Responsible Investment

The Capital Vintage Paradox

May 14, 2013
Image ‘Paper Houses’ by Mike Wilson (CC BY-ND 2.0)

Over the past three decades, building codes have been implemented and sharpened for residential and commercial buildings. For the former, that has led to reduced energy consumption in more recently constructed dwellings (as documented by Matthew Kotchen for homes in Florida[1], and by Matthew Kahn for homes in Sacramento[2]). However, in commercial buildings, something seems to go wrong: the “steady state” energy consumption of buildings constructed after 1970 has been increasing ever since!

Controlling for occupancy and building characteristics (including size and amenities), buildings constructed between ’90-’00 consume 17 percent more electricity, and buildings constructed since '00 consume 12 percent more (both compared to 1960s levels). Importantly, we also find that the response of buildings to “temperature shocks” (or, hot days, in plain language) is much steeper for newer buildings, which has implications for managing peak load demand (an often ignored, but increasingly important factor in building energy efficiency).

So, what's going on? It seems like occupants in newer building choose to be more comfortable when the “price” of comfort is lower (i.e., when the energy efficiency of a building is higher), also known as the rebound effect. This 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).More advanced technology allows people to be comfortable at any moment, at any place in the building. The ability to separately cool spaces in the building is great, but that flexibility has drawbacks for energy consumption (a new start-up called “Building Robotics”, gives occupants an app to adjust the temperature at their workstation). Of course, newer buildings might also have more appliances.

It's important to think about these findings in the light of policy discussions on energy consumption in buildings. The results imply that peak demand of the commercial building sector will increase as new buildings are added, and the existing stock is improved through retrofits. Managing peak loads is an important aspect of policies that aim to reduce energy consumption, especially in areas with a (pre)historical grid (think: most of the US). Key takeaway: there is an exacerbated externality associated with the rising quality of the durable building stock.

References

  1. Kotchen, Matthew J., and Erin T. Mansur. 2012. “How Stringent Is the EPA’s Proposed Carbon Pollution Standard for New Power Plants?” Review of Environmental Economics and Policy, forthcoming.
  2. California “green homes” sell for 9 per cent extra”, Nils Kok, Matthew Kahn, www.tias.edu, August 23, 2012.

This article may be reproduced according to our terms of use with attribution (and link, if online) to www.tias.edu. To be cited as: “The Capital Vintage Paradox”, Nils Kok, www.tias.edu, May 14, 2013.

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The Capital Vintage Paradox
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Author(s)

Nils Kok
Associate Professor in Finance and Real Estate, Maastricht University

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