Thought Leaders Business Taxation

Stock markets signal a growing gap between Canadian and American clean tech firms

Canadian taxpayer-supported clean tech startups may move south of the border due to regulatory risk and political uncertainty despite substantial tax benefits

Author: Yrjo Koskinen, J. Ari Pandes and Nga Nguyen

CANADA is one of the largest oil and gas producing nations in the world, and the oil and gas sector is its most important export industry. 

With the rapid increase of green energy investments globally, stock markets have begun viewing oil and gas firms in Canada and the United States as mature with an uncertain future — despite recent record profits and increases in stock prices. 

A prudent and economically viable energy transition to a low carbon economy is of the utmost importance for the future prosperity of the country. As part of the transition, Canada must become a lucrative destination for clean tech investments. 

The International Energy Association reports clean energy investments (including nuclear) are continuing to grow over fossil fuel investments, with US$1.7 trillion invested in clean energy in 2023, compared to US$1.1 trillion in fossil fuels. This trend will only continue in the coming decades. 

Our recent analysis of stock market data from 2018 through 2022 provides important information about how capital markets view the risk and return for oil and gas companies and clean tech firms in both countries. 

U.S. clean tech firms are valued more

In our study, we examined how stock markets in Canada and the U.S. value traditional energy companies, clean tech companies, and the prospects for both. 

Our study suggests there are large differences between the clean tech industries in Canada and the U.S. Clean tech has much better prospects in the U.S., while oil and gas firms in Canada may outlast their American counterparts. 

Our report indicates that markets view clean tech firms as growth firms in both Canada and the U.S., despite disappointing stock returns for these companies since 2021. Growth firms are companies that reinvest their current earnings into operations to further expand rapidly and then aim to deliver profits later on. 

The valuations are significantly higher in the U.S., suggesting the market sees better long-term prospects for the sector south of the border. Canadian clean tech firms could have problems scaling up and taking advantage of opportunities. 

Clean tech firms in the U.S. are also attracting more equity capital, particularly since that country passed the Inflation Reduction Act (IRA) in 2022. The IRA has significantly accelerated investments in clean tech in the U.S. 

While Canadian tax credits for clean tech are substantial, they don’t seem to have the same impact on investments as the IRA, perhaps because rules for Canadian tax credits and other incentives are deemed more complex. 

The real issue is not Canadian policy for energy transition per se, but rather the complex implementation, uncertainty and lack of clarity of these policies.

Political uncertainty

Opportunities in clean tech exist in Canada, but there is no room for increased regulatory risks. Disagreements between the federal and some provincial governments create uncertainty that hurts investments. 

Alberta’s sudden moratorium on renewable energy was not helpful, especially given the province has quickly become a Canadian renewables hotbed. While the province has since lifted the moratorium, its new regulations for the clean tech sector have been criticized as too strict. 

Political uncertainty, coupled with more risk-averse business attitudes than in the U.S., is creating unnecessary hurdles for the commercialization of clean tech innovations in Canada. 

This should be concerning to many, as Canadian clean tech firms might be tempted to locate their operations south of the border. Consequently, Canadian taxpayer-supported startups may end up creating more wealth in the U.S. than at home. 

Meanwhile, Canadian oil and gas companies have recently experienced strong operating performance, and their valuations and stock return performance support this. Interestingly, Canadian energy firms are valued higher relative to profits than their U.S. counterparts, which is counter to popular opinion among Canadian energy sector pundits. 

One reason for the more optimistic valuations is the impending completion of the Trans Mountain pipeline and the resulting increase in the capacity to export heavy oil from the oil sands. There is no doubt that the energy sector will continue to contribute to the Canadian economy, at least in the medium run. The key question is: for how long? 

Ontario wind turbines
Industries require predictable, stable and clear regulatory environments to provide the certainty investors and companies need to continue to invest in Canada. (Image: Jason Ng on Unsplash.)

Reducing greenhouse gas emissions

The oil and gas sector must reinvest more of its profits into emissions-reducing technologies. However, if Canadian policies and incentives do not support enough investment return prospects, the sector will continue to under-invest in energy transition. In particular, the tax incentives should be made easier for small- and medium-sized companies to access. 

Reducing greenhouse gas (GHG) emissions will be critical in continuing to attract financing and generating profits beyond 2030. The oil and gas sector has been criticized for slow progress in this regard, but the recent announcement of a regulatory application for a carbon capture project by oilsands producers with the Alberta Energy Regulator is certainly encouraging. 

While competing with the U.S. for clean tech investments and reducing GHG emissions in the oil and gas sector are challenging, Canadian firms should continue to embrace opportunities. Both industries require predictable, stable and clear regulatory environments to provide the certainty investors and companies need to continue to invest in Canada. 

Our success as a nation depends on it. 

Yrjo Koskinen is the BMO professor of sustainable and transition finance at the University of Calgary; J. Ari Pandes is an associate professor of finance at the University of Calgary; and Nga Nguyen is an assistant professor in the department of finance at the Université du Québec à Montréal (UQAM). Title image: Efe Kurnaz on Unsplash. Second image: Jason Ng on Unsplash.

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