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I The Economics of Sustainability: The Business Case That Makes Itself Greg Kats, President, Capital-E and Venture Partner, Good Energies I’m going to talk about the cost effectiveness of “greening” buildings, drawing from my book Green- ing Our Built World: Costs, Benefits, and Strategies.1 I wrote the book to address a fundamental question: How much does it cost to construct a green building compared to conventional buildings? Sponsors for the project included the largest real estate organizations in the country, the American Council on Renewable Energy, the American Institute of Architects, the American Public Health Association, Build- ing Owners and Managers Association International, Enterprise Community Partners, the Federation of American Scientists, the National Association of State Energy Officials, the National Association of Realtors, the Real Estate Roundtable, the U.S. Green Building Council, and the World Green Building Council. The objective was to examine the issue from a balanced, in-depth perspective—greening the built environment is neither solely a nongovernmental organization initiative nor an environmental one. We started with 350 buildings and worked with 100 architects, and by the time we were done, we were able to gather good data on about 170 buildings. We found that the perception is that building green costs about 17 percent more than building conventionally. However, the data show that the actual cost premium is closer to 2 percent of total design and construction costs, sometimes referred to as “first costs.” This misperception of higher first cost seems to be very widespread. For example, I had the opportunity to go to Beijing last fall as part of the Obama administration trip. In China, the perception is that green buildings cost 28 percent more (Figure I.1). The perception of higher cost seems to be the primary determinant for why people don’t build green as a matter of course, which underscores the importance of gathering evidence-based data on this, com- municating those data, and helping people understand that green buildings are an important step toward building more intelligently. Figure I.2 shows data collected for utility bills, principally energy and water, for green office build- ings. The additional cost of building green is about 2 percent, or $4 to $5 per square foot. If you assume that energy prices do not rise very fast, discount them at 7 percent, and assume only 20 years of operation 1 G. Kats, Greening Our Built World: Costs, Benefits, and Strategies, Island Press, Washington, D.C., 2010. 135
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136 ACHIEVING HIGH-PERFORMANCE FEDERAL FACILITIES FIGURE I.1 Cost of building green: evidence fromfig i-1.eps 146 green buildings. SOURCE: Greg Kats, Capital-E and Good Energies. FIGURE I.2 Costs and benefits of green buildings: presenti-2.eps 20 years of estimated impacts based on study data set fig value of collected from recent green buildings. SOURCE: Greg Kats, Capital-E and Good Energies.
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137 APPENDIX I FIGURE I.3 Costs and benefits of green buildings: present value of 20 years of estimated impacts based on study data set and fig i-3.eps synthesis of relevant research. NOTE: There is significantly greater uncertainty, and less consensus, around methodologies bitmap for estimating health and societal benefits. SOURCE: Greg Kats, Capital-E and Good Energies. (which is conservative because buildings clearly last more than 20 years), then the net present value from utility bill savings alone is almost three times greater than the first-cost design premium. Thus, based on utilities alone, it is a fiscally prudent strategy to design and build green. Moreover, because there is a lot of uncertainty about energy and water costs—which are volatile and tend to rise faster than inflation—it is also a risk reduction strategy. If you consider the larger set of benefits that accrue over 20 years—improved health, indirect energy savings, reduction of emissions, operations and maintenance savings, and so on—the savings add up. (When examining health-related issues, we relied particularly on the work that Vivian Loftness and her team at Carnegie Mellon University have done to compile and review hundreds of peer-reviewed studies.2) When you add up these benefits—the net present value of direct financial benefits primarily to the building owners, some to the occupants, and some to the community—the total benefits are about 10 times greater than the cost premium of constructing a green building (Figure I.3). Over a period of 20 years, there are a number of additional benefits from green design relating to productivity, property value, and other factors. We were not able to quantify those benefits for this project, but we believe they are roughly the same order of magnitude as the benefits that we were able to quantify. So, the question is no longer: Why would you design and construct a green building? It is instead: Why would you not design a green building? It is fiscally prudent to do so, and it entails lower risk. The next time someone says to you, We’re thinking of designing a conventional building, you should 2 CarnegieMellon University, Center for Building Performance and Diagnostics. BIDS Tool. Additional information is available at http:// cbpd.arc.cmu.edu/ebids/.
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138 ACHIEVING HIGH-PERFORMANCE FEDERAL FACILITIES ask them, Who’s your lawyer? I say this because the allergies, asthma, and respiratory problems associ- ated with conventional design begin to have greater liability impacts when you can build green, much healthier buildings cost-effectively. We also looked at 10 Midwest residential development projects with a combined total of 1,500 homes. In these projects, the homes were built in close proximity to each other, and 50 to 60 percent of the land was set aside for parks, walking areas, or trails. The site development costs per project were more than 20 percent lower on average. The costs per unit were about $12,000 less than conventional development, primarily due to lower infrastructure costs. In addition, the initial sale value was higher, and subsequent value appreciation was greater (Table I.1). Green development is not only about individual buildings, but also about how buildings are located in relation to each other. The argument that you cannot build green without giving up economic benefits, at least for the building sector, is manifestly wrong. Interestingly, of the 170 buildings we studied, 18 were at least 50 percent more energy efficient and about one-third used some on-site renewable energy. The average CO2 reduction for these 18 buildings was about 65 percent, even though the technology used was 5 years old. The average payback for these buildings with two-thirds reduction in CO 2 from operations was about five times the initial cost over 20 years (Figure I.4). The lesson from this study is that we can reduce energy use to a much greater extent than we are typi- cally doing today. The kind of vision that the General Services Administration is laying out, in terms of very deep reductions, is supported by what we know about the actual cost premiums of deep reductions. Executive Order 13514, Federal Leadership in Environmental, Energy, and Economic Performance, sets somewhat ambitious goals for federal agencies, but it could go much farther. In my opinion, some goals are too weak and, in some cases, need both interim and long-term performance targets. This would help builders, architects, engineers, and constructors understand that there are goals that federal agencies, TABLE I.1 Conservation Development: 20 to 30 Percent Reduced Development Costs over Conventional Conventional $ % Description Sprawl Costs ($) Conservation Cost ($) Change Change Grading Subtotal 1,425,418 947,142 478,276 −34 Roadway Subtotal 2,313,896 1,512,412 801,484 −35 Storm Sewer Subtotal 1,145,639 519,544 626,095 −55 Sanitary Subtotal 1,502,840 1,105,282 397,558 −26 Watermain Subtotal 1,657,739 1,233,850 423,889 −26 Erosion Control Subtotal 35,684 35,684 0 0 Offsite Sanitary Subtotal 26,250 26,250 0 0 Landscape/Restoration Subtotal 284,200 665,192 −380,992 134 Amenities Subtotal 999,222 732,240 266,982 −27 Contingencies/Engineering/ 2,347,722 2,347,722 0 0 Legal Subtotal (25%) TOTALS FOR PROJECT 11,738,610 9,125,318 2,613,291 −22 TOTALS PER UNIT 38,237 26,839 11,397 −30 SOURCE: Greg Kats, Capital-E and Good Energies.
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139 APPENDIX I FIGURE I.4 Advanced energy savings and green premium: 18 buildings from the study data set. SOURCE: Greg Kats, fig i-4.eps Capital-E and Good Energies. bitmap and in turn they themselves, have to respond to and that the goals become higher over specific periods of time. Executive Order 13514 requires the diversion of 50 percent of all construction and demolition waste by 2015. However, the average green building diverts more than 80 percent of construction and demolition waste cost-effectively today. So, why isn’t there an 80 percent minimum mandate in this executive order? Similarly, zero-net-energy buildings by 2030 is a good goal, but we need interim goals, such as 50 percent lower energy use by 2018 and 75 percent lower use by 2025. Executive Order 13514 also calls for paper to include 30 percent recycled content. In my office and in my home, we use only 100-percent-recycled-content paper. So, why wouldn’t the federal government establish a goal of 50 percent recycled content by 2015 and a goal of 80 percent recycled content by 2018? Setting such goals for federal agencies would signal to the market that there will be a large emerging demand over a finite timeframe, and then the market could build the capacity to respond to that market. Proponents of green design are sometimes accused of promoting things that are only plausible for the wealthy or for the government. On the topic of green affordable housing, I had the good fortune of being the principal advisor in developing the Green Communities Criteria, which is now the national standard for design of green, affordable housing,3 with 20,000 units built. The design and construction cost premium is about 3 percent, but the utility bills for these units are about 35 percent lower than those for conventional units. These units also show substantial improvements in indoor environmental quality. If we can build green affordable housing cost-effectively, then there is no building type that we cannot green cost-effectively. In my opinion, all of the Department of Housing and Urban Development (HUD) homes (and keep in mind that HUD spends almost $5 billion a year on energy bills) and leased buildings should follow the Green Communities Criteria. (I should add that HUD in this administration is doing a lot of green, healthy cost-effective design changes and programs already.) There are other opportunities that could be mandated by an executive order. For example, greater coordination with the European Union (EU), California, and Massachusetts, which mandate zero-net- 3 Available at http://www.practitionerresources.org/cache/documents/666/66641.pdf.
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140 ACHIEVING HIGH-PERFORMANCE FEDERAL FACILITIES energy residential by 2020, while the EU mandate is for 2019. In addition, all new or retrofitted federal buildings should achieve a LEED Gold rating and reduce their energy use by 50 percent by 2015 and by 65 percent by 2018. Currently, there is public funding for building upgrades, such as lighting, with 2-year paybacks. But if you do a shallow retrofit, you can’t go in and do a more serious energy effi- ciency upgrade. “Cream skimming” should not be allowed—that is, there should be no federal funding, subsidies, or tax benefits for retrofits that do not achieve either at least a 30 percent reduction in energy and water use or an Energy Star score of at least 90. The value of greening goes beyond energy savings. Figure I.5 shows the Comcast Building, owned by Liberty Property Trust—a real estate investment trust in Philadelphia. Like many cities, Philadelphia is suffering from out-migration. Liberty built a super-green building; it is the tallest building between New York and Dallas. When reporters from the Philadelphia Enquirer saw the plans for this, they said, “This building challenges Philadelphia to be great again.” So, it’s not just about buildings. It’s also about brand. I think about brand as really three aspects. One is increased brand awareness. So, an owner of a new green branch bank is going to get a lot of positive free media coverage that drives traffic to the site. There are attribute-specific preferences—I might have health concerns and care about indoor environmental quality improvements, or I might live in Arizona and care about reduced water use. These specific attri- butes that I care about drive me to that building as a purchaser or tenant or client. But, I think the largest brand-related driver here is non-attribute-specific preference—for example, the sense that it’s a higher-quality building, which contributes to the perception that my brand quality is better. The LEED green design process is a more rigorous and integrated one, which results in a build- ing that is more likely to be designed and built as intended and operated as designed. You reduce your risk and increase performance. That is why at least half of the corporate 500 firms that are building headquarters now build green: it’s their face to the world. So, this larger brand aspect is hard to quantify, but ultimately it may be perhaps the largest driver in promoting green buildings. We are also starting to see a significant premium for green buildings in terms of increased rental rates, FIGURE I.5 Comcast Building, Liberty Property Trust. fig i-6.eps bitmap
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141 APPENDIX I fig i-7.eps FIGURE I.6 Green building benefits: increased rent, sales, and occupancy. SOURCE: J. Spivey, “Commercial Real Estate and the Environment,” CoStar, 2008. Available at http://www.costar.com/uploadedFiles/Partners/CoStar-Green-Study.pdf. bitmap sales, and occupancy (Figure I.6). The premium for green buildings is about two and a half times greater for LEED Certified and Energy Star buildings than for conventional ones. So, again, green design is not only about higher financial return; it is also about risk reduction. In a buyers’ market, people exercise their preferences, and they are starting to do so around green elements. We know climate change is happening. As with smoking’s link to cancer, the science is unambigu- ous about climate accelerating damage and costs. There are still perhaps 2 percent of climatologists who do not share this view—perhaps about the same percent of epidemiologists who do not accept the scientific consensus that smoking results in cancer. The question is, What are we going to do about it? My company, Good Energies, a venture capital firm, is one of the largest investors in clean energy technology. It’s a multi-billion dollar firm. I lead our investments in energy-efficient and renewable technologies. I wanted to mention a couple of these technologies because they represent the kind of technologies that can cost-effectively drive deep reduc- tions in CO2 emissions. Figure I.7 is one example of technology about which we are excited. It’s called “SageGlass Elec- trochromics.” It allows you to vary the sunlight coming through a window between 2 percent and 65 percent. By itself, it can reduce the air conditioning load in a commercial building, on average, about 15 percent and peak about 25 percent. And, we’re just scaling manufacturing that. There are a couple hundred installations. I served as the director of financing for efficiency and renewables in the Department of Energy (DOE) for the Clinton administration, and early DOE support for this technology illustrates the kind of impact that federal support for research and development of fundamental technology can have. Figure I.8 illustrates recent work by the Federal Energy Regulatory Commission (FERC) which suggests that full deployment of distributed response (basically, demand management intelligent grid technology), could allow electricity growth to flatten from 1.7 percent down to zero. We have two smart grid invest- ments in AlertMe and Tendril (I am on the board of both). Both are growing very rapidly. They allow
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142 ACHIEVING HIGH-PERFORMANCE FEDERAL FACILITIES fig i-8.eps FIGURE I.7 Performance comparison. bitmap fig i-9.eps FIGURE I.8 Federal Energy Regulatory Commission (FERC) report: demand response potential. SOURCE: FERC, Assessment of Demand Response and Advanced Metering,bitmap w 3 vector masks 2008: assumptions: smart meters, dynamic pricing default, enabling technolo- gies. Available at www.ferc.gov/legal/staff-reports/demand-response.pdf
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143 APPENDIX I FIGURE I.9 CO2 impact. SOURCE: Greg Kats, Cap-E and Good Energies. fig i-10.eps bitmap FIGURE I.10 Greening = wealth and jobs creation. Net present value (NPV) of net benefits of business as usual (BAU) and fig i-11.eps green. SOURCE: Greg Kats, Cap-E and Good Energies. bitmap
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144 ACHIEVING HIGH-PERFORMANCE FEDERAL FACILITIES us to integrate across the meter, with a combination of efficiency and renewables, and drive toward this vision of deep reductions in energy waste through improved controls and enhancing comfort. Let me turn, finally, to CO2 emissions and the debate about whether mandating deep reductions in CO2 emissions will hurt the economy. We modeled the CO2 emissions from buildings under a range of scenarios and policy options (Figure I.9). Then the question is, Does significant CO2 reduction hurt the economy or not? Well, there is an up- front cost premium associated with greening all of those buildings. However, the direct energy savings resulting from green buildings creates about $350 billion in current value to society. Once you add in other direct benefits, the value creation is about $1 trillion in net present value, if you pursue an aggres- sive strategy toward green (Figure I.10). So, although some may argue about climate change, the data are unambiguous: We can achieve very deep reductions in CO2 emissions through thoughtful design, we can do it today, and we can do it cost-effectively. In my opinion, those who argue that we cannot are essentially saying that America has lost its capacity for innovation, that America has lost its capacity to drive through its political systems intelligent choices and the right regulatory structure, that America has lost its will to lead. I believe these pessimists are wrong. I think the investments being made by the federal government and the private sector will allow us to achieve deeper reductions and do so more and more cost-effectively.