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The Billion-Dollar Question: Who’s Paying for Building Decarbonization

  • Writer: Chloe Stoneburgh
    Chloe Stoneburgh
  • Mar 17
  • 7 min read

Written by: Chloe Stoneburgh 

Edited by: Ada Collins


The Financial Imperative of Building Decarbonization 

Imagine a future where your monthly heating bill drops by 40%, your office air quality improves, and your building’s resale value jumps overnight. That’s the promise of retrofitting, upgrading existing buildings with modern, energy-efficient systems to reduce emissions and improve performance. Retrofitting involves replacing outdated heating, cooling, and ventilation systems, improving insulation, upgrading windows, and incorporating smart energy management technologies. These upgrades make buildings more sustainable, lowering energy consumption and reducing their carbon footprint, but why aren’t more building owners making the leap? 

 

For many, the answer lies in the costs and complexities of building decarbonization. While the environmental benefits are clear, financing these upgrades remains a significant hurdle. Decarbonizing Canada’s building sector is critical to meeting national climate goals, but the question of who is footing the bill still stands. With rising costs, regulatory uncertainty, and the need for large-scale investment, the financial side of building retrofits and energy-efficient construction is as complex as it is necessary. This article explores how Canada is funding its transition, the barriers slowing progress, and the innovative solutions emerging to make building decarbonization a reality. 

 

Buildings are responsible for over 17% of Canada’s total greenhouse gas emissions, largely due to heating, cooling, and electricity use (Government of Canada, n.d.). Retrofitting existing structures and constructing highly efficient new buildings could cut sector emissions by more than half, but achieving this transformation requires substantial capital. According to the Canada Green Building Council, deep retrofits alone could reduce emissions from large buildings by up to 51% (Canada Green Building Council, Jan 2022). 

 

The Cost of Building Decarbonization 

The cost of deep retrofits varies widely depending on building type, size, and location but the estimated incremental capital cost ranges from $210 to $1,060 per meter squared (Canada Green Building Council, Jan 2022). For multi-unit residential buildings, costs can represent a 27-39% cost increase over business-as-usual renewals (Canada Green Building Council, Jan 2022). Large-scale commercial buildings face even steeper costs, often exceeding millions of dollars per project, due to the complexity of replacing aging mechanical systems, improving insulation, and installing advanced energy management technology (Canada Green Building Council, Jan 2022). 

 

These high costs present significant financial barriers for property owners, developers, and investors who are hesitant to take on the capital risk without a guaranteed return on investment. Additionally, retrofits often don’t align with the investment period of the asset, leading many asset managers to prioritize short-term financial gains over long-term sustainability improvements. 

 

One of the biggest challenges in financing retrofits is the long payback period, often 10 to 20 years, making it difficult for investors to justify the upfront expenditure. Unlike new developments where energy efficiency is integrated from the outset, retrofits require significant capital to modernize existing systems, such as HVAC, insulation, and windows, often leading to high borrowing costs or additional costs of capital (Cortés Selva, Alma, 2024). Many investors view this as a risky bet, especially as energy prices fluctuate and government incentives change unpredictably. 

 

Return on Investment: Why Decarbonization Pays Offs 

While the upfront costs of deep retrofits may seem prohibitive, the return on investment (ROI) of these projects is increasingly compelling. One of the most immediate benefits of retrofits is a significant reduction in operating expenses. Energy-efficient buildings consume less electricity, water, and heating fuel, leading to annual utility savings of 20% to 50% (International Energy Agency, 2022). Over time, these cost reductions help property owners recoup their initial investment while increasing the long-term profitability of the asset. 

 

Beyond operational savings, retrofitted buildings tend to see an increase in property value. Studies show that green-certified and energy-efficient buildings have higher market values compared to their non-retrofitted counterparts. A 2022 study by CBRE found that office buildings with LEED or other sustainability certifications commanded  a 4 to 8 percent premium (CBRE). This not only benefits individual property owners but also incentivizes future investment in green upgrades for those seeking a higher valuation. 

 

In addition to cost savings and appreciation in asset value, retrofits help property owners avoid future regulatory and compliance risks. Canada is moving toward stricter emissions regulations, and retrofitting buildings now prevents costly fines and non-compliance penalties in the future. Many jurisdictions have introduced energy efficiency mandates requiring landlords to make upgrades or risk reduced marketability of their properties. Early adopters of retrofit projects avoid the financial pitfalls of last-minute compliance spending and potential asset devaluation. 

 

Decarbonized buildings are also more resilient to energy price volatility. As fossil fuel-based heating systems become increasingly expensive due to global energy policy shifts and resource constraints, buildings that have transitioned to energy-efficient systems and renewable energy sources will be less impacted by these price fluctuations (Green Building Council, 2022). Investing in retrofits now provides a hedge against long-term energy cost uncertainty, protecting property owners from unpredictable operating expenses in the future.

 

Private and Public Sector Funding Mechanisms

Recognizing the need for substantial financial backing, the Canadian government has rolled out several funding mechanisms to accelerate building decarbonization: 

-       Canada Infrastructure Bank (CIB): CIB provides low-cost financing through its Building Retrofits Initiative, targeting commercial, institutional, and multi-unit residential building owners. However, access to CIB financing is limited to large-scale projects, leaving smaller building owners without adequate financial support. 

-       Green Municipal Fund (GMF): Administered by the Federation of Canadian Municipalities, this fund offers grants and low-interest loans for energy efficiency projects. However, demand for funding exceeds available resources, causing delays in project approvals. 

-       Greener Home Grant and Loan Programs: Focused on residential properties, these programs provide financial assistance for energy-efficient upgrades. Yet, homeowners often face out-of-pocket costs that make participation challenging. 

-       Provincial Programs: Ontario and British Columbia offer incentives for deep retrofits, but inconsistencies between provinces can create confusion for developers and investors navigating multiple funding options (Green Building Council, 2022). 

 

While government initiatives provide essential support, they are not enough to meet the full scale of Canada’s building decarbonization needs. Private sector investment is crucial to bridging the financial gap, and several mechanisms are emerging to encourage private capital involvement: 

-       Green Bonds: Increasingly used by municipalities and corporations to raise capital for energy-efficient projects, green bonds offer attractive investment opportunities while supporting sustainable building initiatives. 

-       Public-Private Partnership (PPPs): These partnerships leverage private investment alongside government funding to finance large-scale decarbonization projects. PPPs have been particularly successful in financial major infrastructure and energy-efficient building upgrades. 

-       Energy Performance Contracts (EPCs): Property owners partner with energy service companies (ESCOs) that fund retrofit costs upfront and get repaid through the resulting energy savings. This model reduces the financial risk for building owners while guaranteeing long-term sustainability benefits. 

-       Impact Investing and ESG Commitments: Institutional investors, pension funds, and REITs are increasingly considering environmental, social, and governance (ESG) factors in their portfolios. By prioritizing net-zero commitments, these entities can direct more capital into retrofits and low-capital building developments. 

-       Corporate Leadership: Large companies such as Brookfield Asset Management and Oxford Properties have made substantial commitments to decarbonization, integrating sustainability into their portfolios through both new developments and retrofitting initiatives (Brookfield, 2024; Oxford Properties, 2024). 

 

While these programs provide essential support, they fall short in addressing the full scale of required retrofits. High upfront costs, market uncertainty, and restricted access to capital are major deterrents for private investors. The split incentive problem is discussed by the Canadian Climate Institute in the context of heat pumps, a standard energy efficiency technology, where landlords are responsible for retrofit costs, but tenants benefit from energy savings, also discouraging action in rental properties ( 2023). 

 

Adding to the uncertainty is the federal carbon tax, which was initially positioned as a financial incentive for energy-efficient building upgrades. Many investors used carbon pricing to help underwrite retrofit projects, banking on predictable long-term returns as the price for traditional energy sources increased. However, as carbon pricing has become increasingly politicized, its role in incentivizing retrofits has weakened, making it even harder for property owners to justify large-scale investments in decarbonization (Green Building Council, 2022). 

 

Investor Reluctance and the Role of Canadian Banks

Despite the urgency of decarbonization, many institutional investors and asset owners are reluctant to allocate significant capital toward retrofits. While many major Canadian banks have committed to net-zero targets, they are backtracking on their climate commitments by continuing to fund fossil fuel projects at higher rates than green initiatives (Toronto Star, 2024). This contradiction raises concerns about whether financial institutions will step up to support decarbonization at the scale needed. 

 

Large real estate investment trusts (REITs) and pension funds have also pledged net-zero portfolios but often fail to allocate the necessary funding toward deep retrofits to meet these goals. Without clearer financial incentives, policy enforcement, and risk mitigation strategies, many property owners will continue to delay necessary upgrades, risking non-compliance with future emissions regulations. 

 

The Path Forward: Prioritizing ROI in Decarbonization Strategies

Many property owners, despite the clear financial benefits of decarbonization, remain hesitant due to concerns over high upfront costs and uncertainties surrounding government incentives. To address this challenge, policymakers and financial institutions must collaborate to expand green financing programs that provide low-interest loans and grants specifically for deep retrofits. Implementing targeted tax incentives can further enhance the financial feasibility of long-term energy savings for landlords. Additionally, establishing clearer regulatory frameworks will help investors and building owners better understand the financial risks of inaction. Finally, increasing public awareness through real-world case studies can effectively demonstrate tangible ROI and best practices, fostering greater confidence and wider adoption of decarbonization strategies. 

 

Conclusion

Decarbonization Canada’s building sector is an economic challenge as much as a climate imperative. The current funding mechanisms, while a step in the right direction, are often hindered by inefficiencies and market frictions, making it difficult to scale retrofits at the speed required. Greater private sector engagement, combined with targeted government support and clearer financial incentives, is necessary to scale up decarbonization efforts. With the right balance of public and private sector collaboration, Canada can transition its built environment toward a more sustainable, low-carbon future. 


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References:


Brookfield. (2024, September 20). Creating Value Through Sustainability Management: Brookfield’s Approach. https://www.brookfield.com/news-insights/insights/creating-value-through-sustainability-measurement-brookfields-approach


Canadian Climate Institute. (2023, September). Heat Pumps Pay Off: Unlocking lower-cost heating and cooling in Canada. https://climateinstitute.ca/wp-content/uploads/2023/09/Heat-Pumps-Pay-Off-Unlocking-lower-cost-heating-and-cooling-in-Canada-Canadian-Climate-Institute.pdf


Canada Green Building Council. (2022, January). Decarbonizing Canada’s Large Buildings: A Path Forward.  https://www.cagbc.org/wp-content/uploads/2022/04/Decarbonizing-Canadas-Large-Buildings-Report-w.-Appendices-Final-Revised-Copy_with-formtting_2022-04-25.pdf



CBRE. (2022, October 26). LEED-Certified Office Buildings Command Higher Rents, Even Amid Challenging Conditions. https://www.cbre.com/press-releases/leed-certified-office-buildings-command-higher-rents


CIB. (n.d.). Building Retrofit Initiative. https://cib-bic.ca/en/building-retrofits-initiative/


Cortés Selva, Alma. (2024, August 29). Canadian Zero-Carbon Multi-Unit Residential Buildings: An Analysis of the Cost and Asset Value. BMO Climate Institute. https://commercial.bmo.com/en/ca/resources/commercial-real-estate/canadian-zero-carbon-multi-unit-residential-buildings-an-analysis-of-the-cost-and-asset-value/


Government of Canada. (n.d.). Net-zero emissions by 2050.


International Energy Agency. (2022, September). Renovation of near 20% of existing building stock to zero-carbon-ready by 2030 is ambitious but necessary. https://www.iea.org/reports/renovation-of-near-20-of-existing-building-stock-to-zero-carbon-ready-by-2030-is-ambitious-but-necessary


Oxford Properties. (2024, May 28). How We Built It: Decarbonizing our portfolio, one building at a time. https://www.oxfordproperties.com/news/decarbonizing-our-portfolio-one-building-at-a-time-

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