Tuesday, April 14, 2009

Two Pronged Approach: Top Down

This is the last of a three part post on my two-pronged approach for greening China’s buildings. The two-pronged approach consists of both a bottom up and a top down strategy for transforming the market for green buildings in China. The first post focused on how China achieved its success with LEED buildings thus far and what this says about market dynamics. The second post described the need for bottom up green leadership by real estate developers and some policy steps to encourage this. The third post will make the case that particularly in China, this bottom up approach is not nearly enough and introduce a top down approach to supplement the bottom up approach.

In last week’s post, I described the power of the bottom up approach to transform the Chinese real estate market and make building green standard. This assertion rested on two main ideas, or feedback cycles as I referred to them. First, as the building industry develops the capacity to build green, costs will come down to the point where there is no perceived cost premium for green. Second, as tenants become aware of the benefits of occupying green buildings, they will demand green buildings in large quantities. I really believe this framework will transform the market for green buildings in China. However, even if this bottom up effect works exactly as well as I describe, there is still an unfortunately large minority of builders who will refuse to adopt green building practices until they are forced to by policy. The top down approach, therefore, focuses on ensuring that green is adopted by all, even those who otherwise wouldn’t want to adopt green methods.

The Laggards
Laggards are those who lag behind in adopting new practice. Everett Rogers first created this theory in his seminal work Diffusion of Innovations, which Malcolm Gladwell then popularized in The Tipping Point. In this case, I refer to the laggards as those who won’t adopt green building practices even after the market has been transformed and green buildings are the norm.

Unfortunately, the real estate is particularly noteworthy for having laggards. The World Business Council for Sustainable Development recently conducted a survey of over 1400 building professionals (developers, architects, engineers, building owners and corporate tenants) in eight countries, including China. This chart below shows the responses to the question: What do you as see the role of your company in the adoption of sustainable building practices?

This data provides a useful reality check for my bottom up approach. First, it shows that innovative developers are out there. Second, more than 25% of building professionals adopt practices as soon as they are tried and tested. A further 25% of building professionals then adopt practices incrementally. This is an extremely large nascent base of buildings who will adopt green building practices as soon as leading edge developers prove them. This data matches well with the trend lines that Rogers’ described above- with the first group as the innovators, the second group as the early adopters, and the third group the early majority. Moreover, significant adoption of green building by the first two groups has a strong chance of influencing the behavior of tenants and activating the “demand side” feedback loop that I mentioned in my first post. As this demand side snowball is activated, clients are likely to demand green features in many of their projects. This makes it likely that the “late majority” of those who only adopt practices as clients require it will adopt green building practices relatively soon after the early majority.

The real problem though is the embarrassingly large group of laggards: nearly a quarter of global building professionals adopt innovations (and presumably green building practices) only as required by policy! It’s sort of sad because this group of laggards is larger even than Rogers predicts (he predicts 16%). But it’s really sad because, absent good policy, these laggards are allowed to build polluting, energy hogging buildings that will last for decades.

Application to China
As bad as the WBCSD chart makes it look for laggards globally, builders in China can be even worse. To get a realistic look, we should probably add even another line to the bottom of that chart: Not even adopting practices as regulations require. This is an allusion to the extremely poor building energy code compliance in Chinese buildings.

As the data shows (PDF), compliance with energy codes in China is poor throughout the country. The disparity between design and construction compliance also shows the willingness of developers to “cheat” when faced with the perception of increased costs. Given that many Chinese building dont even currently comply with mandatory building energy codes, it seems unlikely that these developers and owners will be willing to voluntarily take the jump to green buildings.

The need for policy with teeth
Therefore, the Chinese government must step in and force these laggard developers to improve their energy efficiency. The current mandatory building energy code, which mandates 50% savings over 1980 levels for new buildings, is a good start. But now the hard work of actually enforcing this code must begin. Several US groups, including NRDC and the US DOE Pacific Northwest National Laboratory,are working with Chinese government to help them develop the capacity needed to enforce the codes.

Enforcing the existing code is necessary, but not sufficient; the Chinese government will have to do more. They will have to continually raise the bar on this standard, and more importantly, make sure that these codes are enforced. Ideally, government policy will set an ever-increasing minimum standard for environmental performance that looks like this:
This government policy can be complemented by a host of other measures, many of which are described in a terrific recent report by the Renewable Energy and Energy Efficiency Partnership. But the fundamental goal of the top down approach is to force the laggards to improve the environmental performance of the built environment.

The goal
When the bottom up and top down approaches are combined, we will get consistent improvements in environmental performance across the market, from the top end to the bottom end, from innovators to laggards.

Ultimately, some variation of my two pronged approach is necessary to transform the market in China. This will involve leading developers and the government striving for great environmental performance across the market: Class A office, government buildings, workforce housing, etc. This push will eventually lead to snowballs in these markets, causing transformations that result in green building becoming the norm. We must not forget the reality of laggards though, particularly amongst developers in China. The government will have to step in and mandate and ensure compliance with energy and related environmental codes. China is already taking good first steps in this direction with the LEED snowball in the Class A office market and the national building energy code. Let’s hope they now quickly start taking the next steps so sorely needed to transform the market and ensure a green future for the Chinese built environment.

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