One solution is to change the growth model and consumption patterns in developing countries which will account for a majority of new greenhouse gases. However, it is unlikely that education to better understand the consequences of our choices for future generations will curb population growth and consumption.
So, what are the implications for the future of housing? Markets should force manufacturers to produce more energy efficient and affordable housing. However, market forces that drive commodities such as sustainable housing are not operating in an efficient manner. Because markets do not adequately internalize the environmental and social costs of using fossil fuels, namely the impact on humans and the burden on society for cleaning up the environment, government intervention is typically justified on this basis.
In 2010, the Obama administration devised a working figure, $21/ metric ton of carbon, although this figure is not universally agreed upon. Many experts feel this figure is too low. The carbon dioxide emissions from coal-fired power are the largest single source of greenhouse gas emissions in the United States. According to a National Academy of Sciences study Hidden Costs of Energy (2009), in 2005 environmental damages from carbon emissions totaled more than $120 billion. At roughly 3 cents/ kilowatt-hour for coal, that equates to $30 per ton of carbon. This figure includes climatic and non-climate factors such as damages to health, crop yields, building materials, etc.
In Sustainable, Affordable, PREFAB: The ecoMOD Project, John Quale, an Associate Professor of Architecture at the University of Virginia, points out a startling statistic compiled by EPA regarding the environmental impact of residential housing in the United States. The average single family home emits more than 22,000 pounds of carbon dioxide each year from electricity generated by utilities and appliances which is twice the amount emitted by the typical American car. In order to address sustainability, green builders have adapted several strategies including passive solar design, prefabrication, retrofits, and size.
Passive solar design takes advantage of the sun for heating and hot water, the landscape for shading, sun screens to reject heat in the summer, and windows for cross-ventilation and natural light. Although passive design is more expensive than traditional building design, utilizing free energy provides savings over time.
To utilize economies of scale, some builders use prefabricated walls and flooring instead of standard wood stud construction, the method used in traditional or stick-built housing. Prefabricated wall and floor panels include electrical, plumbing, and gas lines and insulation. Prefab has less waste and also provides a green edge through reduced commuting in the manufacturing and building processes.
Manufacturers can develop more energy efficient and environmentally friendly products and the government can subsidize behavioral interventions. Architects and designers can make housing as green and affordable as the homebuyer wants it. Given the reality of a budget, however, sustainability is a trade-off between the costs and the environmental impact of the choice of materials.
For affluent buyers, green housing has an inelastic demand. Living Homes in Southern California sells prefabricated homes with higher quality components in the $200-$300 per sq. ft. range. Their target market is the Prius driving, Whole Foods eating, environmentally conscious and well educated consumer.
To accommodate younger and less affluent consumers, IKEA, the world’s largest furniture retailer, which successfully penetrated the Scandinavian and British prefab housing markets, has set up a pilot program in Salem, Oregon with the architectural firm/prefab studio IdeaBox. Since many homeowners spend most of their time in less than 1,000 sq. ft. of living space, IKEA has reduced the square footage in order to lower costs. IdeaBox has created the I-House, a 992 sq. ft. home selling for $100,000, or roughly $100 per sq. ft.
From an economic perspective, until markets can internalize environmental and social costs, electricity generated from coal fired plants will remain a bargain to consumers. Due to the lack of international agreement and problems with enforcing emissions, EPA is regulating carbon emissions rather than market forces which utilize user fees.
The Congressional Budget Office estimates that with a carbon tax, which is really a user fee, based on $20/ton adjusted over time could raise roughly $1.25 trillion over the 2012-2022 period. Although controversial, a user fee addresses the federal deficit, allows for cuts in other taxes, stimulates the economy, and helps reduce carbon dioxide emissions and oil imports.
Given that externalities are reflected in the market process, markets also require knowledgeable and rational consumers. However, behavioral economics studies reveal consumers and are not always rational when making decisions about future cost savings and energy efficiency. For example, given the option of spending $500 upfront or spending $1,000 upfront with a savings of $70 per year, over ten years the more expensive appliance or retrofit actually costs $300 in the long term.
To better gauge the impact of externalities, manufacturers have developed indices as a ratings tool enabling consumers to better measure the environmental and social costs of household appliances. Manufacturers have developed brands based on life cycle analysis of components throughout the supply chain that are driving consumer markets. Whether shopping for lighting fixtures or kitchen, bathroom, and washroom appliances; consumers are inundated with Energy Star rated choices that cost more in the short term.
If consumers give too little weight to future cost savings, the reasonable return on investment is smaller than economics predict. So, there is a need for interventions to encourage consumers to make cost-effective choices. The federal government requires agencies to purchase a certain percentage of bio-preferred products and utility companies are working with homeowners via smart metering and energy efficient light bulbs.
Government nudges including subsidies such as investment tax credits and low-interest loans are used to influence consumer behavior. However, if the government subsidizes a specific industry, for example alternative energy, when the subsidies are withdrawn from this sector it may not have the capability of competing in the energy market. Even worse, if the bubble bursts on a multi-trillion dollar green economy another economic meltdown could occur.
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