The Economics of Green Buildings

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The Economics of Green Buildings

• Lecture 7

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Overview

• General assumptions made by contemporary
  (neoclassical) economics
• A new field of economics ecological economics
• Applications to the built environment
• Life Cycle Costing (LCC) approach

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Neoclassic Economics

• Nature is a sector of the economy
• Nature does not support the economy, but it
  simply is a sector of it
• Economy will grow around / develop / evolve to
  overcome any scarcity that may develop based on
  nature
• Unimportance of Nature

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Prevailing Economic System

• Private ownership of material resources
• Public ownership of sinks
• Perfect functioning of the market
• Infinite substitutability of resources
• Subsidized disposal, energy, water

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Economy
The ecosystem is seen sector of the Economy
Ecosystem
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Environmental Economics

• Three steps
• assessing the economic importance of
  environmental degradation
• finding the economic causes of degradation
• designing economic incentives to slow, halt, and
  reverse environmental degradation
• Assumption the environment is not a separate
  entity from the economy
• Environmental changes have economic impact

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Ecological Economics

• A new transdisciplinary field addressing the
  relationship between ecosystems and economic
  systems in the broadest sense.
• Uses the tools of conventional economics and
  ecology as appropriate.
• Need to establish institutions that take the long
  term view, a la biology
• Economics as an ecological system

R. Costanza, Ed. Ecological Economics, The
Science and Management of Sustainability,
Columbia University Press, 1991, 3-7.
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Hicksian Income
...income that can be consumed without reducing
future consumption possibilities
Hicksian Income income that does not forego
future opportunities for others.
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Sustainable Economic System

• Understands primary role of natural systems in
  the economy
• Integrates functions of industrial and natural
  ecologies
• Accounts for true costs of waste and disposal
• Cradle-to-Grave responsibility for products
• Penalizes waste, rewards efficiency
• Understands that everything is connected

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Current vs. Ecological Summary

• The current economic system is not sustainable
• Depends on the scale of material/energy
  throughput
• Subsidizes resource extraction and pollution
• Taxes productive activities
• Does not measure welfare
• A system based on Ecological Economics would
• Shift taxes to waste, inefficiency, and
  pollution, away from wages, profits,
  productivity, and investment
• Focus on dematerialization, deenergization,
  decarbonization, and detoxification
• Measure welfare instead of absolute monetary
  transactions
• Support an EcoIndustrial revolution

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Changing the Signals to the Economy

• Currently taxes are applied to positive aspects
  of behavior wages, productivity, profit
• It would be better to tax aspects that are
  negative waste, inefficiency, pollution
• Possible mechanisms
• Pollution taxes
• Tradable pollution permits
• Deposit fees
• Shifting impacts of production to producers is
  called internalization
• Internalize the Externalities polluter pays

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Assessing Building Economics

• Depends on the owner private or public
• Speculative buildings minimize capital or
  first cost of the building
• Commercial owner minimize capital costs, some
  consideration of operating costs, issue is length
  of ownership
• Federal government minimize sum of capital and
  operating costs
• The economics of green building is predicated on
  minimizing the total cost of the building over
  its life cycle Life Cycle Costing (LCC)

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Considering the Environment Integrated Decision
Making

• Since Financial and Economic Analysis are
  conducted in terms of money, environmental
  considerations must be somehow turned into
  monetary items
• Analysis Options
• 1. Omit environmental considerations
• 2. Recognize them but do not integrate them into
  the decision
• 3. Describe them list with appropriate
  monetary values
• 4. Qualitative Comparison describe and compare
  monetary and non monetary effects
• 5. Quantitative Non-monetary assessment assess
  and record effects in non monetary units
• 6. Quantitative monetary assessment Evaluate
  in money terms and integrate into decision

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Wild Card IEQ

• Indoor Environmental Quality (IEQ) comfort, air
  quality, lighting, noise, connection to nature
• Cost of building lease 22/SF
• Cost of employee (typical) 124
• Benefit of healthy building 12/SF (assumes a
  10 productivity increase)
• Note for Federal government 350/SF

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Perceived High Cost

• It cost more to buy / use that
• Initial Cost
• Life Cycle Cost
• Cradle to Cradle
• Cradle to Grave
• Full Cost Accounting
• Embodied Energy - subjective

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Life Cycle Costing

• Life Cycle Costing (LCC) is used to determine the
  total cost of a building for the purpose of
  selecting alternatives
• LCC adds together the construction or capital
  or first cost of a building to the total
  operating costs
• Operating costs could include
• Energy electricity, natural gas, fuel oil, other
• Water and wastewater
• Maintenance function of quality, durability,
  complexity
• Total cost of people in building

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LCC Process

• Determine the building lifetime discount rate
• Estimate the capital cost for construction
• Run simulation to determine operating costs
  (typically energy, can include water, wastewater
  treatment, maintenance, IEQ impacts)
• Determine annual building cost
• Amortize capital cost over building lifetime or
  other period of time
• Input operating costs and adjust for inflation
• Sum amortized capital cost and operating costs
  for each year
• Use discount rate to determine the present worth
  of annual costs

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Discount Rates

• Used in economic analysis and LCC
• Discount rate if the alternative investment
• The discount rate is the way society views the
  future
• The higher the discount rate, the lower will be
  the worth of future savings or earnings

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Discount Rate Formula
2,051.10
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Discount Rate Formula
10,000.00
2,051.10
i 8
0
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years
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Inflation Rate Formula
Cost of a 200 item in 10 years if the annual
inflation rate is 3
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LCC Tableau
(1) Net Annual Savings Savings Costs Net
Annual SavingsEnergy SavingsLoan OM
Misc (2) PW of Savings Net Annual Savings
discounted to present (3) Total PW of Savings
Sum over lifetime of the system (4) Savings to
Investment Ratio (SIR) SIR Initial Cost/Total
PW of Savings
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Example
Example Window Replacement For year 10 Annual
Savings2960.49 - 1490.29 - 268.78 - 0.00
1,201.42 PW of Savings 1,201.42/(1.04)10
811.63 Total PW of Savings 4,109.51 (add PW
of Savings column) SIR 4,109.51/10,000 0.41
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FDOE Research Study

• Service Life Cycle Cost Analysis
• Lowering the initial cost of a facility by
  selection of lower initial cost materials will
  likely result in higher life cycle cost of the
  facility.
• Show that low initial cost was not always best

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FDOE Required Assumptions

• Building Service Life 50 years
• Inflation Rate 3.0
• Disregard Bonding Issues
• Discount Rate 0.0
• No Salvage Value when systems are replaced

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FDOE Requirements

• Evaluate commonly selected building materials
• Limited the amount of new materials that were
  introduced into the study
• Primary goal was to show low initial cost was not
  always the lowest total cost over the life of the
  school
• Analyzing individual components or material
  systems of schools not the school as a system

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Needed for Analysis

• Identify all costs for selected materials on a
  per square foot basis
• Initial Cost
• O M Cost
• Determine the number of replacements needed

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Service LCC Analysis

• LCC moving money through time
• Net Present Worth convention

Operation Cost
Replacement Cost
Maintenance Expenses
Purchase Price
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Low initial cost vs. low LCC
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Calculation Results
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Increasing Initial Cost vs. LCC
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Calculation Procedure
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Exposed Concrete vs. Ceramic Tile with mortar
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Cost savings from selecting low LCC vs. low
initial cost
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Increasing Initial Cost vs. LCC
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Increasing OM vs. LCC
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Calculation Procedure
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OM vs. LCC
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Calculation Procedure
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Concluding Thoughts

• The economy responds to signals it is sent
• Cheap waste disposal
• Low costs for emissions (air, water, land)
• Low cost for environmental impacts
• Cheap and subsidized resources
• Tax benefits for resource depletion
• Green building is inherently based on Ecological
  Economics
• Capital Cost of green buildings can be lower than
  conventional construction
• Life Cycle Costing is a necessary step in
  assessing buildings and promoting green buildings