Buildings

4 Enabling conditions and policy instruments

The climate and resource-use challenges in the building sector are clear. Technological solutions exist to green the sector at low or even negative average cost. The socio-economic case for greening the sector is strong. But the greening of buildings has not taken place on a large scale in either developed or developing countries.

Besides more general constraints in advancing green building policy and regulation such as those related to governance and capacity, two key barriers relate to (a) financial constraints and (b) market and industry structures. These are discussed below, following which an overview of available instruments and tools is given. The latter will build on research done by the Central European University (CEU) for the UNEP Sustainable Buildings and Construction Initiative (UNEP SBCI 2007b), considering evaluation studies or reviews of policy instruments implemented in countries all over the world. Of key consideration is the relative effectiveness of instruments and tools in achieving high energy savings and GHG reductions, and their cost effectiveness.

4.1 Barriers to green buildings

Barriers to environmental and energy-efficiency improvements in buildings can be economic or financial, resulting from hidden costs and benefits, market failures or a specific market and industry structure. They can also be political or structural, associated with behavioural or organisational constraints, or linked to information and capacity limitations (UNEP SCBI 2007b). Recognising the latter two barriers is of particular importance in a developing-world context. Hidden costs include transaction costs associated with securing energy- efficient solutions and risks associated with replacement technologies (Westling 2003; Vine 2005). Transaction costs are often high owing to the fragmented structure of the building sector with many small owners and agents. Market failures can take the form of misplaced incentives, such as when building tenants (as bill-payers) have an interest in environmental improvements that are not shared by the building owners. While low energy prices may give little incentive for affluent households and businesses in developed countries to change their behaviour, subsidies often keep energy prices in developing countries artificially low and again take away any incentive to change.

Financial constraints Key financial constraints relate to upfront costs and payback periods, misalignment between investors and beneficiaries, the ability of households to pay, and investors’ policies on what to include in their investment portfolios.

Upfront investment cost and payback period: Although buildings can be greened at low or zero net cost over the lifetime of the investment, the initial additional capital outlay, the so-called “first cost”, could be a deterrent for those who demand finance for greening buildings (home owners, construction firms, and small businesses). In developing countries with acute housing shortages, actual or perceived high upfront costs are often a key barrier. Furthermore, energy-efficient multi- family housing is still widely perceived to be much more expensive to build than is actually the case (in new construction, 20 per cent improvements in energy consumption are achievable with modest financial costs (Brown and Wolfe 2007)).

Moreover, although investments in greening buildings tend to have relatively short payback period (say 5-10 years), many private investors may not proceed unless the net benefit stream starts flowing in within a couple of years. For large-scale green-building programmes, governments usually need to raise significant funds.

Split incentives: A related barrier is that the benefits of energy savings may not go directly to the person making the investment. For example, the owner of a building is likely to be responsible for making energy- efficiency investments, but the occupier may receive the benefit of lower energy bills (although landlords could benefit from higher rents if regulations so allow). On the other hand, if the landlord is responsible for the energy bills, the tenant has no direct incentive to invest in saving energy.

Household ability to pay: Financial capacity is an impediment particularly in multi-family housing where residents often have low incomes. While this group stands to save the highest percentage of income, they are likely to have the greatest difficulty in paying for effective investments, especially as the best results are achieved through a comprehensive retrofitting approach, which encompasses the modernisation

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