How Industrial Strategy Can Secure Canada’s Future in a Net-Zero World

March 16, 2022

By Bentley Allan, Derek Eaton and Anik Islam

Canada has committed to decarbonize and achieve net zero emissions by the year 2050, in less than 30 years. As identified by the Canadian Climate Institute’s Canada’s Net Zero Future and the Transition Accelerator’s Pathways to Net Zero reports, there is some clarity around which technologies will reduce emissions and power the Canadian net-zero economy. However, there remain uncertainties as to which transition pathways Canada will ultimately take.

Nonetheless, reaching net-zero emissions presents significant challenges to many industries of the Canadian economy, which relies heavily on exports (around 30% of Gross Domestic Product). The biggest case in point is the oil and gas industry, which not only accounts for around 20% of Canadian goods exports but is also responsible for 26% of Canada’s total greenhouse gas emissions.

To address these challenges and uncertainties, Canada needs to build industries that will position it in the 21st century global green economy. For that, the country needs to identify different economic opportunities across industries and strategically collaborate with various stakeholders to finance and develop these industries that will generate clean economic growth and allow the country to be globally competitive. In short and as detailed in a new report, Canada needs to develop clean competitiveness roadmaps.

What are clean competitiveness roadmaps and why do we need them?

The idea for clean competitiveness roadmaps is not new. The number one recommendation from Canada’s Expert Panel on Sustainable Finance is to “map Canada’s long-term path to a low-emission, climate-smart economy, sector by sector, with an associated capital plan”. Since then, calls for roadmaps or action plans are increasing, not just from think tanks but also from the business community.

There are three main motivations for roadmaps. First, broad policy levers lay the foundation, but cannot lead to the development of green industries. Free market allocation of resources to spur clean innovation may not be efficient due to different market failures. Broad policy levers such as carbon pricing correct some of these market failures and encourage new directions for clean innovation. However, regardless of its foundational importance, carbon pricing creates incremental change and cannot fully support development of green industries alone at the pace required to address climate change mitigation and adaptation efforts. They need to be complemented with additional strategic support for industries. If this is not done, Canada may risk facing political backlash for increasing fossil fuel prices which could undermine its entire clean growth agenda.

Second, Canada’s trading partners have adopted different strategic approaches, which might lead to the country being left behind. While the federal government and some provinces have taken significant actions, Canada’s major trading partners and competitors are taking a more strategic approach to position their economies in rapidly forming low-carbon value chains. For example, the European Union has advanced a battery strategy. The United Kingdom has deployed an offshore wind industrial strategy. Canada needs to position itself against the strategic choices of other countries or risk being left behind in the global value chain.

Third, Canada needs to pursue economic opportunities that reflect its strengths in the global economy. As a small open economy, it cannot directly compete with larger countries that have more capital and capacity to scale. It also faces lower-cost competitors that can and will enter domestic markets. Moreover, it cannot rely on natural resource extraction to drive other industries. Instead, as Dan Breznitz points out in his book Innovation in Real Places, Canada needs to undertake a second generation innovation and future-proof its existing natural resource and fossil fuel based industries while building new sectors and opportunities where Canada has core advantages. If done right, this approach has the advantage of creating broad and inclusive economic prosperity.

Canada’s approach: the need to do more

Canada has taken some commendable steps towards securing its future economic prosperity. The federal government created Economic Strategy Tables and the Industry Strategy Council, which focuses on a number of broad sectors. At the same time, there have been some sectoral approaches with the Small Modular Reactor Roadmap, Hydrogen Strategy and Net-Zero Carbon Concrete Roadmap. Moreover, the federal and provincial governments have a variety of funds and initiatives, spread across ministries and departments. Examples include the federal Strategic Innovation Fund or the Advanced Research and Commercialization program in British Columbia. While existing sectoral plans, funds, and policies aim to support clean competitiveness, they are limiting progress because:

investments are spread thin across multiple sectors;
most of these investments are often one-off grants to individual firms; and
priorities are fragmented across departments, federal and provincial governments, and private actors.

Without a strategic approach, Canada runs the risk of uncoordinated capital spending that not only misses the country’s emissions reductions targets but also reduces competitiveness in the low-carbon economic transition.

Path forward

Recognizing the challenges and uncertainties, Canada needs to do the following:

Identify top economic opportunities where Canada has long term competitive advantage or will be relatively protected from global competition. This is important considering Canada’s small open economy that means the country cannot outcompete countries with larger capital spending on innovation or lower-cost exports;
Build innovation clusters instead of supporting firms across different industries with one-off grants. The cluster should be centered around the core technology and consider the value chain from upstream research, resource inputs, and supporting technologies to downstream end-uses and markets; and
Align public and private actions by co-developing roadmaps for key sectors. The federal, provincial, and First Nations governments need to set the agenda and work with experts and the private sector to lay out targets, sequences, policies, and investments across the clusters to bring these industries to scale and pursue identified economic opportunities.

We need a strategic, cross-sectoral approach to industrial transition now, based on Canada’s strengths and an assessment of likely opportunities in the decarbonizing global economy. Other countries are doing this and new global value chains are forming. The future holds many uncertainties and this reinforces the case for a strategic approach based on collaboration, learning, and experimentation with a portfolio of opportunities.

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This project is a partnership between Smart Prosperity Institute, the Pacific Institute for Climate Solutions, and the Transition Accelerator. This report was supported by the Ivey Foundation and the Pacific Institute for Climate Solutions