Master 2 Making markets work for the environment 1 A Tale of Two Systems The case for a national energy framework A ‘Big Idea’ for Sustainable Prosperity Alexander Wood Senior Director, Policy and Markets April 28, 2014

Master 2 Making markets work for the environment 2 No real national energy policy/strategy in Canada Market – in terms of consumption – is either provincial (electricity) or North American (oil and gas) Oil and gas seeking diversity of markets, both to avoid US policy risk but also to gain higher price Provinces “own” the resource and so have first call on revenues/rents (although federal tax regime does apply) Creates mixed policy incentives: the Alberta fiscal model is one every province (at least structurally) seeks to emulate, which complicates negotiation of federal/national policy on either energy or on climate change/environment The political economy of energy:

Master 2 Making markets work for the environment 3 The political economy of energy in Canada (2) For Canada, overriding policy objective has gone from ensuring security of supply to seeking security of demand Role reversal for energy: Was input into manufacturing-led export model Now key component of commodity-led export model (for which manufacturing is now an input) Manufacturing still a major part of the Canadian export earnings, but declining Policy emphasis on commodities reflects assumptions about booming emerging markets (in which we may not be able to compete on manufacturing) and decline of US market (which has been natural market for manufacturing, as part of NA supply chain dynamic ) Economic interest has shifted from need for low cost energy (for domestic consumption) to high cost energy (for export earnings) Important to distinguish between electricity and oil and gas

Master 2 Making markets work for the environment 4 Energy Supply Forecast (NEB)

Master 2 Making markets work for the environment 5 Energy (Over)Supply

Master 2 Making markets work for the environment 6 Energy Demand Forecast

Master 2 Making markets work for the environment 7 Energy Demand Sectoral Growth Forecast

Master 2 Making markets work for the environment 8 Canada’s Emissions Gap

Master 2 Making markets work for the environment 9 Basic Conclusions : Canada has an abundance of energy….and emissions Our approach to climate change is held up by conflation of two systems, and the path dependence they represent Canada’s energy sectors – the export oriented energy commodity sector and the domestic consumption system – have differing interests Canada’s domestic energy use has decreasing growth rates and carbon intensity, and energy export sector has increasing growth rates and carbon emissions (despite intensity improvements)

Master 2 Making markets work for the environment 10 An energy framework for Canada Canada could - as a matter of national strategy - focus separately on the interests and opportunities of two systems Based on recognition that what the national economy needs to thrive is not necessarily what energy export sector needs to thrive (and vice-versa) Use carbon pricing mechanisms to both address emissions growth in energy export sector AND generate wealth to build out low-carbon, electricity-based, domestic energy system with use of carbon pricing mechanisms Would allow us to take a potential barrier (path dependence of current system) and use it to build out a new system

Master 2 Making markets work for the environment 11 Benefits for Canada With a low-carbon domestic electricity economy, our economic growth and emissions would be decoupled We would renew our historic comparative advantage in electricity systems, and use it to build out innovation in emerging markets for smart grid, energy storage, electric mobility, etc. We would also address competitiveness issue of energy intensive, trade exposed sectors

Master 2 Making markets work for the environment 12 Policy Research Needs How to accomplish this in political economy of energy? What federal-provincial models exist that could help? Would new models be required? What models/precedents exist for the kind of transition implied here? How can it be facilitated and accelerated? What are the financial and technological needs of such a transition? What are the implications for Canada’s international policies on climate change?