Groundbreaking report: many barriers exist to building energy efficiency and carbon pricing alone is not enough

The World Business Council for Sustainable Development has just released a huge report on building energy efficiency called Transforming the Market. The report is the result of four years of hard work and a first of its kind computer model that attempts to incorporate how regulations, price signals and behavior change can affect global energy use in buildings. The report focused on buildings in the six largest building markets: Brazil, China, Europe, India, Japan, and the US.

The report reconfirms that buildings represent a vast source of low-cost investment opportunities to reduce CO2 emissions. However, much to my surprise, these investments will generally cost more than previously thought. I will come back to this point at the end of my post.
The report drives home the message that in order to capitalize on these carbon reduction opportunities, the building industry must start transforming itself TODAY.

The need for transformation
As the report notes, building energy efficiency isn’t a problem of technology. It’s a problem of scale:

Some very low-energy new homes already exist in many countries, demonstrating that our energy targets are technically achievable. But these examples show little sign of being scaled up globally. Low-energy buildings must become the norm rather than the novelty project.

The report identifies several key structural barriers that are preventing broad take-up and snowballing of energy efficiency solutions

• A lack of transparency about energy use and cost, resulting in a limited focus on energy costs by all those in the building value chain, with viable investment opportunities overlooked and installed technology not operating at optimal levels
• Public policies that fail to encourage the most energy-efficient approaches and practices, or actively discourage them
• Delays and poor enforcement of policies and building codes, which concerns all countries
• Complexity and fragmentation in the building value chain, which inhibits a holistic approach to building design and use (described in their first report)
• A lack of adequate offers today (affordable and quality energy-efficient solutions for new constructions and retrofitted works, adapted to local contexts)
• Split incentives between building owners and users, which mean that the returns on energy efficiency investments do not go to those making the investment
• Insufficient awareness and understanding of energy efficiency among building professionals – identified in EEB research published in the first report – which limits their involvement in sustainable building activity and results in poor installation of energy-related equipment.
  

I’ve come across these same barriers time and again in my China green building research, so it’s not surprising to me that the barriers are global.

The report also does an interesting case study of a multifamily housing unit in Northern China on Page 36. The authors model both a base case, where energy use triples between now and 2050, and a Transformation case, where an aggressive mix of policies and technology restricts the growth in energy use to 63%. Although the Transformation case still results in high growth of energy use, it results in a 50% reduction in emissions over the baseline case. But most importantly, this 50% energy use reduction over baseline pays for itself. The authors estimate this scenario will require an additional investment of $12bn per year, but will pay for itself with about $12bn of energy savings annually. So to me, the choice seems like a no-brainer: either aggressively implement policies that pay for themselves and result in 50% less CO2 emissions or do nothing and watch climate change rip the planet apart.

But as the report notes, it’s not a simple question of economics. Achieving the aggressive energy efficiency goal won’t be easy and will require a lot of strong policies, including:

1. Audit energy performance of apartment buildings; introduce labeling systems to provide transparency, and enforce increasingly strict building energy codes
2. Strengthen building codes and ensure adequate audit and enforcement capacity
3. Introduce heavy subsidies to achieve high performance in existing and new buildings, including significant feed-in tariffs for on-site generation
4. Require sub-metering, apartment level controls and charging according to use
5. Revise legal frameworks to overcome barriers to collective refurbishment of apartment buildings
6. Impose regulations to phase out low-performing buildings, including a requirement for zero net energy, new, low-rise buildings from 2020
7. Government authorities and other owners of social housing must act on their property portfolios
8. Initiate a mobilization campaign to motivate behavior change by owners, project developers, tenants and reinforce the message to fully establish a change in behavior
9. Educate and train developers, architects, engineers and the building trades to improve understanding of code requirements, illustrate the advantages of integrated design and alleviate concerns for higher costs
10. Promote energy service companies (ESCOs) as effective energy managers for building owners, especially public housing authorities
11. Promote onsite renewable generation for all new low-rise buildings
    

It’s not clear that China can find the political will to implement all these policies and get to the Transformation level. But at least this case study provides yet more evidence that he Chinese government should undertake these policies knowing that both the economic case is pretty solid. Again, the overall economics are not the problem; rather it is the many structural barriers listed above.

Building energy efficiency isn’t free
One of the more surprising conclusions of the report was this idea that building energy efficiency investments will cost more than many (me included) assume.

The authors divide the investment into three batches: those with paybacks of 5 years or less, those with paybacks of 5-10 years, and those with paybacks of more than 10 years. The authors suspect that there are about $150 billion worth of annual investments with paybacks of less than 5 years that will result in 40% carbon reductions by 2050. There is also about $150 billion worth of annual investments with paybacks of 5-10 years that will result in an additional 12% carbon reduction, totaling 52% below business as usual. The authors do not calculate a figure for investments with paybacks over ten years. As I’ve mentioned before, I have a problem with payback period, but this is still interesting to see so many good investment opportunities with less than 10-year paybacks. When energy savings are added to the ~$300bn in investment
shown above, this results in a net annual cost of about $250bn.

The authors also note that despite this relatively large cost number (1.5% of global GDP), building energy efficiency investments have much better economics than carbon reduction opportunities in other sectors. Building energy efficiency can also be implemented immediately and creates jobs, further lowering the net overall cost.

A carbon price alone won’t be nearly enough
As the report notes:

EEB modeling shows that increasing the price of energy or carbon will only slightly increase the implementation of energy-efficient options. In fact, reductions would only marginally increase from 52% at today’s energy prices to 55% with an incremental carbon cost of US $40/ton.

This fits very well with my earlier analysis showing that at current carbon prices, the CDM or other carbon price only gives a 20% sweetener to energy efficiency investments, probably not enough to make a whole lot of difference.

This unfortunate fact means that mere passage of a cap and trade bill will not be enough to get us to where we need to be. It also reinforces a statement made by Michael Hoexter, author of the indispensable Green Thoughts blog:

The premise of carbon pricing as a complete climate solution, as opposed to “command and control” regulation, is that regulators and the designers of a carbon pricing do not know the technological solutions to reducing carbon emissions, in keeping with the monetarist/free market tendency to view scientific knowledge as limited in scope and not generalizable. The market becomes a “black box” that produces innovation or favorable and/or efficient social results. In practical terms this could mean that designers of the policy are thought not to be cognizant of industry inside knowledge or that no one can know what the future will bring in terms of technological development. Entering into a carbon pricing system then means embarking on a technological and economic “voyage of discovery”.

If one believes that one knows or we know at least a portion of the technological solutions to reducing carbon emissions, carbon pricing would be in many instances a roundabout solution for supporting those solutions.

We know most of the solutions needed to drastically reduce building energy use and carbon emissions. I’ve blogged about many of them, including improved insulation, combined heat and power, and integrated design. Most of them are fairly mature technologies or processes and most are fairly low-cost. The issue is the many barriers to implementation listed above. Therefore, a carbon price alone will not be enough to access all of the emission reduction opportunities the built environment has to offer.

As the WBCSD says, “building professionals, owners and users do not grasp the urgency and remain unmotivated to act.” Governments and citizens need to start motivating these actors to achieve energy savings and emission reductions in the built environment.