Environment - Climate Change

May 10, 2023 Published by Toronto and Area Chapter - By Stewart Handrahan, Murray Johnson

Carbon Taxes

From the Spring 2023 issue of CCI Toronto Condovoice Magazine.

There Are More Questions Than Answers

The federal government has committed to reducing greenhouse gas emissions by 40-45% from 2005 levels by 2030 and to achieve net-zero emissions by 2050. To achieve these targets many new initiatives, some carrots and some sticks, are required. Carbon taxes are decidedly of the stick persuasion as they are meant to discourage the use of carbon-intensive fuel sources and encourage investment in cleaner technologies and energy conservation. These taxes are critical tools in reducing greenhouse gas emissions that contribute to climate change.

Since 2019 there have been carbon taxes in each province, and in Ontario that tax was introduced in the form of a fuel charge rate specified by the federal government. The current rate, as of April 2022 is $50 per tonne of carbon. The rate has increased steadily over time from $20 in 2019. As few readers will know what a tonne of carbon means, $50 per tonne is roughly equivalent to $0.10 per m3 for natural gas. Utility rates for natural gas vary; for context, rates (excluding carbon tax charges) have been in the order of $0.30 per m3 (including fuel and delivery charges).

The current plan for carbon taxes in Canada includes a steady increase of $15 dollars per year from the current $50 to $170 in 2030. Condominium corporations would be well-served to plan for these increases now, rather than wait and be caught off-guard by rising costs. The average monthly cost per unit in 2011 was $56.70 and actually decreased over the next 10 years to $34.16 per month per unit by 2021. As carbon taxes are increased and the cost of natural gas and delivery naturally increase, it’s easy to predict that the cost of living per suite per month will steadily increase.

You may be asking: how does this impact my building? In Ontario, most residential buildings use natural gas for space heating, and domestic water heating. Depending on the design of the building, typical heating systems that utilize natural gas are in the form of either boilers or furnaces. Ventilation systems such as makeup air units may heat the fresh air with gas burners before the air is supplied to the building. Hot water is often provided by gas-fired water heaters, either locally for each unit or centrally for the entire building. Although there are diesel and gas-fired emergency generators at many buildings, these systems don’t run outside of an emergency or during testing and do not consume a meaningful amount of fuel.

Air conditioning systems are electric based, so not directly impacted by carbon taxes. However, electricity rates may be impacted directly by carbon taxes where the electricity grid is powered by fossil fuels, and indirectly by increased demand for electricity (as an increase in the portion of the overall energy mix) and transmission and distribution system upgrades required to handle the increased demand. In Ontario, the electric transmission system includes a diverse mix of generation sources with nuclear being the largest source at 34%, and natural gas in second place at 28%. The rest is made up of hydro (23%), wind (13%), solar (1%) and biofuel (<1%).

Utility costs in 2021 represented an average of 32% of a condominium’s annual budget, so meaningful increases in utility rates will have a direct impact on the cost of living for condominium owners. Beyond higher operating costs, there may be other less obvious costs such as how evolving technologies may impact maintenance and capital costs for building systems, and how expectations from residents for green buildings may impact asset values. Townhouse condominiums are more able to affect individual reduced consumption, whereas high rise condominium suites are less likely to see in-suite consumption reductions due to lifestyle changes. Amenity, corridor, and lobby heating typically use an average of 50% of the natural gas. Combine this with recirculating domestic hot water and it becomes clear how much is actually consumed for common areas.

Once the impact of carbon taxes on buildings are understood, the next question that needs answered is: what are we going to do about it? There will be no ‘one-size fits-all’ solution, but there will be overarching themes for how existing buildings can be retrofit to reduce their carbon footprint over the next decade. The first step in the process will be evaluating building enclosures, mechanical systems, and energy consumption to identify where improvements can be made. These improvements will likely result in some combination of energy conservation measures (e.g. upgrades to windows to reduce heat loss), energy efficiency improvements (e.g. upgrade to higher-efficiency boilers), and major retrofits to mechanical and building enclosures to “decarbonize” buildings (e.g. over-clad buildings to add additional insulation and convert heating and domestic water to electric-based systems). The selection of appropriate retrofit projects will depend on many factors including: the age of the building, the age of the major equipment, the financial health of the corporation, and non-financial objectives of the corporation.

There are many conversations that need to happen at the condo industry level, and at the building-specific level about these potential solutions. Normal operating efficiencies can be expected by low cost re-commissioning of building operating systems. Over time, building systems are easily tuned out of original operating specifications leading to inefficient and expensive operating parameters.

The critical question specific to condominium corporations is: how will these projects be funded? These retrofits are capital projects, so one may reasonably conclude they should be foreseen by reserve fund planners years in advance and funded from the reserve fund. Although this may be the most obvious path for funding, it is faced with challenges. There are competing interests when deciding when to repair or replace; the replacement timing may be driven by the physical condition (typical for a reserve fund plan) or it may be driven by the payback from reduced operating expenditures (common methodology for energy audits). There may also be legal questions that need to be addressed such as the fact that certain electric HVAC systems (e.g. air-to-air heat pumps or VRF systems) are not current construction standard, although these systems are seeing increased adoption in new construction. Significant changes required to convert from gas to electric heating and to improve the building enclosure may be seen as an alteration or improvement, making them ineligible as reserve fund expenditures, and furthermore may require approval from unit owners.

There are arguments against funding from reserve, so the answer is not so straight-forward. Utility costs and the spread between gas and electric rates cannot be accurately forecast by reserve fund planners nor can the building-specific retrofits be established as part of the scope of work for a reserve fund study. The other consideration is that reserve fund contributions are made by current and future unit owners for repair and replacement of the common elements. Replacement with “like-for-like”, or at most upgrading to current construction standard is what’s budgeted in a reserve fund study with the understanding that both current and future owners contribute and both current and future owners benefit from the use of said common elements. If major retrofit projects are planned in current reserve fund studies, it means current and future owners contribute to the costs of the retrofit. However, it is not clear that current owners benefit from the future retrofit as they don’t experience reduced operating expenditures until the upgrades become financially viable. For this reason, the alternative funding model for upgrades may include special assessments, loans, or a combination of the two. It’s clear that with only eight years to 2030, there is simply not enough time to reasonably fund future projects through contingency line budgeting.

There may be an argument for funding a project by combination of reserve fund expenditure and loan where the reserve fund covers the portion of the expenditure that is equivalent to replacement with like-for-like, and the loan covers the additional amount due to the upgrade. As an example, for a planned window replacement at a building with existing double-glazed windows, there may be a financial benefit to upgrading the windows to high-performance triple-glazed windows to see reduced operating expenditures related to heating and cooling, particularly when considering the expected service life of 40-50 years for the windows and the anticipated increase in heating and cooling costs within that time horizon. In this case, assuming triple-glazed windows are not current construction standard, the project could be partially funded from reserve (the cost to replace with double-glazed windows) and partially funded from a loan or special assessment (the cost to upgrade to triple-glazed). For these long service-life systems there is often only one opportunity to upgrade the system. A long-term view of how carbon tax increases will impact energy prices should form part of the decision-making process.

When considering large-scale retrofits such as gas-to-electric conversions and building enclosure upgrades, certain logistical issues become critical to the viability of the project. Some issues that warrant consideration include:

• Many buildings include central plants that are common element, and terminal units (e.g. fan coil units) are unit-owned.
• Major retrofits will be disruptive to residents.
• Gas-to-electric conversions may require upgrades to the main electrical service at the building and/or upgrades to the utility distribution system where there is insufficient capacity.

Specifically for gas-to-electric conversions there are other financial considerations beyond utility costs, such as reduced operating costs related to service and maintenance. Electric-based systems tend to be lower maintenance systems (with lower associated costs) relative to fuel-based systems. Depending on the equipment, the capital replacement costs may also be lower.

There are non-financial considerations related to reducing carbon footprints for buildings. Building enclosure and mechanical system upgrades may result in increased comfort and indoor air quality for occupants. Upgrades to the building enclosure also offers opportunities to alter the aesthetic aspects of the building, which may or may not be well received by unit owners. The demand for greener buildings may become a more mainstream phenomenon where carbon-intensive buildings may be seen as less desirable places to live and thus negatively impacting asset values. These considerations are difficult to quantify and the impact on asset values may never materialize for residential buildings.

The carbon tax framework has specific implications for condominiums and there are many important questions that must be discussed within the industry at large and at the building-specific level. 2030 is fast approaching and the best time to plan was yesterday. The second-best time is right now.