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Geared for Change: Energy Efficiency in Canada’s Commercial Building Sector – Section 7

      When the four broad categories of policy instruments are compared, market-wide price signals are found to be the most effective for reducing emissions in the commercial building sector, and to have high net benefits to society of mitigation. Command and control instruments can also lead to effective and cost-efficient reductions of carbon emissions in the sector, especially when combined with regulatory measures. Subsidies such as fiscal instruments and incentives have varying results, in large part due to their program design structure.[89] Although the list of policy instruments identified in this report does include several subsidies, it is important to note that they should be phased out when appropriate, should not be technology-specific, and their design should consider free ridership rebound and other additionality issues. Voluntary actions and information programs can lead to long-term behaviour change and some emissions reductions at relatively low costs; however, their impacts are difficult to quantify so they were not included in the modelling analysis, but are still included in the recommended suite of policies outlined below.

Recommendation 1

Implement an Economy-wide Price Signal

Past research by SDTC and the NRTEE, as well as the modelling analysis conducted for this report, reveals that a strong and consistent price on carbon emissions is required to achieve the emissions reductions targets established by the Government of Canada. Such an emissions price would also result in GHG reductions for the commercial building sector. Further research is currently underway by the NRTEE as to the most appropriate program design for implementing this economic signal and is expected to be released publicly in early 2009.

Recommendation 2

Incorporate Command and Control Regulations

a) Incorporate Energy Efficiency into Canada’s National Building Code The National Building Code (NBC) is used as a model by most provinces/territories from which to base their codes, making it an important policy tool for reaching other governing jurisdictions. We recommend that the code incorporate energy efficiency as a core objective and that it be updated at least every five years with increased minimum standards. It must be stringently enforced and adapted to reflect changes in technology and building design practices. Provinces should be encouraged to accelerate updates to their codes to keep up to date with technology advancements and to enhance enforcement mechanisms. b) Establish Higher Efficiency Standards for Building Equipment Research shows that command and control policy instruments are successful for increasing energy efficiency, both in terms of cost and environmental effectiveness.[90] We recommend that minimum efficiency performance standards (MEPS) be applied to an increased number of energy-using technologies in commercial buildings including lighting, heating, ventilating and air conditioning (HVAC) systems, and auxiliary equipment. Since most of the energy-consuming equipment in buildings is imported to Canada, updated performance standards need to be applied to imports of applicable products. Success factors for this policy measure include aggressive measures that enable innovation, and frequent, continuous updates to the scope and stringency of the MEPS. c) Implement a Building Labelling Program Lack of available data for assessing energy consumption in commercial buildings is a barrier to policy monitoring and evaluation that can be addressed with mandatory labelling. We recommend that buildings be required to publicly expose information about the amount and type of energy they consume, so that tenants and investors can make informed buying decisions. Building labels can be valuable marketing tools for industry and help to create baseline data for comparison and for setting policy targets. These labels can also be integral to developing market-based policies and emissions trading certificate schemes for buildings. d) Apply Mandatory Performance Standards to Public Buildings The Government of Canada manages more than 45,000 buildings, representing more than 10% of the country’s total commercial and institutional stock. Since April 2005 all new federal buildings have been required to meet the Canada Green Building Council’s LEED® Gold certification, which results in energy efficiencies over 30% higher than the one set by the MNECB. Existing government buildings are also subject to third party certification; however, the rate of retrofits needs to be accelerated, life-cycle accounting needs to be incorporated, and performance maintenance issues need to be addressed. We recommend that the government demonstrate leadership in energy efficiency performance by committing to mandatory building commissioning and labelling for its building stock. Procurement practices need to value energy efficiency products above other options, and government departments and agencies require greater flexibility for upgrading their buildings. e) Implement Sector-wide Performance Regulations According to the modelling analysis contained in this report, in the absence of mandatory, sector-wide performance regulations, CO2 emissions reductions from the commercial building sector will not attain the targeted reduction of 53 Mt per year by 2050 identified by the NRTEE, or the industry vision identified by SDTC of 36 Mt in 2030. Despite this acknowledgement, the sector requires policy certainty regarding impending regulations and the time to prepare for their implementation. We therefore recommend that a regulatory framework for the commercial building sector be developed in the short term, to be implemented sector-wide by 2030. Emphasis on performance-based regulations is important in order to reduce the risk of sub-optimal performance in buildings over time.

Recommendation 3

Use a Variety of Subsidies to Overcome Financial Risks

a) Apply Accelerated Capital Cost Allowance Rates to Equipment We recommend that fiscal instruments such as capital cost allowances (CCAs) be used to speed up the write-off period of energy efficient equipment. This tool has been applied to efficient and renewable energy producing equipment in industrial processes^w and accelerated amortization rates should be applied to efficient energy-using equipment in the commercial building sector. In a survey conducted by the Real Property Association of Canada (REALpac)^x, accelerated CCA rates were given the highest priority for federal level policy recommendations related to increasing investment. To be successful, the benefits of accelerated CCAs need to be communicated to building developers, owners, and investors. Classes eligible for new rates should be non-technology specific in order to leave the decision authority for technology selection in the hands of consumers. b) Use Capital and Fiscal Incentives to Overcome Financial Risks Similar to the model used in New York State,^y we recommend that Canada consider offering a tax incentive to building owners and tenants who operate or inhabit energy efficient spaces. The total aggregate spending would be capped and eligible taxpayers would be required to submit proof of performance with their tax return in the form of a commissioning certificate or other third-party verification. c) Provide Loan Guarantees to Offset Capital Costs In order to overcome financing barriers, we recommend that the federal government follow Japan’s example and work with the energy service companies (ESCOs) in Canada to provide financial guarantees to mobilize green lease programs. These loans offset upfront costs to accelerate equipment switching in existing buildings and investment in efficient technologies in new buildings. ESCOs provide an assessment of the current levels of building efficiency and recommend areas for improvement where cost savings can be incurred. The loan repayment schedules are set based on the expected payback from upgrading the equipment. Once the loan is repaid the company reaps the ongoing cost benefits. Monitoring mechanisms to ensure the equipment is installed and functioning properly are key requirements for the implementation of this policy instrument and to ensure that free ridership is minimized. d) Provide Funding to Create an Advanced Investment Strategy for RD&C Research, development and commercialization (RD&C) strategies are vital for continuous technology advancement and improvements in energy efficiency over time. We recommend that a long term strategy for energy efficient commercial building equipment, fuel switching technologies, and energy sharing technologies be established now to prepare for an uncertain and changing future Canadian industry. Funding mechanisms, support resources, demonstration projects and procurement opportunities are all required for a comprehensive RD&C strategy. This long-term RD&C strategy should seek to foster two types of energy investments:

• Upstream Investments: Investments made in emerging sustainable technologies, which have a longer timeline to market entry but have a greater potential for larger and more sustained emissions reductions. Today’s emerging technologies will eventually become the market norm, and help to raise industry standards. SDTC focuses on this type of investment, and serves to accelerate these technologies into the market.
• Downstream Investments: Purchases made by end-users (e.g. building owners) of technologies currently on the market. These technologies are readily available but often lack the strong environmental attributes required to make deep reductions in emissions.

The driving forces and market challenges can be quite different in each case, but both forms of investment are required as part of a comprehensive approach to improve Canada’s energy efficiency and to reduce emissions. From a policy design perspective, this means that a range of policy options to optimize market impacts over time must be considered in the long-term strategy. e) Provide Resources to Increase Skills Development Canada is facing a labour shortage in the construction sector,[91] making it difficult to find workers to complete projects let alone ones who are knowledgeable in advanced energy efficiency technologies and operating processes. Building operators, contractors and inspectors are particularly in need of increased training in energy efficiency. Integrated design processes require that practitioners from all phases of the project work together to maximize efficiency. Given that the construction industry is slow to change and major worker shortages are expected, we recommend that the federal government play a role in providing funding and information resources to education providers and industry that are developing curricula to train practitioners in energy efficiency. Training courses targeted at the current workforce and industry incentives to provide training to its employees will be required to improve operating performance in commercial buildings. We also recommend that governments provide funding to Canadian universities and colleges to support development of new integrated design programs where future engineers and architects work with future contractors, trades people, and building inspectors and operators.

Recommendation 4

Promote Voluntary Actions and Information Resources

a) Promote Energy Efficiency through Information Programs and Campaigns Targeted information is required to better inform commercial building investors, owners, operators and tenants about available government services and the benefits of using them. There is a general lack of information about the quantity and type of energy used in commercial buildings and the potential impacts of reducing it. We recommend that the federal and other levels of government invest in educating the public and industry about how to select, install, and monitor energy efficient equipment in order to address the barrier of high transaction costs. Better information also needs to be made available about how Canadian buildings compare to those in other countries in terms of energy performance, and opportunities for improvement. b) Provide Resources to Expedite the Building Permit Process Building officials charged with approving permits are often overworked and do not have resources for training or updating the permitting process. As a result they may be ill-equipped to deal with building processes that do not adhere to standard practices, which causes delays in the application process. For each month a permit is delayed the cost can range from an interest equivalent of 7-20% depending on the stage of the project.^z The extra clarification required can also cost time and money to the developer. Although the federal government cannot directly expedite the permitting process for efficient projects as this falls within provincial and municipal jurisdictions, we recommend that it encourage information sharing between and develop resources for building inspectors and other officials in the provinces/territories and municipalities. A database of best practices and case examples for “green permits” would be valuable to overcome time delays experienced with building permits. Benefits for building developers from such resources will be time and dollar savings, as well as a stronger ability to confirm project scheduling dates with buyers and/or tenants. c) Create a Service Centre for Building Performance The commercial building industry is frustrated with current policy fragmentation and lack of an accessible unified information resource about available programs, tax policies, inspection processes, and other publicly funded services. Much like the Service Canada model for providing a single delivery network of government services and benefits, we recommend that a resource for green building performance supported by all governments provide information about codes and standards, tradeoffs between energy efficiency and water use, waste generation, air quality, etc. Such a service centre would contribute to removing technology adoption barriers associated with the lack of and complexity of available information. d) Establish and Regulate Building Commissioning Standards Underperforming systems are frequently cited barriers to energy efficiency. Despite the fact that commissioning has been linked to both economic and environmental benefits, the industry is very young in Canada and awareness of it is low. It is recommended that the federal government work with relevant organizations to develop standards for commissioning practitioners and processes, and to build capacity of the building commissioning industry. Once standards and capacity are established, we recommend that regulation be established for mandatory building commissioning as part of the construction process. Capital and fiscal incentives can then be linked to commissioning reports, which may serve as pre-requisites to tax credits or other financial instruments to promote energy efficiency. ---------------------- w Class 43.1 provides an accelerated rate of write-off (30% per year, on a declining balance basis) for investments that produce heat for use in an industrial process or electricity by using fossil fuel efficiently or by using renewable energy sources. The specific criteria are set out in Schedule II of the Income Tax Regulations. x REALpac is Canada’s senior national industry association for owners of investment real estate. Its green survey was administered during the summer of 2008 and was distributed to 1400 members, of which 100 responded. y Legislation passed in 2000, Part II of Chapter 63 of the Laws of 2000, establishes a Green Building Tax Credit to be allowable against various business and personal income taxes. The Green Building Tax Credit provides for tax credits to owners and tenants of eligible buildings and tenant spaces which meet certain “green” standards. Total aggregate credits are $25 million and a certificate from a licensed architect or engineer is required each year to guarantee performance is upheld. z Estimate based on stakeholder consultation.