Policy “nudging” for energy-efficient buildings: how effective is it?
Starting this year, the "label-C policy" (first announced in 2018) will take effect. After January 1, 2023, all office buildings with an energy rating below C (on a scale from A++ to G) will not be allowed to retain their original functions. What that means is that all commercial office buildings with energy labels D or lower can no longer be (re)leased, financed, or transacted. According to the policy's criteria, a qualified office space must not consume more than 225 kWh per m2 per year of fossil energy, and existing office spaces can be retrofitted with a variety of energy-saving measures, such as improved insulation, more energy-efficient HVAC systems, and non-fossil energy sources (solar, wind, etc.).
With Europe experiencing an existential energy crisis, the issue of how to motivate or "nudge" private individuals and businesses to improve energy efficiency has again become a topic of interest. The "Label C policy" is an example of such a "nudging" policy.
Ideally, existing office building owners will invest more into improving the energy efficiency of their buildings, while real estate investors will prefer individual properties or portfolios with higher energy ratings (the well-known “green premium”). As a result of this trend, more office building projects (new construction or renovation) will aim for higher energy ratings (e.g., C or better) rather than settling for a D or lower rating.
However, the reality did not go as expected. Low-rating properties still stay in the market. According to the data we collected on office space leasing transactions from 2016-2022, the share of office space with an A or higher rating has continued to increase since the publication of the "label-C policy" (2018). By the end of 2022, approximately 18% of the market stock is still below C.
The data collection process is still underway, and the exact values are subject to change. But it is certain that a small portion of the office space market will still be dominated by energy-inefficient buildings on the eve of the "label-C policy".
Why doesn't the "nudging" policy seem to be fully working here? While it is too early to say that the policy has failed, there are some obvious reasons why it has been ineffective. One of the most notable is that energy costs are overwhelmingly borne by tenants, not owners unless the incentive is directly applied to rents (For example, Brussels agrees to limit rent increases for energy-inefficient homes), or the market as a whole fully recognizes the green premium in rents, there is no significant incentive for landlords to improve the energy efficiency of their buildings.
Another impediment is that the "label-C policy" currently applies only to office buildings. Landlords may believe that it is easier and more profitable to retrofit buildings for other functions than to improve energy efficiency. And of course, the extent to which the new regulation is enforced matters. Some owners will rather accept the chance of a (small) fine than invest significant capital into improving their building.
One more thing: in the long run, policies focusing on energy ratings rather than actual energy performance are unlikely to be helpful in addressing energy reduction outcomes. The energy consultant takes many characteristics (such as insulation construction, building surface area/volume ratio, use of alternative energy sources, etc.) of the building and makes an energy performance calculation based on this. The actual energy consumption of a building is influenced by many more factors than these. For example, insulation design flaws that are difficult to detect with normal inspections (Several studies have confirmed the significant impact of such flaws on insulation performance), occupant behavior, or the aging performance of some building equipment. So, even if the market moves when regulation is put into place, the question is whether actual performance moves with it.
References
Kok, Nils, and Maarten Jennen. "The impact of energy labels and accessibility on office rents." Energy policy 46 (2012): 489-497.
Christensen, Peter, et al. "Decomposing the wedge between projected and realized returns in energy efficiency programs." The Review of Economics and Statistics (2021): 1-46.
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