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The Canada Green Bond Framework Needs a Rework

Edgardo Sepulveda

Monday, March 14, 2022

Dr. Chris Keefer  0:00  

Welcome back to Decouple. Today I'm joined by returning guest, great friend of the podcast, our senior economic advisor, Mr. Edgardo Sepulveda regulatory economist originally in telecommunications, but I feel like you're pretty solidly grounded in, in energy now,


Edgardo Sepulveda  0:17  

I should hope so it's been five or six years now, given how much I know about telecoms. I was a little modest at the beginning when we started doing this, like a year ago, but I think now it's like, on an honorary perspective. Yeah, I'm an energy economist now. Yeah, yeah. And we'll be talking, we'll actually be talking about, like, who gets to be called what? And who's going to tell me not to call myself something right.


Dr. Chris Keefer  0:39  

You know, and a few more of your accolades on the energy sphere, Ed car,


Edgardo Sepulveda  0:44  

electrification Decarbonization,


Dr. Chris Keefer  0:46  

we're going to have you back for an episode shortly to talk about your findings there, this 20 plus countries analysis of their attempts or successes at Decarbonization. So we'll get into that on another upcoming episode soon. But I'm bringing you on, I guess, kind of urgently to discuss something of relevance to Canada, but also to the world. This is the Canada green bond framework, I'm sort of thinking of it a little bit as our little Canadian version of the EU Green Taxonomy, I'm going to check with you to see if that's valid or not. And of course, this has many reasons for being relevant to me, but it's a little bit personal. Because this features one of the great villains of Canadian Antinuclearism, Mr. Steven guilbeault, who had the pleasure of a bit of an ambush interview with in Glasgow, at COP 26, where he told me as a way to avoid having to I guess, make a statement about whether his anti nuclear activist past was going to cloud his judgment as minister. He told me the government had no role deciding on the technology of energy transition, the market would decide LCBO, he would decide got a great episode on that with Mark, of course, but here we have it, we have the Canada green bond framework, and it does take a very particular position on nuclear. But I'm going to bring you in now Edgardo to tell us a little bit about this breaking news, it just I think was released a couple days ago.


Edgardo Sepulveda  2:10  

That's right. We're recording Sunday, March 6, and I think this came out either February 28, or March 1. So it's very recent, because I've been on the show before I would kind of in terms of the bigger picture, we're going to provide you with a bit of an update of what's going on and some of the sort of conceptual framework. But there's two, there's at least two episodes that I'd recommend previous episodes on the couple. One was with Arthur Hyde with Arthur Hyde, who did an ESG episode, I think it might have been in April, May of last year. And that was super good. I've learned lots about that. And then I did one with you, maybe two months ago, Chris, on Bruce Power On Bruce Power, the green bond. So those are two kind of like background episodes. So the nutshell is, is that in the context of the federal government borrowing, and again, for those of you who are outside of Canada, we are a federal country. And so the, you know, government of Canada does their own borrowing as other national governments do to finance their services. And then we also have provincial and municipal borrowing authorities. But in the context of their most recent fiscal plan, the federal government had announced about a year ago that they would be issuing their first green bond, right. And a green bond is a financial instrument, basically a loan, where the government borrows money from the private sector, and promises to pay them interest rate, and the Capitol after X number of years. So they do this all the time. And they had announced about a year ago that they would be issuing a green bond, a would be their first green bond, right? So a lot of governments around the world have issued sustainable bonds, social bonds, green bonds, there's a whole classification process about what is green, what is sustainable, we'll get into that. But they had signaled about a year ago that they're going to be doing this. They had established the whole framework about how they would do this. They had identified and established a series of private sector advisory bodies to help them out in understanding what the sustainable finance framework was and how they could get into it. They ignored all of that, by the way in which we'll talk about that as well. And so last last week, they issued a framework that is the precursor to actually issuing a bond and this framework includes A taxonomy, right and that taxonomy, which goes back to the Greek taxes means going to classification. Nami means system, it's a way to use a system classification. So for example, if you remember your biology, taxonomy, you know, you've got, you know, that's the bowl, mineral, all that kind of stuff, right? It's just a way to classify things. And so in this green blonde framework, the Federal Government of Canada includes a taxonomy of things that are eligible to receive financing, and things that are not eligible to receive financing. And so under the eligible criteria, there's a bunch of stuff, renewable, wind, solar, energy efficiency, etc, etc, etc. And on the excluded part is, among other things, tobacco, fossil fuels, gambling, alcohol, alcohol, at nuclear energy,


Dr. Chris Keefer  6:06  

and nuclear energy. So So Tom has a good a good friend of mine had a funny tweet saying that we should crack a few beers, smoke a few darts and take a gamble on on financing nuclear energy. But yeah, all joking aside, I mean, I've seen this before there was when actually when I was interviewing art height I read for that ESG episode, you know, it had come across my table. Actually, it was Simon Holmes, a court who was denouncing a Green Fund that was listing nuclear alongside a similar list of deplorables. I think that was an Australian fund that also lumped in, you know, trafficking in endangered animal species, organs, you know, just you name it. It's there. Right? Pornography. It was a little shocking. I mean, I feel like there's been a lot of water under the bridge. You know, over the last few years, as you mentioned, the Bruce green bond, I think it was for 500 million. I think they ended up raising seven times that amount. There's certainly a lot of interest in it. A lot of people that are buying in literally to this understanding of nuclear as as green and critical for an energy transition towards Decarbonization. That you Green Taxonomy, as you mentioned, despite the most powerful country in the EU, with a fundamentalist aversion to nuclear, finally, nuclear made its way into that framework. So that's it, you know, and that was after years, years of debate, and again, referencing all episodes made a great episode of Myrto Tripathi that really goes through that.


Edgardo Sepulveda  7:31  

Well, that's exactly that's sorry. And that's the other one I should have mentioned, I've mentioned is, is that there's a whole history of that. And so look, I mean, I think we should we should talk about the process. Right? I think that's super important in terms of credibility, sustainability, is the process in which governments and government entities make decisions. Right? That is one of the core issues that as a telecoms economist, is, is hyper important, right? If you're gonna make arbitrary capricious decisions, right, that are not based, in fact, that do not follow natural justice procedurally correct processes, then, regardless of the substantive decisions that you've made, your decision making process is flawed. Right. And so from a flawed process, often comes flawed decision making. Right. So there's one process we will and I'll get to that. The other one is substantive, Lee. Right. Substantive Lee, this is not a science based decision. And so that's one of the other things so so both in the process and on the substance, this is an incorrect decision. And it's surprising, as you say,


Chris Keefer  8:53  

yeah, maybe I'm gonna try and take a stab at some of the reasons that that I find it surprising this framework and why nuclear wasn't included. So you mentioned there's a bunch of feel good eligible activities, you know, and this includes things like efforts that help biodiversity conservation efforts, clean water efforts within the the renewable power, you know, it's pretty specific wind, solar, micro hydro, not large hydro, bioenergy. So biomass is in and as long as the direct emissions are less than 100 grams of co2 per kilowatt hour. Again, the latest UN Economic Commission of Europe report says that nuclear is at four grams of co2 per kilowatt hour so full 1/20 of those emissions, and just relevant to Canada. You know, I tend to talk about these things a lot, but you know, 76,000 like if we think about ESG, right, we have the environmental side, you know, we have the richest uranium ores in the world. Our mining footprint is thus absolutely tiny. You know, it's the largest employer of First Nations and industrial employer First Nations. You know, this 96% made in Canada supply chain, but I was just doing a calcular On on the uranium side of things, you know, nuclear energy offsets 2 billion tons of co2 per year. I don't have the most recent numbers. But as of 2018, Canada supplied a book 13% of global uranium needs. And so that offsets 260 megatons of co2, which is 1/3 of Canada's national emissions. Wow. Yeah. Yeah, we don't like we're not used to thinking about like, you just, you're not allowed to think about nuclear in these terms. And I don't really like talking about carbon offsets too much. But I mean, if we're gonna go there, it's pretty significant that we produce a natural resource that offsets 1/3 of our country's national emissions. You know, and to give you more context, I mean, our oil sands emit about 70 Mega tons of co2 per year, and our uranium offsets, 260 Mega tons of co2 per year. So, those are a few reasons that I think nuclear should be, you know, pretty eligible, we could talk about the coal phase, I won't go on forever, but but we have a solid record in, in Canada and in Ontario, of nuclear doing pretty incredible things for the environment, clean air, and society in general, I'm gonna get off my, my, my hobby.


Edgardo Sepulveda  11:12  

This is what this is ultimately, a dialogue, Chris. And so just in terms of just stepping back a bit, like one of the things about economics, and I'm an economist, I call myself an economist, by the way, Chris, and no one's gonna stop me from calling myself economists. Unlike you, you're a medical doctor. And if somebody if I was to call myself a medical doctor, and have the law on my case, because that is a regulated profession, and licensed. And so therefore, the state via collective action, considers it important to have a taxonomy of people who can call themselves doctors, and those that cannot,


Dr. Chris Keefer  11:53  

it does. I don't know what it does yank my chain a little bit that naturopaths get to call themselves doctors. But


Edgardo Sepulveda  11:58  

But that's all that aside. What I'm saying is that we do that all the time. Right. And the reason that we do that is because one of the things the way that that markets and capitalism work supposedly well, is through perfect information. Right? So if I can't tell who's a doctor and who isn't, right, am I going to make the right consumer decisions? If I Can I trust you, or maybe not. And so I don't have to do my own research to trust you because I have the state and the licensing body, saying, you know, you're a doctor, and I can trust you because you're qualified, and you had to do X, Y, and Zed. And in this day of misinformation, disinformation, propaganda, there is a marketplace of ideas. And one of the ways in which we're supposed to try to understand that is, if the marketplace is not giving us the right type of information, where not all of us have the facility, and, and time to be able to research your particular practice, and understand whether or not you can be trusted as a doctor. We have short forms of being able to do that. And the way we do that is through a licensing body. Right? So let's take that to electricity and energy generally. for about 20 years, people have been calling themselves green, sustainable ESG willy nilly, willy nilly. I'm green, you're an environmentalist? No, you're not environmentalist. You're green washing, etc, etc, etc. So there's been people and it's all unregulated, laissez faire, Wild West,


Dr. Chris Keefer  13:47  

claiming claiming a certain degree of authority by calling themselves like green economist sustainable, right.


Edgardo Sepulveda  13:54  

Yeah, whatever. Yeah, exactly. Or calling yourself an environmentalist. Like there's no, there's no world environmentalist union that says only you can call yourself an environmentalist or whatever. Anyone got it. So you self identify yourself describe as green I'm making, I'm kind of making joke with this. But it's no joke, because there's billions of dollars to be made by calling yourself writing in how you're labeled, right. So there's billions of dollars to be made by the people who are in receipt of that capital. And there's billions of dollars to be made by the intermediaries, whether it's the bank or the financial institutions, or the advisors, or the people who designate you as green or not green, right. So so in this free for all, and look, and there's some more reputable and less reputable and this is a long standing issue. If we talk about doctors and the need to designate who is a doctor who isn't. In capitalism and markets, generally this is long existed. That's what we have in intellectual property rights. That's why you can't call the sparkling wine that is made here in Niagara Champagne. Champagne is designated. There's a taxonomy. Champagne is made, according to the shampoo Anna's methodology in a specific geographic area in France, you can call champagne that. So it's the same thing. What is green? What a champagne? What a dog who's an economist? Right. So in this free for all of information, this information, the EU decided that market sentiment was insufficient to be able to drive the diversion of the capital necessary, the trillions of dollars that are necessary to be able to designate what is actually clean. Right. So they set up as we talked about a process, a scientifically based process that determined what was green, and what was going to be mandatory. Because remember the other thing about all of these green labels, No one's forcing you to call yourself green or not green, right? It's all voluntary. It's all market driven market sentiment. So then, in the context, you have the EU who are putting out their taxonomy, and who for electricity purposes have determined certain conditions, and certain kinds of hydro and certain conditions and gas and certain conditions and nuclear and certain conditions are sustainable, right? They never use the word green. It's all sustained. So in that context, the Government of Canada about four or five years ago established an external panel called the panel on sustainable finance, right? Because Canada wanted to get into this. We have our own netzero commitments, we have our own parish protocol commitments, etc. And so we wanted to do this right, as a country. And we set out that panel, that panel did a recommendation, they said, they asked for three things. They said, Look, we don't have a taxonomy in Canada. Right? So we're gonna establish a taxonomy for Canada, that's going to be voluntary. And they gave that job to the Canadian Standards Association. Right. So whenever, you know, you ever see the little thing about electricity, and it has a Canadian standard CSA. That's a Canadian status Association. Unfortunately, you know, that Job was given to them about two years ago. And it's like crash and burn. They cannot agree on a taxonomy, unsurprisingly, right? Because it's difficult. Right? So to this day, the transition finance tax, me working group, after two years, has not issued a final result, because it is blocked. They can't seem to reach a consensus. The feds also established a Canadian Financial Group, again, to advise them, they haven't issued anything. And so the Feds had established all of these kind of like external advisory groups, to advise them on how Canada as a whole, and the government should be doing these kinds of what they call sustainable finances. None of them have published anything, because it's really difficult. How long was the EU arguing about this? Three years, four years? Right. And ultimately, as we know, in spite of the scientific consensus, the final decision was political. Right. It was a deal done between Merkel and Macron, about whether or not what should be included in what should be included, right, even though we have the scientific basis to be able to determine what is and what isn't sustainable.


Dr. Chris Keefer  18:49  

And it was, in that context, tasked with looking at the science, but


Edgardo Sepulveda  18:53  

what that's sort of tasked with looking at the science. So anyway, so fast forward, federal government in Canada, which has about a trillion dollars worth of debt. Sounds like a lot. GDP in Canada is 2 trillion. So it's about 50% GDP 55 60%. Sounds like a lot, but in the grand scheme of things by other OECD countries in g7 countries is actually relatively low is going to be and this year in particular is going to be issuing above half a trillion dollars, some of it is refinancing some of this new, so a portion of that. So 1% is going to be the green bond. So it's important to put this into perspective. This is the first green bond that the federal government issues and a green bond or sustainability bond or whatever is basically says that the proceeds of the bond will be used for specific eligible users. And so that's the taxonomy. But there's two problems first of all, the advisory bodies that the government is established two or three years ago, to advise them on how to do this have not issued any public process, any public report, any recommendation. And second of all, this framework was developed totally within an internal to the government. It was never actually consulted on to us to the public. And I've confirmed that I've now confirmed that. And so you have basically this arbitrary capricious decision making process without due to either expert or internal consultation.


Dr. Chris Keefer  20:36  

And the the two main decision makers, the two co chairs of I guess the committee that that put this framework together are Chrystia Freeland, she's our Deputy Premier. Yeah. But


Edgardo Sepulveda  20:45  

she's, she's acting under Yes. She's, she's, she's, yeah, she's active. And it's a joint ministry, finance, because they do the money component of federal government. And then and then Stephen Kubo, who is the environmental minister, right. So it's a joint climate, because there's money and then there's the there's the money, and then there's the, you know, the sustainability aspect of it. And so, so yeah, this


Dr. Chris Keefer  21:11  

this came as a bit of this came as a bit of a surprise for me, right, because it was only the French language press. But there was an article that came out about how Gil Bose former environmental friends were, you know, incredibly upset with him for having finally said that, yes, nuclear was going to be a part of the mix, as long as it could make itself cheaper than three cents per kilowatt hour. So this was seen as a huge betrayal. And my my impression was, you know, that maybe permit which is sort of got a bit of a schizophrenic relationship with nuclear, they have put a certain amount of support into, you know, technologic technology development, they've given 10s of millions of dollars to a couple of Gen four SMR advanced nuclear companies. And our previous Minister of natural resource and climate change was quite bullish on nuclear. So I thought maybe Steven guilbeault was being disciplined and brought to account but that's, that's why it was so shocking for me to see this guy. Here's this co chair on this committee, and nuclear is basically pornography, gambling, tobacco, alcohol, firearms, you know, lives in that company.


Edgardo Sepulveda  22:17  

Yeah. I mean, there's the political aspect. There's the inconsistency aspect of it. Right. Like, and we talked, we talked in our last episode, Chris, about, you know, how, for example, the Federal this federal government would not be able to use these green bond towards proceeds of some of their own equity stakes. I mean, they own the TMX pipeline. That's 100%, owned by the federal government, right. They own the 10% of Hibernia oil fields. Right. So So you've got this schizophrenic kind of like, whereby they are excluding certain types of activities through this green bond process without due process without. And by the way, Chris, I mean, the other thing that's surprising is that this is a 20 page document that severely excludes nuclear energy, literally, without justification, right? Is one graph. one paragraph, there's no justice one


Dr. Chris Keefer  23:25  

that explains it. And the justification is, I think I have it here in front of me, basically, it's in recognition of the exclusionary criteria embedded in major green bond indices and green investor and market expectations. It's literally a sentence. Well, yeah.


Edgardo Sepulveda  23:41  

Wait, and but the beam, the rationale basically is, you know, market sentiment, we don't think that it may or may not be acceptable. Right. So like, that's right.


Dr. Chris Keefer  23:51  

versus green bond brought in seven times what it was asking for. So


Edgardo Sepulveda  23:55  

Well, that's exactly it in the EU taxonomy was just issued. So it's as if this was thing this was like issued last year. And you know, the thing is, I mean, they're the first. I mean, one of the things about the bond is that, you know, all the good stuff is always at the back of it. Because that's what the disclaimers are right? If you read the disclaimer to the actual bond framework, it says, and I quote, there's currently no clear definition legal, regulatory or otherwise, or no clear market consensus as to what constitutes a green, sustainable or equivalent labeled projects, where as to what precise attributes are required for a particular project to be defined as green or sustainable. nor can any assurance be given that a clear definition or consensus will develop over time, nor if a definition or consensus develops that will not change over time. accordingly. No assurance is given that the eligible green expenditures, which is what they've been defined in The body of the text will satisfy any present or future investment criteria or guidelines with which an investor is required or intends to comply in particular, blah, blah, blah, blah, blah. Right? So, you know, it's like when you when you press a disclaimer, this is the disclaimer. And the disclaimer basically says, you know, what we're saying is, it's our opinion, they base it on the international capital, Markets Association ACHEMA, the green bond principles, which is one of dozens of these groups, intermediary groups, who are having their own taxonomies or principles. And they themselves say that they're not a taxonomy, like the the the list of indicative types of projects that are listed in this green bond principles are not exclusive. They're indicative, and they suggest that investors, you know, take into consideration national or regional taxonomies. This is a fundamentally political take. And it's disappointing, because it's not science based, it kind of talks about, you know, what is acceptable, or what they consider may be acceptable in the market, without actually basing it on science without actually having studied and without actually having sought, at least publicly external opinion. So it's disappointing, both from a substantive and a procedural perspective.


Dr. Chris Keefer  26:37  

And what's your feeling on this? I mean, is this they're presenting this fait accompli like this, is it here it is, suck it up? Or is this going to be the beginning of a process? I mean, I gotta, you know, I guess, reveal my hat here. Also, you know, I'm the president of Canadians for nuclear energy we're planning on going to go into bat on this one, going to try and hold the minister accountable and see if we can get this reversed and engage Canadian society to discussion about this, this issue, but is your sense that this is sort of they assume this is kind of the final thing we've no more work for them to do? Or was this launched as sort of a shot in the dark? And okay, let's have a discussion. Now.


Edgardo Sepulveda  27:15  

We'll put it this way. Formerly, it was not a consultation. It's not a discussion document? Well, I mean, this is this for now. Right. David themselves as as, as I just read the disclaimer, they themselves recognize that there is no universal accepted taxonomy in Canada or anywhere else as to what constitutes sustainable and what isn't. It is highly contested ground, if you're going to base this on opinion, is one perspective, that is to say, what is market segments sentiment, or how you interpret market sentiment? Obviously, Bruce Power, who just did a 500 million, so half a billion dollar green bond, that was that had a second, a second external opinion. I mean, this also had a second opinion by a different intermediary, you know, standards organization, like what I see the risk and the danger. And the folly in this is that we will seen see the actual bond, right? So there's going to be a bond I expect within three or four months, and there's going to be a bond and it's going to be picked up and is going to be a green bond. It'll be Canada's first green bond, France, Germany, Hong Kong, China has issued many, many green bonds. So from that perspective, Canada is is is behind on that. And you know, and then the corporate bonds have been issued way before that, right, like Bruce, Brookfield. I mean, there's been a bunch of other green bonds. But the federal government indicates that this is the first that the next upcoming bond would be the first of many. So this is the danger.


Dr. Chris Keefer  29:06  

Yeah, so this is a $5 billion initially green bond. Yeah, I think I saw them say somewhere in the report that, you know, the anticipated that, you know, it's been estimated the green transition was going to cost many trillions of dollars, and that ultimately, Canada would probably need to spend something like $2 trillion to kind of meet all of its climate goals. So this is the beginning of quite a large expenditure to come. Can I tell you what I would do with $5 billion? Go for it. Made a way to set you up for asking me the question I want to answer. I mean, we've talked about this before you were on Emmet Penney is nuclear barbarian talking about Pickering. You know, $5 billion would would fund half of the refurbishment of Pickering. Pickering going offline is going to erase 1/3 of Canada's emission reductions to date since peaking in 2007. We're gonna raise national emissions by 1% by closing one nuclear plant so there's there's a big opportunity here. And when I look at, you know, the other stuff that's listed, it's pretty wishy washy, I mean, stuff that sort of feels good and sounds nice. In, there's gonna probably be some like Wetlands Protection. You know, what else do we have here planting some trees, you know, and helping homeowners install some nicer windows. I mean, this is stuff that's nice. It's kind of frilly. But like, if we wanted to take a real science based approach, I think it would be interesting, like, we've talked before about carbon abatement cost, being the tool that should really drive our Decarbonization decisions, right? How can we most rapidly, you know, and for the least expense, biggest bang for our buck decarbonize, it'd be really interesting to do a sort of carbon abatement cost analysis, or at least have that guide us in terms of like, if we were to have a science based Green Taxonomy. That's the approach I think we should take, not just arbitrarily picking a bunch of things that kind of feel nice and aligned with current, you know, environmental identity politics, or whatever else.


Edgardo Sepulveda  30:56  

I mean, look, I mean, in that free for all wild west of everyone calling themselves green, sustainable, whatever. And, you know, I mean, it's obviously there are people who are, you know, who we had all considered that the green projects, and, you know, they don't get sort of the financial credit, because one of the things that has happened is that people have done the, the studies and, you know, people have studied, at least on the secondary market, and, and also in terms of the amount of subscription over subscription, the difference between, let's call them non green bonds, right? What in the field is often referred to as vanilla bonds, versus green bonds, right. And, and so, people people have recognized at least in the secondary market, there is what they call a green Ium. Right, which is a combination of premium and green, which is that, that there are financial centers to be identified as green. So the same way that, you know, before this IP of champagne was, there was a financial incentive for Niagara on the Lake, sparkling wine to call themselves champagne. Because you, you, you caught, you know, you. And so what you're trying to do with a taxonomy is trying to based on science, is to try to stop that greenwashing. Right, where everyone wants to call themselves green. Right? So it's a taxonomy, and when


Dr. Chris Keefer  32:27  

hopefully, and hopefully spend your money as wisely as possible, right, exactly, exactly. Using something objective, like carbon abatement cost is the way to go here. I mean, one of the things they want to fund is, you know, zero emission vehicles, that's very noble. But for them to be zero emission, they need to be powered by zero emissions, electricity. And we're making no progress there. We're actually shutting down a massive electricity plant, we're setting our clean electricity cathedral, as Emmet Penney would call it, and we're shutting down Pickering. We're re carbonizing Ontario's grid. And, you know, zero electric vehicles are supposed to be the only things that were able to buy as of 2035. So I talked about this all the time, but it's like, you know, we're driving at 120 kilometers an hour towards a brick wall of promises. And there's, there's no brakes on the car. There's no, we're not electrification 2.0 is not going on? That's right. We're not adding to the grid. Yeah,


Edgardo Sepulveda  33:18  

yeah. And so it'll be interesting to see what they actually come up with. And, you know, whether it's science based or not, or whether, you know, it's fundamentally a policy decision that's not founded on on science, or those kinds of metrics that we talked about, like the carbon abatement costs. But yeah, I mean, to go back to your original question, Chris, I mean, a, this is a, you know, this is not law. First thing, like this is a ministerial decision. And so it's not it wasn't debated in Parliament. It wasn't approved or debated, or reviewed by any of the parliamentary Commission's or committee. Sorry, it certainly was not consulted with the public. Nor was there is there any demonstrated evidence that any of the three or four consultative, external bodies, extra bodies, like the people that would actually be able to bring seems like that joint research committee, the JRC that did the study on that nuclear hat does not do any significant harm, and actually does less significant harm than like wind and solar, that expert body, public document advising the politicians, there's no evidence that actually any of that actually took place in Canada. And so it's arbitrary, it's capricious, it's unfounded, but all to say it's not law. And so it can be changed. It can be changed by a minister, a different minister, or different government


Dr. Chris Keefer  34:50  

and enemy to bring things full circle again, my question for Steven guilbeault at COP was literally you know, will your anti nuclear activist commitments cloud your judgment as the Minister environment and climate change will impact your decision making will it will those prejudices despite the IPCC scientific consensus that we need to dramatically increase our nuclear fleets around the world? You know, will that cloud? You know, I mean, it clearly has, it's gonna be interesting to figure out what the inner workings of government are here. If he'll get his wrist slapped on this. I think it's going to depend tremendously on on people's reaction. And we'll see, we'll see, I guess what, what happens over the next couple months. But there's an urgency here because that 5 billion you said is going to be issued? You're thinking within within probably before summer?


Edgardo Sepulveda  35:33  

Yeah, I expect it to be the case that traditional processes, you put out a framework, you get the framework, you have an external review framework, and that's that was issued. And then soon thereafter, you go to market Devorah identified the financial runners, it's TD Bank and HSBC holdings, who are going to be doing this who are going to be placing the bonds with institutional investors, right? I expect, like anything else that's green, self described green, not scientifically based green, is going to be oversubscribed, in the same way that the Bruce green bond was oversubscribed. And if it's successful, um, you know, I expect subsequent government of of Canada bond issues to go this way. Again, it's still small, we're talking about 1%. Of of borrowing for this year.


Dr. Chris Keefer  36:29  

Yeah. And just to clarify, again, you know, under a bond framework, the government has no obligation to invest this money in a way that's going to generate the kind of profits to actually pay this off correctly. There's no link between how they spend this money, no, and no, no, and the outcome. So this could just be, you know, an expensive way to rack a bunch of debt on measures that are not really bad. So, so


Edgardo Sepulveda  36:50  

so. So, you know, as far as the green, the sustainable finance has advanced around the world, in the EU, etc, there, there's a bunch of differences. First of all, one of the things that you're supposed to do is that you're supposed to be transparent in terms of the proceeds, right? So so instead of just, for instance, you know, if you're fortunate enough to own a house, you when you take a mortgage, you're supposed to use it, it's earmarked for the house. It's not a generic loan, if you take out a loan for a car, it's earmarked for the car. So a green bond is is supposed to be earmarked for eligible expenditures, right. So that's one difference. So in before, nothing stopped the federal government from using some of its general revenues to for example, providing credit or guarantee small modular reactor firms, right. And we've done that they didn't have to have a green bond for that. They didn't have to have a green bond for the financing of wind turbines or whatever, right? Didn't have to have a green bond for, you know, purchasing TMS. They just took it out of the general revenues. The difference between green bonds, among other things, is that it's supposed to be earmarked. But it's not as if you're using those investments in terms of collateral, right, or security, nothing like that. It's basically it hasn't got to do with returns, it's just expenditure driven. Right? More importantly, is there any requirement that did this is additional to what they were otherwise going to do. So the Feds could have just done this regularly. There's no indication and ultimately, money's fungible, there's no reason to think that they would have not done this anyway. So what this is, the green bond is all about signaling. It's all about self identification of being green and self identifying and green. And what you know, what people often negative say is virtue signaling, okay. Gardo,


Dr. Chris Keefer  38:59  

just just on this point of using government backed bonds to fund nuclear builds, because this is really exciting to me. You know, Hinkley Point I've heard interest rates were 910 11%. And that that, why is that that's so expensive. Was it? Was it just privately funded? Was it was it a bond? What, what's what's the difference here?


Edgardo Sepulveda  39:19  

So one of the ways in which we were able in the West to have the electricity system that we've had for the last 100 years, is that most of it was done by public entities. So state owned enterprises, you know, and in Canada, it would be the Ontario Hydras of the world, the the hydric backs of the world. And the way that that was actually done, how was it financed was that these companies because their public companies would issue bonds, right? So they would issue bonds to borrow the money from the public, but usually from institutional investors, and they would issue those bonds basically issue bonds to borrow money. And one of the ways that they were able to do this efficiently and effectively, was because either implicitly or explicitly those bonds were guaranteed by the corresponding government. So if I'm a job below, and I want to go borrow $10 billion from the bank, they're gonna say, Well, how are you going to pay it back? What's your credit rating? Do you have a guarantee, etc, etc, etc? What are you building is that going to be able to generate revenues for you to pay me back, they would laugh me out the bank, rightfully. So when you do that, as a private company, you're guarantees that you could go bankrupt, and a whole series of other things, you know that, you know, you, you may not get the permission to do the project that you're looking for. And so you're borrowing at, depending on the year, you're borrowing at 5678 9% a year. And so therefore, it's much more costly. And so your breakeven has to be shorter. And you're less inclined to make really long term investments, like 2030 4050 years, because you're never going to have the guarantee to be able to actually pay that back. But that's not the way it actually worked. That's the way we built our grid here in Canada, the way they built the grid in France, or the way they built the grid in UK, the way they built the grid there was either through public entities where, you know, like Ontario Hydro said, Look, I'm a I'm a public company, and I'm going to go to the capital markets and borrow money, and I'm going to borrow $10 billion dollars. And so the banks and the the lending public would say, Well, okay, you're pretty good, you've got a lot of revenues, I'm pretty sure I'm going to get paid back. So I'm going to give you like a lower interest rate, because remember, interest is a reflection of the risk of not being paid back. And so I'm gonna give you lower interest rate than like, some private company, but I'm going to even give you a lower interest rate. Why? Because I know that the province of Ontario will always pay me back, they will either legally or implicitly pay me back. And so in that instance, I'm going to give you 2%. Right, and so then it becomes super cheap.


Dr. Chris Keefer  42:32  

Hinkley Point to third two thirds of Hinkley Point is interest payments to to the bond buyers, and understanding that situation, EDF put up a bond and unfortunately couldn't get, you know, an interest rate better than nine or 10%. Financing


Edgardo Sepulveda  42:44  

wasn't Yeah. And so what are the things they did is in order to do that is in the next round, they went to what is called the regulated acid base model, which was basically is guarantees like we do in Canada with rate of return and what is done in the United States in Canada for literally 80 years for federal for private companies, which is this, which is the state saying, Look, because wholesale markets are so uncertain, and and are so variable, where it's very difficult to guarantee a revenue flow that is, in the long term, we're going to guarantee you a rate of return, we're going to guarantee you certain revenues. And that revenue stream allows you to de risk your investment. And by de risking the investment that basically means you're able to access a capital markets at a lower rate compared to a wrist investment. Right? So so these are the things that we learned how to do for 80 years in North America and in parts of Western Europe, we learn to if we're not going to do this publicly, through a publicly guaranteed bonds, we're going to de risk private investment to be able that they can actually borrow for cheaper, which is ultimately good because that means that we as consumers get lower prices.


Dr. Chris Keefer  44:15  

This is this is just blowing my mind that girdle that's blowing my mind. It's all of a sudden making making a nuclear renaissance seem seem doable, honestly, I mean, if governments can can get the political consensus if the if we can shift the culture towards really appreciating what nuclear has to offer us partake in terms of this time of war in terms of energy security, a true way to to wean ourselves off fossil fuels. There's a huge amount of money around floating around the world this giant pool of investor money looking for a place to put itself in a green investment but for the short term and the government the government can guarantee it triple A rated governments can offer that's right bonds, a 2% interest that's that's a game changer to me. I hadn't I'd never heard of that. Never thought about it.


Edgardo Sepulveda  44:57  

Last year. Total investment cement in generation was was across the world, I think $400 billion. And that's just maintenance. And also for new generation, there's a huge amount of money. There's a lot of money to be made. And there's a lot of intermediaries. And there's a lot of greenwashing and a lot of opinion based classifications and taxonomies. And then there's science and facts. And our our challenge is to make sure that we stay on the science, and that once we recognize the science, we facilitate both public investment by like what you're saying, Now, Chris, which is you, you politically tried to persuade governments to make the kind of necessary investment and to guarantee that investment being made by those public entities, or you de risk the process by providing financial mechanisms that essentially lower the price of borrowing.


Dr. Chris Keefer  45:59  

Okay, just just because I think we should wrap up because this has been dense. And I don't want to go on too long. But I just wanted to, and people talk about, you know, the need for sort of war time. I mean, war is not hot at all right now. But you know, wars, World War Two level mobilization of wartime type mobilization to combat climate change. A lot of, you know, I've certainly seen the propaganda posters for buy your war bonds. I'm just trying to get a sense of like, you know, in terms of funding climate action, and making that comparison to funding the war effort, how significant were bonds, say, in World War Two, you know, off the cuff? I know,


Edgardo Sepulveda  46:31  

I don't? I don't know. I don't know, look, I mean, and I don't know whether those bonds were truly dedicated to buy munitions, right? Whether if you knew that if you bought a bond, you would buy a bullet, or do you bought a tank or you bought it, whatever? I think it was, my sense of the situation was, was that it was just general government expenditures. Right. And, and the government needed a lot. Look, we're just coming out from huge expenditure by the federal government in the context of COVID, 19. Right, like, literally, they doubled their expenditures, and the debt level went very much higher, because they borrowed you know, without actually increasing taxes. So the the $5 billion, that is going towards this green bond, again, this year, the government will be going to the market to borrow $500 billion. So this is 1%. Right? So it's not a large amount. But it is important in terms of signaling, where they want to do what they want to do what they consider to be sustainable, and what is not sustainable, and unsustainable as fossil fuels, alcohol. armaments,


Dr. Chris Keefer  47:49  

as if the government was going to spend a bunch of money on gambling, smoke, and drink, perhaps that's


Edgardo Sepulveda  47:56  

right. Like that is like you signal your virtue signal, by two things by what you consider to be virtuous and sustainable. And what you consider not to be


Dr. Chris Keefer  48:08  

that this is literally the government saying we the government promised we're not going to spend this $5 billion, you know, racking up gambling, debts, smoking, darts, drinking brewskis. And, you know, manufacturing a weapons. I mean, it's it's really comical when you look at it, and you know, you're saying like, you know, this is fungible, you know, who knows what they'll spend money on, they could have done another way. But I mean, this is an opportunity. This is a way to raise $5 billion and refurbish Pickering and, you know, prevent Canada losing a third of its, you know, emissions reductions, successes since peak like, there, let's not poopoo this, this, this is significant. Yeah,


Edgardo Sepulveda  48:41  

yeah, no, I what I wanted to do is that I just wanted to make sure that I put the context in terms of this is a this is a large, 5 billion sounds like a lot of money, but it is like 1%, of the gross borrowing that the government will do this year,


Dr. Chris Keefer  48:55  

and buy it to make that sort of war bond analogy again, I mean, by by kneecapping, and saying nuclear can't be a part of this. I kind of feel like it's a war bond. You were saying like these war bonds, you didn't think they were, you know, it's gonna buy X amount of munitions, but it's kind of the equivalent of buying a war bond and saying, you know, you can, it's only going to be we're only going to use bows and arrows in the second


Edgardo Sepulveda  49:13  

roll. Yeah. The other thing, it's, it's, it's, you know, it's something that that I personally will be wanting to try to change for, for a bunch of reasons. So, the first thing is, is that in the same way that the EU taxonomy was so important, because it is science based, and it is mandatory, right, so this is the other thing, like the EU taxonomy is mandatory. So like, like, Germany, France, you know, whatever, Portugal, any other EU country does not have a choice to go to an external market based sentiment based methodology or framework to call something green or to call something sustainable, right. So so in that respect, it's coming Like the whole champagne, right? It is regulated, right? It's not a free market unregulated process. This thing right now for Canada is voluntary, like no one forced Canada to do this. They think it's, you know, it's appropriate, it's good to get into the sustainable finance market. But it does two things. First of all, it starts to influence what is happening at the provincial level, because it creates if the possibility that Bruce Power wants to go get and access the capital markets through a green bond, that Canada, the federal government, last week, designated nuclear energy as not sustainable would make it harder for private companies like Bruce to go into the market, even though they had just done it last year. Right. It also makes it harder for the provincial governments where energy and electricity are managed. So the provincial government in Ontario, our province, went out and got a green bond about seven years ago, the one of the first governments in in North America do so it makes it harder doesn't make it impossible, because none of these are mandatory, it makes it harder for you know, the provinces then to get sustainable financing for, among other things, for nuclear energy. So it makes it harder for the President, it makes it harder for the provinces, and it makes it harder for the private sector. Right. It also, what it also does, is that it influences the decision making process and recommendations by these supposedly external advisor groups that are actually putting together the Canadian taxonomy. Like the CSA has been arguing for, you know, with these working groups for two years, they can't come to a consensus on it. And so again, when the federal government says, Look, this is in this is out, that's going to be influencing, it's hard to believe they won't influence what is happening at the advisory committee level.


Dr. Chris Keefer  52:07  

Okay, I got one last question for you a girdle. Just thinking about bonds as a financial tool to make some climate action happen. We know that a nuclear plants are hard to fund discount rates are high interest rates are high, could a bond be issued for, you know, five $10 billion to fund a nuclear plant? You know, paying, like, it's guaranteed, you know, people buy into the bond, the government's backing it, they're guaranteeing we're gonna pay you back that money in 20 years plus 2% interest per year. I mean, would that be a way to get around these usurious interest rates? I mean, it would involve the government taking on the risk. But at a time of historically low interest rates, that is a potential mechanism for government to get a bunch of nuclear plants built if we were living in times. You know, where we took electrification? 2.0, for sure. I mean, seriously, and that's the way it was, you know, building that electrical grid to try to power those cars


Edgardo Sepulveda  52:58  

exactly, traditionally, is the way it's been done. So for example, when, you know, in the same way that Bruce Power, which is a private sector enterprise issued a bond to help it finance, its refurbishment, like, like a provincial electricity company, whether it's BC Hydro, Quebec, hydro, Quebec, hydro issues, millions and billions of bonds on on an annual basis to finance its infrastructure. And it's all guaranteed by the by the, by the, you know, by the Federal by the provincial government. And so, yes, that's the way that's exactly it's been done. And, you know, before sustainable financing was a thing. They were issued by, you know, by OPG OPG does it as well or the old Ontario Hydro, Ontario Hydro had billions of loans out there to finance among other things, you know, it's it's dams, it's it's, you know, nuclear buildup, etc. So, yeah, it exists, it's the way it's traditionally been done. And to this day, I assure you that you know, OPG and BC Hydro Manitoba Hydro BC Hydro is managing billions of debt that are being paid off by you know, ratepayer charges. And that's the way that you do it. And you guaranteed by the you guaranteed by the state,


Dr. Chris Keefer  54:22  

it seems like an elegant way to to build the mega projects we're going to, that's exactly the way you ate and adapt to climate change.


Edgardo Sepulveda  54:28  

That's exactly it. And you just call it green, and you have a sustainable and you get a third party or a second party opinion to do it. And you're good to go. And you go out to the capital markets again, Bruce just did it stay raised half a billion dollars, and it was successful and they're likely to do again.


Dr. Chris Keefer  54:47  

Yeah, I mean, from what I heard they had interest for seven times that amount. 3.5 billion.


Edgardo Sepulveda  54:51  

It's not unusual to be the technical terms oversubscribed. Yep.


Dr. Chris Keefer  54:57  

Yep. Okay, well, we know what's possible. We've identified here on Decouple, you know, the the mechanism to fund the nuclear renaissance. Let's get it done. I almost feel like I kind of editorialize so much on episodes of the red card. I don't know what it is, folks. Please do remember to like, subscribe and review us. It does a lot for the podcast. Also, please go to our YouTube channel. We're planning a major expansion on YouTube. Jesse's going to be really upping his output with Decouple studios support us on Patreon. And last of all, a big thanks to Dylan Moon, the excellent producer of Decouple. You've probably noticed, I think from about episode 60 onwards, the sound quality got remarkable eat better. So thank you, Dylan, for everything that you do as well. That's it for this week, folks. Looking forward to another great episode next week. Thanks again. I go. Bye for now. Bye Chris.



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