Natural gas will be the main conduit for transferring cap-and-trade costs to Ontario’s commercial and multi-residential building sectors. Although there are still few details of Premier Kathleen Wynne’s newly stated intentions to establish an economy-wide limit on greenhouse gas (GHG) emissions and to trade carbon allowances in a system aligned with Quebec and California, the experiences of those two jurisdictions provide a broad outline of what’s ahead.
Drawing on Quebec’s model, which targets emitters that release at least 25,000 metric tonnes of carbon dioxide (CO2) equivalent annually, it’s unlikely that real estate operators or developers will be compulsory frontline participants in the system. However, some of their key suppliers will be conscripted, including fossil fuel distributors, generators of fossil-fuel-fired electricity and the cement industry.
“Buildings will be some of the biggest takers of the price on carbon,” advises Duncan Rotherham, vice president, Canada, of the environment and energy management consulting firm, ICF International.
That said, owners/managers shouldn’t expect pass-through costs added to their utility bills for awhile yet. Ontario officials have some important decisions to make before they can unveil the firmer directions they’ve promised for later this year, and there is potential for a fairly lengthy phase-in period even after the rules are in place.
“In Quebec, more than 50 per cent of the economy wasn’t included at the outset,” Rotherham explains. “That changes in 2015, but we haven’t really seen the price impact yet in Quebec because this is the first (few months) with transportation and commercial and residential natural gas consumers included.”
After roughly two years in which large industrial players were the only participants, fossil fuel distributors joined as of January 1, 2015. It will be 2018 before other types of Quebec enterprises that produce 25,000+ tonnes/year of CO2 equivalent are added in.
The most recent Quebec/California auction in February 2015 yielded a price of $15.14 per tonne (US $12.21) for carbon allowances — a 41 per cent increase from the $10.75/tonne price garnered at the inaugural December 2013 auction.
As of April 1, Quebec’s natural gas distributor, GazMétro, quotes the pass-through cap-and-trade charge at $0.02856 cents per cubic metre or just under $0.75 per gigajoule. That’s up from $0.68/gigajoule on March 1, but still only half of British Columbia’s carbon tax rate of $1.49/gigajoule.
Thus far, real estate industry response to the new charge appears muted, as the January 1 start-date serendipitously coincided with falling oil and gas prices. Hans Brouillette, director of communications and public affairs with CORPIQ, Quebec’s association of private rental residential owners and managers, reports receiving no complaints, to date, from members.
“Since gas is very cheap, maybe it’s too early to have had an impact,” he suggests.
Natural gas heating is considerably less common in Quebec than in Ontario. A 2010 CORPIQ survey of rental buildings, collectively encompassing 20,000 units, revealed that 77 per cent were electrically heated, 17 per cent were heated with natural gas and 5 per cent were heated with oil.
Also in contrast to Ontario, Brouillette notes that 55 to 60 per cent of Quebec’s private rental residential buildings do not include heat in the rent. Perhaps due to the prevalence of electric heat, tenants are more likely to pay the provider directly.
“The number of landlords that are going to be affected by this (cost) increase is lower in Quebec than it would be Ontario,” Brouillette affirms.
Ontario’s system designers have a few key steps to complete before cap-and-trade can be launched. First off, they’ll have to set the initial cap. That will dictate an upper limit on the amount of GHGs that an industry sector can produce, and establish quotas for the carbon allowances that designated emitters will have to apply to account for their share of the total.
Next, they’ll determine whether to allocate free carbon allowances to any cap-and-trade participants and, if so, what volume. They’ll also have to define the carbon offsets that emitters can use as acceptable GHG-reduction measures to counterbalance their own output.
Notably, the Quebec government does not 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. Instead, a fairly limited set of options — 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 — are enshrined in provincial regulations.
“There was probably an irrational exuberance in the early years in Quebec and California around the volume and diversity of compliance-calibre offsets that were going to be created and transacted,” Rotherham observes.
Renewable electricity generation and/or electricity-saving retrofit projects had little offset potential in Quebec anyway, given the province’s low-GHG hydroelectric supply. On the flipside, Quebec’s building owners/managers won’t absorb pass-through costs on hydro, which will be the case in Ontario, particularly if the GHG intensity of power imports from the United States are factored in.
Ultimately, the Ontario government is aiming to fulfill its goals to reduce province-wide GHG emissions to 15 per cent below 1990 levels by 2020, and an even more ambitious 80 per cent below 1990 levels by 2050. “Climate change needs to be fought around the globe and it needs to be fought here in Canada and Ontario,” Premier Wynne said, as she announced her government’s plans.
Debate persists about whether cap-and-trade is the most effective way to do that, with many critics asserting that a carbon tax could be more easily and expeditiously implemented. Yet, the success of carbon tax is premised on consumers’ reluctance to pay it — making it a weaker strategy in booming economic times when restraint might actually be most needed.
“I think the benefit of cap-and-trade, if it’s structured as a hard cap, is a firm emissions outcome,” Rotherham says. “With cap-and-trade, at some point you run out of allowances and have to abate. With carbon tax, if the economy can bear the price, you can continue to emit.”
Barbara Carss is editor-in-chief of Canadian Property Management and Building Strategies & Sustainability.