Sustainability Newsletter – July 2024

CIBC’s inaugural Electrification Summit was held in Toronto on June 11, 2024. The full-day event attracted over 300 delegates, including leaders and industry executives, across the electricity value chain to discuss the progress of electrification in Europe and North America, and the opportunities to transition the economy to clean electricity.

Quick recap: Three key themes emerged from the discussion.

• Capital requirements to fund the energy transition are staggering. In Canada, capital investments of $1.4 trillion will be needed by 2050 to grow the electricity system, representing $55 billion per year, or double the current rate of capital expenditure, according to the Canada Electricity Advisory Council. Panelists representing private capital, energy infrastructure lenders, project developers and companies cited increasing their financing, investing and capital expenditure activities into the tens of billion dollars each to enable transition objectives.
• Transforming and growing the electricity system is extremely complex. The aged system must be refurbished and grow at three times the historical rate over the last several decades. Panelists representing generation, storage, transmission and distribution companies cited the need for policy alignment to overcome challenges involving technology risk, adoption and utilization risk, and the risk of cost overruns associated with long development, permitting and construction timelines.
• Despite these challenges, electrification transformation is already underway. Companies are successfully building-out electricity infrastructure, with almost US$1.3 trillion spent in global energy transition investment in 2023, according to the morning keynote from BloombergNEF. The lunch keynote from Energy Impact Partners illustrated that multiple trends including urbanization, industrialization and demographic growth are already rapidly changing how we consume energy, increasing both the urgency and complexity of “electrifying everything”.

Why is this interesting? Just prior to the summit, the Canada Electricity Advisory Council released Powering Canada: A blueprint for success, culminating its 12-month mandate to provide the federal government with policy recommendations to increase the electricity sector’s role in Canada’s transition to net-zero. Many of the Council’s recommendations are focused on reducing the overall investment requirements of the energy transition to keep costs affordable for industry, businesses and residential consumers.

For a more detailed summary on the CIBC Electrification Summit, read the full post-event recap here. Additionally, CIBC’s ESG Analyst, Shaz Merwat, published a more in-depth report on the Summit with other notable observations. Please contact your CIBC representative for a copy.

The Rocky Mountain Institute (RMI) published How data centers can set the stage for larger loads to come, offering four strategic recommendations that AI data centers could implement for a more sustainable energy future.

Quick recap: According to RMI, power demand for US-based AI data centers is surging, expecting to double from 2022 levels to 35 gigawatts (GW) by 2030, due to more complex computations and a boom in data center building. US utilities are expected to add 16.9 GW of new gas generation between 2023 and 2027 to handle load growth, but would delay grid decarbonization. RMI offers four strategic recommendations that data centers could implement for a more sustainable energy future: 1) Maximize energy efficiency by implementing advanced cooling technologies and AI-driven systems to optimize energy use; 2) Enhance demand flexibility by participating in demand response programs to reduce peak load stress; 3) Get more out of existing grid infrastructure by encouraging utilities and transmission providers to incorporate Grid Enhancing Technologies (GET); and 4) Negotiate for additional renewable energy and storage by forging partnerships with utilities for green tariffs and investing in renewable projects.

Why is this interesting? Big tech companies are attuned to this power demand dilemma. Last year, Microsoft, which has pledged to have 100% of its electricity matched by zero-carbon energy purchases by 2030, announced the world’s first fusion energy purchase agreement, recognizing the potential role it could play in a multi-technology approach to firm, carbon-free electricity. In May 2024, Microsoft, also announced it is investing US$3.3 billion in a new data center in Wisconsin with a 250 megawatt solar array, while also entering into the “largest single corporate PPA” with Brookfield, investing more than US$10 billion on renewable energy capacity .

The 2nd annual State of Carbon Dioxide Removal (CDR) report, led by researchers at Oxford University, tracks the progress of key CDR innovation indicators and finds that novel CDR activity is intensifying, albeit slowly.

Quick recap: Today, approximately 2 GtCO2 per year of CDR is taking place mostly from conventional CDR methods, such as afforestation/reforestation, and soil carbon sequestration. Novel CDR methods, such as direct air carbon capture and storage (DACCS) and bioenergy with carbon capture and storage (BECCS), contribute about 1.3 million tons (0.0013 Gt) of CO₂ removal per year, representing less than 0.1% of total CDR – but is growing at a more rapid rate than conventional methods. The report tracks key innovation indicators which show evidence that novel CDR activity is increasing, for instance: CDR patents have declined since 2010, but have become more diverse with novel CDR methods playing a larger role; some major novel CDR demonstration programs have recently launched internationally with the potential to scale commercially; companies are raising their climate ambitions, with announced DACCS and BECCS projects expected to remove 118 million tons of CO₂ annually by 2030; and the voluntary carbon markets are becoming a growing source for novel CDR as purchase agreements for future delivery have grown sevenfold in 2023 vs 2022.

Why is this interesting? According to CDR.fyi in What the State of CDR Report Tells us about the Removal Market, the voluntary carbon markets will play a critical role in scaling novel CDR. However, not all demand will come from it. Government delivery agreements and in-setting without the issuance and sale of credits are two other mechanisms they expect to see a lot more of in the coming years.

Ecosystem Marketplace (EM) published its 2024 State of the Voluntary Carbon Markets (VCM), which finds that while total market value fell in 2023, integrity efforts are helping to restore buyer confidence in 2024.

Quick recap: The report finds that VCM total market value and volume contracted in 2023 vs 2022. Market value decreased 61% to US$723 million, and the volume of reported transactions declined 56%. While total market value fell for all VCM credit categories, different category types experienced different trajectories. Forestry and Land Use and Renewable Energy credits had the biggest drop in volume, even though they are still the most favored project types, but faced intense scrutiny around additionality. On average, buyers paid US$6.53 per ton CO2e for carbon credits in 2023, a slight decrease from 2022. As of early 2024, prices seem to be recovering from this low point. Market participants also reported a clear negative impact from media scrutiny of the VCM. But efforts by the International Council for Voluntary Carbon Markets (ICVCM) to establish the Core Carbon Principles (CCP) – its global benchmark for high-integrity crediting programs – and the launch of the Voluntary Carbon Markets Integrity Initiative (VCMI)’s Claims Code, have contributed to buyer confidence in market quality and integrity.

Why is this interesting? In June 2024, ICVCM announced it approved the first set of carbon-crediting methodologies, allowing ‘CCP-eligible labels’ to be used on an estimated 27 million carbon credits generated from projects that capture GHG emissions like methane from landfill sites and refrigerant gases from discarded equipment. Additional categories of carbon credits remain under active assessment. The CCP-approved status of credits will be visible to buyers in the programs’ registries in due course. Marketplaces, like exchanges, are likely to start bundling CCP-labelled credits for sale during the course of the year.

The Climate Bonds Initiative (CBI) released its Quarterly Sustainable Debt Market Update, revealing the first quarter of 2024 was the most prolific on record for sustainable finance volumes, and recognizing the emergence of nuclear energy in green financing frameworks.

Quick recap: In the first quarter of 2024, US$272.7 billion was issued in green, social, sustainability, sustainability-linked and transition (GSS+) bonds, a 15% increase from the US$237.2 billion issued in the first quarter of 2023, and a 41% rise from the US$193 billion issued in the last quarter of 2023. Green bonds accounted for the largest share and reached a new quarterly record, with US$195.9 billion raised in the first three months of the year. CBI also recognized that in Q1 2024, several US and Canadian issuers priced green bonds that included nuclear-related expenditures as eligible green projects in their green financing frameworks. While acceptance by investors and policymakers vary across jurisdictions, Canada has been supportive by including nuclear energy in their Green Bond Framework in 2023, followed by Ontario earlier this year. Nuclear energy is also included in the EU’s taxonomy on sustainable activities. This recognition is an important enabler, helping to remove barriers for issuers to fund nuclear technology with green bonds.

Why is this interesting? Sustainable Fitch recently published a Cautious Shift on Nuclear Energy from Sustainable Finance Could Create Momentum for the Sector. While green and transition labels have been used for nuclear-focused sustainable debt issuance, use of proceeds (UoPs) tended to focus on refurbishing or extending existing assets. However, new UoPs are emerging, including financing the research and development of new reactors, the procurement of nuclear fuel, and non-power generation auxiliary activities – which could potentially attract new investors and new types of issuers in the nuclear industry value chain.

The US Treasury Department and the Internal Revenue Service issued final rules that can help clean energy developers tap generous tax credits by meeting labour standards (meanwhile, Canada formalized the first of its equivalent tax credits by Royal Assent).

Quick recap: The Inflation Reduction Act (IRA) of 2022 amended and enacted various clean energy tax incentives that provide increased credit or deduction amounts – up to five times the base credit amount – if certain labour standards such as prevailing wage and registered apprenticeship requirements are met. The newly published final rules, which cover many project types, including alternative fuel vehicle refueling (30C), renewable electricity production (45), carbon capture (45Q), production of clean hydrogen (45V), clean electricity production (45Y), clean fuel production (45Z), and more, will give developers more clarity to proceed on such projects. According to a White House Factsheet, the IRA is attaching strong labor protections and incentives to climate and clean energy tax credits for the first time ever. Independent analysis estimates the IRA could create 1.5 million additional jobs over the next decade.

Why is this interesting? In other related news, Canada announced the passing into law of its first four Clean Economy Investment Tax Credits (ITC) that were tabled in the 2023 Budget and 2023 Fall Economic Statement. With the Royal Assent of Bill C-59, eligible businesses can now apply for and claim the Clean Technology ITC and Carbon Capture, Utilization and Storage (CCUS) ITC. Both are anticipated to provide eligible companies approximately $11.4 billion in support through 2027–28. With the Royal Assent of Bill C-69, eligible businesses should also be able to apply for the Clean Technology Manufacturing ITC and Clean Hydrogen ITC in the coming months. Tax credit rates for the Clean Technology, CCUS and Hydrogen ITCs are also subject to labour requirements such as prevailing wage and apprenticeship.

The Government of Alberta released an independent assessment that it commissioned from Deloitte, on the potential economic impact of the proposed federal oil and gas emissions cap. The report suggests that cutting oil and gas production could be a more cost-effective option than investing in carbon capture and storage (CCS) projects.

Quick recap: A proposed federal framework for an oil and gas sector greenhouse gas emissions cap seeks to limit 2030 emissions at 35% to 38% below 2019 levels. Current policy, absent of the cap, forecasts a 30% increase in oil production and 16% increase in gas production between 2021 to 2040, though emissions are projected to decline somewhat in this period as a result of regular capital upgrades. After accounting for these factors, the report suggests that the proposed cap would impose 20 megatonnes in emissions reduction on producers by 2030, which would necessitate substantial investment in CCS technology. To assess the likelihood of CCS proceeding, Deloitte developed corporate financial models based on two representative assets (high-cost producer and low-cost producer) in the oil sands, finding that “curtailing production leads to higher asset values than investing in CCS abatement”.

Why is this interesting? While oil sands consortium, Pathways Alliance, has been promoting CCS, it had not yet made a final investment decision. The recent passing of Bill C-59 amending Canada’s Competition Act, may add further delay. The Bill includes a greenwashing prohibition intended to address unsubstantiated environmental claims in companies’ products and business activities – requiring claims to be supported by “an adequate and proper test” or “substantiation in accordance with internationally recognized methodology”. The rule could create new legal risks for companies. The Competition Bureau announced it intends to provide further guidance on the greenwashing prohibition following a review.

Environment and Climate Change Canada (ECCC) released Canada’s 2030 Nature Strategy: Halting and Reversing Biodiversity Loss in Canada, and introduced a Nature Accountability Act (Bill C-73) that, together, would mandate Canada to protect 30% of its lands and waters by 2030.

Quick recap: The Strategy outlines how Canada will implement its nature protection goals under the Kunming-Montreal Global Biodiversity Framework (GBF) adopted at COP15 in 2022. The Strategy is based on six pillars, among them: recognizing, upholding, and implementing the rights of Indigenous peoples and advancing reconciliation; ensuring a whole-of-government, whole-of-society approach; supporting a resilient economy; and using the best available science and knowledge. Signatories to the GBF committed to initiatives, known as Targets, that include: Target 15 on implementing measures to require businesses and financial institutions to disclose their biodiversity-related risks, dependencies, and impacts and to extend these requirements throughout their operations, value chains, and investment portfolios; and Target 19 on mobilizing US$200 billion annually by 2030 to implement national biodiversity strategies.

Additionally, if Bill C-73 is passed, it will establish an accountability framework at the federal level, to include developing national biodiversity strategies and action plans, like the Strategy, and establishing an advisory committee and report on progress. Canada is one of the first countries in the world to propose legislation enshrining an accountability framework to meet its GBF commitments.

Why is this interesting? Last month, the EU formally adopted the Nature Restoration Law, a first-of-its-kind landmark regulation that aims to restore 20% of its land and sea areas by 2030, and ultimately all ecosystems in need of restoration by 2050. The law sets legally binding targets and obligations for various ecosystems, including agricultural lands and forests. It also sends a signal to businesses to prepare for potential compliance and financial risks due to nature loss.

In line with our commitment to make sustainability a reality for our clients and the communities we serve, CIBC Capital Markets led significant client deals as part of a focused objective to help our clients become global leaders in environmental stewardship and sustainability.

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