land transfer tax

Paybacks reflect carbon tax and offset costs

British Columbia demonstrates faster returns on energy efficiency investments
Monday, July 7, 2014
By Barbara Carss

Carbon tax and offset requirements have begun to filter through to paybacks on energy saving measures in British Columbia and Quebec. Notably, B.C.’s carbon tax currently adds $1.49 per gigajoule directly onto natural gas utility bills, while designated public sector entities including schools, postsecondary institutions and health care providers pay an additional yearly carbon offset charge of $25 per tonne of greenhouse gas (GHG) emissions.

“If you factor in both the carbon tax and the carbon neutral government charge that could be enough to reduce an energy efficiency project payback from seven years down to five,” observes Andrew Pape-Salmon, senior energy specialist with RDH Building Engineering Ltd., based in Victoria. “With the current gas rates, the carbon offset costs are a significant top-up equal to about a third of the price.”

For now, the impact of Quebec’s GHG cap-and-trade regime is more muted. A relatively small number of emitters will be compelled to purchase carbon allowances by December 31, 2014 during the first phase of the program, and analysts maintain there is little to be gained from voluntary participation.

“The take-home message for the commercial building sector is: this compliance system wasn’t made to incentivize energy end-users via offsets,” says Duncan Rotherham, vice president of the environmental and energy management consulting firm, ICF Canada. “Some people might be thinking that they are going to be able to create offsets from commercial energy efficiency related projects in the province, but that would come with a lot of risk if based solely on the assumption the project will create saleable offsets.”

Would-be offset creators have a limited range of options today. Only offsets complying with protocols established in Quebec regulations are eligible, which currently encompass just three activities: destruction of methane at covered manure storage facilities; destruction of methane at landfill sites; and destruction of ozone-depleting substances removed from refrigeration and freezing appliances.

Information from Quebec’s Ministère du Développement durable, de l’Environnement, de la Faune et des Parcs (MDDEFP) confirms that “other protocols will be developed over the coming years.” However, renewable electricity will likely never be eligible due to the low-carbon hydroelectric generation of almost all supply in the province.

Nor does the Quebec government recognize credits registered through the Verified Carbon Standard (VCS) or Gold Standard (GS) that many purchasers in the corporate sector rely on as an authentic source of offsets.

It will be at least another 41 months before commercial building owners might be compelled to act. In the initial 2013-2014 phase, operators of industrial or electricity generating facilities emitting in excess of 25,000 tonnes of carbon dioxide (CO2) equivalent are required to purchase GHG emission allowances. In practice, that’s really only the large industrial emitters.

Commercial enterprises, such as companies with large real estate portfolios and/or fleets of vehicles, that hit the trigger of 25,000 tonnes of annual emissions are targeted for the third and final phase-in period from 2018 to 2020. Nevertheless, all building owners/managers should expect some new flow-through costs beginning in 2015 when fossil fuel distributors including the natural gas utility, Gaz Métro, are added for the second stage of compliance.

“Gaz Métro will be required to acquire allowances equal to the CO2 emissions associated with combustion of the total volume of natural gas delivered to small and medium sized energy end-users,” Rotherham explains. “Real estate operators need to anticipate that the price of natural gas will change because the utility will almost certainly be passing that through to consumers.”

Thus far, the cost penalty looks much less onerous than in British Columbia. The price emerging from the most recent auction on May 27, 2014 was $11.39 per metric tonne, the Quebec government’s predetermined lowest allowable bid.

Like Quebec, B.C.’s electricity supply is predominantly hydroelectric so, in the real estate sector, the carbon tax and carbon neutral charge have the greatest impact on natural gas consumption. The tax itself has nearly doubled in incremental step-ups from $0.75 per gigajoule (GJ) when first introduced on July 1, 2008 to the current rate of $1.49/GJ, which has been stable since July 1, 2012.

For public sector facilities, the annual carbon neutral charge of $25 per tonne equates to about $1.25 per gigajoule of natural gas consumption. Designated fee payers must also account for the carbon footprint of their electricity usage, paper consumption, vehicle fleet and business travel, and remit the total charge to the B.C. government in an annual lump sum.

“We include carbon tax and the carbon offset in calculations for every energy retrofit, efficiency and optimization measure. We include that as part of the saving projections for the project,” reports Mauricio Acosta, director, energy and environmental sustainability with Lower Mainland Health Authorities’ Facilities Maintenance. “That has allowed us to make a reasonable business case for some projects we wouldn’t have done otherwise.”

He applauds a new source of project funding, following the 2014 B.C. budget announcement that the Carbon Neutral Capital Program will be expanded to include the health care and post secondary education sectors. The program, which was first introduced for elementary and secondary schools in 2012, redistributes funds collected from the carbon neutral charge in the form of grants for energy-efficient capital improvements and clean technology demonstration projects.

“We are really glad to see it extended to health care,” Acosta says. “It is also the outcome of the effort we have been making and the conversations we have been having with the government over the past three years.”

The 2014 budget pledges $14.5 million for the expanded program, with $5 million of that earmarked for elementary and secondary schools. Program administrators estimate projects funded since 2012 have cut GHG emissions by 3,000 tonnes annually, thus saving school operators $75,000 in carbon charges and $800,000 in energy related operating costs.

Meanwhile, B.C.’s 180 municipalities have signed the Climate Change Charter, committing to offset their emissions annually, and are eligible for a rebate on the carbon tax they pay through the provincial Climate Action Revenue Incentive Fund.

“We have begun to see the price of carbon find its way into the broader economy in Quebec, B.C. and the Alberta GHG regulation aimed at large industrial emitters,” Rotherham notes. “If this proliferates, it will be important for governments to deploy the revenues associated with the taxes or sale of allowances to drive investment in energy efficiency and demand-side management to ensure emissions are driven down and we invest in continued competitiveness of our economy.”

Barbara Carss is editor-in-chief of Building Strategies & Sustainability and Canadian Property Management.

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