In its new report Transforming Canada’s economy for a low-carbon future, the Canadian Institute for Climate Choices provides a sober assessment of where the country stands. Among other things, the report notes the heavy weighting of energy and energy-intensive industries in Canada’s economy.
If anything, the institute underplays the challenges confronting Canada on the journey to a low-carbon future. Examining the composition of exports suggests it will be difficult to significantly reduce greenhouse gas emissions across the country’s industrial base – especially within such a brief time frame as five to 10 years.
Pre-COVID, natural-resource industries and transportation-equipment manufacturing together accounted for roughly 70 per cent of Canada’s merchandise exports – and for more than half of total exports of goods and services combined. Natural-resource products alone make up more than half of merchandise exports.
Factoring in other energy-intensive manufacturing industries, such as aluminum, pulp and paper, chemicals and petrochemicals, fertilizers and iron and steel, further underscores the country’s dependence on a handful of traded-goods industries for export earnings. Most of these industries emit significant quantities of greenhouse gases and/or rely on fossil-fuel energy inputs for the manufacturing and shipment of the goods they produce.
For a trade-dependent economy, the health of export industries warrants policy makers’ close attention. Export patterns hold vital information about where Canada possesses comparative advantages. Many of the industries in which Canada has long been globally competitive serve the world’s energy consumers or are energy- and raw materials-intensive. The Canadian economy therefore faces major risks as the world tackles climate change and our own governments make it harder to extract, process and add value to our abundant natural resources by implementing costly new regulatory and fiscal measures.
Politicians often opine about the business opportunities that come with addressing carbon emissions. Such opportunities do exist and are growing. But a sense of perspective is needed. Natural-resource production is Canada’s highest productivity industry – by far. The sector contributes $330 of value-added output for every hour worked, on average, and $1,300 in the case of unconventional oil and gas. It is a fantasy to believe Canada, within the span of a decade or even two, can replace its highest-productivity industries with other business activities that contribute only $30 to $90 of value-added an hour, such as many service sectors, and not experience a step-down in living standards in the process.
Tracking trends in Canada’s merchandise trade balance is a useful way to see the role of natural-resource industries in our economy and to gauge how living standards may be affected if these industries wither because of shifts in global markets and/or domestic policy.
According to Scotiabank Economics’ latest commodity price report, all major categories of internationally traded natural resources saw sizable price increases through the first three quarters of 2021. Canada’s merchandise trade balance has moved into surplus on the back of rising exports of oil, gas, coal, metals, non-metallic minerals and forest products. Canada’s improving merchandise trade balance is set to make a sorely needed contribution to GDP growth in 2021 and likely in 2022 – with developments in natural-resource markets being the principal reason.
Too often, the centrality of natural-resource industries in Canada’s economic base is breezily dismissed. The high value-added and unmatched export earnings generated in these sectors cascade through the rest of the economy, helping to underpin domestic demand for non-traded goods and services and to pay for both imports and public services.
Canada needs thoughtful regulatory, tax and carbon-mitigation policies to encourage the transition to a less carbon-intensive economy. At the same time, policy makers must avoid undermining Canada’s role as a trusted supplier of energy, minerals/metals, foodstuffs and other raw materials. The world consumes these products and will keep buying them – hopefully from us. Yes, it’s a complex balancing act. But Canadian living standards depend on getting it right.
As published in the Globe and Mail.