Ottawa poised to exacerbate housing crisis with new ‘energy efficiency’ plan

If you thought housing in Canada was already expensive, buried in the Trudeau government’s Emissions Reduction Plan (ERP) is a little-noticed provision that’s poised to hike the cost of building new homes even higher after 2025. On page 201 of the ERP, in the bottom of a table listing proposed building code revisions, lies an astonishing requirement: “Increase energy efficiency such that new [residential] buildings use 61% less energy by 2025 and 65% less energy by 2030 in comparison to 2019.” Alongside this is a proposal to require commercial buildings to meet a 47 per cent target by 2025 and 59 per cent by 2030, compared to 2019.

A required 65 per cent reduction in energy usage compared to 2019 represents an extraordinary hurdle to new home construction. It would be hard enough to make new Canadian homes 65 per cent more efficient compared to ones built in 1919. But new Canadian homes were already highly energy efficient by 2019, so to try to force another 65 per cent in efficiency gains will add considerably to the price.

How much? In a new study published by the Fraser Institute, I turned to analysis from the Canadian Home Builders Association, which has published estimates of cost increments on new home construction for many types of energy efficiency gains. By compiling these, I estimated that hitting the 65 per cent target will raise building costs across the country by 8.3 per cent (on average). New home construction costs vary across the country. I estimate the increase will be in the $22,000 to $35,000 range in Atlantic Canada and on the Prairies, $38,000 in Quebec, and more than $70,000 in Ontario and British Columbia, yielding a national average of about $55,000 per home.

Using a macro model of the Canadian economy I estimate further that these increases in residential (and commercial) construction costs will cause a slight drop in national GDP (1.8 per cent as of 2030), and a 6.8 per cent decline in construction activity as of 2030 compared to the no-policy base case. At a time when we need all hands on deck in the homebuilding sector, we could instead see more than 80,000 construction-related job losses and an exodus of capital from the sector.

But at least we will reduce greenhouse gases, right? Not really. There’s ample evidence in the economics literature that energy efficiency mandates have little impact on emissions and come at a relatively high cost. Yes, they make it cheaper to, for example, heat or illuminate your home. But people respond to that change in part by using more heat and light. This is the so-called rebound effect, where the evidence suggests that in the long run this effect negates virtually all the initial gains from tighter energy efficiency rules. Nevertheless, even if I assume a low rebound effect in the macro model, the emission reductions are only about one per cent by 2030. Since the economy contracts by more than that, the emission intensity of Canada’s economy actually increases. And the emission reductions we do get cost about 50 times more per tonne than the proposed carbon tax rate. Adding regulations like this on top of a carbon tax policy destroys the economic efficiency of the emission pricing instrument.

But won’t households benefit from mandated improvements in energy efficiency? No, this is a common misconception. People who own or are buying a home already have the option to invest in energy efficiency improvements—and they do, up to a point. But beyond that, the extra energy efficiency features are worth less to them than other things they can purchase. Some energy analysts assume that households are too stupid to know how to spend their own money so regulations that force them to overinvest in efficiency improvements will make them better off. As I discuss in my study, this view is rejected in the economics literature both in principle and on the basis of analysis of the payoffs from government energy efficiency programs.

Canada faces a housing crisis of historic proportions. Young people and newcomers, even those with decent jobs and substantial savings, have been priced out of the housing market and face a future with no realistic hope of homeownership. Our focus must be on how to fix this crisis, in part by cutting the cost of new home construction. The radical energy efficiency requirements in the federal Emission Reduction Plan will do the opposite, while yielding virtually no environmental benefit. It’s the wrong move at the wrong time and must be rescinded.