to commit to reducing their carbon emissions. But that doesn't really change the business culture… it's more likely that these top [emitters] are going to really engage if they can see that the whole culture of business is shifting”. As such, SME emission reduction is likely to have a long-term impact that is greater than the reductions achieved by each individual firm.

SMEs cannot make this transition alone. Firm size is a strong determinant of whether or not a company will voluntarily take on emissions reduction targets; in general, SMEs tend to be more resistant to taking on voluntary sustainability measures compared with larger firms. Other research shows that external prompting is critical for emission reductions in SMEs, as these firms rarely take on emissions reduction projects on the basis of economic merits alone. Voluntary projects that are taken up by SMEs most frequently (such as recycling and environmental audits) also tend to be less effective compared with more transformative measures such as life cycle planning, eco-designs, retrofits, or alternative power generation. All of this is to say that SMEs will need both prompting and support from government to effectively reduce their carbon emissions in robust and meaningful ways.

What groundwork has been laid to date?

The groundwork has been laid for some effective federal programming to support SME emission cuts: for example, the previous Energy Manager Program, hosted by Natural Resources Canada, provided funding to support the hiring of an Energy Manager or to conduct a corporate energy assessment in 2019. A report from Chartered Professional Accountants of Canada indicates that the majority of Canadian businesses (63% of those surveyed) are not currently tracking, and have no plans to track, their greenhouse gas emissions. Given these results, the Energy Manager program seems to be a useful starting point to support firms—however, while the program was oversubscribed in its first year and a possible second intake for the program in 2020 was floated, it was not renewed.

In the same year, Environment and Climate Change Canada introduced the SME stream of the Climate Action Incentive Fund, which supports retrofit projects to reduce the energy consumption or emissions of SMEs. However, the Climate Action Incentive Fund programs are only available to firms based in provinces that use the federal backstop (Ontario, Saskatchewan, Manitoba, and New Brunswick). Like the Energy Manager Program, the Incentive Fund was also oversubscribed, which suggests that there is indeed an appetite among SMEs to be doing more. In their 2019 report, Innovation, Science and Economic Development Canada show that there are 426,486 SMEs based in Ontario, yet only $72 million was provided by the SME stream of the Climate Action Incentive Fund in 2019-2020 for Ontario businesses—meaning if every SME registered in Ontario accessed the fund, they would each receive only $168. An energy audit alone typically costs between $1,000-$15,000. Increased funding and programming for retrofits to reduce emissions will be both welcome and necessary in the coming green recovery.

What future engagement with SMEs will require

Further engagement with SMEs will require a targeted strategy that reflects the unique needs and priorities of smaller firms. More than half of Canadian SMEs have fewer than four employees, which means that the majority of federal climate incentives and funding streams that are currently available are entirely out of reach for most of these firms. For example, the project floor for the Climate Action Incentive Fund is $20,000, of which the federal government will provide up to 25% of the associated costs. The upfront costs associated with a qualifying project ($15,000 or more) are likely to be a stretch for a local bakery or bookstore to even consider and would likely also exceed the cash holdings of these kinds of businesses. Smaller and more flexible funding opportunities may be more difficult to administer on the back-end, but are likely to increase the interest for voluntary projects among SMEs. Cash holdings of SMEs are also likely to be depleted in the wake of the COVID-19 crisis, which may decrease the willingness of SMEs to access this incentive in the coming months or years. It will be even more important that funding opportunities consider the specific needs of SMEs in order to incentivize uptake in the future recovery.

Relatedly, government funding streams tend to have inflexible and short intake windows, which may or may not align with the existing asset management plans of SMEs. Firms tend to align new projects with their existing capital budgets and so, depending on where the firm is in its budgeting process, businesses may be unlikely to consider taking on new projects that rely on short or inflexible intake windows for government incentives. Funding instruments should be flexible enough to deal with this challenge by assessing projects through continuous intake, and as always, stable sources of funding will be much more successful at incentivizing robust engagement from firms in comparison to transactional or one-time funding opportunities.

As businesses consider how to adapt their operations plans in the near and longer term, capital should be available to them to make the necessary modifications as businesses weigh how emissions reductions may factor in to the “new normal”. Statistics Canada projects that post-pandemic, one quarter of Canadian businesses expect that at least 10% of their workforce will continue to telework from home. This could have significant cost-savings for many businesses and would significantly reduce transportation-related emissions incurred during work commutes. Beyond direct funding opportunities, the federal government would do well to consider support for alternative financing tools to help SMEs to implement low carbon changes. While teleworking options may be a less costly change, emission reduction projects are often capital-intensive and require significant upfront costs which SMEs are unlikely to have available on-hand compared with larger firms. Making capital available to SMEs will be essential to enable businesses to take the initiative to reduce their emissions, particularly with diminished cash flow in the wake of the COVID-19 shut down.

What effective engagement with SMEs could look like

Supporting and partnering with nongovernmental organizations to finance low emissions projects for SMEs may be the optimal way to achieve robust results: for example, initiatives like the Ottawa Renewable Energy Co-op supports the energy efficiency and renewable energy projects of small businesses through community-financing. Eligible projects include heating and cooling system upgrades, LED light installation, solar energy projects, or other building retrofits. The federal government could consider establishing or partnering with similar initiatives to help SMEs access financing to support large capital investments that reduce corporate emissions.

There is reason to suspect that SMEs are willing and waiting to engage on these issues: SMEs tend to cite “visionary” motives for conducting voluntary emissions standard-setting, whereas larger businesses tend to focus on efficiency and competitiveness. SMEs also tend to more closely reflect the personal values of their leadership team, which means that getting these businesses on board with the federal government’s plan may be easier and faster in comparison to larger firms that have to negotiate a large number of priorities and departments. Leaving SMEs out of the federal strategy means that the vast majority of Canadian firms are likely not even thinking about the role of climate change mitigation in their long-term business models—potential emissions reductions are left on the table, and Canadian firms may remain less efficient and competitive than they otherwise could be.

Engaging with SMEs in developing a low-carbon pandemic recovery just makes sense. It targets an underserved sector where real moves towards decarbonization and the green economy can be made. It also makes sense politically, with programs that are more likely to build coalitions supportive of further climate action. As the federal government navigates the challenges of building back better, let’s not overlook SMEs again.

This blog is based on a recent Smart Prosperity Clean Economy Working Paper titled “The Low Carbon Policy Ecosystem: Leaving Small and Medium Sized Enterprises Behind” by Michaela Pedersen-Macnab.

The Clean Economy Working Paper Series disseminates findings of ongoing environmental and clean economy work conducted by researchers from a range of disciplines including economics, public policy, political science, and law.

The opinions and findings herein are the author's alone, and do not necessarily represent those of their academic institution or Smart Prosperity Institute.