Let’s talk economics.
No, not the economics of the marketplace driven by instinct, enterprise and a deep understanding of customers – the
economics of a Gerry Harvey.
I’m talking about the thinking boxes of academically trained professional economists looking at our sector from the outside.
Let’s start with chapter 18 of Professor Garnaut’s recent report on climate change, which examines barriers to energy efficiency in buildings.
OK, get out your note books and write down these phrases:
- Principal-agent problems/split incentives
- Information asymmetries
- Bounded rationality.
According to many economists, these factors inhibit a greater commitment to energy efficiency in the property sector.
Principal-agent issues describe a mismatch between those who make investments (and take the risks) versus those who get
the benefits.
Information asymmetries occur when stakeholders don’t have access to the information needed to make decisions outside their familiar mode of operation. Business as usual is the comfortable response in the face of alternatives that might seem riskier.
Bounded rationality is all about having too much (generally confusing) information.
These concepts underpin Professor Garnaut’s analysis of the property sector. Admittedly, he also talks about the benefits of more focused R&D and the importance of building skills.
Nevertheless, his fundamental conviction is that if market players are better informed about the implications of their
decisions they are more likely to change their behaviour and ‘do the right thing’.
For instance, if a tenant knows how much energy a building consumes then they’ll choose more efficient buildings.
There are two problems with this approach.
First, there are many other forces that drive a tenant’s behaviour, such as rental levels, the quality and availability of
space, location, lease structures and the like. These factors tend to wash out small ticket items, such as energy costs.
The second problem is that an information fix offers a modest complement to the big idea of a carbon emissions trading scheme.
One criticism of Professor Garnaut’s approach is that he expects the price signals from carbon trading to do the heavy lifting.
When it comes to buildings, it seems the main backstop to the trading scheme is an information program.
If the goal is to transform market behaviour then economics, or this particular version of it, is a woefully inadequate tool for designing policy. It is a crutch rather than a lever.
Another problem with many economists is their naivety about the way decisions are made by investors.
Take the much quoted McKinsey & Co findings that investment in building energy efficiency provides the fastest and most economical gateway to major carbon abatement.
According to McKinsey, the community can achieve big blocks of abatement by improving the energy efficiency of buildings.
Quite true. But then it goes on to say that most investment in building energy efficiency comes at ‘negative cost’. That is, the investment will pay for itself as it costs less to run energy efficient buildings.
This is a very popular idea. Many people talk about 3-4 year paybacks on energy efficient investments. In short, they say it’s a no brainer and you’re nuts not to make hefty investments in energy efficiency.
Once again, this so-called economic analysis arises from a textbook approach to the sector.
A quick, cool-headed peek into the real world of decisionmaking reveals a different story.
In all the commentary on barriers to energy efficiency, few mention that it may be rational not to invest in energy efficient technologies.
The quantity surveyors, Davis Langdon, recently investigated the cost of upgrading a building by a couple of energy star ratings. They examined the issue from the perspective of the investor rather than neat textbook diagrams.
Their analysis showed that retrofitting is an expensive business.
Even without touching the building structure, it costs around $900 a sqm to achieve a four-star NABERS-Energy rating.
The payback period stretches to 20-plus years, even assuming compounding increases in energy costs.
In other words, the market often behaves rationally where it chooses to forgo expensive upgrades in preference to other investments.
Let’s make it clear, the Property Council is not defending inaction. More information is virtuous. Investment in efficiency is desirable.
However, the crutch of simplistic analysis leads to policy solutions that aren’t radical enough.
We need policies that will massively lift the eco efficiency of buildings.
That’s why incentives are needed to get the paybacks into the sort of territory the economists are talking about.
The Prime Minister is in closer touch with reality than his advisors. He recently said that energy efficiency was the second plank to his carbon pollution reduction scheme.
The Property Council’s existing building initiative, which calls for the incentives that will help drive an enormous building tune-up and retro greening program, will underpin and brace the PM’s second plank.
Check out the latest version of our policy at: www.propertycouncil.com.au/environment
Peter Verwer |
Friday, 5 September 2008 6:00 AM |
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