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Tuesday, April 14, 2015

Pricing Carbon: Implications for the Real Estate Industry, Part 2 in a Series

by Amy Erixon, Toronto

According to the United Nations Environment Program (UNEP) Sustainable Buildings and Climate Initiative, buildings are responsible for over 40% of global energy use and 30% of the Greenhouse Gas Emissions.   They further estimated that buildings consume 30% of all global raw materials and 25% of earth’s water.   In urban areas the percentages are much higher.  For example, according to the Province of British Colombia, 54% of the carbon footprint of Vancouver is from building emissions.   

Mandatory carbon reporting, currently required in approximately 30 US municipalities and 2 Canadian Provinces is expected to become far more widespread in the years ahead.  Most northeast and west coast states have definitive carbon emission limits in place as do Quebec, Nova Scotia, Alberta and British Columbia.  As a result, and as a matter of good corporate governance, many best-in-class owners, tenants and developers already report on their portfolios to a benchmarking system and may include these results in their annual reports in compliance with the Global Reporting Initiative.   What used to be a "nice to have" is shortly becoming a "need to do".  

Last week President Barack Obama signed an executive order expanding the greenhouse gas emission controls to cover more US industries, including real estate.  In Canada, the Province of Ontario announced it would begin implementing a Carbon Cap and Trade program, joining the states of California, Oregon and Washington and the Province of Quebec in a unified carbon marketplace known as the Western Climate Initiative.  Cap and Trade was originally introduced in the 1990 US Clean Air Act.  It is a regulatory system that is meant to reduce certain kinds of emissions and pollution and to provide companies with a profit incentive to reduce their pollution levels faster than their peers. Under a cap-and-trade program, a limit (or "cap") on certain types of emissions or pollution is set, and governments and companies are permitted to sell (or "trade") the unused portion of their limits to other companies that are struggling to comply.  (Definition from www.investopedia.com)  In the US, cap and trade is being hailed as a "private sector" solution, although it does require set up of a regulatory entity to oversee and enforce.   

Ontario believes taking this step will increase the likelihood of achieving its commitment to a 20% reduction in Greenhouse Gas Emissions from 1990 levels by the year 2020.   Details of the program are to be developed over the course of the year and will likely have profound potential implications for builders, owners and occupants of real estate.  Step one is likely to be mandatory reporting.   Step 2 will be the debate over where to set the caps.  


According to news reports, Ontario decided against replicating the popular British Colombia model in part to avoid the optics of imposing a “tax” and in part to lend support to creation of a unified North American carbon trading marketplace.   As laid out in my February 3, 2015 blog on this topic, British Columbia puts a set “price” on carbon, and everyone pays the same rate per ton for it.  Proceeds from the tax are used to produce green energy and to offset taxes from other sources.  Critics of the carbon tax approach believe a tax alone may not be enough to achieve meaningful reductions in emissions, as well as opposition to taxes in general.  

The key criticisms of a cap and trade approach, which is far more widespread and more complicated to implement are more numerous: 1) that the limits are often set at different targets for different industries, providing flexibility where needed but detracting from the optics of fairness; 2) concern that providing a workaround for polluters rather than requiring better efficiency may also not result in reducing emissions, and will likely increase costs to consumers 3) an underdeveloped carbon marketplace could result in fluctuating prices which will not support development of green energy and could cause harm to affected companies and industries based on their scale and resources; and 4) need to create an oversight agency to promulgate regulations and enforce the system.   For a robust discussion of the merits and proponents of each approach see:  http://e360.yale.edu/feature/putting_a_price_on_carbon_an_emissions_cap_or_a_tax/2148/.




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