5 Low-carbon and Resilient Trade and Competitiveness
By engaging in international markets for low-carbon and resilient products and services, Canada can enable and reinforce clean growth over time. Trade in low-carbon and resilient products and services is also an important measure of Canada’s competitiveness as global markets shift.
Canada can contribute to a positive global cycle in trade. Development of better and cheaper climate-related technologies, goods, and services in Canada can help grow exports to countries seeking to improve climate outcomes—which provides new (and clean) opportunities for economic growth here at home. At the same time, imports of climate-related products and services from other countries can help grow global markets, driving additional global innovation and cost reductions. Imports can also provide Canadian consumers with more choice at better prices, while reducing the carbon emissions embodied in goods and services that Canadians produce and consume. If enough countries become part of this positive cycle, climate action will become cheaper and easier over time.
Headline Indicator #5: Trade in Low-carbon and Resilient Goods and Services
To measure Canada’s climate-related trade, we track the country’s exports and imports of environmental and clean technology (ECT) merchandise and services between 2012 and 2018.1 As Canada transitions to 2050, expanding ECT trade over time is an important component of clean growth and making Canada more competitive in a low-carbon global economy.
As Figure 5.1 illustrates, trade increased in absolute terms and as a share of GDP since 2012. In 2012, trade in ECT represented about 1.2 per cent of Canada’s total economy, generating $20 billion in GDP; by 2018, the share of GDP increased to nearly 1.6 per cent and generated $30 billion (inflation-adjusted). This trend in Canada is consistent with broader trends in international markets, where demand for climate-related goods and services continues to grow at a rapid pace (Analytica Advisors, 2017; Elgie & Brownlee, 2017).
As Figure 5.1 illustrates, the current share of trade in ECT is small, representing roughly one and a half percent of Canada’s total economy. It also shows that growth in ECT trade has been relatively slow when adjusted for inflation. Still, it is important not to minimize the total value of these traded goods and services. Trade in ECT grew at a faster rate than Canada’s total economy. And as discussed in Indicator #3, the sector represents around three per cent of Canada’s GDP when both exports and domestically purchased ECT are considered.
Several other trends are noteworthy. For both exports and imports, manufactured goods were the most heavily traded type of ECT merchandise or service by value (about 65 per cent of total ECT imports and 45 per cent of exports in 2018). In particular, trade in complex manufactured goods experienced some of the largest growth. Trade in biofuels (both exports and imports) also increased significantly, driven in large part by mandated blending requirements by provincial and federal governments. Finally, it is notable that while exports of clean electricity (nuclear, renewables) represent over one-tenth of Canada’s total ECT exports (by value), they did not grow over this period. In every category, most of Canada’s trade in ECT—like the rest of Canada’s international trade—was with the U.S., accounting for 75 per cent of exports and 61 per cent of imports (Provenzano et al., 2019).
Provincial trade in ECT varies across provinces. Figure 5.2 shows the relative trade intensity of ECT merchandise and services across provinces for 2018 (i.e., ECT exports and imports as a share of provincial GDP). It also shows absolute values to help illustrate the provinces where ECT trade is highest (in 2012 dollars). New Brunswick, for example, had among the highest share of ECT trade as a percentage of its GDP (about 1.8 per cent), driven largely by increasing trade (both imports and exports) of nuclear electricity, biofuels, biomass, and other primary goods (Statistics Canada, 2020a). However, at $0.5 billion, the value of this trade was smaller than in most other provinces.
Overall, a few high-level trends stand out. In dollar terms, Ontario, Quebec, and British Columbia were the largest exporters and importers of ECT merchandise and services in 2018 (by value), accounting for 80 per cent of total Canadian trade. At the same time, not all provinces saw an increase in ECT trade between 2012 and 2018 as a share of provincial/territorial economies. While the share of ECT trade grew in New Brunswick, Quebec, Ontario, Manitoba, Saskatchewan, Alberta, and B.C., it shrank in Newfoundland and Labrador, P.E.I., Nova Scotia, and the territories.
Comparisons between specific provinces can also provide important information on trade. The differences between B.C. and Alberta are particularly interesting. Despite having similar populations, the share of ECT trade in British Columbia’s economy was roughly double the share of ECT trade of Alberta’s economy in 2018 (1.8 per cent compared to 0.9 per cent). Total ECT trade in B.C. generated $4.4 billion, compared to $3.1 billion in Alberta.
Exporting and importing directly with other countries is not the only way that Canada can influence global trade in low-carbon and resilient goods and services.
Financing climate initiatives abroad offers an important way that Canada can support the positive cycle associated with trade in low-carbon and resilient goods and services. Public and private sources of finance can provide critical access to capital in developing countries, helping support investments that reduce emissions and improve resilience. Financing from Canada can help build essential capacity, knowledge, and skills that generate other important economic and social benefits (OECD, 2017; IFC, 2018).
Although there are different types of public and private international financial flows, official development assistance (ODA) data illustrate that Canadian funds can help catalyze climate-related trade abroad. ODA includes financial aid provided by Canadian governments to developing countries to promote economic development and overall welfare, often through grants, soft loans, and technical assistance (OECD, 2018). Figure 5.3 shows the share of Canadian ODA going towards mitigation and adaptation initiatives between 2010 and 2017. While the share of ODA for climate-related measures decreased substantially after 2012, it has since returned to its previous high. In 2017, over one-quarter of Canadian ODA went towards mitigation and adaptation initiatives abroad, which was higher than the average share in other OECD countries (17 per cent). Generally, the increasing share of Canada’s ODA related to mitigation and adaptation is consistent with the broader trend across OECD countries (OECD, 2017).
Foreign direct investment (FDI) is another important area of climate-related finance and trade. Investments flowing into Canada from abroad (domestic FDI) can help the Canadian economy adjust as global markets shift and provide a key source of economic growth. At the same time, FDI flowing abroad from Canadian investors can support international activities that address climate change while increasing global clean technology market size and driving economies of scale. With better disclosure requirements, FDI can also help achieve other important social and environmental goals, such as fulfilling requirements relating to free, prior, and informed consent as well as meaningful engagement with Indigenous people (see Box 5.1).
Box 5.1: Using Disclosure to Fulfill Requirements of Free, Prior, and Informed Consent
Disclosure requirements at the firm level can play a significant role in directing FDI towards projects that meet multiple environmental and social objectives. The Sustainability Accounting Standards Board, for example, tracks whether resource projects are consistent with the United Nations Declaration on the Rights of Indigenous Peoples. While these international standards are nascent and voluntary, they show a path to incorporating the use of free, prior, and informed consent (or consultation) processes into FDI—both in Canada and abroad.
Sources: Rohan (2019); SASB (2018).
Figure 5.4 shows Canadian FDI flows between 2005 and 2018 in the 10 largest sectors. Importantly, these investment flows do not necessarily support global efforts to reduce emissions or improve resilience to a changing climate. FDI in oil and gas extraction and petroleum and coal product manufacturing, for example, nearly doubled between 2005 and 2018. These trends highlight the importance of investors incorporating climate-related risks into their decision-making processes.
The data in Figure 5.4 do, however, suggest significant growth in service sectors, which are typically less carbon-intensive than natural resource extraction and goods manufacturing. The biggest area of growth across all sectors was finance and insurance FDI abroad, which more than tripled between 2005 and 2018. As global markets shift, tracking investment flows can highlight areas where Canadian investors may be exposed to risk from carbon-intensive activities or are successfully capturing emerging opportunities.
As mentioned in Indicator #3, broadening the technologies, products, and services included in Statistics Canada’s Environmental and Clean Technology Products data would provide a more complete picture of clean growth progress relevant to climate change. The database does not include technologies relating to resilience and adaptation or to mining and minerals for clean technologies, for example. Some of these missing technologies could be important sources of low-carbon and resilient trade.
Data on climate-related public and private international financial flows raise similar challenges. Within Canada, climate-related finance comes from both the private and public sector—sources that are spread across the country. In many cases, these funds are added to financing from other sources outside Canada (which could be governments, organizations, and the private sector), which is then used to leverage additional private-sector funding in the recipient country. Tracking these individual contributions from Canada is complex.
Methods to track financial flows are, however, improving. The OECD, for example, is leading international efforts with work by its Research Collaborative for Tracking Finance for Climate Action. The group is developing international standards for tracking public finance and the extent to which it mobilizes private finance (ECCC, 2019). Such initiatives are helping Canada more accurately identify the impact of its investments abroad.
Lastly, better data on ECT trade and financial flows can provide a clearer picture on Canadian competitiveness in the global economy, but they are an incomplete measure by themselves. As global markets shift, a large portion of the Canadian economy could be exposed to competitiveness risks. These risks will be highest for emissions-intensive and trade-exposed sectors, such as oil and gas, mining, chemicals manufacturing, and iron and steel. But other sectors in the Canadian economy could face competitive pressures too, such as Canadian automotive manufacturers that produce gasoline-powered cars, SUVs, and trucks. While pursuing clean growth in Canada requires a more comprehensive understanding of these carbon risks, there is currently limited data and analysis available.