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Climate Policies Are Not Likely To Impact Canada's Sovereign Credit Rating

On March 29, the Canadian government published its first Emissions Reduction Plan, which outlines how the country plans to meet its ambitious decarbonization targets. Canada is committed to reducing economy-wide greenhouse gas (GHG) emissions by at least 40% compared to 2005 levels by 2030 and achieve net zero emissions by 2050. However, with emissions in 2019 essentially unchanged from 2005, the goal of rapidly transitioning to a low carbon economy and eventually a net-zero economy presents a massive challenge.

DBRS Morningstar considers environmental risk factors in its sovereign credit rating analysis, including the potential economic and fiscal costs associated with GHG emissions policies. This commentary provides a brief overview of Canada’s decarbonization challenge, the government’s climate policy agenda, and the potential effects of GHG emissions policies on Canada’s sovereign credit profile. In our view, Canada’s GHG emissions policies may have credit implications for certain sectors of the economy over time, but they are unlikely to have a material impact on Canada’s sovereign credit rating.

Key highlights:

-- Canada has ambitious plans to bend its GHG emissions trajectory downward, with sizable emissions reductions from all sectors, including carbon-intensive sectors such as oil and gas.
-- Canadian climate policy is acting on three fronts to reduce GHG emissions: carbon pricing, regulation, and fiscal support.
-- The green transition is bound to have economic and fiscal implications for Canada over time, especially since Canada is more carbon-intensive than many other advanced economies. However, given Canada's current credit strengths, climate policies are not likely to impact the Canada's sovereign credit rating.

“Meeting Canada’s ambitious decarbonization targets will require powerful policy action,” said Michael Heydt, Senior Vice President, Global Sovereign Ratings. “The implications of these emissions policies on the Canadian economy are far from clear and will change over time, but given the size, diversification, and resilience of the Canadian economy, as well as the country’s strong policy management, climate policies are not likely to impact the sovereign rating.”