A few months ago, the Intergovernmental Panel on Climate Change (IPCC) sounded the “red alert”. In November, nearly 200 countries gathered at COP26 to endorse the Glasglow agreement. It was a failure ; a successful Conference of the Parties would have put in place concrete mechanisms to limit temperature rises to 1.5 ° C, including through a global carbon tax.
Over the next 25 years, $ 2 trillion will be needed to finance Canada’s energy transition. In the absence of a sufficient carbon tax – $ 200 per tonne of CO2 in 2022 to $ 375 per tonne in 2030 – the objective will probably not be reached, since economic players will not have sufficient interest in investing in the energy transition.
Unfortunately, it is doubtful that a majority of citizens and governments will agree to pay a carbon tax high enough to achieve the energy transition on its own. In fact, the planned carbon tax in Canada would reach only $ 170 per tonne in 2030. Another method must therefore be found to support companies in the energy transition.
Currently, the recommended mechanism is the public subsidy. However, the subsidy is not necessarily effective, in addition to being expensive and politicized. It can only help certain companies and often leaves companies that participate in the supply chain without adequate help, slowing the energy transition. In order to remedy the problems incurred by subsidies, Christine Lagarde, President of the European Central Bank (ECB), promotes the Green Capital Union (UCV), a capital fund intended for the energy transition. An ECB report argues that UCV is essential for raising the capital needed to meet the European Union’s greenhouse gas (GHG) emission reduction targets. This proposal is also consistent with the recommendations of the Expert Panel on Canada’s Sustainable Finance.
Faced with these findings, we propose to reorient a well-known investment vehicle, the Tax Free Savings Account (TFSA), towards the fight against climate change. This CELI 2.0 would ensure the energy transition by providing the necessary capital to key companies.
Currently, the TFSA is an investment vehicle aimed at increasing the savings of Canadian households. However, during the last election campaign, the Liberal Party of Canada (PLC) proposed the creation of the account facilitating access to property (CÉFAP). The latter will combine the advantages of the TFSA and the RRSP. The PLC therefore proposes the establishment of a third savings program, while only 30% of households contribute to RRSPs and TFSAs. Therefore, the addition of CÉFAP – without modifying existing programs – would partially meet the objectives of the TFSA while only benefiting a minority (in addition to helping to raise real estate prices).
The arrival of CÉFAP offers us the opportunity to modify existing programs so that they are better aligned with public objectives. In its current form, the TFSA has several problems. First, by reducing the taxation of capital gains, it is costing the Public Treasury dearly (1.34 billion per year in 2019). This cost is set to increase, since the maximum contributions increase annually. In addition, the TFSA contributes to increasing wealth inequalities since high-income households contribute more to it. However, while this tax shelter benefits the rich more than others, it still benefits a large portion of voters, so any government is unlikely to commit to abolishing it.
However, it is possible to redirect the use of the TFSA towards climate action. Thanks to the tax advantage offered, the TFSA 2.0 would allow projects beneficial to society to obtain capital, whereas in the absence of an adequate carbon tax, obtaining sufficient capital is currently difficult or even impossible for some green projects. To do this, it would be necessary to create decision-making rules to ensure that the investments of this fund are consistent with our GHG reduction objectives. For example, it is possible to create an index that would combine yield and potential reduction of GHGs from said projects (by attributing the social price of carbon). The CELI 2.0 would therefore provide an attractive return for investors, in addition to financing projects essential to the energy transition.
In short, the climate crisis continues to worsen and companies that have the potential to offer solutions are struggling to finance themselves. The arrival of CÉFAP opens the door to the overhaul of existing programs. In addition to making Canada a pioneer in sustainable finance, the TFSA 2.0 would be efficient and less political, and it would ensure Canada’s long-term prosperity.