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This is the first of two articles by the author on the future of energy and workforce transition in Canada. The second part is here.
It’s fair to say that the term “just transition” has fallen out of favour in Canada. The International Labour Organization defines a just transition – a term widely used internationally – as greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind.
It is difficult to disagree with that. The issue with the terminology in Canada, however, seems to be less about the concept of supporting workers and more about the nature of transition itself.
At the heart of the debate are dueling visions of the future global economy, particularly when it comes to oil and gas. In one vision, the world will still need oil in 2050 and there will be growing opportunities for Canada to export natural gas. In the other vision, the world succeeds in meeting global emission-reduction goals that will result in a significant decline in demand for fossil fuels such as oil and gas.
People who are bullish on the future for oil and gas often point to the International Energy Agency’s (IEA’s) Stated Policies Scenario (STEPS) included in its World Energy Outlook 2022, which accounts for climate change policies already in place or under development. The scenario is consistent with a global average temperature increase of around 2.5 degrees above pre-industrial levels, exceeding the “well below 2 degrees” target included in the international Paris Agreement.
People who are bearish on oil and gas refer to the IEA’s Net Zero Scenario, where global action would provide a 50 per cent chance of achieving the 1.5-degree target on warming set by scientists from the Intergovernmental Panel on Climate Change (IPCC). This scenario requires halting investment in oil and gas, and a substantial decline in production towards 2050.
To develop the right strategy for Canada’s workers and economy, we need to know which vision is right. That means moving away from dueling scenarios and doing a better job of predicting and shaping the future.
The bulls and bears are both wrong
If we believe the bulls, Canada’s oil and gas sector (which exports 80 per cent of oil and 48 per cent of gas produced) will continue to have a strong market for its products for decades. If that is the case, then the only challenge – if we are to meet our 2030 and 2050 emissions targets – is to reduce emissions from oil and gas production through technologies such as carbon capture and storage.
If we believe the bears, however, Canada will need to find new sources of economic growth, exports, jobs and government revenue to fill a growing hole. In 2021, oil and gas accounted for around 20 per cent of the value of goods exports, six per cent of GDP, one per cent of jobs (direct) and around 20 per cent of the Alberta government’s budget.
However, there are clear indications that both visions are wrong, and the most likely path lies somewhere in between.
Take the IEA’s STEPS, preferred by the bulls. Believing this is the most likely global trajectory means believing that governments will not implement in the coming decades new climate policies beyond those already in place or under development. As the effects of climate change become more evident and the youth of today move into leadership positions, is it reasonable to expect that climate policy will stagnate?
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Some backtracking is plausible, particularly in the U.S. if there is a change in government there. However, auto manufacturers have already committed to shift to electric vehicles, and renewable energy is now often the cheapest option for electricity production. The ball has already started rolling down the hill and it will get harder for any government to stop its momentum (see figures 1 and 2).
In fact, looking back at previous IEA energy outlooks shows that their business-as-usual scenarios have continually been revised as government climate policies expand, technology costs decline and private investment increases. Between 2012 and 2022, the IEA’s projections, based on stated policies, went from a 3.5-degree trajectory to a 2.5-degree trajectory.
At the same time, the IEA’s net-zero scenario is also looking increasingly unrealistic. For example, 2022 set a record for coal power generation. That is not to say that the global 1.5-degree goal is not still worth seeking. It is possible to overshoot the target initially and then bring emissions back on track. Those pathways are still very much alive. We also know every fraction of a degree closer to limiting warming to 1.5 degrees matters to reducing climate damages, with resulting large financial and human costs.
So where does this leave Canadian governments for planning purposes?
Hope for the best and prepare for the worst
For Canada’s economy and workers, the best scenario is one where there is a long and certain runway on oil and gas demand. Time and predictability are key ingredients that will allow companies to adapt, allow workers to upskill or reskill, and allow communities to position themselves to capture opportunities in new markets.
That runway is also important to oil and gas consumers. If the supply side of oil and gas declines before we have adequately addressed the demand side, price spikes could lead to hardship for consumers who still depend on those products. But the inverse is also true. If there is a push on the demand side – for example by widespread banning of natural gas connections to new homes without planning the supply side – there could be stranded assets and job losses.
While it is possible to provide more certainty within Canada, it is much more challenging for those bound to global markets.
Domestically, Canada could better co-ordinate demand and supply side actions within and across federal, provincial, territorial, municipal and Indigenous governments. Long-term clarity on policies, including carbon pricing, regulations and financial incentives can help support more accurate planning by governments and the private sector. Ideally, this clarity would include agreement across political parties to avoid policy reversal when a new government comes to power. Contracts for difference –where governments agree to compensate companies if policies or carbon price trajectories change – could help reduce investment risk and deter future governments from policy reversals.
In international markets, Canada could do more to encourage policy co-ordination in North America, and with the EU and other trading partners. Climate clubs, where like-minded countries co-ordinate policies and use trade measures to encourage broader participation, would be one way to improve predictability.
By taking a more active role in providing certainty on future pathways, Canada could help shape the transition in the best interest of Canada’s economy and workforce.
This is the first of two articles by the author on the future of energy and workforce transition in Canada. The second part, looking at how to prepare Canada’s economy and workforce, is here.