Evidence of meeting #121 for Environment and Sustainable Development in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was taxonomy.
A recording is available from Parliament.
Liberal
The Chair Liberal Francis Scarpaleggia
Good morning, colleagues. It's nice to see you all this morning.
Welcome to our witnesses. All the witnesses are online for this first panel.
To the witnesses, if you are not speaking, would you keep your mics on mute.
We have with us this morning—
Conservative
Dan Mazier Conservative Dauphin—Swan River—Neepawa, MB
Chair, I have a point of order.
There have been multiple requests from the parties to get Mark Carney here to be a witness at this study. I was wondering if you have heard back from him at all.
Liberal
The Chair Liberal Francis Scarpaleggia
I haven't personally, but maybe our team here has.
He's available in October, apparently.
Conservative
The Chair Liberal Francis Scarpaleggia
I believe so. We're going to have a steering committee at 3:30. We can discuss all of these potential witnesses.
Liberal
Adam van Koeverden Liberal Milton, ON
I apologize, Mr. Chair, but that's not a point of order. That's in-committee work. I think that's where we should discuss that, in camera.
Liberal
The Chair Liberal Francis Scarpaleggia
Yes, that's why I said we'll discuss that in the steering committee. Thank you, Mr. van Koeverden.
We have with us Peter Dietsch, professor at the University of Victoria, who's testifying as an individual. We have from the Canadian Climate Institute, Jonathan Arnold, acting director, clean growth. From the Carbon Tracker Initiative, we have Mr. Michael Coffin, head of oil, gas and mining.
We'll start with Professor Dietsch for five minutes, please.
Dr. Peter Dietsch Professor, University of Victoria, As an Individual
Thank you for inviting me as a witness to your committee.
I'd like to start by acknowledging the Lekwungen people from whose territories I'm zooming in today.
I will make my presentation in English, but then I will be happy to answer questions in French.
In a nutshell, here's what I'm going to show in the next five minutes. I will argue that our current financial infrastructure throws a wrench in the green transition. I'll proceed in four main steps. I will look at the main policy approach today, explain where that approach goes wrong and why, and I will look at the situation here in Canada in particular. Finally, I will finish with a concrete policy recommendation.
Liberal
Bloc
Professor, University of Victoria, As an Individual
Okay. You've just heard the four steps.
Step number one is the main policy approach today.
There are many different ideas out there about how to facilitate the green transition. However, here's something that policy-makers globally seem to agree on today. They agree that relying on government spending alone will not be enough for a successful green transition and that private investment will be needed too.
This is why different policy frameworks try to incentivize private investment in green energy. Think of the Biden administration's Inflation Reduction Act, or here in Canada, the clean fuels fund. Now, what all these initiatives are betting on is that investing in green energy will be sufficient to bring emissions down and to meet our climate goals. This, I will argue, is a mistake because it's based on a misunderstanding of how our financial system actually works.
To see why that's the case, consider two features of contemporary economies. The first feature is money creation. Many people think of commercial banks as intermediaries. Robin needs to put in some money before Chris can take out a loan. It's true that banks are intermediaries, but they're not just intermediaries. Their banking licence enables them to create money out of thin air, and they will do so if they think the borrower will pay the money back. There are some regulatory constraints on this, but they're not very restrictive.
What this means is that if a bank thinks that a fossil fuel project will be profitable, it will provide a loan. The other important thing to realize here is that no licensed bank in an economy such as Canada's can extend any loans without the support of the central bank, and in our case, it's the Bank of Canada. This support takes many forms, including clearing the money the commercial bank has lent through the national payment system. In other words, it would be misleading to call money created by commercial banks “private finance”. Instead, this is public money creation outsourced to private institutions.
Let's move on to the second feature of contemporary economies: negative externalities from greenhouse gas emissions.
We know that market prices don't incorporate the social and environmental costs of climate change, which are huge. Various forms of carbon pricing, including carbon taxes, try to correct for this inefficiency and raise the price of carbon-intensive activities to a sustainable level. However, economic models tell us that today's carbon prices are nowhere near where they would need to be. Notice what this means. Many fossil fuel projects that are unsustainable and inefficient will still be profitable.
Now step back and ask yourself what happens when these two features of contemporary economies that I've just described occur at the same time. In short, commercial banks will keep lending to the fossil fuel sector. They can keep lending to the fossil fuel sector because there's no firm limit on their lending. They will keep lending because they deem that sector to be profitable. As long as carbon prices remain inefficiently low due to political choices, this will indeed be the case.
In other words, all the green investments our current policies are encouraging will not stop commercial banks from lending to fossil fuel projects; they'll simply do both. We will end up with more and cheaper energy, but we won't bring emissions down.
If you saw the early estimate for 2023 emissions published by the Canadian Climate Institute last week, we're at 702 megatonnes. That's only slightly down from the year before, and the subcategory of emissions from oil and gas is actually up.
This brings me to my third point: the situation here in Canada.
Since the adoption of the Paris Agreement in 2015, the world's 60 largest banks have provided $6.9 trillion in financing to fossil fuel projects, with $705 billion U.S. coming in 2023 alone. Five Canadian banks are among the top 21 banks lending to fossil fuels worldwide, and they have provided a total of $911 billion U.S. to the sector since 2015. What I want to re-emphasize here is that this is not private lending. This is lending that happens under the auspices of central banks, including the Bank of Canada, and this lending is therefore a political choice.
If you talk to representatives of the Bank of Canada, they're likely to contest part of what I've said. They will say that climate considerations are not part of their mandate, and this is true. However, notice that this is entirely compatible with their policies having significant side effects on climate and on climate policy.
Finally, this is point four: policy recommendations.
In light of this analysis, what could be done? How could we stop our financial architecture from putting a wrench in the green transition and instead mobilize it for effective climate mitigation?
What we've seen is that it's not enough to turn the financial capital—
Liberal
The Chair Liberal Francis Scarpaleggia
Excuse me, Professor. I've allocated a little extra time because of the interruption around interpretation, but if you could wrap it up in about 10 seconds, there will be time in the question and answer period for you to raise a lot of the points.
Professor, University of Victoria, As an Individual
Okay.
What we need is a credit policy. We need to attach conditions to the capacity of commercial banks to create money through credit.
Let me just summarize in French what I said. I said that current policy to mitigate climate change contains a major gap. Encouraging investment in green energy is not enough to achieve the green transition. We need a credit policy.
Liberal
The Chair Liberal Francis Scarpaleggia
Thank you very much.
We'll now go to Mr. Arnold, from the Canadian Climate Institute.
Mr. Arnold, you have the floor for five minutes.
Jonathan Arnold Acting Director, Clean Growth, Canadian Climate Institute
Thank you for the opportunity to meet with the committee this morning.
My remarks today focus on four policy insights from the Canadian Climate Institute's research and our work with the sustainable finance action council on developing a green transition taxonomy in Canada.
The first insight is that climate change and the global response to it is quickly transforming the fundamentals of economic competitiveness. The costs of climate change are increasing rapidly and already costing Canadian households billions of dollars. These costs will continue to rise as extreme weather events become more frequent and will be a drag on the financial system and economic growth.
At the same time, a combination of markets, technology and policy is accelerating the energy transition faster than what most experts thought possible even just a few years ago. Renewables such as wind and solar are being deployed faster and cheaper than any other source of electricity in history. Over 70 countries have now committed to net zero by mid-century, which covers over 90% of global GDP, 80% of global oil demand and 75% of global natural gas demand. All of these trends are reshaping what competitiveness means in the global economy.
The second insight is that the architecture of the global financial system is aligning with this new economic future through standards for climate-related disclosure, taxonomies and transition plans. On climate-related disclosures, countries representing more than half of global GDP have either adopted or are in the process of adopting the ISSB's standards. This includes the European Union, the United Kingdom, Japan, Australia and Brazil. Thirty countries have either adopted or are developing their own sustainable taxonomies. This list includes most of the G7 and G20 countries, plus many developing economies.
Efforts to standardize corporate transition plans for businesses and financial institutions are also well under way. The U.K.'s transition plan task force has set a gold standard for what credible transition plans look like, while the IFRS—the body responsible for setting global accounting standards—is now adopting this work in full. These developments are standardizing and improving information in capital markets, ensuring transition and physical risks from climate change get priced into how capital gets allocated. This helps reduce greenwashing and drives investments that are genuinely aligned with global climate goals, both of which help reduce systemic risk in Canada's financial system.
The third insight is that falling behind on these emerging global standards will compromise Canada's ability to attract capital. Transitioning Canada's economy to compete in the global energy transition requires an additional $80 billion to $115 billion annually. Most of this capital will need to come from the private sector and foreign investors in particular, given the relatively small size of Canada's economy. The U.S. Inflation Reduction Act is amplifying the competition for attracting these investment dollars.
These facts stress why it's imperative that Canada keep up with global standards in climate-related disclosure, transition plans and taxonomy. On one hand, investors and lenders looking for opportunities within Canada will expect the same level of high-quality and consistent rules set internationally. Without complete and comparable data, investors and lenders will underinvest due to this higher risk. On the other hand, Canadian multinationals are increasingly exposed to more stringent reporting and disclosure standards in other jurisdictions. A 2024 report by the Institute for Sustainable Finance found that over 1,300 Canada-based companies will be subject to the EU's new sustainability reporting standards.
The fourth and final insight is that strengthening Canada's financial architecture coupled with strong climate policy can improve the country's long-term competitiveness. So far, Canada has been slow to adopt global standards in all three areas and should accelerate these efforts. On disclosure, the Canadian sustainability standards board is in the process of adopting globally aligned disclosure standards, but it's facing pressure to weaken them. Canada has also been slow to develop a green transition taxonomy. The sustainable finance action council's 2023 “Taxonomy Roadmap Report” was supported by the country's 25 largest financial institutions. However, efforts to establish a national standardized taxonomy have yet to get under way.
Overall, maintaining and growing Canada's market share in the energy transition will hinge on its ability to attract capital. Matching or surpassing international standards will help the country get there. In fact, Canada is well positioned to take a global leadership role in these areas. The SFAC taxonomy road map provides the first sophisticated framework for labelling transition investments, designed to help Canada transition its existing emissions-intensive engines of growth. Done well, Canada could play an outsized role in promoting the adoption of this framework in other emissions-intensive economies. Having one of the ISSB offices located in Montreal also gives Canada a unique leadership platform and responsibility.
In addition to accelerating these foundational pieces of financial architecture, other key policies are important complements to improving Canada's long-term competitiveness. Among these, Canada's industrial carbon-pricing system is driving the bulk of emissions reductions in the Canadian economy, while also protecting the competitiveness of individual sectors and helping to attract low-carbon investment.
Thanks for the opportunity to discuss these important issues, and I look forward to your questions.
Liberal
The Chair Liberal Francis Scarpaleggia
Thank you very much
We'll go straight to questions.
We'll start with Mr. Kram for six minutes.
Conservative
Michael Kram Conservative Regina—Wascana, SK
Thank you very much, Mr. Chair.
Professor Dietsch from the University of Victoria, I read with interest the book that you co-authored, entitled Do Central Banks Serve the People? I suppose now might be a good time for a spoiler alert for anyone watching at home, but, Professor, do central banks serve the people?
Professor, University of Victoria, As an Individual
Yes, they do, but we can always do better.
This is a very good question to reframe what I said earlier. Central banks' main mandate today in most countries is the narrow mandate of price stability. For a long time, I would say for most of the postwar period, that was a good mandate, because what central banks did to promote price stability did not have too many unintended side effects on other policy objectives.
Now, with the financial crisis, with the COVID crisis and with the new instruments that central banks have been employing, there have been more unintended side effects of these policies on other policy fields, including wealth inequality and the climate. That's why we're in a position where we have to rethink the interaction between what central banks do and what other parts of government do.
What I tried to show earlier is that something that happens under the supervision of the Bank of Canada, namely bank lending, throws a wrench in the green transition. I think that's something that we need to realize and act upon.
Conservative
Michael Kram Conservative Regina—Wascana, SK
Professor, in your book, you talk about a lack of transparency at central banks and the lack of response to the criticism that central banks take.
Can you elaborate on these points a little bit?
Professor, University of Victoria, As an Individual
It's tricky, because what central banks do today is watched by financial markets and every word is put on the scale, so the official communication of central banks is relatively restricted.
They have become more transparent, but one of the aspects that we criticize in the book is that there is no open political debate about the substantive issues concerning what central banks do and what the unintended side effects are. If you look again at the concrete point that I made earlier, the fact that the Bank of Canada, in our case, implicitly accepts all the lending by commercial banks in Canada is not something that is widely discussed as a political issue.
Conservative
Michael Kram Conservative Regina—Wascana, SK
If the Bank of Canada were to adopt this taxonomy system, and after some time there are problems with the system that need to be corrected, how do we avoid some of the problems that you identified in your book, with the lack of response to criticisms and the lack of willingness of central banks to correct their past mistakes?
Professor, University of Victoria, As an Individual
I think there are good models in the past and in the present for how to do these things. For instance, in Asian countries, there's much more coordination between governments and central banks. In the past, in countries such as Canada or in European countries, there was much more coordination between what the government does and what the central bank does.
Today we have a very strong independence framework, and there are justifications for that. We have to be careful in tinkering with the system that we have, but at the same time the unintended side effects, in this case on the climate, are becoming too important to ignore.
Conservative
Michael Kram Conservative Regina—Wascana, SK
There has been an idea debated in this Parliament that central banks and the Bank of Canada should be subject to audits by the Auditor General's office
In your opinion, Professor, would this offer a greater degree of transparency for the Bank of Canada if it moves forward with this taxonomy system?
Professor, University of Victoria, As an Individual
The devil's in the details. There are many ways to implement this coordination that I talked about. I'm not going to endorse one over the other at this point. What I'm arguing is that we need this coordination so that the right hand of the government doesn't undermine what the left hand does.
Right now we have a commitment to climate goals. What I've tried to show is that central bank action, or what happens under the supervision of central bank action, throws a wrench in the green transition. That's what needs to be addressed. There are many ways to do it.
