A Better PACE for Alberta: ELC recommends law reforms to increase financing and flexibility of Alberta’s Property Assessed Clean Energy (PACE) programs

06 Nov A Better PACE for Alberta: ELC recommends law reforms to increase financing and flexibility of Alberta’s Property Assessed Clean Energy (PACE) programs

Since 2018, Alberta has had legislation which supports PACE programming via the Clean Energy Improvements Regulation (CEIP Regulation) and amendments to the Municipal Government Act (MGA).^[1] The amendments to the MGA grant municipalities authority to impose a “clean energy improvement tax” and the CEIP Regulation sets out the framework for PACE programs in Alberta.

Alberta’s existing PACE programs are currently tied to financing flowing directly from a municipality to a landowner, and operate on a municipality by municipality basis which impedes the creation of economies of scale that contribute to program success. These limitations may be tied to the use of “tax” language which potentially leads to confusion around municipal jurisdiction in relation to PACE program financing and administration, and may have influenced the framing of Alberta’s PACE legislation.

What is the purpose of PACE programs?

The intention of PACE programs is to provide easy access to financing for retrofitting existing buildings to reduce energy use and emissions and to create more resilient buildings, thereby contributing to climate change mitigation and adaptation targets. This is done by allowing property owners to obtain a loan to fund clean energy improvements to their property. That loan runs with the property (i.e. it is transferred to any new owners of the property) and is repaid via a charge on property taxes (we will refer to these as PACE charges).

How is expansion of Alberta’s PACE programs being curtailed?

The scale of PACE program implementation in Alberta has been impeded by the reliance on public funds and a municipality by municipality approach.  Program scale is unnecessarily limited by requiring all funding flow from municipalities; opening access to private capital will allow Alberta’s PACE programs to expand and achieve economies of scale.  Currently, Alberta’s PACE programs are administered by Alberta Municipal Services Corporation.  We recommend that additional efficiencies will be achieved by creating a dedicated third-party non-governmental program administrator with augmented authority that can carry the bulk of administrative burden for all municipalities in Alberta thereby reducing transaction costs.

The current structure of PACE programming in the Municipal Government Act and its limitations may arise from policy stance that the program must be treated as a “tax” under the MGA and CEIP Regulation (PACE charges are called “clean energy improvement taxes”). This language potentially leads to confusion around municipal jurisdiction in relation to PACE program financing and administration, and may have influenced the framing of Alberta’s PACE legislation.  Although called a “tax” in the legislation, the PACE charges are not taxes but are actually loan payments.  Municipal taxation is merely the mechanism for collection of the loan payments.

However, because the PACE legislation adopts the language of “tax”, it seems to have led to a presumption that municipal debt is required in order to collect PACE charges via property taxes.  This means that financing must flow directly from the municipality to a program participant (rather than directly from private investors).  This presumption creates limitations on the financing and administration of PACE programs in Alberta, leading to less effective programming.

Are PACE charges taxes? And why does it matter?

The authority of municipalities is limited in two ways.  Firstly, municipalities are creatures of statute and can only operate in the bounds outlined in statute (primarily, the MGA).  Secondly, municipalities have no constitutional status of their own and their power derives from provincial constitutional authority.  This means if a province lacks jurisdiction to do something, so does a municipality.

PACE programs are one of many tools that may be used at a municipal or provincial level to address climate change goals.  While provinces have broad constitutional authority to address climate change arising from their jurisdiction over property and civil rights, and local matters within a province; their taxation powers are more constrained by the Constitution.[1]  A province may only impose direct taxes within the province.  Municipalities are further constrained by having only the taxation authority granted by the province in the MGA.  So, if PACE charges are taxes, then these constraints apply.

Both the MGA and the CEIP Regulation have language which suggest that PACE charges are to be considered a form of tax, including that PACE charges are called “Clean Energy Improvement Taxes”.  As well, the role granted to municipalities with respect to PACE programs suggests that it was seen as critical that PACE agreements be made between a property owner and the municipality which seems to reflect an assumption that, in order to collect PACE charges via the property tax roll, the municipality must be the lender.

But PACE charges are not taxes

At first blush, it may appear that PACE charges are a form of tax because they are called “taxes” and treated and collected in the same manner as municipal property taxes.  Indeed, the legislative drafters may have maintained the notion or were directed to treat these charges at taxes. While the Canadian courts have not considered whether or not PACE charges are taxes, they have set out the basic characteristics of a tax:

• enforceable by law;
• enacted under the authority of Legislature or Parliament;
• levied by a public body; and
• intended for a public purpose.^[2]

There is an argument that because PACE charges arise, at least initially, from a voluntary agreement between the property owner and the lender that they lack the level of compulsion necessary for a tax. Even assuming PACE charges meet these four essential characteristics of a tax, further examination is needed to determine the primary purpose of the charge to determine if it is truly a tax or more in the nature of a regulatory charge or an unique form of charge.  A tax is designed to raise revenue for general purposes whereas a regulatory charge is used to finance or constitute a regulatory scheme. ^[3]  Unlike a tax, PACE charges are not designed to generate revenue for general purposes.  Rather PACE charges are imposed on a property as a means to collect loan repayments (and to recover program administration costs incurred by the municipality).

What changes do we recommend?

We recommend a host of amendments to the MGA and the CEIP Regulation to address the barriers which have arisen as a result of treating PACE charges as a form of tax.  Firstly, the legislation should be amended to clarify that PACE charges are not taxes but rather are charges collectable in the same manner as property taxes and do not require recovery of funds only provided directly by the municipality. Secondly, it is recommended that the role of the program administrator be expanded in the implementation of Alberta’s PACE programs.

Essentially, the program administrator would be responsible for all aspects of the PACE program including entering agreements and arranging financing with property owners.  The program administrator should be granted express power to seek financing from both public and private sources. Ideally, the role of program administrator would be fulfilled by a dedicated arms-length, non-governmental body as opposed to Alberta Municipal Services Corporation (as is the current situation).

The municipality’s role would be limited to passing a PACE bylaw (to opt-in to the program) and collection of PACE charges through the property tax roll (which would, in turn, be remitted to the program administrator).  The municipality would be enabled to charge an administrative fee for collection of PACE charges.

Under the proposed approach, the program administrator would accept, review and approve (or reject) applications for PACE projects submitted by property owners.  If accepted, the program administrator would enter into a financing agreement with the property owner – financing would flow from the program administrator to the property owner.  The program administrator would, in turn, advise the relevant municipality to place a PACE charge on the appropriate property roll to be collected in the same manner as property taxes, protected by lien.  Upon collecting the PACE charges, the municipality would remit these to the program administrator (subject to withholding an administrative fee).  Liens placed on the property by the municipality for associated PACE charges would be assigned to the program administrator for enforcement purposes.

[1] Constitution Act, 1867 (UK), 30 & 31 Vict, c. 3, reprinted in RSC 1985, Appendix II, no 5 [Constitution] at 92(2).

[2] National Steel Car Ltd. v Independent Electricity System Operator, 2022 ONSC 2567 (CanLii).

[3] Ibid.