Decarbonization: The economics of Canada’s carbon pricing, part 2

Decarbonization – The economics of

Canada’s carbon pricing (Part 2)

Image 1: Incentives and Green loans can help deliver low to no emission buildings for Canada. Design by Author in Canva.

On the path to decarbonizing Canada’s buildings and new constructions, owners will need guidance on costs and available financing for sustainability driven projects. Estimates have indicated that Canada will need C$20 to C$32 billion annually to retrofit its entire building stock to net zero by 2050.

Introduction

In Part 1, we reviewed the federal carbon pricing framework across Canada’s provinces, the carbon pricing outlook through to 2030, and the implication for buildings and construction owners . The carbon price is guaranteed to increase by $15 per tonne each year until 2030 when it reaches $170 per tonne . This is in line with the minimum effective carbon rates that the OECD recommends for its 44 member countries by 2030 to reach NetZero by midcentury . Given the predictability of the rates, Canada’s building and construction owners can better plan to reduce their exposures to this additional cost . These can be achieved through several means including fuel switching, adopting renewables and non-emitting sources, reducing energy usage through retrofits, investments into carbon offsets, etc . The effectiveness of measure(s) adopted to reduce the burden of the carbon pricing will depend on factors such as the type of building (whether new or existing), use of the building, local laws, and policies etc .

Retrofitting existing buildings

Estimate suggests that 70%-80% of buildings that exist in Canada today will still be standing in 2050 . The operation of existing buildings already account for 13% of Canada’s total greenhouse gas (GHG) emissions which makes them a

Retrofitting existing buildings to wean off fossil fuel dependencies is quite expensive, and available estimates from Efficiency Canada indicate that Canada will need C$20 to C$32 billion annually to retrofit its entire building stock.

key focus for decarbonization . Indoor space heating mostly relies on fossil fuels, especially natural gas, which is a major contributor to emissions . Hence, retrofitting existing building heating to electric sources such as heat pump is fast becoming a viable option to reduce emissions . Natural gas prices, which have been historically low, have been projected by the Canada Energy Regulator (CER) to increase through to 2040 . Switching heating fuel source in existing buildings can be a viable option to reduce exposures to the increases in cost of natural gas and the carbon pricing . Retrofitting existing buildings to wean off fossil fuel dependencies is quite expensive, and available estimates from Efficiency Canada indicate that Canada will need C$20 to C$32 billion annually to retrofit its entire building stock .

What about new construction?

New construction is a massive opportunity to lower Canada’s projected carbon footprints . Leading the way, the federal government announced that new federal buildings will be net zero and has pledged to reduce embodied carbon by 30% starting in 2025 . Embodied carbon, being the carbon locked into the materials used for building construction are notoriously difficult to decarbonize, and there is still no Canadian standard to quantify and analyze them . With the ongoing transition to low carbon construction, new investments in business-asusual, fossil-fuel-driven buildings may be foolhardy; however, investments in low carbon or green buildings remain slow largely due to financing, since green building usually presents a higher cost than traditional construction .

Financing efficient buildings – loans and incentives

The two types of financing currently available for efficient buildings are green loans and sustainability-linked financing . In 2020, Bloomberg LP estimated the volume of the global green and sustainability-linked finance at around US$30 trillion . Buildings that meet green and sustainability metrics will increasingly benefit from this growing finance vehicle . Green construction loans are gaining popularity in Canada .

Image 2: Rendering of 141 Bay Street by DBOX. The construction is backed by a $780 million green construction loan.

In 2021, Ivanhoé Cambridge and Hines provided Canada’s largest green real estate loan of C$780 million for the CIBC SQUARE, 141 Bay in downtown Toronto . Also, Canada Infrastructure Bank (CIB) earmarked C$2 billion for energy efficient building retrofits of existing buildings, which is available to both public and private buildings . The CIB expects their investment to help prove the viability of energy retrofits to attract additional private capital with favorable terms . Evergreen, a not-for-profit that is dedicated to low carbon, inclusive, and sustainable cities has called for a Canadian Green Bank to among others, “attract and stimulate private-public investments and growth into… green infrastructure projects .” Across the border, the Biden administration has been backed a national green bank with US$20 billion and, by most indications, Canada should follow along soon .

The Canada Green Buildings Strategy which was announced last August by Natural resources Minister Jonathan Wilkinson for Spring 2023 is expected to establish guidance for finance and investments for net zero buildings . In the meantime, various incentives are offered through government and utilities across Canada to promote energy efficiency retrofits for buildings . For instance, through Efficiency Manitoba, building owners can receive incentive for up to 100% of the material cost for roof and wall envelope insulation upgrades, and there are performance-based financial incentives available per project per fuel type for custom energy solutions . Several financial incentives are available across different provinces . These amounts are usually paid out after the project is complete and serves to motivate the owner to undertaking the retrofits . Financial incentives are usually short-lived and are usually removed after the retrofit becomes more ‘mainstream’ . It is therefore prudent for building owners to consider available incentives in their jurisdictions when planning their retrofits and construction .

Final thoughts

The Canadian government instituted carbon pricing as a revenue-neutral instrument to promote green and net zero activities across the economy, with pricing predictability that allows for businesses and owners to properly plan and forecast . In this author’s opinion, the program’s best feature is that it places the ongoing transition to a low carbon future at the top of mind for several stakeholders across sectors of the economy . Consequently, as construction economists, we should focus our lens to understanding the exposures that projects have to the rising costs of carbon and greenhouse gas emissions to properly guide clients .

Further reading

Environment and Climate Change Canada, (2022) . 2030

Emissions Reduction Plan: Canada’s Next Steps for Clean Air

and a Strong Economy. Gatineau, QC: Her Majesty the Queen in Right of Canada, represented by the Minister of Environment and Climate Change, 2022 .

Author’s acknowledgement

The author wishes to acknowledge Anjola Olufowobi, fourth year Biomedical and Mechanical Engineering student at Carleton University, Ottawa . Anjola provided research assistance from the ‘2030 Emission Reduction Plan’ and Canada’s energy incentive programs for this article .

About the author

Ayo Daniel Abiola, P .Eng, PQS is the Engineering Manager for the Energy and Sustainability Services (ESS) at Black and McDonald Limited . He has experience delivering mechanical services and sustainability solutions for buildings and infrastructure development . He has also contributed to the development of resilient renewable energy infrastructure for the Canadian climate and environment .

Ayo is a licensed professional engineer in Alberta, BC, Ontario, and Saskatchewan . He is also a Certified Energy Manager . He has provided services for construction projects and developments located across Canada, US, and the Middle East .

Congratulations to the following ‘Designation Holders’ who have qualified as a PQS or CEC (Including reinstatements).

CIQS – British Columbia

Amir Naderi, PQS Eugene Van Den Berg, PQS Jacob James Lewis, PQS Jennifer C . Sawicky, CEC Juan Carlos Castillo, CEC Ka Hei Ip, CEC Kristian Keinhorst, PQS Lam Chi Shing Ken, CEC Pasindu Gunathilake, PQS Qi Huang, CEC Tian Heng Wang, CEC Vikramjit Singh Sandhu, CEC Zin Mar Lwin, CEC

CIQS – Maritimes

Adam Gordon, CEC

CIQS – Newfoundland and Labrador

N/A

CIQS – Members at Large

Chiu Kwun Ching, CEC Dinesh Gunasena Kalu Bandarage, PQS John Buenaventura Bernalte, CEC Joselito Mascarinas Barbosa, CEC Lau Chun Yin, PQS Lucy Makina, PQS Manoj Baburao Barsagade, CEC Messay Berihun Kassaye, PQS Mushfiq Husain Adil, CEC Oghenekore Aghoghovwia, PQS Pasan Lahiru Srilal Palihawadana, CEC Rajesh Narayana Pillai Puthiyaveetil, CEC Ryad Kasem Abdullah, CEC San Yu Maung, CEC Shrey Bahadur, PQS Siraj Ahmed, CEC Tang Hoi Tung, PQS

CIQS – Ontario

Abdulrahman Ahmed

Hassan Ba-Abad, PQS Behzad Mirzamohammadi, CEC Beverly Domingo, CEC Cameron Stitski, CEC Chan Chun Bon, CEC Clinton Michael Saddington, CEC Danping Liu, CEC Elizabeth Culanculan Cordenillo, CEC George Vescio, CEC Gideon Ojo, CEC Hany Hassan Aly, PQS Harsh Gupta, CEC Ibrahim Ahmed, CEC Inoka Darshanee

Samarathunga Arachchi, CEC Israa Alazawi, CEC Jacob James Strasser, CEC Jose Alan Flores Gumalas, CEC Ka Man Chan, PQS Kamyar Akhavankazemi, CEC Marissa Jocel Brioso Balbuena, CEC Marvin Gorospe, CEC Michael Jules Vandeputte, CEC Morteza Tamimi, PQS Nima Haghighi, CEC Pedram Riahi, CEC Rahul Prabhudayal Agrawal, CEC Rinushan Sureshkumar, CEC Sameer Chandrashekhar Bhirud, CEC Steven Esgaio, PQS Sujay Ramganesh, CEC Sunday Oluwafemi Daramola, PQS Sura Abbas, CEC Suraj Darra, PQS Syed Jamalshah

Mohamedhn Lowtun, PQS Timothy McNamara, CEC Vishnu Vardhan Rao Dugyala, CEC Xandry Agno, CEC Yong Tan, CEC Zain Ghaffur, CEC

CIQS – Prairies and NWT

Ashley E . Haider, PQS David A . Simpson, CEC Delia Tabor, PQS Ermias Belachewu, PQS Evan Faris, CEC Humberto J . Goitia, CEC Johnson Peter Addai, PQS Julien Gelineau, CEC Scott MacIntyre, CEC Seyed Milad Ahmadpoursharif, CEC Yuen Ying Ma, PQS

CIQS – Québec

Castália Nunes Tavares, CEC/ECC Faisal Morshed, PQS/ECA Kreshen Dorsamy, CEC/ECC Patrick Proulx, PQS/ECA Paulo V . Hayet, CEC/ECC Samuel Oluwagbenga Owolabi, CEC/ECC Saoud Manuoullah, PQS/ECA

ArbiTECH • Entitlement Review • Damages Quantification • Metallurgical Analysis • Schedule Analysis • Productivity Studies • Expert Opinion • Buildings Forensic Analysis Forensic Engineering & Construction Claims | 1.800.838.8183 | www.arbitech.ca | Antoine Aurelis MSc, FCIArb, MRICS, PQS

INVESTIGATE CAUSE EFFECT SUBSTANTIATE RESOLVE