Canada updated its nationally determined contribution (NDC) under the Paris Agreement in 2021, increasing its commitment to reduce emissions from 30 percent to between 40 and 45 percent by 2030, compared with 2005 levels.1 While it is likely that all sectors will need to contribute, the scale of the challenge requires industrial sectors and companies to lead the way in meaningful emission-reduction efforts. But individual consumers will also have a role to play. For individual Canadians, there are a variety of opportunities to contribute to decarbonization. Passenger transport and residential heating are two areas in which individuals can have a more direct and visible impact,2 specifically by adopting electrified cold-climate air source heat pumps (CCASHPs) and electric vehicles (EVs). These technologies require Canadian households to opt for low-carbon options rather than those that use fossil fuels.3
Across Canada, affordability is a critical consideration. With the recent rise in inflation, many Canadians have insufficient discretionary income to cover their existing purchases,4 making incremental investment in EVs or heat pumps more challenging, depending on individuals’ current living situation, income, city, and other factors. Therefore, affordability is one factor that needs to be addressed to ensure Canada can reach the adoption required to achieve its NDC commitment and mitigate further damage caused by increasing levels of CO2 in the atmosphere.
To help Canada meet its targets, this article explores the potential barriers to adoption of these technologies and the factors that would influence consumer decision making in these areas. Our analysis examines the implications of purchasing these products for consumers in various parts of the country and at different income levels from two perspectives: that of product life cycle cost and of up-front capital cost.5 The analysis indicates that purchasing low-carbon passenger vehicles and home-heating appliances does not provide a unified outcome, and affordability considerations are variable depending on a consumer’s income level and their location in the country.
EV adoption across households
As of 2022, about 3 percent of passenger vehicles on the road in Canada were EVs.6 For the passenger transportation sector to contribute its “equal share” to Canada’s NDC commitment, EVs would need to account for more than 45 percent of vehicles on the road. Therefore, the historical growth rate of EVs would need to be double that of today.7 There are several barriers to EVs reaching this level of penetration by 2030, notably the availability of sufficient EV models and affordability.8
While owning an EV can be on par with or cheaper than owning an internal-combustion-engine (ICE) vehicle over an assumed 15-year vehicle life, the higher up-front cost of an EV can be a potential deterrent. Based on analysis using 2024 data (including capital and operating costs and current subsidies), the time for a consumer to pay off an EV compared with a similar ICE vehicle is between four years and more than 15 years,9 depending on the city and the scenario considered (Exhibit 1).10 Mid-tier and higher-end vehicles would be paid off more quickly than entry-level vehicles because of the relative difference in up-front cost.11
The time required for an EV to reach parity with an ICE vehicle varies dramatically depending on regional power prices, gasoline prices, and EV incentive schemes. In Nova Scotia, British Columbia, and Québec, for example, EVs reach parity the fastest, typically in four to eight years. In Ontario and Alberta, the payback period is six to ten years.
Cold-climate heat pumps for single-family homes
As of 2023, 6 percent of Canadian households used heat pumps for residential heating.12 If residential buildings (in particular, single-family detached homes) were to contribute their equal share to the emission-reduction commitment by 2030, about 45 percent of households would need to adopt heat pumps, accelerating the historical growth rate of heat pump adoption by more than eight times.13 As with EVs, while it will be challenging for heat pumps to reach this level of penetration by 2030,14 an important consideration is affordability.
The personal economics for heat pump adoption range depending on the city, the prevailing heating appliance in each urban area,15 and the scenario under consideration. The time to parity with traditional home heating methods could range from zero to more than 15 years (Exhibit 2).
As regions plan for heat pump adoption, an important consideration is heat pump efficiency at cold temperatures, particularly in regions with extended periods of very cold weather. Some households may choose to keep a backup heating system, which could further burden the business case.16 But in Halifax, for example, heat pumps would pay off in many of the considered scenarios because of the high cost of heating oil and the subsidies offered by Nova Scotia.
If a household can align the replacement of their heating appliance with that of a cooling appliance (such as air conditioning), the economic case for adopting a heat pump improves significantly and would benefit the homeowner in most cities.17
Affordability across residences and locations
While an individual economic case for EVs or heat pumps might pay off in the long run, adopting these solutions requires an up-front capital investment that today is higher for these lower-carbon technologies than for the prevailing alternatives. Assessing average Canadian income levels and spending across low-, middle-, and high-income quintiles determined that many Canadians may not have sufficient income to cover their current spending, therefore likely making additional purchases challenging.18
These findings held true across many of the cities considered. If midquintile households chose to invest despite having potentially net-negative income, they had to redirect 15 to 90 percent of their discretionary income typically used for other purchases—such as gifts, recreational activities, and personal care—toward these purchases (Exhibit 3).
Purchasing an EV could require Canadians in the middle-income bracket19 to redirect 5 to 40 percent of their discretionary income. The proportion of discretionary income that would need to be redirected to the purchase of a CCASHP ranges from 5 to 65 percent.20 Low-income households would likely not have sufficient discretionary income to redirect their spending to low-carbon purchases, and only high-income households in Toronto, Halifax, and Montréal could purchase an EV and heat pump without having to subtract from their existing discretionary purchases.
How stakeholders can provide a way forward
Affordability remains a hurdle in adoption of EVs and heat pumps, particularly in the near term. The costs of heat pumps and EVs are projected to decrease significantly over the 2030s, and, as technology costs decline over time, consumers may be able to afford these technologies more easily.
Stakeholders across industries can consider how to increase affordability and improve the feasibility of adoption by, for example, improving access to a wider range of vehicle or appliance makes and models. There are also additional pathways that could be explored, such as alternative technologies (including hybrids, biofuels, hydrogen, and demand-side management) and behavior changes (including designated parking area or traffic lanes for EVs and better public transit options). These options are not exhaustive, and there are many considerations that can improve adoption and affordability.
While end user adoption is a critical factor, industries and government regulation have vital roles to play in creating the conditions that allow for decision making in support of decarbonization. There are other critical factors, in addition to addressing affordability, that need scale to enable increased adoption, including simpler or more permitting for infrastructure build-out, coordinated grid planning to keep pace with electricity demand, the availability of materials and labor for installations of chargers and heat pumps, and more contractors with the knowledge to recommend these solutions. Providing additional education for consumers and contractors about lower-carbon technologies will also be a vital part of scaling these technologies.
The decarbonization challenge will require coordinated and collective action by industry and individual consumers alike. EVs and heat pumps are two technologies that could drastically reduce emissions by individual consumers if they were adopted widely, but there will not be a one-size-fits-all approach to improving adoption across the country.
Each province and income level has different drivers under consideration for adoption. A more tailored approach that considers regional and income constraints—such as grid availability, power price, grid emissions intensity, annual temperatures, primary space heating method available to households, and annual mileage—can help achieve increased decarbonization across the residential-heating and passenger transport sectors.
About the authors
Asad Husain is a partner in McKinsey’s Toronto office, where Rob Palter and Zak Cutler are senior partners. Elaine Almeida is a partner in the Calgary office, where Greg Kudar is a senior partner.
The authors wish to thank Jacqueline Smith and Raj Herian for their contributions to this blog.
Sources
1 “Canada’s 2017 nationally determined contribution submission to the United Nations Framework Convention on Climate Change,” Government of Canada, May 11, 2017; “Canada’s 2021 national determined contribution under the Paris Agreement,” Government of Canada, 2021.
2 When we refer to heat pumps and EVs in this analysis, we are specifically referring to cold-climate air source heat pumps and passenger EVs in the residential building (single-family homes) and passenger transportation sectors.
3 To showcase the implications of the energy transition on affordability, the differences between traditional and lower-carbon technologies were analyzed (namely, the differences between EV and internal-combustion-engine vehicles and the differences between CCASHPs and furnaces and baseboards). The following findings are based on life cycle total cost of ownership for capital costs, operating expenses, potential changes in tax, and emissions across each technology over its lifetime.
4 Guy Gellatly and Carter McCormack, Recent developments in the Canadian economy: Fall 2023, Statistics Canada, October 25, 2023; “Household spending, Canada, regions and provinces,” Statistics Canada, October 18, 2023; “Income of individuals by age group, sex and income source, Canada, provinces and selected census metropolitan areas,” Statistics Canada, April 26, 2024; Average scheduled monthly payments for new mortgage loans, Canada Mortgage and Housing Corporation, August 28, 2024; “Household sector credit market summary table, seasonally adjusted estimates,” Statistics Canada, September 12, 2024; Aled ab Iorwerth, “Risks to Canada's economy remain high as household debt levels continue to grow,” Canada Mortgage and Housing Corporation, May 23, 2023; Pete Evans, "Households now owe more than Canada's entire GDP, housing agency warns,” CBC News, May 23, 2023.
5 Only residential purchases (for example, heat pumps for single-family detached homes or personal vehicle EVs) were considered. The findings may be very different for commercial or industrial scale purchases and were not considered here.
6 “Market snapshot: Record-high electric vehicle sales in Canada,” Canada Energy Regulator, October 26, 2022; “Automotive statistics,” Statistics Canada, accessed on September 17, 2024; 3 percent of total registrations and 5 percent of new registrations.
7 Assuming 18 million households in 2030 and that each household has at least one EV.
8 Canadians do not purchase enough vehicles annually today to reach this level of penetration by 2030, even if 100 percent of them were EVs starting this year; “Market snapshot: Record-high electric vehicle sales in Canada,” October 26, 2022; “Automotive statistics,” accessed September 17, 2024; Emma Jarratt, “ZEV registrations hold steady in Q2 2023, according to new StatsCan data,” Electric Autonomy Canada, September 27, 2023.
9 Assuming 15,000 km driven per year, which is about the average distance Canadians drive annually.
10 Calgary, Vancouver, Toronto, Montréal, and Halifax were considered, across low-, mid-, and high-quintile income and spending groups and across various scenarios. For EVs, these scenarios include EVs as an entry-level or midtier vehicle, with and without carbon tax, and changing electricity prices and mileage. For CCASHPs, these scenarios include replacing furnaces or baseboards only versus replacing an AC unit at the same time, with and without carbon tax, and changing electricity prices.
11 The payback period for entry-level vehicles is longer because the base cost of a battery increases the entry-level EV cost to more than $20,000 above an entry-level ICE vehicle. For vehicles in the mid- to high-end range, the up-front cost of the car increases, but the delta between EV and ICE shrinks ($10,000 to $15,000), so the EV reaches parity in total cost of ownership sooner.
12 “Market snapshot: Steady growth for heat pump technology,” Canada Energy Regulator, February 21, 2018; “The heat is on: How Canadians heat their home during the winter,” Statistics Canada, January 13, 2023.
13 Assuming adoption scales from about 900,000 households today to about nine million households in 2030, the adoption rate would have to increase from about 4 to 5 percent growth per year to more than 35 percent per year (assuming equal share contribution by the buildings sector).
14 Canadians do not purchase enough heating appliances annually for this level of turnover because may appliances last 15 to 25 years.
15 Natural gas furnaces in Calgary, Vancouver, and Toronto; oil furnaces in Halifax; and baseboard electric heaters in Montréal were assumed for this analysis.
16 Stated effectiveness of CCASHPs is usually up to a low temperature of about –30°C; in 2024, some Canadian cities experienced temperatures lower than –40°C. Some Canadians may choose to operate a hybrid system, retaining natural gas furnaces or baseboard heaters in addition to a CCASHP, in which case the “payback” analysis is not valid because it is not a direct replacement. For more, see “Heat pumps for the Oil to Heat Pump Affordability program,” Government of Canada, updated September 10, 2024.
17 The cost of natural gas being lower than electricity prices today results in a higher operating cost for a CCASHP, which erodes some of the benefits over the first one to two years.
18 Bottom-quintile household income is defined by Statistics Canada as about $25,000 to $35,000 per year, depending on the province, and midquintile household income is defined by Statistics Canada as about $75,000 to $105,000 per year, depending on the province.
19 Midquintile income per Average scheduled monthly payments for new mortgage loans, Canada Mortgage and Housing Corporation, August 28, 2024, and the following Statistics Canada sources: Recent developments in the Canadian economy: Fall 2023, October 25, 2023; “Household spending, Canada, regions and provinces,” October 18, 2023; “Income of individuals by age group, sex and income source, Canada, provinces and selected census metropolitan areas,” April 26, 2024; “Household spending by household type,” October 18, 2023.
20 This analysis was conducted using 2024 data and could improve over time as the capital cost of these products comes down.