Reducing Emissions in Canada’s Oil and Gas
How to get the Natural Resources Canada Emissions Reduction fund right
Through Canada’s COVID-19 Economic Response Plan: New Support to Protect Canadian Jobs, $750 million has been allocated to Natural Resources Canada (NRCan) over two years.
Starting in 2020–21 these funds will create a new repayable loan program to work with conventional and offshore oil and gas companies to reduce their greenhouse gas emissions
The Canada Cleantech Alliance welcomes this new program. Significant economic and job creation benefits combined with emissions reductions are key to a resilient recovery from the Covid-19 pandemic. Canada Cleantech members have identified three recommendations to leverage this financial commitment:
1. Program Design that for multiple desired outcomes, including emissions reduction and Canadian research & innovation.
2. Financial Terms that stimulate additional investment in Canadian cleantech companies.
3. Leveraging existing provincial programs that are examples of best-practice program design.
1. Multiple Outcome Program Design
We recommend that the program include multiple targeted streams that deliver on key objectives. This includes emissions reduction, Canadian IP development and SME innovation. The Ontario TargetGHG program successfully used this approach to achieve greater results:
A. One stream focused on deployment of ‘off-the-shelf’ emissions reducing technologies at scale. To incentivize applications in this stream, we recommend tying the portion of the loans that are converted to grants to the emissions reductions each company and/or technology is able to achieve (i.e. Company X using Canadian cleantech reduces emissions by a per cent year over year, receives a conversion of a proportional per cent of their loan total to a grant that year). Reductions to be verified using provincial emissions schemes and/or an ISO 14065 certified entity.
B. A second stream for Canadian IP deployment. Offer a similar process to capital cost allowances, where a portion of the loan is converted to a grant once deployed (i.e. Company deploys a Canadian cleantech solution for an amount, it is then able to have a proportional per cent of loan converted to a grant).
C. A third stream for SME research & innovation. Reward emitters in oil and gas for partnering with cleantech SMEs to pilot novel solutions to emission reduction. This is similar to the Clean BC Industry Fund challenge approach, which worked with Foresight Cleantech Accelerator to connect emitters with innovators under a simplified framework that is more efficient than traditional corporate procurement processes. Consider forgiving loans where project fails to encourage innovation.
We also recommend a bonus or penalty depending on realized emissions. These measures would create a powerful incentive for companies developing and deploying emissions reducing cleantech.
2. Leverage Canadian Investors
There is tremendous potential to leverage government money to catalyze additional private sector investment in cleantech. Additional Canadian investment is the top demand of cleantech companies.
We recommend that loans and grants under the NRCan program adopt a ‘first-loss’ stance. First-loss means that loans should adopt the most junior debt position within a distribution waterfall. Where loans are converted to grants, those grants should be provided for the express purpose of covering a set amount of first-loss.
By placing government loans and grants in a position to absorb losses in the event of future financing or transactions at a lower than targeted valuation, the government insulates investors from risk. First-loss mechanisms thereby attract capital towards a target impact. Companies benefitting from this capital generates investment data in new markets that help prove out market cases. This stimulates additional investment while also lowing the cost of capital.
3. Getting it Right
The success of this program will depend on its ability to deliver jobs, economic growth and emissions reductions. That will depend hugely on the extent to which this capital is leveraged by both investors and employers. Barriers to adoption can be minimized by modelling on well-known programs. We recommend modelling on these examples:
1. The Business Scale-up and Productivity program at Western Economic Diversification, which offers non-recourse zero interest loans to innovation-based ventures. It is a helpful model that has been road tested and shown not to be a barrier to follow-on investors.
2. The TargetGHG Program at Ontario Centre of Excellence, which encouraged large industrial plants to adopt leading-edge technology developed by Ontario’s entrepreneurs.
Canada Cleantech encourages ongoing dialogue between our members and the government of Canada as we seek to achieve a cleaner and more prosperous future for all. We welcome public feedback on this proposal.
