Upgrading Canada's Homes: A path to net-zero

The Economics of Energy Efficiency in Buildings

Buildings account for 18% of Canada's GHG emissions, making it the third-largest emitting sector after the oil and gas and transportation sectors. The majority of energy use in residential buildings goes toward space heating (63%), with lights and appliances (19%), water heating (15%), and cooling (3%) representing the remainder of energy use.

The emissions profile from the buildings sector varies across provinces due to differences in the energy sources used for heating and the share of electricity that is produced from low- or non-emitting sources.  

• In Manitoba, 55% of buildings rely on natural gas for heating compared to 45% that use electricity.
• In Ontario, natural gas is the primary heating source for 75% of buildings.
• In British Columbia, natural gas represents about 60% of household energy consumption, while electricity covers about 40%.
• In the Atlantic provinces and Quebec, heating oil is more commonly used in the Atlantic provinces and Quebec, with about 25% of households in Atlantic Canada relying on it for heating, compared to just 6% in the rest of the country.

British Columbia, Manitoba, Newfoundland and Labrador, and Quebec all benefit from grids based on hydroelectricity that reduce the electricity-related emissions in buildings. Conversely, Saskatchewan and Alberta, which rely more heavily on fossil fuels for electricity generation, have higher emissions from their buildings.

Clean and Efficient Homes for Canadians

The approach to retrofitting buildings depends on the type of building. The vast majority (approximately 11 million) of buildings in Canada are residential, with single-family detached homes making up the largest share (see figure below). In contrast, there are approximately 556,000 commercial and institutional buildings across Canada.

Virtually all homes in Canada will require some form of building retrofit to achieve net-zero targets, with older homes typically representing a much larger decarbonization challenge compared with newer ones. Deep energy retrofits (DERs), which involve comprehensive upgrades such as improved insulation, advanced air sealing, and upgraded heating systems (e.g., HVAC systems or heat pumps), offer a significant reduction in energy consumption. Unlike standard energy-efficiency measures, which focus on specific components like windows or doors, DERs aim to overhaul the entire building envelope for maximum energy efficiency. The federal government defines a DER as achieving a minimum of a 50% reduction in energy consumption relative to previous standards.
 

Homeowners now have options to expand their use of renewable energy, including installing solar panels on homes and increasing access to clean electricity from the grid. Reducing overall energy demand also decreases the electricity needs of homes, making rooftop solar a more viable and effective solution. 

Advances in heat pump technology, including both ground-source and air-source systems, provide an opportunity to substantially increase efficiency and switch from fossil fuels to electric heating. 

Ground-source heat pumps, while requiring more upfront infrastructure, are highly efficient even in extreme cold, making them well-suited to the harsh winters of the Prairie provinces. Additionally, emerging technologies like smart thermostats and energy recovery ventilators further optimize energy use, making buildings more resilient to climate change while contributing to emission reduction goals. 

Measures like installing a heat pump—even without upgrading the building envelope—can still be considered a DER if they reduce the building's energy use by at least 50%. This illustrates how efficiency upgrades and fuel-switching may not be independent of each other. Some upgrades reduce overall energy use and eliminate fossil fuel use. Reducing the building's heating and cooling load before installing a heat pump would minimize energy use and operating costs for homeowners. However, the decision to upgrade the building envelope would depend on other factors, such as the age of the building and the owner’s ability to pay the upfront costs. 

Achieving net-zero emissions in Canada's building sector requires finding a cost-effective balance between energy retrofits, fuel-switching, and expanding clean electricity generation. Electrifying the building energy system without accompanying efficiency upgrades may place a strain on the grid. For example, reducing natural gas space-heating usage by half in Manitoba would require at least double the province's current electricity generation. Similarly, making extensive efficiency upgrades to every building is challenging due to the high costs.

Also important to consider is the impact of embodied carbon, which includes emissions from the extraction, production, and installation of building materials. The federal government has developed a standard for embodied carbon in construction materials which could be expanded to include additional high-impact materials. 

In March 2025, the federal Liberal government announced a new policy to support the construction of prefabricated housing to address Canada's housing crisis. The policy does not specify what energy-efficiency standards these prefabricated homes must meet, meaning they will likely be built to the energy-efficiency requirements set out in provincial building codes. This could result in uneven energy performance standards across the country. While the federal government has already committed to high-efficiency requirements for its own buildings under the Greening Government Strategy, it remains unclear whether prefabricated homes built under this new initiative would qualify as federal buildings.

Economic Opportunities

Investment in Canada's building energy efficiency is not just a climate imperative but also represents a significant economic opportunity. Investing in green buildings would serve as a powerful economic driver by creating jobs, increasing demand for goods and services, reducing household energy costs, and boosting GDP. Some research suggests that the green building industry could contribute as much as CAD 150 billion to Canada's economy by 2030. While energy-efficiency upgrades offer long-term cost savings and environmental benefits, the high upfront costs remain a barrier to adoption. Targeted government funding for low-income households and incentives for landlords are essential to ensuring that these benefits are widely accessible. 

Prioritizing energy efficiency can be understood as an investment with positive spillover effects, rather than a cost, as it reduces overall energy use and provides many years of energy savings. Government support for upfront efficiency investments can secure longer-term energy affordability for homeowners while providing clear market signals to make energy efficiency feasible and attractive for builders. 

An estimated CAD 10 billion–CAD 15 billion in annual funding is required each year until 2040 to decarbonize buildings, which is expected to yield significant economic benefits, including lower energy bills for Canadians. Estimates suggest that energy retrofitting can lead to CAD 10.8 billion in annual energy bill savings. At the same time, building retrofits are projected to create thousands of jobs, supporting workforce development and providing long-term employment opportunities across Canada’s low-carbon economy.

Day-to-Day Benefits for Canadians

High-efficiency energy systems in buildings lead to lower utility bills, directly impacting affordability and reducing rates of energy poverty. Research suggests that upfront investments in energy efficiency often pay for themselves over time by reducing long-term utility costs and the total cost of building ownership. Because up to 90% of a building's lifetime costs come after construction, investing in energy-efficiency design upfront is one of the most effective ways to reduce operating expenses and overall ownership costs. Targeted programs can support low-income households with upfront capital costs, ensuring that benefits flow to all Canadians, not just those who can afford energy retrofits. 

Highly efficient homes can help reduce the overall cost of building and maintaining electricity grids by lowering energy demand. A highly efficient building envelope is one of the most effective ways to reduce energy demand, lower peak energy loads, and enhance climate resilience. Peak demand can also be reduced by lowering overall energy use and using smart appliances and thermostats that can be set to cycle off during peak electricity demand periods. Rooftop solar panels can also reduce the demand for electricity from the grid and support overall grid resilience. This decreased strain on the grid can minimize the need for costly infrastructure expansions. For example, the Government of Ontario has estimated that achieving net-zero emissions could cost CAD 400 billion, a figure that could be significantly reduced if overall energy demand from buildings were lower.

Gas stoves emit pollutants such as nitrogen dioxide, benzene, and carbon monoxide, which can exacerbate respiratory conditions like asthma and increase the risk of cardiovascular diseases. A recent report indicates that gas stove emissions contribute to approximately 40,000 premature deaths annually in Europe due to heart and lung diseases. While not as significant a health risk as gas stoves, gas furnaces can still contribute to indoor air pollution by emitting gases like nitrogen dioxide and other combustion byproducts, which have been linked to respiratory issues. Poor ventilation or aging equipment can exacerbate these effects, potentially increasing the risk of asthma and other respiratory conditions. Electric heating systems can eliminate indoor combustion and improve air quality.

Investing in net-zero buildings in Canada presents an opportunity to address a range of social issues, including inequality and housing disparities. This is especially relevant considering the current housing and affordability crises. By prioritizing low-carbon housing—particularly in the not-for-profit, public housing, and cooperative sectors—governments can reduce long-term energy costs for residents while ensuring access to climate-resilient housing. 

Achieving the size and scale of building energy-efficiency upgrades across Canada to meet our climate targets will require ambitious levels of public investment from all levels of government, which will foster growth in the Canadian building industry and create significant employment opportunities. However, the scale of the challenge means that these investments cannot be accomplished within the current market structures and policy frameworks.

Achieving Widespread Building Decarbonization Measures in Canada

The following measures can be taken to achieve widespread building decarbonization measures in Canada:

Adapt International Best Practices to the Canadian Context

Nearly all of Canada's homes require some form of energy-efficiency retrofit for net-zero, as current energy-efficiency rates in Canada's building stock are too low. The most successful model for achieving widespread building retrofits is the Energiesprong model pioneered in the Netherlands, which focuses on maximizing the efficiency of DERs through prefabrication and off-site assembly (Energiesprong Global Alliance, n.d.). Due to more diversity in housing stock and higher numbers of single-family dwellings, some modifications are required for Energiesprong to achieve success in the Canadian context. A limited number of Energiesprong trials have been launched in Canada, for example, the Presland PEER pilot by Ottawa Community Housing and the Sundance Cooperative in Edmonton. Governments can support DERs by providing resources to duplicate and scale up these initiatives. 

Commit to Reaching the Highest Tier of National Building Code Performance

Building codes are critically important because it is much more cost-effective to incorporate energy-saving measures during the initial construction than to retrofit buildings later. The federal government has developed the National Building Code of Canada, which provides a model that provinces can adopt in their entirety or with modifications. Provinces have adopted different tiers of the national building code framework, reflecting varying levels of ambition in energy-efficiency standards. The Province of Manitoba, for example, recently set its building codes at tier 1, the lowest standard. British Columbia, on the other hand, created its own Energy Step Code in 2017, which aligns closely with the national tiered system and has since driven significant improvements in building energy performance. Provinces should either adopt the highest tier of the national building code or, at a minimum, present a clear and credible roadmap for reaching that level in the near future. Likewise, the federal government should set an ambitious energy-efficiency standard for their commitment to build prefabricated homes for Canadians.

Integrate Energy Efficiency With Affordable Housing Policy

Increasing energy efficiency should complement other strategies to enhance housing affordability. Building retrofit programs have typically benefited Canadians with the means to invest in their own properties; however, affordability is increasingly being recognized as a key concern in housing policy. The Canadian Affordability Action Council has recommended that the federal government invest in the not-for-profit and cooperative housing sector as a means to address social inequalities while simultaneously addressing the climate crisis. Additionally, advocacy groups such as EcoTrust Canada have proposed policy adjustments to help provincial governments design efficiency programs that better serve low-income renters.

Implement Innovative Financing Solutions

Financing is a key barrier to scaling up energy efficiency in buildings. Without accessible funding mechanisms, many property owners are unable to invest in the deep upgrades needed to reduce emissions and energy costs. Financing mechanisms like Property Assessed Clean Energy (PACE) or public banks specifically targeting building retrofits can provide essential solutions to homeowners. For example, Germany's KfW Development Bank offers low-interest loans for residential, commercial, and institutional retrofits, as well as energy-efficient new construction. PACE allows homeowners and businesses to finance upgrades—such as heat pumps, insulation, and high-performance windows—through their property taxes, spreading costs over time while ensuring that repayment stays with the property rather than the individual. PACE legislation has been enacted at the provincial level in both Alberta and Saskatchewan, enabling municipalities to establish property-assessed clean energy financing programs. At the same time, public banks can provide stable, low-interest financing for large-scale retrofits, filling gaps where private lenders may be reluctant to invest.

Enhance Efficiency Programs

Energy-efficiency programs are active across much of Canada, with provincial organizations providing funding to reduce energy use and lower emissions. These programs play a crucial role in helping households, businesses, and industries cut costs and transition to cleaner energy. Efficiency Canada's Scorecard highlights a range of tailored policy opportunities for each province, including measures to support electrification, enable deeper building retrofits, and improve efficiency in industrial operations. Strengthening and expanding these efforts can help unlock greater savings and climate benefits across the country.

Headline Policies: Recommendations

The table below summarizes key actions that provincial and federal governments can take to support building energy efficiency across Canada. These recommendations focus on expanding retrofit financing, strengthening building codes and energy labelling, and leveraging public investment to accelerate the transition to low-carbon buildings.

Conclusion

Implementing an effective net-zero buildings policy in Canada will be an essential element of climate policy in Canada. This should include a robust DER program, more ambitious building code standards, and the adoption of new technologies. Beyond a climate imperative, investments in net-zero building policies will benefit the economy and provide jobs for Canadians. In addition to their economic benefits, net-zero building policies offer an opportunity to address pressing social challenges like housing costs and inequalities.

A full list of references can be found here.

Re-Energizing Canada is a multi-year IISD research project envisioning Canada's future beyond oil and gas. This publication is part of IISD's Clean Energy Insights policy brief series under this project, which outlines the benefits of a net-zero economy for Canadians across the country.