Natural Capital: A Critical Foundation of Our Economy Protecting natural capital in urban communities 4.1 The Importance of Natural Capital to Urban Well-Being Through initiatives such as the Prime Minister’s Caucus Task Force on Urban Issues, the federal government has recognized the need to play a stronger role with respect to municipalities. As the government’s 2002 Throne Speech emphasized, “Competitive cities and healthy communities are vital to our individual and national well-being, and to Canada’s ability to attract and retain talent and investment.” These issues are becoming increasingly important as our population becomes more concentrated in urban centres, and as cities play an ever-growing role in driving the Canadian economy. The linkages between the quality of urban natural capital, economic performance and social well-being are numerous. A city’s local natural capital in the form of air and water quality, as well as the impact of contaminated sites, can have a profound impact on the health and quality of life of its residents, on its ability to attract and retain businesses and well-qualified workers, and on regional and national economic prosperity.

Cities also influence the state of Canada’s natural capital outside their boundaries. Their large, concentrated populations require constant infusions of energy, water and materials. Urban expansion can lead to a loss of prime agricultural lands and sensitive areas. It has been estimated, for example, that redeveloping a hectare of urban brownfields can save at least 4.5 hectares of greenfields from being developed in outlying areas. Greenhouse gas emissions from automobile and energy use demonstrate that some urban environmental impacts are global in nature.

In many cases, maintaining natural capital in urban areas implies the improvement of municipal infrastructure and the creation of a more compact and energy-efficient urban form. In other words, improving natural capital in cities necessitates improving the quality of their produced capital (e.g., water treatment plants, transit systems, buildings).

The NRTEE’s report on urban environmental quality shows that federal fiscal policy, by helping to shape transportation, energy use and development decisions, already has an important influence on the natural capital of cities. However, in most cases this influence is unintended. The recommendations included in this submission are a first step toward creating a cohesive federal approach to improving environmental quality and natural capital in urban areas.

One urban issue that has received particular attention from the NRTEE is the redevelopment of brownfields, an area where the NRTEE has developed a detailed national strategy. This strategy was requested by the federal government in its 2001 budget.

Brownfields are vacant or underutilized commercial and industrial properties where past actions have resulted in actual or perceived contamination. Brownfields differ from other contaminated sites in one important way: they have good potential for being cleaned up and redeveloped for productive use. Although the exact number is unknown, the NRTEE has estimated that there may be as many as 30,000 brownfield sites across Canada.

The benefits of brownfield redevelopment are numerous. Remediating contaminated sites can help protect human and environmental health (particularly in adjacent areas). Moreover, brownfield remediation opens these sites for economic use and saves a comparable greenfield (which may be on agricultural or ecologically sensitive land). The result is a more efficient urban form that reduces urban sprawl and traffic, with its associated air pollution and greenhouse gas emissions.

4.2 Budget Recommendations

The recommendations in this section stem from two recent NRTEE reports: Environmental Quality in Canadian Cities: The Federal Role (released in May 2003) and Cleaning Up the Past, Building the Future: A National Brownfield Redevelopment Strategy for Canada (released in February 2003).

Environmental Quality in Canadian Cities focused on the need to create a coherent approach for how the federal government uses fiscal levers to improve environmental quality in cities. One of the key themes of the report was the need for greater horizontal and vertical integration of fiscal policies that affect urban decision making. It also made specific recommendations to promote various aspects of urban environmental quality, including recommendations on:

• funding and encouraging the use of urban transit;
• promoting energy-efficient buildings and community energy systems;
• supporting sustainable urban development patterns (or urban form); and
• promoting sustainable municipal infrastructure.

Many of these recommendations are included in this submission.

The measures proposed in this section complement the climate change initiatives announced by the federal government on August 12, 2003. The federal spending announced then will contribute to initiating or expanding a variety of programs that will develop and increase the use of greenhouse gas reduction technologies. Several of the recommendations in this submission propose fiscal tools (e.g., GST rebates) that will create positive market signals to provide further incentives to disseminate these technologies.

The second report, on the NRTEE’s National Brownfield Redevelopment Strategy, included recommendations in three areas:

• the need for strategic public investment – tax incentives, loans, grants and mortgage guarantees – to overcome market reluctance to provide capital to finance the early stages of brownfield redevelopment;
• the need for all levels of government to work together to improve the regulatory environment for brownfield redevelopment by introducing predictability and consistency with regard to the liability regime and the post-remediation evaluation process; and
• the need to raise stakeholder awareness of the benefits of brownfield redevelopment and increase brownfield redevelopment capacity by promoting innovation in the area of remediation technology.

Most of the fiscal recommendations in this submission address the first area: the lack of available capital, which is one of the main barriers to brownfield redevelopment. In many cases, federal tax and other laws provide incentives for greenfield development that are unavailable for comparable brownfield projects. For this reason, the NRTEE is making several recommendations to address the lack of capital at various stages of the brownfield redevelopment process. No single type of financial assistance can address all of the problems facing brownfield properties, and different policy instruments will be needed for different participants and different brownfield sites.

It should be noted that the measures included in this Greening of the Budget submission to address upfront financing are part of an integrated strategy to address the barriers to brownfield redevelopment and, as such, are highly interdependent. Issues of liability and stakeholder awareness must also be addressed by all levels of government.

4.2.1 Encourage the Use of Urban Transit

Air quality is one of the key types of natural capital affected by urban communities. Like urban areas around the world, Canada’s cities face the increasingly difficult challenge of controlling air pollution. At the same time, Canada is also responding to the need to reduce national greenhouse gas emissions. Transportation accounts for 35% of Canada’s end-use greenhouse gas emissions, and more than 40% of this amount comes from private passenger transportation. ³

Greater use of urban transit could contribute significantly to achieving Canada’s greenhouse gas reduction targets under the Kyoto Protocol, while also reducing air pollution and traffic congestion in urban areas. For example, compared with a single-occupant car, greenhouse gas emissions from a transit bus are 65% lower per passenger kilometre, while quantities of pollutants released are between 25% and 90% lower. ⁴

Despite the obvious benefits of urban transit in helping to reduce greenhouse gas emissions and improve air quality, Canada is the only G8 country without a national program to finance transit projects. The federal government recognizes that this must change. In its latest Throne Speech, the government promised to address the issue of sustainable urban transit as part of its 10-year commitment to upgrading urban infrastructure.

4.2.2 Provide a Tax Exemption for Employer-Provided Transit Passes

At present, the Income Tax Act indirectly promotes the use of private vehicles over transit. While the Act designates both employer-provided parking and transit passes as taxable income, a range of loopholes makes it easier to avoid paying tax on parking than on transit passes, even though taking transit generally benefits the public. For example, if an employer provides open parking rather than spaces dedicated to particular employees, the parking space is not considered a taxable benefit. By exempting employer-provided parking but not transit passes, the tax system gives employees a financial incentive to drive to and from work rather than take transit.

4.2.3 Expand the Use of Community Energy Systems

Community energy systems provide shared heating and cooling steam or electricity to groups of residential or commercial buildings in close proximity to one another. These systems can yield significant energy savings. For example, the Hamilton Community Energy Project, which will soon begin distributing heat to about a dozen buildings, estimates reductions in emissions in participating buildings as follows: sulphur dioxide emissions reduced by 57 tonnes per year; oxides of nitrogen reduced by 13 tonnes per year; and carbon dioxide (a major greenhouse gas) reduced by 9,851 tonnes per year. ⁵

Although they are energy-efficient, community energy systems are capital-intensive and require significant upfront investments in physical plant and distribution networks. These large upfront costs mean that private companies that are considering investing in such a system cannot expect to recoup their investment for many years.

Until 1994, community energy production and distribution equipment was eligible for an accelerated capital cost allowance under Class 34 of the Income Tax Act (now Class 43.1). However, this exemption was cut as a deficit-fighting measure. Allowing community energy systems to be once again eligible for the capital cost allowance would create an incentive for their use.

4.2.4 Offer a GST Rebate for Eco-Efficient Renovations

Older homes are much less energy-efficient than new homes. For example, a typical 1950s home employs about twice the energy used by a conventional new home of the same size. ⁶ Significant energy efficiency improvements could be realized by retrofitting older houses to be more energy-efficient. At the same time, pressures on urban infrastructure and the need for more greenfield development would be reduced if more rental units could be created in existing urban homes.

New housing is eligible for a rebate of 36% of the GST paid. However, homeowners undertaking renovations to improve energy efficiency or to add rental space typically receive no break on their GST payments.

4.2.5 Encourage the Purchase of New Homes Built to the R-2000 Standard

The R-2000 home program is well established and internationally recognized. Yet even though R-2000 homes consume 30% less energy than conventional new homes, they represent only about 3% of new units.⁷ This is partly because an R-2000 home is slightly more expensive to purchase than a conventional new home. Although they cost less to operate and therefore offer long-term savings, R-2000 homes are an estimated 2% to 4% more expensive than conventional new homes. ⁸

4.2.6 Eliminate the GST on Green Municipal Infrastructure

A key to improving the environmental quality of cities is to remedy the green infrastructure deficit in urban areas – a view echoed in the latest Throne Speech. Over the last few decades, municipal infrastructures have been allowed to deteriorate severely. In some municipalities, for example, wastewater treatment is non-existent. Similarly, existing demand for transit goes unfulfilled for lack of funds to buy new rolling stock or expand networks.

The federal government has taken some steps to address this deficit. The 2000, 2001 and 2003 federal budgets all allocated municipal infrastructure funds. However, one of the fiscal inconsistencies identified by the NRTEE is that while the federal government already provides funds for green infrastructure, it also charges municipalities GST on purchases related to these investments. In contrast, provincial and territorial infrastructure purchases are GST-exempt. Although some municipal GST is rebated, much money is retained. For example, the Toronto Transit Commission estimates that since the introduction of the GST it has remitted $130 million to the federal government. ⁹

4.2.7 Develop New Sustainability and Competitiveness Criteria for Federal Infrastructure Programs

The federal government has already begun investing in Canada’s municipal infrastructure through Infrastructure Canada and the Strategic Infrastructure Fund. However, only a portion of the funding is allocated to sustainable infrastructure projects.

Federal infrastructure investments should place a priority on projects that will make substantial contributions to improved environmental quality in a cost-effective manner.

4.2.8 Examine Eco-Efficient Mortgages

One way to improve urban environmental quality is to make urban development patterns more compact and use already-urbanized areas more efficiently. These changes could reduce car travel, energy use and greenhouse gas emissions, while supporting other initiatives in this budget submission, such as increased use of transit and expanded use of community energy systems.

Buying housing in already-urbanized areas is typically more expensive than buying new housing in greenfield areas. This higher expense is offset, in part, by reduced expenses in other areas. People living near concentrated transit or employment areas, for example, are less dependent on cars and tend to have lower vehicle ownership costs. Households with fewer or no cars may therefore be able to carry a higher amount of mortgage principal.

Conventional mortgage lending practices do not take this factor into account, but location-efficient mortgages (LEMs) do – providing higher amounts of principal to people buying houses in the urban core or in areas with good transit service. In so doing, LEMs support reinvestment in downtown and older suburban areas, redevelopment of brownfields, increased use of transit and more efficient use of existing municipal infrastructure.

Other jurisdictions are currently exploring LEMs as a tool to promote urban core regeneration. For example, the U.S. government is currently piloting a two-year, $100-million project to test LEMs in select U.S. cities.

“Green mortgages” are similar to LEMs, but these mortgages take into account the potential reductions in monthly expenses resulting from energy efficiency measures such as purchasing energy-efficient heating or appliances, participating in community energy systems or purchasing an R-2000 home.

4.2.9 Provide Upfront Deductibility of Brownfield Remediation Costs

One of the key barriers to brownfield redevelopment is the large upfront expense for developers associated with cleaning up the site. These cleanup costs must be incurred well in advance of developing the site, and recovering these costs can often take years.

The Income Tax Act adds to this barrier by forcing developers remediating brownfield sites to treat their investments as upfront capital costs rather than as expenses deductible against annual income. For developers this means that the costs incurred can be deducted only from the income generated by the redeveloped site, which typically will not be realized for several years.

Internationally, many governments have recognized this disincentive and amended their tax laws to address it. In 1997, the U.S. Congress approved a tax incentive known as the Brownfield Expensing Provision, which allows new owners of brownfield sites to write off cleanup costs in the year incurred. As well, the United Kingdom recently passed legislation allowing businesses to claim 150% of the costs incurred to remediate contaminated sites against corporate tax otherwise payable.

In Canada, the federal government recently changed the Income Tax Act to make expenses for mine expansions and oil sands investments eligible for an accelerated capital cost allowance against income not directly related to the capital investment. Doing the same for brownfield redevelopment will create environmental and social, as well as economic, benefits.

4.2.10 Implement a Brownfield Redevelopment Current Deduction and Investment Tax Credit

A second way to reduce the burden of upfront remediation costs is to create a Brownfield Redevelopment Current Deduction and Investment Tax Credit. Under this mechanism, qualifying remediation costs would be classified as deductible business expenses that could be carried forward and would be eligible for an investment tax credit. This option complements the recommendation proposed above, since such an incentive could be valuable to a party that does not earn positive taxable income in a year in which it incurs qualifying expenditures. If the tax credit was claimed, qualifying expenditure deductions made in computing income would then be reversed.

Such a tax credit would allow capital expenditures associated with remediating a brownfield site to be treated for income tax purposes in the same way that eligible capital expenditures for scientific research and experimental development are treated. Under the Income Tax Act, scientific research and experimental development investment tax credits can be deducted from income when computing tax payable. In the case of small business corporations, this investment tax credit can be refundable up to a certain amount.

4.2.11 Remove Federal Liens and Tax Arrears from Qualifying Brownfield Sites

Many brownfield sites fall into a class known as orphan sites. These sites are usually delinquent with regard to property tax payments, to the point of being eligible for municipal tax sale. Such properties are notoriously difficult to sell, however, because of the known or perceived contamination and the anticipated high costs of remediation. They are also often encumbered by outstanding federal and/or provincial Crown liens, which cannot be cancelled through municipal tax sale. Developing these sites is difficult, since the weight of back taxes and Crown liens can often destroy an otherwise sound redevelopment proposal.

This recommendation represents a highly cost-effective approach to providing financial assistance to brownfields, because it can be delivered for free (except for administration costs) to sites that may be of zero or very little worth to the government in the absence of any redevelopment.

The NRTEE proposes that all levels of government should forgive Crown liens and tax arrears for qualifying brownfield sites. Some provinces are currently considering developing a set of recognized criteria and protocols that would allow the removal of all provincial liens from an orphaned site if a feasible redevelopment proposal was submitted for approval. This process would be more effective if clear and consistent criteria and processes were established across all government jurisdictions, so that developers and purchasers would know whether a particular site, wherever it might be located, was eligible for lien removal.

4.2.12 Provide Mortgage Guarantees for Qualifying Brownfield Sites

Private lenders often prefer greenfield developments over brownfield redevelopment proposals, because the latter often carry additional financial burdens. In the United States, government mortgage guarantees have been one of the main instruments used to encourage private lending for brownfield redevelopment.

Government mortgage guarantees target the lack of access to capital from conventional sources, a market failure that arises when lenders have concerns over the reduced value of properties and collateral due to contamination. They also complement the tax changes and lien relief measures proposed above, because the impact of mortgage guarantees is likely to occur during the later, post-remediation stage, when the environmental status of the land is clear enough to attract loan financing from conventional sources.

In Canada, the Canada Mortgage and Housing Corporation (CMHC) has acted as a vehicle to enable higher-risk mortgage financing in the residential sector, as well as direct lending in certain circumstances. It would be possible, under its existing legislative mandate, for CMHC to provide mortgage insurance for brownfield redevelopment sites, provided the underlying purpose of the redevelopment was to provide housing. Expanding the mandate of CMHC to cover all types of development, including commercial and industrial, would give even more impetus for private sector action.

4.2.13 Establish a Designated Brownfield Revolving Loan Fund Program

Brownfield redevelopment projects are often unable to attract private sector financing, because lenders see the risks as being too large to justify a mortgage on commercial terms. In the United States, the Environmental Protection Agency’s Brownfield Economic Redevelopment Initiative helped create and fund Brownfield Cleanup Revolving Loan Funds through cooperative agreements with states and municipalities to capitalize these revolving funds. This practice has helped promote brownfield projects that would otherwise be uneconomical. The revolving nature of the fund allows loan repayments to be used to make new loans for other projects.

Revolving loan funds are particularly well suited to those brownfield sites that are only marginally unprofitable to private developers, because they deliver a modest level of financial assistance in the form of reduced interest rates. These loans should be made available only to sites that meet criteria determining whether the projects contribute positively to the economic, social and environmental aspects of the community.

4.2.14 Provide Grants for Qualifying Brownfield Projects

Many municipalities are interested in redeveloping brownfield sites for such public uses as parks, museums or recreational facilities and in remediating orphan sites with little immediate economic interest for the private sector. However, such brownfield redevelopment proposals may be unsuitable for mortgage financing, because the land once redeveloped will not generate enough income to repay the mortgage.

Current funding models for municipalities (such as the Federation of Canadian Municipalities’ Green Municipal Enabling Fund) could be adapted or expanded to accommodate the specific funding needs of brownfield redevelopment. Alternatively, a new grant funding program, involving all levels of government, could be established with criteria for site assessment and revitalization demonstration projects. In both cases, criteria should limit the availability of grants to municipalities and not-for-profit organizations (including properties remediated under the control of these entities) to target those sites where remediation is not market driven and where the site would not be redeveloped in any other case.

This approach is in broad agreement with recent budget recommendations offered by the Federation of Canadian Municipalities, which is responsible for administering the Green Municipal Funds.

4.2.15 Facilitate the Demonstration of Innovative Brownfield Remediation Technologies and Processes

Canada’s national brownfield redevelopment strategy should support efforts to bring to market made-in-Canada brownfield remediation technologies and processes. These efforts should strive to provide an additional platform in support of Canadian innovation that complements programs already in place to promote the development, demonstration and commercialization of environmental technologies.

In Quebec and several other provinces, temporary approvals or temporary operating permits (certificates of approval) can be issued to technology vendors that want to demonstrate the validity of their technological claims and test the effectiveness of their processes. The concept could be extended to brownfields, with the assistance of funding programs such as Industry Canada’s Technology Partnerships Canada program. Where environmental technology vendors are provided with the financial means to demonstrate their technologies and bring them to market, they should be granted access, through a formal process, to designated brownfield sites to test and perfect their proposed technologies and techniques.

The positive impact of such technology demonstration programs has been demonstrated by the Superfund Innovative Technology Evaluation (SITE) Program, operated by the U.S. Environmental Protection Agency for the past 13 years.

Endnotes

3 Natural Resources Canada, End-Use Energy Data Handbook, 1990–2000, June 2002.

4 Noxon Associates, At the Crossroads – Towards a Federal Vision for Urban Transit, May 2001.

5 Robert Desnoyers, President, Hamilton Community Energy Project, Personal Communication, January 2003.

6 Canadian Homebuilders’ Association, “About New Homes,” January 2003 (www.newhomesmonth.com/aboutnewhomes/newhomeenergy.html).

7 National Climate Change Program, Buildings Table Options Report, Residential Sector, final report prepared by Marbek Consultants in association with Sheltair Scientific and SAR Engineering, revised November 15, 1999.

8 Ibid.

9 Toronto Transit Commission, “TTC seeks court declaration to be exempt from GST,” news release, June 21, 2002 (www.newswire.ca/releases/June2002/21/c8948.html).

10 Canadian Urban Transit Association 2002 Budget Submission, Employer-Provided Income Tax Exempt Transit Passes, p. 4.

11 This assumes that the incentive would double the demand for R-2000 homes from 3% to 6%.

National Round Table on the Environment and the Economy 2004 Greening of the Budget Submission

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Improving the Information Based on Natural Capital [Summary] - [Details and Table of Recommended Measures]

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Protecting Natural Capital in Urban Communities [Summary] - [Details and Table of Recommended Measures]