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Tenant protection attached to carbon pricing

Ontario's Climate Change Action Plan alludes to legislation or regulatory changes
Tuesday, June 21, 2016
by Barbara Carss

Yet to be clarified language in Ontario’s recently released Climate Change Action Plan (CCAP) hints that rental housing landlords could be uniquely prohibited among bulk fossil fuel purchasers from passing cap-and-trade related costs farther down the chain of consumers. Distributors will begin adding the cost of carbon emission allowances to the commodity price in 2017, giving the Ontario government approximately six months to follow up on its pledge to “consult on and develop options to reduce the impact on residential tenants of increased energy costs “.

Rental housing owners/managers will have the same period to contemplate the just-announced 2017 allowable rent increase guideline of 1.5 per cent – a drop from 2 per cent in 2016. Under existing rules, they’ve traditionally been able to obtain above-guideline rent increases to offset so-called extraordinary increases in electricity, gas, water or property tax costs, but industry advocates are now pondering what the CCAP’s promise for “protecting tenants from the price of carbon” might entail.

“Tenants appear to be the only group that the government is specifically proposing to protect from the impact of cap-and-trade,” says Scott Andison, president and CEO of the Federation of Rental-housing Providers of Ontario (FRPO). “It’s not trying to protect public transit riders from higher fares. It’s not telling the airlines that they have to do something to protect the airline travelling public.”

It’s projected carbon emission allowances will increase natural gas prices by $0.84 to $1.05 per gigajoule during the first four-year period of cap-and-trade. Electricity price add-ons could also be an issue after 2020.

Until then, designated large emitters of more than 25,000 tonnes of carbon equivalent annually — which includes gas-fired power generating plants — have been granted free emission allowances and won’t be participating in the carbon market. Nevertheless, long-time industry watchers are wary of the Ontario government’s unspecified musings on “legislation and/or regulatory change” and advise landlords to use this interim to pursue energy efficiency upgrades.

Joe Hoffer, a partner and specialist in residential tenancy and municipal law with Cohen Highley LLP, speculates interventions might take the form of: eliminating the above-guideline rent increase option for gas/electricity price jumps attributable to carbon pricing; or new mechanisms to transfer the future carbon price portion of electricity costs back to landlords even when suites are sub-metered. The latter would seem to address the government’s aim, stated in the CCAP, that “the impact of carbon pricing is not passed on to tenants who are not able to make capital improvements to their buildings” and an earlier statement that it wants to “ensure that carbon pricing does not negatively impact tenants and that private building owners take advantage of retrofit programs.”

“The idea would be to force, or at least strongly encourage owners to minimize a building’s carbon footprint and enhance energy conservation,” Hoffer suggests. “Bottom line: multi-res owners who have not already done so will have to implement better energy consumption systems and practices or face increased costs which cannot be passed onto tenants.”

Owners/managers who will be undertaking retrofits are also wondering how requests for above-guideline rent increases to cover capital expenditures will be treated in light of the agenda to protect tenants from flow-through costs of carbon pricing. The CCAP pledges up to $400 million over four years to help fund energy efficiency upgrades in privately owned rental housing, but this will not cover the full costs of the investments to be made.

Thus far, any tenant protection attached to carbon pricing remains largely conceptual — even after the Ministry of Municipal Affairs and Housing briefed stakeholders yesterday. “There was a webinar meant to provide some clarity, but I think we came out with even more questions than we went in with,” Andison reports.

Rental housing owners are in line to receive a more generous portion of cap-and-trade revenues than their peers in the commercial sector, and Andison foresees it will be put to good use. However, he places the promised funding in the context of the estimated $2.8 billion Ontario’s private multi-residential sector already invests in maintenance and repair every year.

“The rental housing industry is in favour of anything to do with reductions of greenhouse gas emissions,” Andison says, “We applaud the gesture, but if the government thinks $100 million a year for four years is going to offset the needed investment to meet this challenge, I don’t think it is being realistic.”

Barbara Carss is editor-in-chief of Canadian Property Management.

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