This section provides a high-level analysis of the economic and environmental effectiveness of policy types available to decision makers for impacting investment in energy efficiency: market-wide price signals, command and control regulations, subsidies, and voluntary actions. The purpose of this section is to provide an overview of the policy instruments that have been used to promote energy efficiency, and an indication of how Canada fares in energy efficiency policy evaluation.
As well, examples of effective energy efficiency policy instruments are included, based on secondary research, to guide the choice of recommendations in this report. This analysis is not meant to be a full cost-benefit evaluation, but is based on domestic and international research that highlights the policy types that are deemed to be most effective in reducing emissions with economic efficiency.
2.0 Commercial Building Sector Profile
3.0 Barriers to Investment in Energy Efficiency
4.0 Energy Efficiency Policies and Evaluation
5.0 International Policy Trends
6.0 Policy Modelling Analysis
7.0 Policy Recommendations
8.0 Policy Pathway
11.0 Policy Pathway Diagram
ANNEX: Modelling Scenario Assumptions for Policy Design
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Market-wide price signals seek to send messages to consumers and producers in the form of commodity prices about increasing supply or reducing demand for those commodities. In the case of energy efficiency in commercial buildings, full-cost energy and emission pricing, emissions and energy taxes, and cap-and-trade systems are the most common price signal options targeted at reducing CO2 emissions. In 2007 the NRTEE conducted an analysis that led to the assertion that ?strong, consistent and economy-wide emission pricing is required as soon as possible if cost-effective emission reductions are to be sustained to mid-century and likely beyond.? In 2007, SDTC found that establishing a clear and consistent price on carbon was the single most important factor in driving a shift toward sustained efficiencies. Without such an economy-wide emission pricing policy, it is highly unlikely that the Government of Canada?s targets of reaching overall emission levels 60-70% below those of 2006 will be achieved.
The Organization for Economic Co-operation and Development (OECD) defines command and control regulations as ?institutional rules with the purpose to influence directly the environmental performance of polluters by regulating processes and products used by prohibiting or limiting the discharge of certain pollutants and/or restricting activities to certain periods, areas, etc.? Several European researchers who conducted extensive analyses of the cost-effectiveness and environmental effectiveness of policy instruments designed to reduce GHG emissions in buildings  found that command and control regulations are generally effective in the building sector if applied well, but their cost-effectiveness can be limited by high enforcement costs. The rebound effect can limit their effectiveness, but its impact has not been found to be strong enough to offset energy use/ GHG emission mitigation from this policy type. 
As a policy instrument, building energy codes are used to entrench best practice energy efficiency measures and/or techniques that are commonly used within the building construction industry. Energy codes can produce a shift in the average efficiency of the market by eliminating the option of having an energy use performance below that mandated by the code.
Research has found that building codes can significantly improve energy efficiency in new buildings; however, implementation must be well prepared and enforcement, monitoring and verification, and regular updates are necessary for them to remain effective. The development and implementation of building energy codes requires substantial investment in two main areas:
The National Building Code (NBC) of Canada forms the basis for provincial building codes and sets the technical provisions for the design and construction of new buildings. It also applies to the alteration, change of use, and demolition of existing buildings. Provinces and municipalities are not required to adopt the NBC, although most choose to either adopt it or apply a higher degree of stringency to their own codes. The NBC does not address energy efficiency, which has led to the development of the Model National Energy Code for Buildings (MNECB). Released in 1997 as a federal voluntary standard that specifies comprehensive minimum energy-efficiency standards for new commercial building construction, the MNECB is published and maintained by the National Research Council?s Institute for Research in Construction (NRC-IRC). To date, the City of Vancouver and the Province of Ontario have referenced it in their building regulations. The MNECB was developed and is maintained by the National Research Council?s Institute for Research in Construction (NRC-IRC) and it provides minimum energy efficiency standards for commercial buildings in Canada.
There has been limited quantitative post-implementation evaluation of building energy codes. However, extensive analysis of available data by researchers at the Central European University  revealed that building energy codes are highly effective in CO2 emission reduction. For example, in 2000 alone, building codes in the US accounted for a reduction of 79.6 megatonnes of CO2 from the commercial and residential sectors. The EU has documented a savings of 35-45 Mt, and up to 60% energy savings for all new buildings.
The cost-effectiveness of building codes is considered ?medium?h based on the need for compliance monitoring and enforcement, and regular updates. An approximate cost to society of USD$46-109 per tonne of CO2 has been estimated in the US.  It is important to note that building energy codes do not offer an incentive for performance improvement beyond the minimum target, and they are only effective when enforced. Some recent assessments indicate that in order to have a significant impact on the overall built environment within a reasonable amount of time, building codes should apply to both new and existing buildings. Germany is one of the few countries with regulations that apply to existing buildings (i.e., when more than 20% of the building area is affected by renovation, new construction codes must be followed).
Minimum energy performance standards (MEPS) are used to regulate the energy used by building equipment. MEPS have the greatest impacts on energy efficiency because they affect all purchasing decisions. Typically, MEPS can be implemented at a very low cost because the mechanisms are already in place and in many cases program standards exist so new testing and certification is not required. Standards are typically self-enforcing since the burden of testing and certification falls on the manufacturer.
The main piece of legislation in Canada targeted at increasing the energy efficiency of buildings is the Energy Efficiency Act, which is managed by NRCan?s Office of Energy Efficiency (OEE). Canada has regulated MEPS since 1995 under the Energy Efficiency Act in order to eliminate shipment of inefficient, energy-using products that are either imported into Canada, or manufactured in Canada and transported between provinces for the purpose of sale or lease. To date, the standards have been amended nine times to incorporate additional products or to increase the stringency of standards. NRCan has calculated that by 2010 these MEPS will have achieved a reduction in GHG emissions of 25.6 Mt per year. The Turning the Corner Plan commits to improving energy efficiency standards under the Energy Efficiency Act and NRCan?s minister is expected to introduce amendments to the Act including new energy performance standards for equipment.
MEPS are comparable to appliance standards, which have been found to be among the most cost-effective and widespread instruments used to reduce emissions. Analyses conducted in the US, the EU and Australia have reported net economic benefits to society resulting from the application of appliance standards. Contributing to these economic benefits are attributes such as low transaction costs and relatively easy control due to the limited number of manufacturers.
Mandatory certification and labelling programs have been found to be effective, both in terms of cost and GHG emissions reductions, especially when combined with other policy instruments such as MEPS, building codes, or subsidies. For example, tighter labelling standards in Australia are expected to result in emissions reductions of 204 Mt CO2 between 2005 and 2020, with net economic benefits. An indirect benefit of mandatory labelling is the transparency of information related to energy consumption, which is necessary for determining the impacts of policy instruments via monitoring and evaluation processes, and opportunities for improvement. As of October 1, 2008 England and Wales introduced mandatory energy certificates, a form of labelling. These certificates rate a building?s energy efficiency from A to G, as well as its potential rating with select improvements. All public buildings are required to publicly display their certificates; all other buildings will require a certificate when purchased, sold, or rented.
Canada?s ecoENERGY for Buildings and Houses program is an information-based initiative offering training, labelling, and rating of houses and buildings. A 2008 NRTEE report  noted that actual impacts on emissions from information programs are difficult to assess and can be overestimated due to the fact that direct impacts are not easily quantified. There may be other reasons for changes in behaviour that happen concurrently with the information programs, so estimated impacts of mandatory energy labelling should be conservative.
As major consumers, governments can influence the commercial building market with their purchasing decisions. Public procurement is a way for governments to show leadership and provide information about technologies and processes employed to achieve energy efficiency. The Federal Buildings Initiative (FBI) implemented in Canada by Natural Resources Canada (NRCan) in 1991 assisted federal organizations in reducing their energy use, water consumption and GHG emissions from their facilities. This voluntary program was designed to address barriers related to inadequate capital budgets for energy efficiency projects, a need for reliable information, and a lack of required skills to manage major refits. Energy Service Companies (ESCOs) were engaged to help address the issue of tight capital budgets. Following energy efficiency refits organizations would pay the lower resulting operating costs to the utility companies and then pay the savings incurred to the ESCO until the project costs were recovered. In April 2007, the federal government committed to Leadership in Energy and Environmental Design (LEED) Gold standards for new buildings. Although documented evaluations of the FBI and the LEED policies are unavailable, stakeholders indicate concern with lack of monitoring for energy-use performance levels from government buildings and feel that more can be done to improve public procurement processes. The mandatory display of energy certificates in public buildings in Britain and Wales is aimed at making energy use transparent to the public and is expected to help address issues related to poor energy performance in public buildings. 
Subsidies are a form of financial assistance paid by the government to an enterprise in order to benefit the public. In the context of promoting energy efficiency in commercial buildings, the most common subsidies include capital and fiscal incentives to overcome financial barriers, funding to promote the development and commercialization of new technologies, and financial assistance to organizations providing training and information resources to the industry.
Whenever considering the use of subsidies as policy instruments to promote behavioural change, it is necessary to acknowledge and account for the issue of ?free ridership? in order to accurately report impacts. When financial incentives are used to encourage investment in energy efficiency, free riders are those consumers who benefit from the incentives, but who would have made the investment even without the incentive. A 2008 NRTEE report cautioned that emissions reductions can be exaggerated ?when stated reductions include the results of behaviour that is rewarded but not influenced by the policies. This can occur when subsidies are paid to all purchasers of an item, regardless of whether they purchased the item because of the subsidy.? Although subsidies can be effective for reducing targeted carbon emissions when implemented (and removed) appropriately, the issue of free ridership should be accounted for when designing the measure evaluating policy impacts.
Capital and fiscal incentives are subsidies that provide financial support for the purchase of energy efficient appliances, equipment or buildings, and aim to address cost-related barriers including financial risk. This includes grants, tax incentives and subsidized loans.
The Commercial Buildings Incentive Program (CBIP) is an example of a capital incentive administered by NRCan?s OEE. CBIP was launched in 1998 to provide financial incentives to builders and developers who designed and built commercial buildings that were at least 25% more efficient than the MNECB standard. Qualifying parties were eligible for interest-free loans with five-year terms in order to finance the project costs. The CBIP was terminated in 2007 and the ecoEnergy Retrofit Incentive for Buildings was implemented, which provides financial incentives to homeowners, small- and medium-sized businesses, industry, and public institutions to help increase investment in energy and pollution-saving upgrades. The Retrofit Initiative expects reductions of 440 kilotonnes of CO2 in 2008, up to 1 megatonne in 2012 (from residential and commercial buildings). A 2008 NRTEE analysis of this program noted significant concerns related to the free-rider problem, and estimated that between 40 and 80% of subsidy recipients could be considered free riders. Consideration of free ridership in program design can significantly reduce its potential to influence outcomes; however, changes in design are unlikely to ever be 100% successful.
Tax exemptions and reductions are used by the federal government and managed by the Canada Revenue Agency (CRA) to provide signals promoting investment in energy efficiency to end-use consumers. In 2005, a new class was introduced into Canada?s structure for Capital Cost Allowances (CCAs) that provided a rate acceleration of 50% for equipment depreciation for clean energy generation equipment, allowing firms to write off the equipment in half the time and free up investment capital.
Tax incentives ?price-in,? or account for, positive externalities and help to encourage the adoption by producers or consumers of more environment-friendly technology, goods or services. As part of the 2005 federal budget process, the Department of Finance prepared a framework for the evaluation of ?environmental tax proposals.? Proposals for new environmental taxes may be assessed on a case-by-case basis, taking into account the following criteria:
In 2001, the American Council for an Energy Efficient Economy (ACEEE) conducted an assessment of a US commercial building tax credit of $2.25 per square foot for buildings certified to achieve at least 50 per cent in projected energy savings relative to a 1999 model building code. The assessment revealed total costs of $6.7 billion and total savings of $36 billion, resulting in a cost-benefit ratio of 5:4. The ACEEE concluded that tax credits ?should stimulate the development and deployment of new technologies that might not otherwise be implemented, rather than subsidize actions that would occur even if the tax credits were not provided (i.e., free riders). Credits should be applied to leverage private sector investments on a large scale in order to maximize energy and economic savings, emissions reductions, and other benefits over the long run.? Furthermore, they noted that to be effective, tax incentives should
In Canada, the federal government has been a major funder and catalyst of energy efficiency technology RD&C for many years. These programs analyze, plan, and build market infrastructure; fund and promote the adoption of new technologies; and review, evaluate, and report on results.
Technology funds are established to increase innovation of new technologies or dissemination of commercially viable ones. The $550 million SD Tech Fund? executed and managed by SDTC is aimed at supporting the late-stage development and pre-commercial demonstration of clean technology solutions, which include products and processes that contribute to clean air, water and land, and that address climate change and improve the productivity and global competitiveness of Canadian industry. The ecoENERGY Technology Initiative is a $230-million investment in science and technology by the Government of Canada to accelerate the development and market readiness of technology solutions in clean energy. The Initiative is a component of an effort to support long?term solutions to reducing and eliminating air pollutants from energy production and use. Among the eight priority areas is the ?built environment,? focusing on the integration of renewable energy technologies into buildings and community systems.
The NRCan CANMET Energy Technology Centre (CETC) is a vital component of RD&C for energy efficiency in Canada. Its technology development activities are performed on a cost-shared basis through in-house R&D or by providing funding support to technology partners. CETC activities focus on reducing the costs of existing technologies by performing applied research or by undertaking more fundamental research where new technologies and concepts offer significant future market potential. Deployment and commercialization activities serve to increase market penetration of proven, cost-effective technologies, through support for standards development, technical workshops, training and full-scale implementation.
Technology deployment delivery activities have four main goals:
Desired effects of research, development, and commercialization strategies include the following:
The evaluation of technology deployment strategies has always been challenging due to the complexities of establishing a causal chain of impacts. A recent American study has established some groundwork for a robust evaluation framework of technology deployment initiatives. The proposed framework focuses on linking program outputs to short-term and long-term outcomes, measuring partner and target audience response to program outputs, designing sound evaluations, and assigning credit for the program effects that are directly attributable to the program.
There is empirical evidence from work done in the US that RD&C strategies do indeed generate significant incremental energy performance in the built environment. The US Department of Energy conducts annual performance analyses of its RD&C activities. In FY 2004, the ?buildings technology? category of initiatives was forecast to generate annual secondary energy savings amounting to about 1583 PJ by 2030. This finding shows that government funding can have a positive impact on technology penetration in the market over time.
Information transfer and training are critical elements of all energy efficiency programs. In some cases, they are offered as stand-alone initiatives; in other instances they are key elements of broader initiative. Due to the fact that energy users are often influenced by market changes or more direct inducements (e.g., financial incentives) to invest in energy efficiency, establishing the causal link of information and training is difficult. Nevertheless, it is possible to derive some quantitative effects of these initiatives and the balance of this sub-section provides some performance results from evaluations in Canada and elsewhere.
Public education and skills training are designed to change individual behaviours, attitudes, values, or knowledge. These policies are very difficult to model for their tangible impacts on energy use; however, their benefits in overcoming barriers related to information gaps are important. The federal ecoENERGY program includes awareness building, training, communications, demonstration projects, advisory services, audits, and energy management and monitoring for the commercial and institutional building sector.
The Canadian Industry Program for Energy Conservation (CIPEC) was created in 1975 as a unique voluntary partnership between government and business to champion industrial energy efficiency across Canada. It has evolved to successfully meet the changing needs of Canadian industry and currently is involved in the development and delivery of tools and services to encourage industries to implement cost-effective energy efficiency improvements. CIPEC has three key elements:
NRCan has evaluated various aspects of CIPEC; the approach to and results from these studies are useful indicators for this policy review. The overall CIPEC performance for the five-year period ending June 30, 2005, attributed specific impacts on energy conservation and energy efficiency improvements in CIPEC participants compared to non-participants. Quantified energy savings for CIPEC participants totalled more than 117,000 GJ per facility.
There is currently a skills shortage in Canada?s construction industry, making it difficult to locate skilled workers for the installation, operation and maintenance of energy efficiency technologies and systems. Research conducted for this report revealed that significant investment is required to train employees, but that causality between skilled workers and building energy use can be established. An analysis based on 224 buildings revealed that, at a cost of $1400 per trainee, decreases of about 1% in energy use per building can be achieved.
Voluntary actions include information and marketing tools that make codes, standards and labels available to organizations that are committed to minimizing the energy use of their buildings. These performance or prescriptive standards are promoted, supported and adopted on a voluntary basis with the idea that market innovators will take a lead and push an eventual transition to widespread adoption. The greater the degree of perceived value of the standards to building buyers and tenants, the greater their expected level of uptake becomes. The international ENERGY STAR label identifies products that meet premium levels of energy efficiency. In Canada, NRCan administers the label, and most ENERGY STAR products are 10?50 % more efficient than the minimum regulated standard in Canada.
Information programs tend to have relatively low costs, but their emission reduction effectiveness can be limited as well, depending on uptake levels. However, they are often implemented with other policy measures such as MEPS and can promote long-term behavioural changes.
The effectiveness of voluntary policy instruments is widely contested, but in the buildings sector they can be useful when regulatory instruments are difficult to enact or enforce, and when they are effectively designed. Voluntary actions can be combined with other policy instruments to increase their effectiveness, and can also be used to help industry prepare for regulation.
Buildings go through a commissioning process prior to being handed over to the owner. The purpose is to ensure all of the systems are operating as designed and intended. However, there are factors that can have a negative impact on system performance (and energy consumption). Often the equipment that is installed is not of the same quality or performance characteristics as originally specified, but is cheaper to purchase or install. This results in lower building performance from the start. Also, as buildings age, the performance of the systems and equipment deteriorates. If the building is not re-commissioned on a regular basis, performance can drop below sub-standard levels. These two conditions are the driving force behind a call for retro-commissioning or continuous commissioning standards in Canada. A recent study found that continuously monitoring and maintaining energy systems could reduce annual energy bills by 5 to 25% or more. Currently in Canada, continuous commissioning is done solely on a voluntary basis.
In some regions, such as in the US, commissioning is supported by utility energy efficiency programs, making it a subsidized activity. In 2004, a US analysis was conducted to review the performance of 175 (106 existing, 69 new) commissioning projects across the country, representing a total floor space of over 30 million square feet. The following metrics were reported as a result of the analysis:
Commissioning evaluation studies have found that realized energy savings can be significantly lower than program goals and claims. Some have high attrition rates among initially recruited projects, few of which ultimately tend to be successfully completed. Projects that are completed are often found to have only implemented a small number of the recommended measures. Others tend to be ineffectively implemented or negated by subsequent changes. It should be noted that the delivery of commissioning was in many instances supported by utility energy efficiency programs. Some of the reported non-energy benefits are improved equipment life, reduced numbers of change orders and warranty claims, increased productivity and safety, and improved indoor air quality.
Effective policy and program evaluation is a cornerstone of managing public and taxpayer resources and is a fundamental requirement for performance assessment as the basis for decision making. Inflexible policies that are not regularly updated can act as regulatory and institutional barriers to maintaining high performance standards in commercial buildings. Therefore, ongoing policy monitoring and evaluation are crucial to adapting to changes in the market and in available technologies.
Since 2001, government-wide Treasury Board requirements have been in place for:
All regulatory departments and agencies are expected to show that a recommended policy option maximizes the net economic, environmental, and social benefits to Canadians, business, and government over time more than any other type of regulatory or non-regulatory action. As a best practice, departments and agencies are expected to prepare an accounting statement of policy performance. Regulatory authorities must demonstrate that the benefits to Canadians outweigh the costs and that they have structured the regulatory program so that the cost-benefit analysis is maximized.
The cost-benefit analysisi employs the following steps:
An interim review of the Treasury Board evaluation policy conducted in 2003  identified some significant shortcomings and barriers with respect to the capacity of departments to carry out effective evaluation. A clear link exists between departmental capacity and resourcing, and the ability to effectively carry out the evaluation function.
The current federal evaluation policy represents a suitable platform for effective and rigorous evaluations of energy efficiency policy, both regulatory and non-regulatory instruments. However, no evidence was found that the federal policy is being carried out in a meaningful fashion. Energy policy regulatory instruments have not been consistently subjected to post-implementation analyses, and only a handful of non-regulatory instruments have been subject to evaluations. Indeed, there is no evidence to suggest that the evaluations being applied today include an estimation of the value of non-energy benefits (e.g. reduced GHG emissions).
The evaluation of energy efficiency policy instruments and program types is limited in Canada, particularly with regard to the scope (only a small number of initiatives have been subject to evaluations) and rigour (very few evaluations are designed and implemented at the level of rigour now accepted by leading utility regulatory agencies as best practice).
Several key barriers were identified by the Treasury Board policy review as impediments to effective policy evaluation in the Canadian federal government:
In order for the Canadian government to build on its evaluation accomplishments and learn from its own experience as well as from international experience, several principles to govern the decision-making process need to be adopted including recognition that program evaluation should be:
Given the important role of energy efficiency as a cost-effective future resource to reduce energy consumption and carbon emissions, it would follow that the public investment in various policy instruments should be carefully assessed. The absence of consistently rigorous evaluation of energy efficiency policy will ultimately undermine confidence in performance and lead to ineffective policy choices. Again, it is important to emphasize the importance of policy evaluation and reporting in the program design process so that cost-benefit analyses can be based on actual results in the market.
Energy efficiency policy evaluation is best represented by North American utility energy efficiency programs. The breadth, depth and rigour to which these programs have been and continue to be evaluated are being driven by state and provincial government and utility regulatory requirements. They represent best practices for the following reasons:
California is a leader in evaluation, measurement and verification requirements and protocols for energy efficiency policy. The California Evaluation Framework provides a consistent, systemized, cyclical approach for planning and conducting evaluations of California?s energy efficiency and resource acquisition programs. The primary purposes for conducting evaluations of energy programs in Californiaj are to reliably document program effects, and to improve program designs and operations to be more cost-effective at obtaining energy resources. Program effects and generated savings are documented, as are the efficiency of the program processes and longer-term and lasting changes made on the market.
From a policy perspective, although profiling and monitoring program performance metrics is required for effective evaluation, it is also essential to focus on understanding what drives program success or failure. Even leaders in energy efficiency strive to improve policy performance. Recent provincial, state and regional energy plans call for energy efficiency to play a central part to meeting long-term energy demand:
Policy instruments available to governments for the promotion of energy efficiency in commercial buildings fall under a general typology as described in this section and outlined in Table 5. They form the basis for potential policy solutions to encourage greater energy efficiency in the commercial building sector; however, research has revealed that their individual effectiveness varies based on program design and implementation. Regular evaluation and reporting mechanisms are necessary to monitor actual emissions reductions attributable to each instrument, and to guard against the Rebound Effect or issues related to free ridership. A policy package including instruments from all policy types may be optimal to maximize emissions reductions.
TABLE 5: Energy Efficiency Policy Typology
|Policy Type||Policy Instruments||Barriers Addressed||Policy Evaluation
i Other countries and international communities such as the United States, Australia, the European Commission, etc. have also come to recommend that a cost-benefit analysis be the centre of regulatory analysis. A cost-benefit analysis has become one of the key analytical tools employed to assist in making this determination before approval is given for any significant new regulation.