Thank you for the opportunity to present. I've been in the investment business, focused exclusively on energy, for almost 30 years. The lens I will present through is from the perspective of decision-makers who allocate investment capital, whether it's here or in the United States, Europe or abroad.
To set the stage, the job of a decision-maker in investing capital is to quantify the expected return of an investment—in other words, the amount of money to be made on that investment—and then to quantify the associated risk, or the probability that the return will be achieved. Assessing risk and return is the job of an investor.
I will go straight to my conclusions and recommendations. Canada is weakly competitive in attracting capital for clean energy and broad decarbonization. In fact, it is potentially more serious than that: Canadian investors of private capital lean toward financing American clean energy projects instead of domestic ones. In other words, Canadian capital is leaking to go finance American net-zero aspirations.
The root problem is not that our policies are necessarily financially inferior—in other words, the return side of the equation. It's that they are complex and dense and make it difficult for financial analysts, like me and others, to properly assess the risk. The solution lies in consolidating and simplifying our energy policies, not adding complex new ones to try to facilitate the goal of financing net zero by 2050.
I have spent the past five years working on how to quantify the risk of energy policies, from an investor's perspective, to finance any kind of energy project. My work has led me to the conclusions above, though the question of why sophisticated investors favour the United States over Canada is actually quite simple. Two quotes from famous investors come to mind, from Warren Buffett and Peter Lynch, respectively: “Never invest in a business you cannot understand” and, as Mr. Lynch said when talking about making an investment, “you ought to be able to explain why in simple language that a fifth grader could understand, and...won't get bored.”
Generally speaking, incentives for investing in decarbonization projects and clean energy under the U.S. IRA are simpler and straightforward, and there's greater clarity. For example, a solar panel manufacturer in the United States will be paid a simple payment for every kilowatt of capacity produced. A developer of carbon capture and sequestration projects receives a payment for every ton of carbon dioxide removed.
In Canada, incentives are generally tax-based, which makes them more complicated to model in a spreadsheet. Policies that have complicated, output-based performance systems and then surrogates and affiliated provincial-level policies just tend to make them very complicated to analyze. That's not to say that Canadian offerings are necessarily less lucrative, depending on the investment. They are just more difficult to understand, especially from a policy risk perspective.
However, the complexity of Canadian energy policies is amplified by what I call the layering, chaining and clashing of policies across energy systems. For example, carbon taxes for heavy emitters are layered with many layers of policy, often federal stacked on top of provincial. Then policies are chained. For example, a carbon tax on a producer of natural gas is chained with the spectre of emissions caps and looming clean electricity regulations on natural gas power plant operators that then go buy that natural gas. Again, there are many layers on top of the chained policies at federal and provincial levels.
That may provide satisfaction to those who want to heavily burden fossil fuel energy systems. However, the consequences spill over into confusion in the financing of clean energy projects that we want. Canadian policy architecture is such that it is based on heavy emitters financing clean energy projects through carbon markets, yet private investors are less likely to invest in clean energy projects here because of the uncertainty of carbon markets. Our carbon markets are fragmented in this country. They are opaque and difficult to understand. Volatility of carbon pricing can't be assessed by an investor because of the lack of trading data that is public. In Europe I can access carbon prices on my mobile phone. Canadian carbon prices are inside a series of black boxes. Investors don't invest in black boxes or anything that's dependent upon a black box.
Further, if an investor doesn't have confidence that there will be buyers of carbon credits for clean energy projects, then their default will be to not invest in that clean energy project, or their default will be to pass on a Canadian project and find an investment in another jurisdiction, like the United States, that's easier to understand and where there is perceptually less risk in that project.
I have been to many boardrooms in some of the biggest financial institutions and corporations in the country. The common refrain is “policy is the number one risk”, followed by “if I don't understand it, my default is not to invest”—