EcoBlocks

This post will describe the Eco Block concept and what the government will have to do to encourage developers to build with this type of whole-systems design.

EcoBlocks
EcoBlocks aim to be mass replicable, economically viable, and nearly entirely resource self-sufficient communities. EcoBlocks are an alternative way to meet the huge and growing demand for urban space in China, currently filled by inefficient and wasteful apartment blocks. The EcoBlock concept is still a only a concept, but it’s creator Harrison Fraker, former dean of the UC Berkeley School of Architecture, has worked with Arup to prove the concept and is in talks with various Chinese cities to build an EcoBlock. The slide show below is Professor Fraker’s full introduction to the concept, and I will focus on a few key slides in my post today.

Harrison Fraker- EcoBlocks

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Whole Systems Design
Professor Fraker has done a masterful job of using whole systems thinking to design the EcoBlock. As the schematic below shows, the EcoBlock considers the many interactions between the energy, water, and waste systems. The anaerobic digester is a prime example: water used to flush the toilets goes into the septic tank as waste, which then goes through the digester where it is turned into energy. This is an interesting example of “waste equals food”, a concept Will McDonough and Michael Bruangart champion in Cradle to Cradle.


The upshot of this whole systems thinking is a development that is almost entirely self-sufficient from a resource perspective. As the chart below shows, thanks to significant energy efficiency measures and on-site generation, EcoBlocks is a net-zero energy community and doesn’t need to be connected to the grid.


As a result of water conservation measures and extensive on-site treatment, EcoBlocks are entirely self sufficient from a water perspective. The EcoBlock also tries to close the waste loop. All sludge, food waste, and green waste is sent to the digester where it is used for energy generation. Unfortunately, the waste loop is not completely closed, and about 17% of the complex’s waste (primarily non-recyclable solid waste) will have to be sent to the landfill.

The EcoBlock’s community design aims to create a pedestrian-friendly environment, maximizing the room for social interaction and minimizing emissions related to automobiles.

First costs
But of course, the primary barrier keeping EcoBlocks from moving from concept to reality is cost, or rather, the distribution of costs and benefits among different players.


The EcoBlock’s additional sustainability initiatives are expected to increase the upfront costs by 5-10% over a standard development. On it’s face, that seems pretty remarkable: a completely net-zero energy and water and nearly net-zero waste community for just 5-10% more than a standard resource-inefficient development.

But an extra $7 million in upfront development capital can significantly affect the project’s economics: Professor Fraker estimates that this investment will take a 10.1 year payback period. 10 years is a long time for developers anywhere, and light years in China’s fast-moving development market, and is likely to be a big deterrent to Chinese developers.

But the real financial barrier with the EcoBlocks is not necessarily this cost increase per se, but rather a mismatch between costs and benefits. All the costs- solar panels, digesters, wind turbines, wastewater treament facility, etc- are borne by the developers. On the other hand, most of the benefits are enjoyed by either the tenants or the government.

The benefits that flow to the tenant are obvious: a net-zero energy and water community means no monthly electricity or water bill. Theoretically, these utility saving benefits could potentially be capitalized upfront and included in the price of the units. However, that would likely make the units prohibitively expensive for the average urban Chinese resident, limiting the usefulness and scalability of the EcoBlock model.

Most likely, government support in the form of a financial subsidy to developers will be needed to get EcoBlocks off the ground. Luckily, I think the government has a real incentive to do this. Besides the many obvious environmental benefits of this type of development, the EcoBlock could also save the government a lot of money in capital spending. Since EcoBlocks are net-zero energy and net-zero water, the government doesn’t have to provide any power or water infrastructure to the community. If many communities pursued this mode of low-impact development, this could result in the reduction of an entire water treatment plant or coal-fired power plant, saving the government significant amounts of infrastructure spending. Government therefore has an economic incentive to encourage mass implementation of EcoBlock-like low-impact communities.

The chart below shows one kind of government subsidy model that Fraker envisions. Essentially, the government gives a financial subsidy to the developer, who is then incented to build a resource efficient EcoBlock development. After completion, users pay the developer a phantom “utility bill” to the developer instead of a real utility bill. Essentially, the idea is for those who get the long-term benefit (government, users) to pay the developer, the actor with the most control over the design.



The future role of government in green building
Thus far, the green real estate market in China (and the US to a lesser extent) has consisted almost entirely of Class A office buildings and luxury apartments in Tier 1 cities. Developers are willing to build green for these high-end markets because they can make more money in three primary ways: higher rents since companies will pay more for green space; lower operating costs as a result of lower energy bills; and a better competitive position thanks to the green features.

But green buildings cannot just be an isolated, high-end phenomenon; in the future every building- from the cheapest hutong all the way to the most luxurious hotel- will need to be green. And for that vision to be achieved, green building payoffs can't be based on higher rents alone.

The Asia Business Council’s report on green buildings showed that investing in energy efficiency is 4-6x cheaper than investing in new power plants. The problem is, this statistic takes the societal viewpoint. From the viewpoint of the average Chinese developer, sustainability is an extra cost and the benefits will be enjoyed by somebody else. Government must step in and change this economic calculus: In order for developments like the EcoBlock to be competitive and mass-replicable in the short term, the government must step in and provide financial incentives to developers.

But maybe it doesn’t have to be the Chinese government. The recent Brookings Institution report on overcoming obstacles to US-China cooperation on climate change recommends that the US and China announce a major headline green initiative that “capture[s] the public’s imagination”. Could EcoBlocks in China- and financial incentives from the American government to build them- fit the bill?

Ministry of Construction Green Building Evaluation Standard- The “Three Star” System

Today’s post will describe China’s green building evaluation standard and compare it the US Green Building Council’s LEED rating system.

An English translation of the Chinese rating system can be found here:

Part 1: full rating system

Part 2: notes and scoring system

(note: from the google doc's site, you can download the rating system in PDF or Word)

The Three Star System
The Ministry of Construction’s Green Building Evaluation Standard is China’s first attempt to create a local green building standard. As the introduction of the rating system notes, the purpose is to create a voluntary rating system that will encourage green development:

Our country is now in the phase of rapid economic development, ranking world No. 1 in terms of annual building volume, with significantly growing consumption of resources year by year. Therefore, scientific development philosophy must be steadily created and seriously implemented, and the concept of sustainable development must be adhered to, to strongly develop green buildings... The purpose of formulating this standard is to regulate evaluation on green buildings and promote the development of green buildings.

The evaluation system, introduced in 2006, is credit-based, and allows developers to choose which credits they want to pursue.

The evaluation system has two different standards: one for residential buildings and one for public (i.e. large commercial) buildings. As the rating system describes,

Considering current construction market in our country, this standard will mainly evaluate residential buildings that are huge in quantities and public buildings that consume much energy and resources, like office buildings, mall buildings and hotel buildings. For evaluation on other buildings, this standard can serve as reference.

The evaluation standard rates buildings with a variety of prerequisites (called “control items” in the Chinese system) and credits (called “general items” in the Chinese system) in six categories:

1. Land savings and outdoor environment
2. Energy savings
3. Water savings
4. Materials savings
5. Indoor environmental quality
6. Operations and management
   

A seventh category called “Preference items” contains strategies that are both cutting-edge and harder to implement, such as brownfield redevelopment, more than 10% on-site renewable power generation, etc.

The China green building system grants three levels of ratings: 1-star, 2-star, and 3-star, hence the nickname “Three Star System”. The charts below show the different ratings for residential and public buildings:

Similarities between Three Star System and LEED
Those familiar with the LEED rating system will notice many striking similarities between LEED and the China standard.

First, both are credit based systems rather than command and control systems. This gives the developer maximum leeway over what credits they wish to pursue, although some critics of LEED have said this reduces the level of sustainability in LEED rated buildings. China’s system does have more prerequisites (32 in residential, 26 in public buildings) than LEED (7 in LEED for New Construction [PDF]).

Second, the categories are almost the same, save for the Three Star's additional operations and management category. Moreover, the credits within those categories are very similar; things like minimum energy performance, water savings, local materials, and others are seen in both systems.

Third, the rating categories are very similar: 1-, 2- and 3- stars in the Chinese system and Certified, Silver, Gold and Platinum in LEED.

Complement to LEED
One interesting aspect of the Three Star System is that it a rating can only be awarded after one year of property operation:

Evaluation on newly built, expanded or reconstructed residential buildings and office buildings, mall buildings and hotel buildings belonging to public buildings, shall be conducted in one year after turnover to the property owner.

I think this is a good idea for China, because it requires real, measurable reduction. One complaint about LEED is that many credits are based on energy savings predicted by energy modeling, rather than actual certified energy savings. Although New Buildings Institute data [PDF] shows that on average, the models accurately predict energy savings, this can vary widely on a building to building basis. The Three Star System remedies this by basing results on hard data, and collection of this data may be an important first step toward better measurement of building energy use in China.

However, I worry that this post-facto certification process could slow the market transformation that LEED has driven so efficiently in America. The LEED Core and Shell system allows developers to submit their design and achieve “pre-certification”, which they can then market to prospective tenants before the building is built. This allows developers to capture some of the benefits of going green by getting higher rents and faster lease up and ultimately drives more developers to build green.

Luckily, LEED and China’s Three Star System can work together and complement each other quite nicely. This will allow developers who want to get the marketing benefits of green to pursue LEED Core and Shell pre-certification and then ensure that the predicted energy savings were achieved by going for Three Star certification.

As Rob Watson, “father of LEED” and CEO of EcoTech International, a green building consultancy in the US and China, says:

I really don't see LEED or other international green building standards as "competing" with the MOHURD [Three Star] green standard. The real competition is with the standard non-green developments. The MOHURD [Three Star] green standard is more geared for the Chinese market and should appeal to a broader base of developers than LEED. However, key segments of the market are demanding LEED and everyone agrees that the market should not be interfered with. I also believe that, as the cost to certify comes down, I expect the reach of China's green standard and LEED to expand.

Watson expects to pursue both the Three Star standard and LEED standards on the projects he works on in China.

All in all, the Three Star System seems to be a good start for China’s nascent green building market. As the market begins to accept this system, I hope we will see the Three Star System begin to gain popularity and become much more widespread than LEED, which still remains almost exclusive to Class A office and luxury apartment development. After all, for China to get serious about green development, all buildings will have to be green, not just those at the top end of the market. Hopefully the Three Star System will eventually help make the Chinese real estate market greener, healthier and more prosperous.

Building combined heat and power: a key strategy for GHG reduction in China

This post will describe building combined heat and power (BCHP) and what role it could play in helping China reduce it’s emissions in the near term, and also what role it can play in laying the groundwork for China to significantly reduce it’s emissions in the long term.

BCHP
Building combined heat and power (BCHP) refers to technologies that simultaneously provide both electricity and heating and/or cooling inside buildings. The idea is pretty simple: take all the waste heat that comes from normal power generation processes and use it for something useful, namely heating the building. Using the fuel for two processes really drives efficiency. Most BCHP systems operate between 70% and 90% efficiency, as compared to the mid-50% range for high efficiency natural gas plants and the mid-30% range for a standard coal plant.

Buildings are uniquely well-suited for combined heat and power because they almost always need both electricity and heat and/ or cooling (the thermal heat can be used to drive cooling processes). Generally, BCHP systems are sized to provide enough power to the building to match the building’s electrical or thermal baseload, i.e. the lowest amount of energy that will be used during the day or throughout the year. BCHP will provide the baseload and then the grid or other onsite renewables will provide power to meet peak loads.

CHP is not new to China, although it has primarily been used in larger applications, and not sized down to the building level. According to a recent report led by the US EPA (PDF), China already produces 13.5% of it’s electricity from CHP units. Most of this CHP capacity is coal-fired district heating units. The report notes that although China’s share of CHP electricity generation is growing,

China [still] has a large district heating sector that relies primarily on heat-only boilers, rather than on more efficient and less polluting CHP. Compared to other countries with large district heating sectors and many industrial consumers of heat, China has a relatively low share of CHP in both electricity and heat production.

So although I will focus on BCHP in this post, wider adoption of CHP for district heating would help reduce the energy use and carbon emissions related to the inefficient Chinese space heating system I described last week.

BCHP advantages
BCHP are good sources of carbon reductions for two reasons. First, the high efficiency of BCHP means 25% less fuel is used for the same level of heating and electricity as compared to conventional separated heat and power systems. 25% less fuel means 25% less emissions, both global GHG emissions and locally harmful pollutant emissions. Second, the fuel for BCHP is most often natural gas, which provides even further emission savings. Since natural gas is cleaner than coal, ie produces less CO2 per unit of energy, this “fuel switching” provides additional GHG reductions. As this analysis by the World Alliance for Distributed Energy (WADE) shows, BCHP could save significant amounts of carbon emissions in China:

Importantly, unlike other “clean” fossil fuel technologies like coal CCS, BCHP is a well proven technology, with many units around the world working reliably. The US already gets about 8% of it’s electricity from CHP, most of which is in the form of distributed BCHP units. Transferring this know-how from the US to China could be a key piece of a program of technology transfer that must be expanded as a centerpiece of US-China collaboration on climate change.

Most importantly for China, the economics work for BCHP. As the WADE analysis shows, the cheapest way for China to meet its expected electricity demand in 2020 is through DE, or distributed energy, such as BCHP, thanks to much lower transmission and distribution (T&D) costs:

So as China inevitably gets serious about reducing emissions, BCHP as well as community level CHP will be one of the obvious places to start. Indeed, China’s NDRC has already announced a goal of 200 GW of CHP generation by 2020, which is expected to account for 22% of installed power capacity at that time.

Is CHP a good long-term strategy?
Although BCHP would certainly be a good step forward in the sense that it results in serious emissions reductions in the short-term, one problem is that it might be considered a “second best” solution over the long-term. As Michael Hoexter wrote recently in Green Thoughts,

A carbon pricing system, especially in its first years, will encourage investment in what might be called “local minima” or the currently less expensive carbon reduction technology or practice. In some cases, these local minima may be zero-carbon or potentially part of a net zero carbon emitting economy, but in most cases these choices will entail the more efficient use of fossil resources or switching to “second-best” alternative fuel systems like substituting natural gas for petroleum... However commitments to second-best, long-lived infrastructure with a useful lifetime of 40 or 50 years that commits us to a lot of carbon emissions during that period appear to be ultimately a waste of resources.

The 25% GHG emissions reduction that BCHP provides is certainly a big reduction, but does not get to the 80% below 1990 CO2 emissions levels by 2050 considered necessary by IPCC scientists. Of course, if China were also to switch from coal to natural gas as they move to BCHP, the emissions savings could be even larger and make BCHP look better.

However, widespread fuel switching in China would depend heavily on a serious build out of natural gas infrastructure. According to the US EPA report, natural gas only provides about 3% of China’s current energy needs, although this figure has been growing recently.

China is also pouring lots of money into building out its natural gas infrastructure. But in a zero carbon world, it seems likely that even natural gas will eventually have to be abandoned, making it a “second best” option and ultimately a waste of resources. On the other hand, WADE suggests that since natural gas is limited, China should maximize the value out of it by investing in high-efficiency BCHP:

The fact that gas reserves are located in western China and the biggest demand for gas use in buildings is in the eastern part of the country means that bringing gas to market requires large-scale capital investment. To get the most value from infrastructure investment the Chinese will want to ensure it is burned in a manner which minimizes waste. BCHP is perhaps the best application for optimising the value of the incoming gas supplies.

Biofuels and biodiesel may also soon become low-carbon realities and help displace some of the natural gas requirements. Although given the water difficulties China is facing, I find it hard to believe that biofuels will be anything but a “second best” solution for China.

CHP is a good move forward for China
Despite the serious issues relating to fuel above, I believe BCHP is a key step toward the long-term imperative of a carbon neutral China for three reasons.

First, a build out of BCHP will provide a learning curve for the Chinese to figure out how to make distributed generation work. As I mentioned in my post on the Pearl River Tower, China’s current grid policy does not allow for “running the meter back”, which prevented the installation of CHP at that project. If China starts ramping up BCHP, this policy will likely be changed as more and more building owners will want to have both BCHP and access to the grid. Moreover, China's grid operators do not have much experience integrating distributed and centralized power generation. More grid-connected BCHP would push grid operators and regulatory bodies to create a "smart grid" that can seamlessly take both distributed and centralized power and provide it to customers. A smarter, more interconnected grid is a key part of further development of net zero energy buildings and distributed renewable power generation, which will likely be the centerpieces of a future low carbon society. BCHP would be a good next step toward a smart grid.

Second, wide scale installation of BCHP will help slow the growth of coal plants and avoid “locking in” future CO2 emissions. BCHP technology is a proven, cost-effective way to reduce China’s carbon emissions in the short-term. Given China’s still unresponsive attitude toward climate change, BCHP likely represents one of the few real short-term alternatives to continued growth in Chinese coal power plants.

Third and most importantly, BCHP will spur more systems thinking, particularly a focus on the inherent linkages between power plants and buildings. For most of the modern area, power plants have been built further and further afield. This makes obvious sense for coal plants, since no one wants a coal plant and all the emissions it produces in their backyard and would much rather have it “out of sight and out of mind”. However, with much cleaner burning BCHP power generation, the logic of far flung power starts to disappear and “relocalizing” generation begins to make sense. As power generation becomes relocalized and integrated into buildings, designers will be forced to think about the buildings energy load and how to provide the power for that load. In the extreme, if it becomes the norm for building owners to foot the bill for their power rather than just outsource it to utilities, designers will become much more conscious of the energy impact of their design decisions.

Ultimately, better design will have to be the solution to the climate crisis. Widespread adoption of BCHP and relocalization of power generation are steps China can take right now to help drive better design.

Heating in China- Inefficiency and Opportunity

Today’s post will focus on China’s extraordinarily inefficient heating system and how to fix it.

Heating in China
Due to China’s geography, heating is required in many regions of the country. As the map below shows, much of China faces cold winters, some of which are severely cold. According to the World Bank, 19% of residential floor area is in “severe cold” regions and 27% is in “cold” regions. As a result, significant amounts of space heating is required to keep occupants comfortable (I use the term “comfortable” verrry loosely, as I will touch on later).



Nowadays heating is slowly creeping southward and entering the “hot summer and cold winter” zones. There was no provision of central heating in these regions until the very late 1990’s, and central heating remains limited. But it’s clear that as China (and particularly southern and central coastal China) continues to get richer, citizens throughout the nation will clamor for more comfortable condition. This China Daily editorial nicely captures that sentiment in it’s title: “freezing Shanghai needs central heating”.

Since the hot summer and cold winter zone accounts for 37% of China’s residential floor area, this southward trend has the potential to dramatically increase the amount of heating in China. Indeed, LBL expects space heating (PDF) to be in 55% of Chinese commercial buildings by 2020, up from 35% in 2000, “as the country’s ‘heating zone’, historically limited to northern China, continues to expand into many southern regions.”



Heating is inefficient and uncomfortable
The problem is China’s space heating is extremely energy inefficient. Wang Qingqin of the Chinese Academy of Building Research estimates (PDF) that buildings in China use 2-3x more energy per square meter for heating than buildings in comparable temperature zones in Europe or the US.

Yet despite all that extra energy use, thermal comfort is significantly lower in China.
Why is this? Well, a number of causes actually. Some central heating systems don’t allow for user control of the heat, so sometimes windows have to be opened to compensate, which is an obvious waste of energy. The billing system also doesn’t help, which I’ll explain later. But certainly the major cause of this inefficiency is extremely poor insulation in Chinese buildings.

Poor insulation

As the results of the Asia Business Council expert interviews above show, the primary factor affecting a building’s heating load is the building envelope and the insulation it provides between the interior of a space and the outdoor environment. The worse the insulation, the more energy transfer between the indoor and outdoor environment. When it’s cold outside, this means the cold air comes in, and the hot air goes out, resulting in a lot of wasted energy as well as occupant discomfort.

As the graph below shows, insulation in Beijing (and the rest of China) is significantly worse than the developed world’s, and allows much more heat (in the form of energy) to escape to the outside.

Graph based on data from Chinese Academy of Building Research

My anecdotal evidence backs this up: I can feel the cold when I put my finger against the glass of almost any window in Beijing, even in high-end apartment buildings. One major exception thus far was the Linked Hybrid, which as I mentioned here, focused on high-quality insulation.

Insulation is a great investment
Investing in improved insulation is a win-win-win, resulting in higher thermal comfort for occupants, and less energy use and GHG emissions at low cost.

Insulation works “year round”, in the sense that improved insulation reduces heating energy use in the winter, but also reduces cooling energy use in the summer. This is really important, since as we can infer from the LBL graph above, in addition to the southward creep of space heating units, there is also a northward creep of air conditioning units.

Maybe the best part about investments in insulation is that they are also a win financially. As the McKinsey global GHG abatement cost curve below shows, investments in insulation are one of the lowest cost sources of carbon emission reductions available.



The need for government policy
So why isn’t their more investment in good insulation, or even more importantly, why isn’t it just built into the buildings from the beginning?

This is primarily a question of government policy. Theoretically, the government mandates higher levels of insulation, but due to lack of enforcement, these levels are not achieved. But as I will describe in a post next week on building codes, many if not most buildings in China don’t actually meet code.

Just as important is the inefficient pricing system for heating in the northern part of the country. The Chinese government views provision of heat in the north as a public good, and therefore has historically mandated that Chinese companies provide heating for their employees. After reforms to that system in 2007, heat is now paid for by tenants, but is still generally sold per the square meter, rather than by the BTU or the KWH. Under this system, no matter how much or little heating a Chinese apartment actually uses, the heating charge is still the same. This helps explain the lack of insulation.

Given the lack of proper pricing structure, there is no financial incentive for the building owner or an ESCO to invest in better insulation. This is why developers usually just skimp upfront on proper insulation. To make matters worse, since Chinese building codes theoretically mandate higher levels of insulation, CDM financing cannot be used to bring these buildings up to code (although as I wrote in a previous post, this should be changed to reflect the reality of the code compliance situation in China).

Luckily, the slow gears of policy change are starting to turn. The government is convinced of the need to price heat properly, and is now just figuring out how to roll out the system without harming low-income Chinese. As this China Daily article noted, some residents already struggle with their heating bill:

But low-income households still find it tough to afford. "We will have to pay 1,700 yuan (US$ 210) for the heating of a 70 square-metre flat under the new system," said 45-year-old laid-off worker Jiang Yongfu in Beijing. "That's almost triple my monthly income."

Hopefully along with pricing heat properly, the government can also start a weatherization program to help lower-income residents like Jiang upgrade their insulation and save money by using less heat.

Land Use Rights in China: an Opportunity for Green Policy?

This post will focus on the unique real estate laws in China and what these laws might mean for green building.

The development of land use rights
Since China is still technically a communist nation, land is government owned. But as we know from my blog posts on the Nokia campus, the Linked Hybrid, and Prosper Center, private developers and corporations can obviously buy the rights to use the land.

This policy of private land use rights in China is a relatively recent development. The Lincoln Institute of Land Policy provides a nice introduction:

By the end of the Cultural Revolution in 1976, nearly all land was owned by collectives or by the state. Private property rights virtually disappeared and land transactions were banned.

Modern land reforms began in the mid-1980s. Following a successful experiment in Shenzhen (a Special Economic Development Zone on the border with Hong Kong), in which state-owned land was leased to foreign corporations, the Constitution was amended in 1988 so that “land use can be transacted according to the law.” In 1990, China officially adopted land leasing as the basis for assigning land use rights to urban land users.

In the current property rights regime, use rights for specified periods can be obtained from the state through the up-front payment of land use fees. The fees are determined by the location, type and density of the proposed development.

This separation of land ownership and use rights allows the trading of land use rights while maintaining state ownership of land. For the Chinese government, this separation offered three advantages: first, market mechanisms could help guide the allocation of land resources; second, land use fees would provide local government with a new source of revenues; and third, by retaining state ownership, social and political conflict would be minimized.

This change to the Constitution spurred private development of property and provided a legal basis for real estate transactions, since these land use rights are transferable. This property rights regime laid a foundation for the massive Chinese construction boom of the last 20 years.

Shenzhen in the 1980's was a small fishing village

Shenzhen today

But this early property rights regime created some uncertainty. Land use rights were transferred to property for a fixed time period: residential property for 70 years; industrial and commercial property for 50 years.

While a 50-70 year period was long enough to be ignored when the law was initially written, as the real estate market grew and matured, it eventually became clear that the government was not actually going to reclaim most of these properties at the end of the ground lease and would have to clarify things. For residential properties, China clarified the situation in the Property Law of 2007. As Amy Sommers, Partner at Squire, Sanders & Dempsey, LLP, says:

With respect to Land Use Rights (LUR) for residences, the Property Law has now clarified that the contracts will definitely be extended; the only question is the price. As I understand it, the government is considering a couple of different alternatives. One would include using an annual property tax approach, similar to what we have in the US, which would then generate regular revenue streams. However, whether to take this approach or to use some hybrid of it and the payment of 'grant fees' remains to be sorted out.

But it’s not so clear for other types of property. As Sommers notes, “For other types of rights, it has yet to be sorted out.”

China will likely have to resolve this uncertainty soon. Since land reform started in the mid-80’s, an office building in Shenzhen could conceivably be half way through it’s alloted land use right period of 50 years. While 25 years seems like a long way off, this uncertainty could conceivably affect a real estate investors decision making process:
Assume Investor A buys this office building today and expects to sell it 10 years later to Investor B, who will also hold it for 10 years. A major part of the return on investment for Investor A will be the sale of the building in 10 years. But Investor B will also have the same logic, and plans to sell it to Investor C. But Investor C will have to deal with the huge uncertainty surrounding the property rights, which will lower the price Investor C is willing to pay for the building. This will also lower the price Investor B is willing to pay for the building, and as a result reduce the price Investor A will pay today. Of course this assumes that these investors actually value this uncertainty and don’t just ignore it, which might not always happen. But as the time to end of lease draws closer, it’ll be more and more important for China to fix this problem.

China Law Blog further laments about the uncertainty of the whole process:

This system results in a great deal of uncertainty about real estate ownership in China. What happens when the time limit for the land use right comes to an end? Will the state act reasonably in granting extensions and in limiting the imposition of new fees, or will the state see this as an opportunity to earn a windfall profit from new fees? Will the state seize productive commercial property with no compensation? Will the state seek to engage in social engineering by restructuring ownership interests to accommodate new conditions?

Opportunity for progressive green building policy Certainly China Law Blog’s concerns are legitimate. It’s important the state not act unreasonably by seizing productive commercial property with no compensation. But why should the government just give away these valuable land right extensions for nothing?
I propose that the Chinese government trade land use rights extensions for progress on building energy efficiency. Essentially, the government will automatically grant the rights to a developer or building owner who undertakes energy efficiency retrofits. The land use rights extension period can even vary depending on the level of efficiency achieved. So for example, if a developer reduces energy usage by 20%, maybe they get a 10 year extension. But if they reduce energy usage by 50%, maybe they get a 25 year extension. This process will then repeat itself: it will require continuous improvement in building energy performance in order to maintain land use rights.

This approach is modeled on the EU’s Directive on the Energy Performance of Buildings, which came into force in 2006. The directive requires that anytime a building is sold, the owner is required to obtain an energy performance certificate (EPC) from a qualified building expert. The EPC requires that the building meet minimum energy standards. In some ways, an EPC also functions like nutritional label, but instead of alerting the consumer to saturated fat or sugar content of a particular food, it alerts a tenant to energy use characteristics of a particular building. This law is extremely progressive because it gradually requires all buildings to measure their energy usage. And of course once people measure something, they usually try to manage it, which should have the effect of driving down overall energy use in the built environment.

The Chinese government could and should take this model from Europe and mold it to their own needs. By trading energy efficiency improvements for land use rights, China could seize a unique opportunity to kill two birds with one stone: remedy the current uncertainty relating to land use rights and simultaneously make buildings greener.

Linked Hybrid

As Steven Holl writes, the new 160,000 square meter Linked Hybrid (LH) in Beijing “aims to counter the current urban developments in China by creating a new twenty-first century porous urban space, inviting and open to the public from every side.” As I discovered on my recent tour of the place, while the project may not necessarily reach Holl’s lofty vision, it is nonetheless a step in the right direction of vibrant triple bottom line communities in China. Hopefully it can serve as a good example for other developers and architects to follow.

Holl's inspiration for the Linked Hybrid: The Dance (II) by Henri Matisse

Triple bottom line communities
Triple bottom line expands the idea of profitability from the current paradigm, a simple focus on financial profitability, to a new, more inclusive look at financial, social, and environmental profitability. Ideally, the increased social and environmental profitability enhances the financial bottom line in the long-term, too. Triple bottom line communities then take this three pronged focus and apply it to the built environment. Instead of just considering economics and simple payback period, how can the development benefit the community, the environment and still give the developer a good financial return? The LH in many ways makes a good first step in this direction.

Environmentally efficient
While the LH doesn’t necessarily benefit the environment, it is much “less bad” than other communities going up around Beijing. The Linked Hybrid is aiming for LEED for Neighborhood Development Gold certification.

The key green feature for the LH is a massive geothermal heat exchanger system. The system relies on 100m deep wells (660 of them in total) to use the relatively constant temperature of the deep earth to keep the building warm in winter and cool during the summer. According to Steven Holl’s Hideki Hirahara, the lead architect for the project, the geothermal system will provide 78-80% of the buildings heating and cooling needs in a carbon-free way. Of course, the building also features an extremely well-insulated building envelope and a displacement ventilation system to reduce overall heating and cooling needs.

The LH also saves significant water resources through a graywater recycling system. The system takes water from non-toliet household uses (dishwashing, showers, sinks, etc), then centrally purifies this water and uses it to flush the toilets or irrigate the grounds. Holl’s Hirahara estimates this system saves 41% of fresh water usage.

Other green design strategies include local and rapidly renewable materials (bamboo, locally-sourced aluminum, stonework, etc), smart building controls and occupancy sensors. The site itself is also important. Architectural Record claims the site was a brownfield that used to be a factory, although I haven’t seen this claim anywhere else. Regardless, the location is tightly in the city center and is fairly well connected to transit.

Modern Group
Modern Group, the developer of the LH, ostensibly did pretty well financially. Tough as with most real estate groups, Modern is privately held and will certainly never reveal their financial results on LH. But sales look good. Despite the slowing market, 7 of the 8 LH towers are completely sold out and are starting to be occupied. Most of these spaces went for 20,000 yuan per square meter ($275 per sf) when they were first offered in 2006, about average for Beijing luxury residential prices at the time according to CB Richard Ellis (PDF). Amazingly, the last few apartments (with great views, I must admit) are now going for 45,000 yuan per square meter, or nearly $600 a square foot.

Forbes Asia also had an interesting piece on Zhang Lei, the head of Modern Group, in it’s 2007 China’s “richest list” (Zhang was listed at #276). Zhang and the Modern Group have seized on green as their core brand and expect to roll it out to other properties.

Linked Hybrid photos

View more presentations from geoff848. (tags: green architecture)

A new type of community in China
In my view, LH’s most important contribution to China’s architecture is its openness. In my writing on this blog, I often focus on the environmental or financial but ignore the social aspects of real estate and development. The social aspects of the LH cannot be ignored.

In stark contrast to most gated, single-entrance communities in China, LH has no gates: it is open to all from multiples sides. Public green spaces like the courtyard and rooftops encourage community and spontaneous interaction. Even the sky links will be open to the public and encourage building residents to explore the space beyond their own apartment. This openness also pushes back against the increasingly privatized lifes of Beijingers. As the car proliferates, city residents have less and less interaction with each other; they step into their cars in their gated communities and step out at their offices in the CDB and never interact with their fellow citizens. The openness encouraged by the LH is by no means a cure for all the ills of modernization and industrialization, but at least helps humanize its edges.

The LH also encourages a freedom of movement that is foreign to Beijing. The few public spaces in Beijing are large, monolithic, almost empty structures: Tiananmen Square or the Central Business District for example. Although one can freely walk around Tiananmen, there is no life there. No one lives there, no one works there. It’s merely an occasional gathering place. The courtyard of the LH, by contrast, feels full of life: residents coming and going, shops filling and emptying.

LH is by no means perfect: the community lacks low-income housing and the socioeconomic diversity that often accompanies it. And the life-like feel probably would have been enhanced by some office space. But LH pushes back against many of the worst architectural impulses of China and encourages openness and creativity.

Steven Holl in China
Steven Holl seems to have made a name for himself in China: he is also designing green buildings in Shenzhen and Chengdu that emphasize the same triple bottom line values as the Linked Hybrid. Hopefully his iconic works can continue to push the real estate market toward longer-term thinking and balanced economic, social, and environmental development.

China International Business article on LEED in China

This is the link to my recent article in China International Business on LEED in China. I've also pasted it here:

Building the Future

By Geoffrey Lewis | From CIB February 2009 Print Edition

Courtesy of Parkview Group

When people talk about the massive urban development happening across China, “green” is unlikely to be one of the words at the forefront of their conversations.

In the building frenzy that has enveloped China, environmental concerns seem, at first glance, to have been forgotten. Yet, if this was once the case, developers are no longer overlooking the importance of building green in China.

Studies have shown that green buildings will be critical to sustainable development. According to the UNEP (United Nations Environment Program), buildings already account for 25% of total energy use across the country, and a similar share of carbon emissions. This is expected to rise to 35% of total energy use by 2020 if green building strategies are not widely implemented.

As of now, a small but growing number of buildings in China have been working to prove their green and energy-efficiency credentials by pursuing Leadership in Energy and Environmental Design (LEED) certification – an internationally recognized rating system developed in the US to evaluate the environmental performance of a structure. A recent study by Good Energies, a renewable energy investment firm, found that LEED buildings in the US on average use 33% less energy than standard buildings.

Fourteen buildings in China have so far been awarded LEED certification, with many others currently under construction hoping for approval. According to the USGBC (US Green Building Council), a further 103 buildings across the country have registered their intent to seek LEED certification.

While these numbers are small compared with the overall number of buildings being constructed, and they will do little to lessen the environmental strain on their own, they are indicative of a growing demand for environmentally friendly office space in China led not by local firms, but foreign multinationals.

LEED-ING THE WAY

For a long time, it has been suggested that multinationals operating in China have felt little need to go beyond the minimum compliance requirements when it comes to environmental regulations. Now, more and more buildings in China are being built according to sustainable design and construction principles, and it is, by and large, foreign multinational corporations that are the ones driving this forward.

Of the 14 currently certified buildings, eight were built by foreign multinational corporations, and two of the others are occupied primarily by foreign companies. LEED buildings generally take the form of owner-occupied, single-tenant buildings and corporate headquarters, which gives those responsible all the long-term benefits of the green features.

Plantronics, a California-based maker of electronic audio equipment whose headsets were used to carry the historic message “That’s one small step for man, one giant leap for mankind” back from the moon in 1969, was the first multinational to seek LEED certification in China, for its factory and office in Suzhou, back in 2006. Since then, Nokia has followed suit with its LEED Gold campus in Beijing, and GM, Coca Cola and ExxonMobil are among others who have registered with the USGBC to construct their own LEED-rated green buildings in China.

GREEN SELLING-POINT

Property developers — both local and international — seeking multinational tenants have begun to recognize this growing trend, and are increasingly building rentable LEED-certified buildings. Tishman Speyer, a US-based real estate developer, is currently constructing three LEED projects in China, all of which conform to a company-wide policy adopted in 2007 to achieve certification of all new buildings so as to entice foreign tenants.

Foreign multinationals take up most of the recently completed Gold-rated Prosper Center in downtown Beijing – buildings are rated Certified, Silver, Gold, or Platinum, depending on how environmentally friendly they are. And Carrefour, the French retail giant, is the anchor tenant of the Silver-rated LeSang Shopping Mall in Harbin. Both developments were constructed by Chinese companies but aimed at largely foreign tenants.

Parkview Green, a new mixed-use tower in downtown Beijing which hopes to become China’s first Platinum-rated green building, exemplifies this phenomenon. Leo Hwang, director of the Parkview Group, a Hong Kong-based developer, says the building’s green credentials were critical to attracting top international tenants. “The green aspects of the building were very much driven by the fact that to differentiate ourselves from the rest of the competition, we had to give our tenants a reason to want to come to us before our competitors,” he explained.

Chinafotopress

IMAGE-BUILDING

“Most [large] international companies are implementing green building-standards, including LEED, on their projects all over the world,” said Rob Watson, the “father of LEED” and now CEO of EcoTech International, a green building consulting firm with a growing number of projects in China, including Parkview Green. “These companies realize that their real-estate portfolio affects them on several levels: their corporate image, their ability to attract and retain good employees, and the reduction of operating cost and environmental liability.”

Corporate social responsibility (CSR) policies that increasingly require firms to occupy green real-estate globally are also having a large effect. Nokia, for example, built its new green campus in part to comply with CSR. And, after the success of the Gold-rated Nokia China campus, the company has adopted a global policy of building to LEED Gold standards. CB Richard Ellis, the world’s largest commercial real estate services company, also takes environmental factors into account when making location decisions, occupying LEED space where available. Prosper Center, currently the only rentable “green” office space in Beijing, was therefore chosen for its offices.

Foreign multinationals are generally willing to pay a premium for certified green space, and developers are aware of the higher rental charges they can charge for these properties, even taking into account the added construction expenses.

“Rents for LEED-certified buildings are often at the highest end of the market,” said Julien Zhang, managing director at Jones Lang LaSalle (JLL) in Beijing. Indeed, Prosper Center is one of the most expensive properties in downtown Beijing, and these inflated prices are likely to stay that way for all new green office buildings in the short-term, at least until supply starts to rival demand.

Foreign multinationals are beginning to recognize the many additional benefits of LEED-rated real estate, on top of the obvious reduction in energy costs. LEED buildings can be used as effective recruiting, retention and productivity tools. Nokia, for example, successfully used the green aspects of its new campus as a key selling point to employees wary of working out in the suburbs of Beijing.

“Many multinationals want to present themselves to potential clients and employees as environmentally friendly firms, and occupying green office space is one way to show this,” Zhang added.

In China, where “green-washing” — lying about your company’s green credentials — can often go unchecked and contractors sometimes skimp on quality, the strict and internationally recognized third-party verification that LEED provides is indispensable.

As Parkview’s Hwang noted: “It shows our tenants that we really believe in walking the walk rather than just talking the talk, which is very important in this day and age where there is a lot of green-washing.”

Courtesy of Parkview Group

LOCAL FIRMS LAGGING

At present, however, demand for green office space is largely restricted to foreign multinationals operating in China. This is largely a question of economics – most Chinese firms still can’t afford rent in Class-A buildings, which averages around RMB 200/sqm/month (USD 29) in Beijing and RMB 250/sqm/month (USD 37) in Shanghai, and LEED space in China falls exclusively into this category. “Multinationals occupying space in this segment of the market far outnumber domestic firms because of affordability,” said Jones Lang LaSalle’s Zhang.

Complying with the stringent LEED rating standards requires high-end design and construction expertise, which costs more, although not as much as some developers assume: – Tishman Speyer estimates that meeting LEED requirements adds around 3-5% to the cost of building in China.

But even those Chinese companies which can afford to rent Class-A properties are on the whole not choosing green-certified buildings. “Due to generally lower environmental awareness in China, local firms don’t have the same kind of pressure to prove their environmental credentials,” Zhang said.

However, he adds that it is not necessarily the case that Chinese firms are not concerned about environmental or energy-saving measures. PetroChina’s recently built Beijing headquarters is a case in point: the constructors worked hard on maximizing energy efficiency to reduce energy costs, but saw no need to get the building certified as “green.”

THE FUTURE’S GREEN

This may be starting to change, with growing environmental awareness and government regulations causing more Chinese companies to start thinking about occupying green space. “Actually, over the past few years, the Chinese government has done a lot to move this green building idea forward,” says Yingchu Qian, a manager at EMSI, a green building consultancy.

The Ministry of Construction has recently released its own “Evaluation Standard for Green Building,” which, while yet to have significantly affected the marketplace, is a sign of the increasing governmental interest in green building standards.

According to EcoTech’s Watson, the new Chinese green standard “is more geared to the Chinese market and should appeal to a broader base of developers than LEED.” He also believes that “as the cost to certify comes down, the reach of China’s green standard and LEED will expand.”

In the long-run, this may attract more local firms to base themselves in green-certified buildings. But, for the time being, demand for LEED and environmentally friendly office space is being driven by foreign multinationals.

That firms operating in developing countries — often perceived to be trying to evade the stricter environmental laws of the developed world in order to squeeze out more profit — are leading this drive is testament to the growing role of foreign businesses in China.

By demanding green space, multinationals have actually begun to transform China’s real-estate market, making it greener. This is an unexpected but welcome role for them to play in China.

Geoffrey Lewis is a Beijing-based Fulbright Fellow studying green building trends in China

WSCOs

China faces a critical water situation in the northern part of the country. Ominously, this will only get worse as climate change threatens the Himalayan glaciers that are the source of most of China’s water. Green building strategies can save significant amounts of water use and help alleviate the strain on China’s water resources. In this post, I will describe Water Service/ Savings Companies (WSCOs, pronounced wes-co), a concept that could help China retrofit it’s buildings and factories to use significantly less water.

How critical is China’s water situation?
Christine Boyle, a Fulbrighter studying water issues in Northern China, gave a great overview presentation on this the other night at Beijing Energy Network, that I will use as the basis for this introduction. Her slides are available here.

The statistics on water in Northern China (also known as the Huang Huai Hai river region) are scary: Northern China accounts for 47% of China’s population, 43% of total GDP, and 65% of arable land, but only 19% of water resources. This imbalance has created a significant strain, with water ranging from 350 to 750 cubic meters per person per year. Less than 1000 cubic meters per person year is considered water scarce, the worst classification available.

Green buildings save significant water resources
As this graph from Christine’s presentation shows, agricultural use clearly accounts for the bulk of water use. Commenting on how to improve agricultural water efficiency is way outside my competency, so I’ll focus here on domestic and industrial use. Non-agricultural water use is not insignificant, accounting for 35% of annual water use.

Moreover, as cities develop, domestic and industrial water use increases. Here is the data for Beijing in 2005, according to a World Bank study:

Now agriculture is a much smaller part of the picture, at only 38%. This situation doesn’t seem likely to ease anytime soon, either. The International Water Management Institute (PDF) estimates that global domestic water use will rise by 71% between 1995 and 2025, the majority of that in developing countries like China.

So buildings use a lot of water. Fortunately, it’s quite easy to save significant resources with green building strategies. Here is what typical residential use of water looks like in Beijing according to the same World Bank study:

As we can see, more than 80% of water use is for washing things: faces, clothes, bathroom, etc. From this table then, the key water saving strategies are pretty obvious: reduce flow from toilets and faucets and require manufacturers to make water-efficient appliances. Reducing flow from faucets and toilets is just a matter of specifying low-flow faucets and a mix of waterless or low-flow urinals and low-flow toilets. Applying just these basic strategies in buildings can result in large water savings. In fact, according to the US Green Building Council (PPT), green buildings on average save 40% of water relative to standard buildings.

Industrial facilities are also a prime source of water conservation opportunities. Of course, for industrial facilities, these fixes won’t be nearly as simple as those described above for buildings, thanks to the more highly designed industrial processes. Fortunately, these are just the types of processes that will be well-suited to WSCO water-saving retrofits.

What is a WSCO?
WSCOs are an innovative model to get the private sector to take an interest in saving water. The idea behind a WSCO is essentially the same as an ESCO, but with a focus on water rather than energy. Essentially, a WSCO will partner with a building or factory owner, perform a water use audit and devise strategies to save water. The WSCO then puts up (or raises from outside sources) the capital needed to invest in the water saving strategies. This capital is then paid back through the resultant water savings. Ideally, the savings are large enough that the WSCO gets a good return on their investment and gets to share the savings with the owner. The key attribute of a good WSCO is an ability to take a complex water using system and spot cost-effective water reduction strategies.

Industry is likely the low-hanging fruit of water savings. I came across this chart while looking at CDM last week, illustrating the “long-tail phenomenon”:

There are a handful of large, profitable GHG reduction opportunities, primarily located in industrial facilities or huge buildings. The remainder of GHG reduction opportunities are small and fragmented, contained in the “long tail”.

I think a closer look at water would show a similar long tail, although I don’t have the data to prove it. As the industry gets off the ground, WSCOs should take their expertise in analyzing water use in complex systems and actually make money in the “short tail” of large, granular water reduction opportunities in factories and large buildings.

In contrast to GHG and energy reduction opportunities, many of the long-tail water reduction opportunities are obvious, as described earlier. Building owners and home owners can do the upgrades themselves in order to save water at low cost the next time they move to a new apartment or change their sink or toilet. Of course, a coordinated policy push wouldn't hurt.

So why aren't there any WSCOs?
A quick internet search showed no WSCOs currently operating in China (although if you know of any, please email me!). Why not?

As with any promising green innovation, significant barriers are holding back the WSCO model. First and foremost is economics. As Christine illustrates in her talk, water prices in Northern China are low.

As the chart above shows, urban and industrial prices are about half of those in the also water- challenged Colorado River basin in the Southwestern United States. Agricultural water in China is essentially free.

For a WSCO scheme to work, water needs to be priced accurately and dearly, since water savings make up the income stream needed to pay back the water conservation investment. The WSCO model might even work on agriculture if the government was willing to clean up the water pricing structure. WSCOs could work with big farms or municipalities to reduce water consumption and share the savings. Given the hard to ignore warning signs of water scarcity cropping up around China, the government will likely be forced to raise the price of water. Potential WSCOs should keep an eye out for government policy action.

Parting shot
Government policy will have to drive the move toward efficient water use. Ideally, this will be in the form of a pricing structure that incentivizes entrepreneurial WSCOs to get out and do the work in the "short tail" of water reduction opportunities, but the government will have to do the heavy lifting in the "long tail" by mandating water efficient appliances and raising the price of domestic and agricultural water.

Water might become the environmental issue China gets serious about even before they get serious about climate change. But in order to sustainably fix the water problem, climate change cannot be ignored. Maybe an opportunity for WESCOs who focus on both energy and water savings?

Random thoughts

China doubles wind power in 2008

Recently released figures from the Global Wind Energy Council show that China doubled it's installed wind power capacity in 2008, reaching 12.2 gW, up from 6.3 gW. This is obviously huge growth and very important progress, but China still has a lot of work.

The US also passed Germany to become the world leader in installed wind capacity, with 25.2 gW.

China to subsidize purchase of advanced fuel vehicles

Xinhua reports that China will begin to offer subsidies for 13 big municipalities (Beijing, Shanghai, etc) to purchase advanced fuel buses, taxis, dumptrucks and postal cars. The details aren't yet clear, but the subsidies would help cities fund purchases of fuel-efficient hybrids and electric and fuel cell vehicles. This could be a big boon for BYD, SAIC and the other Chinese automakers charging into next generation fuel vehicles.

UPDATE: New Energy Matters reports on the subsidy levels, announced today:

The highest levels for small cars were set at CNY 50,000 (USD 7,300) for a hybrid car, CNY 60,000 (USD 8,760) for an electric and CNY 250,000 (USD 36,500) for a fuel cell car. Buyers for large buses will get much higher subsidies, with CNY 420,000 (USD 36,500) for a hybrid, CNY 500,000 (USD 73,000) for an electric and CNY 600,000 for a fuel cell buses.

This subsidy really matters: the subsidy for electric cars will bring BYD's autos well within cost competitive range with normal internal combustion engine-powered cars. See my previous post on electric car economics.

China gets wake up call on climate, energy

As Climate Progress notes, China faced a serious wake up call recently showing how important it is to move to clean energy now. First, local pollution is hurting China's children. A BBC article reports that birth defects are on the rise, and a senior family planning official blames pollution related to coal. Birth defects have been most severe in coal heavy areas.

Second, symptomatic of worsening climate change, northern China is suffering the worst drought in 50 years. As the Guardian reports, the drought is seriously threatening the wheat crop in Henan province and several other locations. It hasn't rained in Beijing and other northern cities in over 100 days. (for more on water in China, see two recent presentations on the topic by fellow Fulbrighters)

In order to alleviate both local pollution and global warming, China needs to move away from coal now.

Clinton plans to visit China and discuss climate change during first overseas trip

Against the backdrop of the worsening global warming-related problems described above, US Sec of State Hillary Clinton will make her first international trip to Asia, with a trip to China to discuss climate change, reports dotEarth. This very well could be the international issue of Obama's presidency. Several reports also came out with advice for US-China climate change negotiations: Brookings Institution and Pew Center for Clim/ Asia Society.

Another look at carbon finance for green buildings

Today I’m going to revisit the clean development mechanism (CDM) as a financing tool for green buildings and energy efficiency in developing countries. As I mentioned in a previous post on carbon finance, the CDM hasn’t done anything to date to finance investments in building energy efficiency in developing countries. But it’s starting to look like this may change soon. It’s time for developers in China to start thinking about how carbon finance can play a role in their projects and portfolios.

Before I get into the post, I think it’s worth mentioning one more time why carbon finance should be funding building energy efficiency projects. As the graph below shows (source: World Bank report [PDF]), efficiency is the largest piece in the puzzle of reducing our carbon emissions.



But as this chart shows, the CDM is not doing nearly enough to invest in efficiency:



As I mentioned before, a recent UNEP study did a good job of describing why the CDM hasn’t been effective in funneling money into investments in building energy efficiency. The programmatic CDM (pCDM) was established in 2005 to fix this problem, but hasn’t made much of an impact to date.

Luckily, things may soon change. The Executive Board of the CDM, who oversees and decides on all policy changes, called for public input on how to fix the pCDM and will review the program at their next meeting in mid-February. Most public input provided pretty sharp criticism (see this PDF for an example) as well as recommendations that should hopefully be incorporated into updated guidelines for the pCDM, ideally allowing many more projects (and groups of projects) to get CDM financing. But since no one can predict how long it could possibly take a body like the Executive Board to make up their mind, I won’t speculate here. Instead, I’ll just describe what the future might look like once a working carbon finance system is in place.

Greening building portfolios
The key place CDM will play a role is the greening of existing building portfolios. Existing building portfolios are well-suited to the CDM methodologies for several reasons. First, the emissions reductions baseline is solid. Unlike for new buildings, where the baseline is hypothetical and model-based, existing buildings already have a baseline in the form of their operating history and historical energy usage. Second, the emissions reductions are verifiable. How much energy did the building use before, and how much less does it use now? Third, the energy-efficiency measures undertaken across a portfolio of buildings will all be pretty similar. Once some of the current pCDM roadblocks are removed, it should be pretty easy to combine these activities at different buildings into one CDM program. Essentially, once the first building is approved and verified, it should be straightforward to get the rest approved. Fourth, and most importantly, the emissions across an entire building portfolio are large.

How big does the portfolio need to be?
In order to make going through the hassles of the CDM process worthwhile, the portfolio of buildings needs to produce a large number of CERs. Wind projects provide a good proxy of how many CERs might be needed: general wisdom seems to be that most wind projects need to be at least 50 mW in order to make CDM financing worthwhile. A 50 mW wind plant with a 25% capacity factor in China would produce about 110,000 CERs a year (calculations available here).

A 150,000 square meter office building (about the size of Prosper Center) in China would normally produce 30,000 tons of carbon dioxide per year. If the building owner could prove a 50% reduction in carbon emissions through a combination of energy efficiency improvements and on-site renewable generation, this would result in 15,000 CERs per year. So a building owner would probably need a portfolio of at least 1,000,000 square meters to make the CDM financing process worthwhile.

Several China developers fit this bill: SOHO Group, with a portfolio of a million and a half square meters of property in Beijing, and CapitaLand China, with a massive portfolio in 5 different regions of China, are two good examples. I’m sure Vanke and several others also have big portfolios of real estate ripe for investments in energy efficiency.

Carbon finance will provide a large opportunity for these companies to make good investments in energy efficiency, but will not be a panacea. At $0.10 per kWh of electricity and $20 per ton of carbon, carbon finance will provide a 20% kicker on energy efficiency investments over and above the savings on the electric bill. I was surprised by how little this kicker matters. If a developer faces a 5 year payback on energy efficiency, carbon finance would only reduce this to 4. It helps, but probably not enough to change behavior. This is part of the reason why David Victor and others are saying current carbon prices are just too low to make much of a difference.

It’s important to note that this carbon credit kicker will also rise (or fall) with carbon prices, as portfolio owners would be entitled to a stream of income, rather than a lump sum payment. In a world of properly priced carbon (maybe $100/ ton or more?), this kicker will really matter.

Opportunities abound
While the Executive Board tries to fix the pCDM, the voluntary carbon market is an option for developers who want to get ahead of the curve and learn how to use carbon finance to fund investments in energy efficiency.

One option is for developers to contract directly with interested companies in America or other non-carbon regulated countries, allowing the developer to sell off the carbon credits from a large portfolio in bulk. The company purchasing the carbon credit could then tout it's carbon neutrality or environmental friendliness. In fact, for companies like CB Richard Ellis, who has committed to being carbon neutral in 2010, this might be an interesting option. CBRE manages a lot of buildings in China, and could finance energy efficiency upgrades and then take the resulting carbon credits to reach their carbon neutral goal. And while doing this, they would get first hand experience in the emerging field of carbon finance for green buildings, a market that will undoubtedly be huge for CBRE in the future.

Developers could also sell their credits to the voluntary markets, using the Gold Standard or other voluntary standards. Voluntary standards, generally less stringent than the CDM, might be more receptive to the programmatic nature of building energy efficiency reductions.

Regardless of what happens with the Executive Board, the pCDM and even the post-2012 climate treaty, carbon finance is not going away. Developers and building owners who stay up to date on the developments in the carbon markets will have a significant leg up on their competition.