Summoning the motivation to invest in efficient buildings

Why, in these recession-bound times, are companies reluctant to invest in making their buildings more energy efficient? It is after all one way of reducing carbon emissions that is often described as having a ‘negative cost’ – in otherwords, it saves money.

The Peterson Institute has outlined a new report on building efficiency, how much it could cost and why it does not receive the investment it appears to deserve.

The International Energy Agency says buildings account for 40 per cent of carbon emissions in most countries and that the building sector alone will need to make a substantial contribution to meeting targets agreed by the G8 last year. The IEA estimates a cost of $7,400m of additional investment in residential and service sector buildings to in a scenario to reduce emissions to 50 per cent of 2005 levels by 2050; or $2,600m just to reduce emissions to 2005 levels.

The Peterson Institute has drawn on a model by the World Business Council for Sustainable Development, which looked at five types of building in different regions around the world, and converted it to apply more widely. They said:

Cutting building emissions by 8.2 gigatons annually by 2050 will
require an additional $1 trillion per year in investment globally
between now and 2050. This accounts for roughly 1.5 percent
of global GDP over the same period and would constitute an
increase in energy-related investment of 18 percent. Of this,
$209 billion per year would take place in the United States,
$158 billion in the European Union, $114 billion in China,
and $37 billion in Japan (table 1), assuming per-building
transformation occurs equally across regions.

The study found that the savings would kick with carbon permits at an average cost of $25 per ton. To put this into perspective, prices under the European scheme have been trading at about €14 in the past few days, and some estimates for the carbon price under a US cap-and-trade scheme put the price at initially about $13 (though in both cases price levels are expected to rise).

However the actual price level varies at which efficiency investment begins to pay off widely between countries:

Lower carbon-intensity of energy supply makes abatement costs slightly
higher in Europe ($30 per ton), while China’s coal-dominated energy mix yields an
average abatement cost of $14 per ton. With a higher share
of investment costs recovered through energy price savings,
reducing emissions in residential structures is cheaper than in
other parts of the building sector. In the United States, the
average abatement cost for households is $9 per ton, compared
to a building sector–wide average of $28 per ton.

However the report says that even imposing a market price won’t necessarily spur more spending, because various barriers exist.

Perhaps most important is the short timeframe decision-makers in the building sector use when considering efficiency improvements. Most firms and households are only willing to invest in energy-saving technology
and design if it pays for itself in five years or less. This
means that even a relatively high carbon price will not change
consumer behavior. Providing households and businesses with access to
longer-term and lower-cost sources of capital will be critical
in overcoming this barrier. Promising models for financing
efficiency investments are being developed, but they remain
untested at the scale necessary to achieve transformation.

In the FT’s special report on building efficiency published yesterday, Constant van Aerschot, director of sustainable construction at Lafarge makes another point: energy spending is a fairly small part of most businesses’ costs - around 5 per cent – and with prices falling, so is the motivation to reduce prices.

There is another reason why many companies ignore the energy efficiency of their buildings, Fiona Harvey writes: they do not own them:

The landlord-tenant relationship means the interests of each are often at odds over energy use. For instance, tenants may not have the right – or may be unwilling – to make improvements to the building as they will benefit only until the end of the contract. Landlords may not want to take on refurbishment work if the advantages in lower bills accrue to tenants.

Related links:

Special Report: Efficient buildings 2009 (FT)
Energy efficiency in buildings: A global perspective (Peterson Institute for International Economics)

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