“Green” industrial policy framework needed to prioritize cleantech projects for public funding: Transition Accelerator

The federal government needs a strategic “green” industrial policy framework to assess and prioritize which cleantech projects should get public funding, according to a report from the Transition Accelerator.

Canada’s international peers and competitors use sophisticated strategies to identify and publicly support emerging clean industries, but Canada’s approach has been more fragmented.

“Without an overarching strategy to maximize the economic potential of its investments, [Canada] risks ad-hoc decision-making, wasteful spending and reduced long-term economic opportunities,” the report says.

“We’ve really allowed our strategic capacities in governments across the West to completely atrophy, because we believed this idea that everything was done by the free market,” report co-author Bentley Allan (photo at right) a professor at Johns Hopkins University and transition pathway principal at the Transition Accelerator, said in a webinar presenting the report.

“We’ve almost lost this knowledge that we had about our own history, this Canadian tradition of industrial policy that [built up] our mining sector, our forestry sector, our nuclear sector, and our oil and gas sector,” he said.

The government can and must get better at assessing the relative importance of various clean growth projects, according to the report.

Canada has a number of programs and funds designed to catalyze the transition to a net-zero emissions economy.

However, the report says, “These funds have not been strategically directed to seize Canada’s opportunities in the transition. They have been passive and opportunistic rather than active and focused. They have not been coordinated across departments.”

Climate programs have tended to target near-term greenhouse gas reductions, rather than catalyze net-zero energy systems or bolster the technologies that would create prosperity and drive decarbonization, the report notes.

In government economic programs, it is not clear that rigorous analyses of economic value-added and productivity growth – key drivers of long-term economic prosperity – are used as the basis of evaluation.

Countries can do industrial policy very poorly, said report co-author Heather Exner-Pirot (photo at right), director of energy, natural resources and environment at the MacDonald-Laurier Institute.

“You can spend money in very inefficient ways and we’ve certainly seen some of that,” she said. “We’ve seen a lot of political sprinkling of money in strategic ridings.”

However, the public sector has a critical role to play in supporting strategically targeted projects and innovative companies that aren’t yet able to compete in the global market, Exner-Pirot said. “There are some things that need to be de-risked that do go to the public interest [and] that do provide a public good or do help our economic or national security.”

The federal government “needs a strategic framework to help it prioritize which projects will secure Canadian competitiveness and produce transformative outcomes,” the report says.

“What’s at stake is that we’re in a very competitive global economy and there are firms that will not be competitive unless they have strategic support from multiple levels of government,” Allan said.

“So we actually have to step up. We can’t allow ourselves to be excused from participating in that broader race. We have to find the smartest possible way to engage in it.”

Target high-priority areas where Canada has advantages

The Transition Accelerator’s report, How to Prioritize Strategic Projects for Better Net-Zero Industrial Policy, provides a high-level framework outlining five factors that can help government choose the projects that are most likely to contribute to sustainable industries and a competitive economy.

In addition to Allan and Exner-Pirot, the report’s co-authors are Derek Eaton, and Travis Southin, director of future economy and future economy lead, respectively, at the Transition Accelerator. The pan-Canadian organization works with others to identify and advance the pathways that lead to net-zero greenhouse gas emissions by 2050.

The authors’ framework offers a simple set of questions to determine how a project fits into the broader economic landscape and to ensure investments have the potential to add up to more than the sum of their parts.

To determine whether any cleantech project should receive public funding, the first question, or criteria, is: Does the project contribute to a target in an area of national significance that Canada needs to achieve?

Such targets should be net-zero compatible in that targets should track true net-zero emission pathways, and avoid dead-end technologies that are incompatible with a net-zero energy system because they only provide near-term reductions and delay capital expenditures needed to achieve net zero, according to the report.

These targets should be set in high-priority areas, the report says. Existing studies of Canada’s opportunities have identified seven consensus areas that will experience growing demand as the world transitions to net zero by 2050:

• EVs and the battery supply chain.
• Carbon capture, utilization and storage.
• Hydrogen.
• Biofuels.
• Value-added agriculture (such as alternative proteins).
• Value-added forestry (such as mass timber construction products).
• Critical minerals.

Several reports have also identified advanced nuclear energy as an opportunity area where Canada has potential to secure leadership.

Exner-Pirot noted that Canada is the second-largest exporter of uranium in the world and the sixth-largest nuclear producer.

The country is on track to have the first commercial-scale small modular reactor in North America, at the Darlington, Ontario nuclear site where site preparation for the reactor has already begun.

“Nuclear is where we should be going,” Exner-Pirot said, pointing out that nuclear is the most energy-dense system available. “As a matter of our foreign policy, I think we should be advancing nuclear.”

“When I think about civilization in 100 years, there’ll be a nuclear civilization. To me, it’s inevitable,” she said.

When it comes to the global battery race, Allan said that lithium-ion phosphate batteries – in which China dominates the global market – were actually developed in Texas and commercialized by Hydro-Quebec. Hydro-Quebec then allowed China to have the technology licence for free as long as Chinese companies didn’t sell the lithium-ion phosphate batteries outside of China.

But when the patent on the batteries expired in 2022, that was the first year that CATL, China’s battery giant, announced it was going to start building lithium battery-manufacturing factories in other countries.

“This is an industrial policy fail of the greatest magnitude, that we basically allowed China to have free intellectual property,” Allan said.

Yet he noted that Canada is still doing world-class R&D on batteries at Dalhousie University, University of Calgary, University of British Columbia both at the Vancouver and the Okanagan campuses, University of Toronto and University of Waterloo.

A smart green industrial policy would be to coordinate this Canadian battery cluster and develop the next generation of batteries and become globally competitive in these advanced batteries, rather than trying to compete with China’s lithium battery production, Allan said.

Criteria for assessing whether a project warrants public funding

The green industrial policy framework’s second question, or criteria, for assessing whether cleantech projects should get public funding is: Is this a strategic investment that will catalyze the development of a supply chain, build innovation ecosystems, or drive long-term transformation?

Strategic investments establish innovative net-zero energy systems by clustering clean economy assets, according to the report. This clustering creates symbiotic ecosystems that can drive innovation over the course of the transition.

 “For example, by creating this infrastructure project, does it mean that we can do four or five different mining projects or a bunch of other different natural resource projects?” Allan said.

Projects also should contribute to long-term transformation of the economic realities and stakeholder dynamics of clean energy production and use. Such clean growth projects could include:

• Projects that increase the supply of low-carbon fuel (hydrogen, biofuels).
• Projects that increase the supply of low-carbon electricity (from non-emitting sources such as wind and solar and game-changing technologies such as small modular nuclear reactors).
• Projects that increase the mining, extraction and processing of critical minerals required to support the net-zero transition.
• Projects that enable fuel switching, electrification or the removal of carbon dioxide (such as energy storage, distribution infrastructure, carbon dioxide transportation or storage infrastructure).

“But to really get at long-term impact we need to get away from thinking about technologies and start thinking about how to deploy industrial policy investments that will build coalitions of industry actors (technology developers, adopters, manufacturers, investors and service providers) who understand that a shift to net-zero emissions will improve their competitiveness and provide shareholder value,” the report says.

The third criteria for assessing projects is: Is the project economically competitive with global peers or does it make other priority sectors more competitive?

 “This is where we [Canada] have not really gotten our heads screwed on right in the net-zero transition,” Allan said.

“We have to actually be able to assess whether or not the project is competitive globally, and really figure out what we’re good at in the global economy and be strategic about it.”

The COVID-19 pandemic showed Canada how vulnerable its supply chains are, and Russia’s invasion of Ukraine added a national security dimension to these supply chains, Exner-Pirot said.

“We cannot offshore everything. Some things we need to have capacity in,” she said.

If Canada can’t compete with China on solar panel production, for example, then Canada needs to be developing and supporting energy technologies and systems that make sense for this country, Exner-Pirot said.

When it comes to critical minerals, she noted, the international conversation has shifted from thinking of them in only the context of batteries and electric vehicles, to those critical metals needed for national defence and security purposes.

“We need an industrial policy to address that, to have the supply chain for our industrial base, for our defence sector,” she said.

Allan pointed out that China’s green industrial policy, which started with wind energy in 1996 and then added solar power in 2000 and batteries as a strategic sector in 2009, has always been both a clean energy technology strategy and a defence industrial policy since its inception.

“We [Canada] haven’t really thought that through and taken a smart approach to our own industrial strategy vis-à-vis China,” he said.

Engaging Canada’s regions in national cleantech projects

The fourth criteria for assessing cleantech projects is: Does the project contribute to regional economic transformation or build a cluster of green innovative assets?

Along with the national contribution, specific regions of Canada are going to need to see themselves as having a place in the future geopolitical order of the world and in Canada’s economic strengths, Allan said. “It’s worth doing strategic projects in specific regions just so they are part of the overall future.”

Exner-Pirot said despite tensions between the federal and Alberta governments, there have been some positive federal-provincial collaborations in such areas as carbon capture and hydrogen development.

 In Saskatchewan, she added, the Saskatchewan Research Council is taking leadership –  supported by the federal government – to develop rare earths processing capacity, which China currently dominates.

Allan said there’s potential to tie a precision manufacturing cluster in the Greater Toronto Area to an advanced materials cluster in Quebec, to start building regional clusters of cooperation that reduce the cost and increase the quality of technology manufacturing in other places.

"[It is about] connecting the dots of the strengths and weaknesses of the economy at that sub-sectoral level,” he said. “That’s where we’re going to find real value-add, real human capital investment paying off, real investment in our logistical and industrial base paying off.”

Allan pointed to a recent Transition Accelerator report which argued that countries that will succeed in a globally competitive economy are those able to leverage a diversified natural resource base into high tech and value-added manufacturing and chemical processing.

 “Canada is really well-positioned to do that,” he said. “It means more mining, using biofuels strategically, [and to] eventually become a hydrogen exporter.”

 It means Canada turning its timber resources into advanced manufactured panels for mass timber construction, and turning wood waste and agricultural waste into sustainable aviation fuels, he added.

“These are the best opportunities Canada has in the energy transition, on top of batteries and EVs where we’ve got a legacy industry that we’ve got to transition into other sectors.”

The fifth criteria for assessing cleantech projects for public support is: Do the project economics warrant public support?

Financial modelling can help determine whether a project warrants public support and what level of public support is needed, according to the report.

Government must develop its own tools for assessing project economics and cannot simply take the term sheets from firms at face value, the report says. “Building up expertise in project economics in other jurisdictions, as well as the rigorous analysis of existing Canadian projects, will allow Canada to make more refined decisions on project finance.”

For example, the federal government provided $400 million through the Strategic Innovation Fund, and the Ontario government an additional $500 million, to ArcelorMittal to convert a coal-fuelled blast furnace at its Hamilton steel making plant to natural gas.

Yet ArcelorMittal did essentially the same conversion project at its Corpus Christi, Texas plant, with no public funding.

“So we basically subsidized [the company] to make a business-as-usual decision,” Allan said.

Also, even though ArcelorMittal said its converted blast furnace at the Hamilton plant would be ready to run on hydrogen fuel, the company plans to keep running it on natural gas for some time – raising questions about whether the project is even net-zero compatible.

“We spent a lot of public money on that project and I’m not sure it’s one that would have cleared the five criteria [in the green industrial policy framework],” Allan said.

Government needs to be smarter at supporting technologies

The federal government could use the green industrial framework “passively” to evaluate proposed projects for public funding, for example under the Strategic Innovation Fund, the Canada Growth Fund, the Canadian Infrastructure Bank or other funding programs, Allan said.

But the government also could use the framework “actively” for identifying and originating new projects not yet proposed by the private sector, he said. “For example, we [government] are going to go out and find a mine that delivers on the Critical Minerals Strategy that meets these five criteria.”

Exner-Pirot said there have been cases where government took the initial risk and led the development of emerging technology, such as in developing Alberta technologies to mine, extract and process oilsands bitumen – both at the surface and at depth underground.

That initial government investment has yielded an oilsands industry that’s now surpassed $1 trillion in spending injected into the economy, she said.

She also pointed to a methane emission reductions technology “accelerator” established by Tourmaline Oil Corp. where startups can test their pilot emissions-reduction technology. “It has led to commercialization, to actual ways to implement methane reduction.”

[Editor’s note: Despite this initiative, Tourmaline has become the largest emitter of methane in Canada’s energy industry, following a series of acquisitions in recent years, according to a news report by EnergyNow.ca. The company vented 3,862.5 thousand cubic metres of natural gas (or 3.862 million cubic metres) in October 2024, a threefold jump from September and a 25-percent increase from a year earlier. That’s about 84.8 tonnes per day of methane – the highest in Alberta Energy Regulator data. Also, in 2023, Alberta’s oil and gas industry exceeded its provincial flaring limit for the first time. The industry flared (burned off) 766.8 million cubic meters of natural gas, or methane, which is more than the annual limit of 670 million cubic meters, according to AER data.].

Exner-Pirot noted that Alberta was the first jurisdiction in North America to establish an industrial price for carbon on large emitters (as opposed to a broad-based consumer price), and has used that carbon levy to fund emissions-reduction projects.

However, with governments that are right-of-centre incoming in the U.S. and likely in Canada, the green industrial policy of the last 10 years is not going to continue as is, she said.

“A lot of mistakes were made and it was very expensive and it is competing with other priorities now, especially on the [national] security front. And there’s only so much money.”

This means Canada needs to be smart and strategic as a nation with the public funding used to support cleantech technologies and companies, Exner-Pirot said. “How can we learn from what we’ve done wrong instead of throwing the baby out with the bathwater?”

Concludes the Transition Accelerator’s report: “At least part of the solution is to apply more rigorous standards to evaluating whether projects should be prioritized for public investment – standards that take account of strategic economic considerations as well as contribution to net-zero pathways.”

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