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How Canada Doubles International Climate Finance in a Net Zero World

By Aniket Bhushan and Lance Hadley

Published: July 30, 2021

At the G7 Leaders Summit (June 2021) Canada announced “a doubling of its international climate finance (ICF) commitment to $5.3billion over the next five years.” We argue how Canada doubles ICF matters more than the fact that it is doubling.    

It should be remembered, in the lead up to COP21 (Paris, 2015) Canada also “doubled” ICF to $2.65bn (2015-2020). The current context, however, is different. First, donors are likely to face pressure from developing countries at COP26 in Scotland in November. Collectively, they have fallen short of the US$100billion commitment agreed at COP21. A key weakness has been the lack of a mechanism to credibly hold donors to account. Doubling, without an accountability, transparency and impact framework is almost meaningless. Second, the urgency of climate change, including its impact on the sustainability of aid funded projects in a range of areas – from food security to humanitarian response – has become far more self-evident. Third, the widespread acceptance of “net zero” baselines (by 2050 in the case of Canada), and the extent to which current trajectories and policies are inconsistent with the same, are further developments that make the COP26 context different.  

Given this backdrop, we identify three areas to watch in terms of how Canada redoubles ICF in a net-zero world.   

How ‘Doubling’ Works at the Envelope Level

The main source of funding for Canada’s ICF commitments is the international assistance envelope (IAE). When Canada announced a doubling of its ICF level in 2015 at COP21, it did so without commensurately increasing the IAE. This has two effects. Either it creates a robbing Peter to pay Paul dynamic i.e., internal competition between priorities (climate vs. health, climate vs. education). Or it leads to attribution indiscipline and concept stretching (e.g. initiatives are health and climate focused, and simultaneously feminist and gender-responsive). 

As we have shown, given the overall resource constraint, pressures to demonstrate too many inconsistent results out of the same limited quantum of investment leads to a program that fails to clearly define objectives and prioritize meaningful outcomes. Therefore, how doubling works at the envelope level is critical to watch. 

Type of Finance and How it is Channeled

Canada’s last ICF doubling in 2015 brought about other shifts. First, the majority of financing was provided on a non-grant (soft loan) basis. Second, the majority of finance was intermediated via multilateral institutions, specifically, Canadian branded trust funds (e.g. at the Inter-American and Asian development banks, and at the International Finance Corporation). 

Our analysis raised questions regarding Canada’s real level of influence over these funds, the level of financial and development leverage achieved, and potential inadvertent market distortions (i.e. over subsidization of already risk-averse multilaterals).  

Furthermore, our findings pointed to inconsistencies between Canada’s choice of financing modalities and channels on the one hand, and its ‘feminist’ international assistance posture on the other. The data suggest limited overlap between gender and climate projects (especially channeled via multilaterals). 

Keeping an eye on whether Global Affairs Canada (GAC) is able to strike a better balance between grants and debt, multilateral and bilateral channels, and increase the level of gender-responsive climate finance given all the associated challenges, is worth watching closely. 

Does Redoubled ICF Enhance Competitiveness in a Net-Zero World

Momentum on net-zero commitments has increased across the board. To date, 49 Parties representing 60 countries and 54.1% of global GHG emissions have communicated a net-zero target. Significant efforts are underway to track private sector commitments and net-zero investments

 However research shows commitments vary considerably in quality and contentious areas remain (such as the use of offsets as a substitute for cuts). It is clear that the global competitive landscape is both uneven and shifting significantly. One area where these shifts are visible is trade policy. For e.g., Europe’s new Carbon Border Adjustment Mechanism, part of the new Green Deal, puts a price on imports to ensure trade does not lead to ‘carbon leakage’.  

Backed by strong government funding and a thriving domestic ecosystem, Canada’s position on the Global Cleantech Innovation Index has risen to 2nd in 2021. However, this performance does not necessarily translate into global competitiveness. Key, long-standing issues like weak local market adoption, and specific gaps in funding to scale internationally, persist. 

According to our analysis (in contrast to others) the picture on Canada’s climate-friendly export competitiveness remains unclear. A lot depends on which products are counted and how. What is reasonably clear is: (a) Canada’s share of global climate exports, at or under 2%, remains low, and (b) this share has remained stagnant over a decade, and has declined over a longer timeframe. Net-zero considerations will have an impact here too as the largest backer of Canadian cleantech, Export Development Canada, recently committed to net-zero

Global competitiveness is an area that has been neglected by Canada’s ICF. We have argued elsewhere that this is a missed opportunity. The case for greater collaboration between trade and development has arguably never been stronger or more clear than in the case of cleantech competitiveness. It is worth watching whether a redoubled ICF looks to leverage the private sector to enhance Canadian competitiveness in a net-zero world.   

Institutional Source of Climate List World Bank World Trade Organization (Friends Group) OECD World Trade Organization Canada, (ECTPEA)
Name of Climate Exports List Climate Friendly Technologies**** Committee on Trade and Environment in Special Session Potential Convergence Set**** The Combined List of Environmental Goods**** WTO Synthesis of Submissions on Environmental Goods**** Environmental and Clean Technology Products*
Canadian Climate-friendly Exports, per list (2019) US$5.01B US$17.36B US$23.14B US$74.58B CAD $13.50B
Climate-friendly Exports as Percent of Total Canadian Exports 1.12% 3.88% 5.20% 16.70% 2.48%***
CAGR of Climate-friendly products 2010-19 2.20% 2.00% 2.50% 1.20% 6.59%
Canada’s share of Global Climate Exports (2010) 1.59% 1.74% 1.64% 2.22% -%
Canada’s share of Global Climate Exports (2015) 1.77% 1.69% 1.59% 1.92% -%
Canada’s share of Global Climate Exports (2019) 1.66% 1.57% 1.57% 2.11% -%
Year List Published/Submitted 2007 2007 2005 2005 2007
Number of distinct HS 6 Codes 45 170 240 462 ~246**
Notes: All data is in nominal figures. No deflators (i.e. constant dollars) are used in calculations. Canadian exports in 2019 equaled USD $447.35B. Canadian exports in 2010 equaled USD $387.68B.
* Data from https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610062901&pickMembers%5B0%5D=1.1&pickMembers%5B1%5D=2.10&cubeTimeFrame.startYear=2010&cubeTimeFrame.endYear=2019&referencePeriods=20100101%2C20190101
** ECT list is compiled from the Environmental and Clean Technology Products Economic Account (ECTPEA) Supply-Use Product Classification (SUPC) list. This list is primarily used for domestic economic accounts and includes products and services classified as Environmental and clean technologies. The ECTPEA SUPC list is comprised of 500 SUPC codes. For use in international trade analysis, the SUPC list has been used to generate a corresponding HS code list according to concordance tables between SUPC2016->HS2017. Note also, that this concordance is with HS8 and HS10 codes. The concordance with the SUPC list yields 255 distinct HS8 codes and 259 HS10 codes. However, given that UNComtrade (this analysis’ data source for international trade) uses HS6 codes, this HS conconcordance (at the HS8 level) has been broadened to HS6 codes. As such, while it may seem that the ECT list has a high number of codes, but low export value, this is likely due to the ECT list having a more specific classification system (SUPC, or HS8 as a corollary)
*** Total is taken from CIMT. In 2019 Canadian exports equaled CAD $544.61B
****List sources:

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