Canada West Foundation Blog

By: Shawna Stirrett

Using market-based instruments (MBIs) for environmental protection is a potentially exciting way to manage the tension that sometimes arises between economic and environmental goals. MBIs apply the economic principles of supply and demand to the management of natural resources and they rely on the market to positively influence behaviour.

There are many different kinds of MBIs and some of them, such as deposit refund programs for drinking containers, have a long history in Canada. Other types of MBIs, such as transfer of development credits and resource allocation trading, have had limited uptake in Canada so far.

There is, however, the chance that MBIs will be used more frequently in Alberta in the coming years because of some recent policy changes that have come about with the passing of the Alberta Land Stewardship Act (ALSA) in 2009. This Act explicitly enables the use of market-based instruments for the protection of natural resources in Alberta.

While the theory behind MBIs is solid, the challenge is in the details. It is imperative that market-based solutions are clearly addressing an environmental problem, that they are understandable and accessible to the public, and that they operate within clear regulatory boundaries.

An illustration of how challenging it can be to find the right balance is found in Alberta’s home rebate program for energy efficient new homes. The idea behind this rebate is to incent homebuilders or homebuyers to choose products and designs that will be as energy efficient as possible. This means that if you buy a new home with an EnerGuide rating of 80 or above you will receive a government rebate that ranges from $1,500 - $10,000 on a sliding scale tied to efficiency ratings.

This is a fantastic program in theory because the more that can be done to encourage home owners to reduce their energy consumption the less greenhouse gas will be emitted, the less need there will be for new power generating stations and fewer building materials will end up in the landfills. According to C3 (the organization that administers the rebate program): “Upgrading the energy efficiency of a new home could reduce its greenhouse gas emissions by upwards of one tonne per year.”

The devil, of course, is in the details. The first challenge is that most builders do not know, or do not advertise, the energy rating of the homes they build. If a new buyer wants to find out the rating of their home, they will have to go through a pre-evaluation process. This means sending building site plans with elevations, sections and floor plans; specifications on insulation, doors and windows; mechanical details on the furnace, hot water heater, fireplace and other efficiencies; and information about appliances and lighting systems for assessment.

Not only is this a lot of work, but it will cost homeowners around $300 (if their new house is 1,200 square feet or less, additional footage is charged extra) to have this pre-evaluation done, which will tell them if they might be eligible for the rebate. The fee is non-refundable. There may also be additional charges if the house has solar or geothermal systems attached.

Should they decide to go ahead with getting their house EnerGuide rated, homeowners then have to get a blower door test done—at a cost of $175 for the first hour and $120 for every subsequent hour, and potentially including mileage for the Energy Advisor.

Finally, it is an additional $100 to update the file with the blower door test information, submit the claim to Natural Resources Canada and get the EnerGuide label and report.

A conservative estimate, then, is that a homeowner would need to spend around $600 in order to apply for the rebate that is offered. This is worth it if the house will be rated at the highest level, giving them a rebate of $10,000 or if there is certainty that the house will qualify for a rebate. But what about those who come in at the lowest level eligible for the rebate? They will have spent $600 (not to mention what they will have already spent on high efficiency furnaces, windows, insulation, etc.) in order to get back $1,500. What about those who invest in the pre-evaluation only to find out they are ineligible?

Because of the effort and the amount of money required to get this rebate, this program will have the greatest appeal for those who already care about the efficiency rating of their home and will have designed their home with efficiency measures in mind. In other words, this rebate as currently designed is aimed largely at people who would have made their homes as efficient as possible already and are not motivated by the promise of money back.

The argument could be made, therefore, that the rebate program is not incenting people to buy or build energy efficient homes, merely rewarding those who do.

So what can be done about this? It’s not as though the assessment process can be scaled back. There needs to be certainty that rebate-receiving houses really are as efficient as they say they are otherwise taxpayer money will be thrown away and no environmental benefit will result.

One potential solution is increased system integration around this issue. Would it be possible, for example, to require homebuilders to assess and disclose the EnerGuide rating of their homes, much like auto manufacturers are required to disclose the fuel economy of their vehicles? This would enable consumers to quantify the efficiency levels of new homes and this information, in addition to the rebate program, could lead to preferential selection of homes with higher efficiency ratings. In this way, builders would acquire greater experience and expertise in efficiency measures, one of the main barriers to consumers (the cost and the time of finding out the rating of their new home) would be reduced and substantial improvements could be made in Alberta’s environmental performance.

As this example demonstrates, the idea behind MBIs is good and they have the potential to enable environmental protection in an economically sustainable way. Getting the details of a market-based instrument right, however, is imperative if the tool is going to be effective at solving environmental problems and motivating people to change behaviour.

A detailed look at the role of market-based instruments within the Alberta context is covered in a forthcoming Canada West Foundation report entitled: “The Invisible Hand’s Green Thumb: Market-Based Instruments for Environmental Protection in Alberta.”

By: Robbie Rolfe

I sometimes find myself getting weary of ideologues on environmental issues. One argument I find particularly tiresome is the insistence that there are significant tradeoffs when it comes to the economy and the environment. The conclusion of these extreme viewpoints is that we can be prosperous polluters or penniless hippies. Apparently, there is no middle ground.

These zero-sum views neglect market-based instruments (MBIs for short) that can make us both prosperous and green. The careful deployment of MBIs can address a major difficulty facing governments trying to encourage good environmental practices: people and businesses will not provide enough ecological goods and services because the costs of providing them accrue to individual persons or businesses while the benefits are enjoyed by the wider community. An MBI is a mechanism that shares the costs of environmental protection among its many beneficiaries.

Take a farmer who is nearing retirement and needs cash. If he sells his farm to a developer, he gets the money he needs. If he holds onto the land to ensure that it continues to provide a nearby city’s water system with valuable natural filtration, he takes a direct financial hit. There are significant tradeoffs in that situation: the farmer gives up some of his livelihood to maintain ecological benefits or gives up ecological benefits to enhance his livelihood. An MBI could pay the farmer for the ecological goods and services his land provides. To ensure a fair price, the amount the farmer gets could be set by a market, or at least market-like mechanisms. Taxpayers living in the city who benefit from the natural filtration on the farmer’s land could fund the MBI through their taxes, thereby sharing in the costs associated with the benefits they receive.

The good news is that these kinds of policies are increasingly under consideration in western Canada. The Alberta Land Stewardship Act, for example, urges the use of market-based instruments on a regional or local level to better provide ecological goods and services, particularly when it comes to land use and land management.

Though market-based instruments show great potential, we are only beginning to explore their varied applications. If we can tap that potential, then one day we may be able to have our cake and eat it too.

MBIs are explored in detail in a new Canada West Foundation report entitled The Invisible Hand’s Green Thumb: Market-based Instruments for Environmental Protection in Alberta. To download the report, click here.