My fellow research friends have been busy over the last couple of months, which has lead to some interesting new studies that have recently come out, both from academia and from the industry.
A short but sweet two-pager about the "rebound effect" -- the idea that consumers will drive their car or use their washing machine more frequently, if these items are more efficient. The rebound effect can offset part of the savings achieved through energy efficiency, and this behavioral effect is typically not included in engineering models of energy savings (and payback/return predictions). Kotchen et al. do a good job of putting the big claims on large rebound effects into perspective. Important work for policy makers.
You won't find many references to industry reports, but...DTZ has just published a report on sustainability trends in Europe. Quite surprisingly, they take a factual approach by listing, for example, energy prices per country (very informative), and the report has an extensive appendix that describes energy efficiency initiatives in each EU member state in more details. Worth a read.
Home Energy Efficiency and Mortgage Risks (IMT/University of North Carolina) (* see end of article)
This is a very interesting paper-turned-into-industry-report on impact of home energy efficiency on the likelihood of mortgage delinquency (that is, no mortgage payments for 90 days, which is almost similar to default). The headline finding states that "loans on Energy Star homes are 32 percent less likely to go into default." If true, that is important news for the financing of energy efficiency retrofits and improvements: banks could lend a bit more (a higher LTV) to homeowners of more efficient homes, or allow for higher LTVs if owners make energy efficiency improvements. At this point, banks do not explicityly incorporate the energy efficiency of a home into the underwriting of a loan/mortgage, which prevents many homeowners from investing into improving their home, and thus reducing their energy bill. Also, it would be a very strong market signal if less efficient homes would have a harder time to obtain financing. Now for the sidenote: I find the "32 percent" number very high. To me, this clearly signals that the model used in the paper does not appropriately control for other factors that influence mortgage default, most importantly, the household characteristics. If (prospective) homeowners, with good jobs, sort into more efficient homes, that will influence the default rate. The study would attribute this to the efficiency of the home, whereas the quality of the borrower is the real cause of this decrease. Academics would call this a "suggestion for further research." And that is what it is. This paper is very good start to move an industry that has thus far been extremely myopic. Last week, I was at a meeting with some of the largest banks in the Netherlands (Rabobank, SNS, ING), to talk about residential energy efficiency. Of course, everybody wanted to talk about fancy retrofit financing possibilities, including revolving funds, etc. But when I asked the question whether the banks actually look at the EU energy label when making decision on home mortgages, the room went very quiet...
An Economic Perspective on Building Labeling Policies (Stavins/Analysis Group) (* see end of article)
This paper provides a well-written, detailed review on the "why" and "how" of energy labels. It is not necessarily an academic paper, but rather an excellent summary for policy makers that are in the process of mandating/designing energy labeling policies. I like this graph:
But I don't like the subjective tone of the report. There is, currently, no empirical evidence on how energy labels "nudge" corporate tenants and private homeowners/tenants into reducing energy consumption. (One 10-year old small-sample study from Denmark is not sufficient for bold claims. And since when do economists trust "...analyses [that] tend to draw these conclusions based on interviews…"?)
So, why start the report with the statement that "...there is currently no real evidence that these mandatory programs lead to any changes whatsoever in energy use"? Seems like a non-results turned into a result. I rather talk about results: labels provide information on the steady state (Europe) or in-use (US) energy performance of buildings and dwelling, and it has been shown that this leads to value differences. Yes, there are shortcomings to these kinds of analyses, as we cannot control for "unobservables," but at least the studies are based on large samples of market data, not interviews with clueless households (as the Economist posits this week "economists [should] reassess some articles of faith" which "might also make them more sceptical of “revealed preference”, the idea that a person’s valuation of different options can be deduced from his actions.")
The authors mention that "If building labeling affects property purchase and rental decisions, there will be no immediate impact on the energy efficiency of the building stock; labels may alter the choice among properties, but does not affect the energy efficiency of the overall building stock because it does not directly affect energy use and investment decisions."
These price effects provide indirect effects on energy consumption, indeed. They do not directly decrease consumption, or increase efficiency of homes. But these market effetcs should lead developers to build better, more efficient homes. It should also provide confidence to homeowners and investors that investments in the energy efficiency of their mansion will not just lead to lower utility bills, but these investments will also be capitalized into the transaction price at the time of sale (so decisions can be made based on returns rather than payback period). Another important point: if energy labels affect the choice for commercial and residential properties, price differences will emerge. Some call this a green premium, some a brown discount, but hat's just different sides of the same coin. If the value of inefficient properties becomes too low, these properties will be demolished and new real estate will be developed. (Of course, there is more at play than just the efficiency of the dwelling.)
Other "main" conclusions in the report are, for example, that "Building labeling does not distinguish between occupant energy use patterns and a building’s inherent energy efficiency, unless special measures are taken to control for occupant energy use." Great point. That's why a European-style energy performance certificate (EPC), which is based on modeled energy performance, should be accompanied by a US-style Energy Star rating. Importantly, the latter does control for the most important determinants of commercial building energy consumption: occupancy (in percentage of floor area, in # of people, in opening hours), building size, and weather. (Note to the authors: the EPA publishes its methodology in detail on their website.)
And yes, "Because each building is unique, development of accurate building label information requires very careful property-specific assessments, which are costly to create and verify." This sounds like the real estate lobby. (See my point about sponsored research below.) Yes, assessments cost money, but like a bank needs a valuation when providing a loan, a tenant, consumer or investors has similar needs for appropriate information at the time of lease or purchase. The art of benchmarking has to be perfected over time, but already, the EPA does a pretty good job at measuring the energy performance of buildings, for less than $1,000.
The paper ends with some useful recommendations, for example the inclusion of utility bills in property transactions (but, well, that would benefit from some standardization as well), property inspections by potential buyers (great, ever heard a realtor talking about leaking windows and missing rooftop insulation?), and voluntary labels (that's where we are right now). And then, the overall recommendation: "Our assessment of mandatory building labeling policies has identified many limitations to these policies that merit full consideration before proceeding with new programs."
Great. What a vision.
Building energy labels are not perfect. In fact, they are far from perfect. The European EPCs suffer from many shortcomings. But they represent an important step in providing transparency into an otherwise notoriously intransparent market. There is no doubt that buildings are increasingly the focus of global policies related to energy use and climate change. These policies will consist of a mix of prescriptive building codes (Europe wants zero net energy by 2020), demand side management (for example, incentives provided by utilities), and attempts to influence investment behavior. Policies will also include measures that will be painful, such as restrictions on transactions of inefficient buildings (the UK is taking the lead here: with effect from April 1 2018 it will be unlawful to let buildings with an EPC rating of F or G), or mandatory audits and improvements for commercial building owners.
Of course, this would all be unnecessary if the externality effects of energy consumption were appropriately priced (reflecting the social cost of energy generation). But, well, rather than going down that politically unpalatable road, national and state governments like indirect, winding paths much better. Even if they're unsure about the challenges ahead.
* a little note of caution: even though some of these studies are "academic," they've been funded by industry associations or lobby groups. External funding in academia is not new (in fact, it is increasingly common with shrinking government budgets, and I'm an avid user of such funds), but I'm always a little weary when a brand promotes its products with "independent research."