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Ottawa should be building on Kyoto

One of the many unjust features of the Kyoto Protocol is that buildings -- office towers, malls, schools, houses -- receive a get-out-of-Kyoto-free card even though they are a big part of the greenhouse gas problem. But no one is ordering them to cut back. No wonder the industries getting stuck with the Kyoto bill think the system is rigged against them.

Russia's recent arrival in support of Kyoto means Canada has no handy excuse to back out, even though the United States is a Kyoto no-show. The federal government and the big greenhouse gas emitters, including the oil and gas and electricity industries, are negotiating an emissions reduction schedule. Building owners aren't at the table. They may consider this a blessing. It may not be.

Any industry doing Kyoto's heavy lifting will resent the fact that building owners are exempt. A power company has cut back on emissions but a building that sucks the power doesn't? The threat is that the power or oil company will resist co-operating unless the building owner is brought into the equation. There's a way to turn the threat into a money-making opportunity: Join Kyoto voluntarily and sell surplus greenhouse gas credits on the market.

Emissions from buildings of every shape and size are counted in the greenhouse gas inventory. They produce roughly 10 per cent of Canada's 750 million tonnes a year of emissions, making them the second-largest source. If buildings were split into two categories -- residential and commercial/institutional -- they would rank third and seventh, respectively.

Kyoto members such as Canada can cut emissions any way they want. The feds, of course, would love buildings to join the national reduction campaign. Education programs are being drafted and Finance Minister Ralph Goodale has put aside $78-million to finance the cost of retrofitting homes to make them more energy efficient. The amount is a joke. Canada has about 12.5 million homes. The retrofit budget works out to $6.25 a home, enough perhaps to buy a roll of insulation tape for the bathroom window. By the start of the first Kyoto reporting period, 2008 to 2012, another two million homes could clutter the landscape.

The government could gamble that soaring natural gas and heating oil prices will encourage home and building owners to spend their own money on ultraefficient furnaces and thicker insulation. Forget it. High energy costs translate into less disposable income, especially for poorer families. A proper home retrofit could cost $10,000. It's not going to happen when you're struggling to pay the gas bill. Ditto for building owners. The owner of a suburban strip mall wouldn't install $500,000 of thermal windows to save a few thousand bucks on heating.

In short, getting building owners to reduce greenhouse gas emissions seems like a lost cause -- unless there's something in it for the building owners, namely the potential to make money. If Kyoto is treated as a business opportunity instead of a regulatory nightmare, some building owners will get in the game.

Think of a greenhouse gas as a commodity. It can be traded as if it were a bar of gold or a tonne of nickel (a formal trading system starts in January in the European Union). Companies that exceed their quota will have to reduce emissions or buy greenhouse gas credits on the open market. Here's where it gets interesting. Among the Kyoto members, Canada has one of the biggest gaps -- about 25 per cent -- between what it currently emits and what it is supposed to emit between 2008 and 2012. That means a lot of companies will have to buy a lot of greenhouse gas credits to bring themselves into compliance.

Now suppose you are constructing an office tower. You know Kyoto is coming so you spend a bit more to make the tower superbly energy efficient. This would allow you to have the building certified as a net greenhouse gas credit generator, allowing you to sell the credits once trading begins. Between the credit sales and the energy savings, you might be able boost the yield on your building by several hundred thousand dollars a year.

Here's another scenario: Suppose you own an old, leaky office tower and you can't afford a retrofit. But an energy audit tells you the retrofit will turn the building into a credit generator. To get this value up front, you enter into a forward contract with an intermediary to sell, say, 10 years of credits at once. You then cash the cheque and use it to finance the retrofit.

Building owners who voluntarily join Kyoto would win political points too. That would keep the oil and power industries off their backs. Canada's ambitious Kyoto commitments are bound to fail unless more industries are encouraged to join and treat it as a trading opportunity.

ereguly@globeandmail.ca

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