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New Zealand Journal of Environmental Law |
Last Updated: 16 February 2023
233
Turning Buildings Green: Instruments for Improving the Energy
Performance of Existing Buildings
Thomas Garry*
A significant amount of greenhouse gas emissions are attributable to the operation of buildings. Existing technologies provide substantial cost- effective opportunities for reducing these emissions, but the opportunities remain unrealised because of known market failures and barriers in the building sector. New Zealand has begun to pursue policies to address this, such as strengthening the building code. Much of the regulatory attention, though, has focused on new buildings, despite the existing building stock presenting the greater opportunity for reducing emissions in the near term. In large part this stems from the fact that reducing emissions from existing buildings in a cost-effective manner is, for a number of reasons, the more difficult endeavour for government. New and innovative regulatory approaches are required. The literature on so-called “smart regulations” and reflexive environmental law provide principles for developing such regulations. The application of some of these principles can be seen in the regulatory measures other countries have taken to reduce emissions attributable to existing buildings. This paper examines these measures taken overseas and articulates a normative framework for New Zealand to improve its regulatory approach to existing buildings in the context of its overall climate change strategy.
*AB Princeton University, JD University of Minnesota. An earlier version of this article was prepared by the author for submission as part of his Master of Laws (LLM) studies at The University of Auckland, New Zealand. The author would like to thank Associate Professor Ken Palmer for his helpful comments on an earlier version of this article.
1. INTRODUCTION
Buildings1 are responsible for a significant amount of global greenhouse gas (“GHG”) emissions. The bulk of these emissions come from generating the energy to provide heating, cooling, and lighting, as well as to operate electrical appliances. Building construction and the production of building materials also constitute a significant source of emissions. In New Zealand the portion of GHG emissions attributable to buildings is generally less than in other developed countries because of the relatively high percentage of electrical energy gener- ated by renewable sources. Nevertheless, the operation of buildings alone is still estimated to be responsible for some 17 per cent of domestic carbon dioxide (CO2) emissions.2
Buildings present a clear opportunity for policy-makers to reduce overall GHG emissions. A 2007 report by the Intergovernmental Panel on Climate Change (“IPCC”) projects that there is the potential by 2020 to avoid at least 29 per cent of the projected baseline global GHG emissions through cost-effective3 mitigation measures in the building sector using existing technologies.4 Such potential reduction was the highest among all sectors studied in the IPCC report.5 Studies of New Zealand’s building sector have similarly found that cost-effective emission reductions are achievable through energy efficiency measures.6 Given the near-term economic and technological limitations
on reducing New Zealand’s emissions in other sectors (e.g. agriculture and transportation), taking advantage of these opportunities in the building sector is critical for New Zealand’s overall climate change strategy.7
Findings like these give further credence and momentum to the “green building movement”, which among other things seeks to reduce the energy used in the built environment, through improvements in design, construction, siting, and operation of buildings. Accordingly, green building has received increasing attention from policy-makers, non-governmental organisations, and academics, and has seen some initial penetration into the marketplace.
In large part, though, the focus of the green building movement has been on lowering the embodied and operating energy footprint of new buildings. For long-term reductions in emissions this is a necessary outlook given the long operating life of buildings. However, the durable nature and slow turnover of buildings also means that in a country like New Zealand, with a well-developed building sector, the greatest potential for emission reductions in the near term8 resides with the existing building stock.9 In addition, improving the energy performance of existing buildings also has significant co-benefits, such as increased energy security, improved health from warmer homes,10 and other sustainable development objectives.11
neecs/report/evaluation-of-options-for-intervention-in-stationary-energy-efficiency-06.pdf
>; Ministry of Economic Development, “Benefit-Cost Analysis of the New Zealand Energy Strategy” (November 2007) <http://www.med.govt.nz/templates/MultipageDocumentTOC_
31983.aspx>. (Note that all URLs listed in this article are as of 18 October 2008.)
<http://www.mfe.govt.nz/publications/climate/policy-review-05/policy-review-05.pdf> (hereinafter “MFE Climate Change Policy Review”) at 110–21.
While substantially reducing the amount of energy used by existing build- ings is cost-effective and achievable with existing technologies, such efficiency gains are unlikely to be achieved by market forces alone, even with a push from a carbon pricing scheme.12 The “efficiency gap” — the gap between the actual level of energy efficiency in the building sector and the higher level attainable at a net negative cost to building owners — has been well documented and arises from certain long-standing market failures and market barriers in the building sector.13
Now, however, spurred by the need for quick and cost-effective ways to reduce GHG emissions, a number of countries have begun undertaking strong regulatory14 measures to address these failures and barriers, and close the efficiency gap in existing buildings.15 This article will review some of these measures in the context of New Zealand’s pressing need to reduce its GHG emissions in the near term, and investigate what type of new measures for existing buildings can be effective in New Zealand. It is an opportune time to examine these issues in New Zealand given the recent commitment by Parliament to invest a billion dollars over the next 15 years in a “House- hold Fund” to be used by the government to reduce GHG emissions from the residential building sector.16
The objective of this article, though, is not to create a new policy plan or detail how the Household Fund should be allocated.17 Rather, it is to articulate a
See Klaus Bosselmann, Jenny Fuller & Jim Salinger, Climate Change in New Zealand: Scientific and Legal Assessments, NZCEL Monograph Series (Auckland, 2002) at 53.
1197.
normative framework for creating the best mix of instruments to capture, in the most cost-effective manner for both society and government, the energy-saving potential of existing buildings in light of not only experience overseas but also the scholarship on so-called “smart regulations”18 and reflexive law.19 This paper thus lies in the transition zone between broad calls for government action on climate change and the nuts and bolts of developing workable climate change measures. The underlying thrust of the paper is that better legal instruments are needed to ensure that those climate change mitigation actions that are economically justified in their own right take place, and take place quickly.20 Such actions should be the proverbial low-hanging fruit of climate change policy,21 and the law has a critical role in achieving this outcome.22
Section 2 of this paper will provide a brief primer on the context (e.g. scientific, economic, and legal) for reducing GHG emissions, particularly in the near term. Section 3 will examine why existing buildings present an opportunity for reducing GHG emissions. Section 4 will outline the role of the law in taking advantage of these opportunities, given that they stem from systemic market failures and barriers. Section 5 will then examine what regulatory measures currently exist in New Zealand and other countries to increase the energy efficiency of existing buildings. The paper will then conclude with an analysis of the extent to which innovative approaches from overseas and the principles of smart regulation and reflexive law provide guidance for the way forward on improving the energy performance of New Zealand’s existing buildings.
on New Zealand’s building stock. See e.g. Centre for Housing Research, “The Impact on Housing Energy Efficiency of Market Prices, Incentives and Regulatory Requirements” (Wellington, 2006) <http://www.chranz.co.nz/pdfs/housing-energy-efficiency-report.pdf> .
(Clarendon Press, Oxford, 1998).
2. THE CONTEXT:
THE URGENCY TO REDUCE EMMISSIONS
Examining the merits of reducing New Zealand’s GHG emissions from build- ings first requires placing the overall need for near-term reductions in context, both at the international and domestic level.
2.1 The Importance of Near-term Emission Reductions
It can now be fairly said that there is a global scientific consensus that concen- trations of GHGs in the earth’s atmosphere have increased dramatically in the past two centuries,23 with the greatest increases occurring since 1970.24 These increases have been significant enough already to warm the earth’s climate beyond a level of natural variation, and over the course of the next century will cause the climate to warm further.25 The extent of this future warming depends on the levels at which the concentration of GHGs in the atmosphere are stabilised.26
The IPCC has developed a matrix of scenarios which relate a certain amount of temperature increase (once all committed warming has been realised) with particular levels of stabilised GHG concentrations and, in turn, by when emis- sions need to peak and then fall to achieve those stabilised concentrations.27 Across scenarios, the earlier emissions peak and decline, the lower the level at which temperatures will stabilise.28 Given this, and in light of the inertia in the climate system as well as the inertia in human social and economic systems, the IPCC concluded that emission mitigation efforts in the next several decades will have a disproportionately large impact on the ability to achieve lower GHG
concentrations and thus a lower stabilised temperature increase.29 “Delayed emission reductions significantly constrain the opportunities to achieve lower stabilisation levels ... [M]itigation actions begun in the short term would avoid locking in both long-lived carbon intensive infrastructure and development pathways, reduce the rate of climate change and reduce the adaptation needs associated with higher levels of warming.”30
This importance of near-term emission reduction efforts is underscored by the IPCC’s reporting that, given the scientific uncertainties, their projections if anything may underestimate the amount of warming at various GHG concen- tration levels — and the higher the concentrations, the greater this underestimate may be.31 In other words, the uncertainties and risk of delay weigh heavily on the side of higher warming.
2.2 The Policy Context for Reducing Emissions
Generally speaking, climate change mitigation means using alternative methods of production (production of energy, products, locomotion, food, etc.) to emit fewer GHGs, ideally while achieving the same level of output. With respect to energy, there are essentially two avenues for accomplishing this: (1) reducing the amount of GHGs emitted per unit of energy used (i.e. the GHG intensity of energy sources); or (2) reducing the amount of energy used per unit of economic output (i.e. energy intensity).32
While it is clear such a transition is necessary, it is far less clear how to go about doing so. There is no silver bullet. No one technology or policy can solve the entire mitigation problem or even solve the mitigation problem in any one sector. Nor can sufficient mitigation be achieved by addressing emis- sions from one sector (e.g. transportation or energy generation).33 Yet there is much agreement that GHG emissions can peak and then decline as early as 2015 by employing technologies either currently available or expected to be commercialised within coming decades.34 The critical step is to put policies in
place that remove the market and institutional barriers that prevent the rapid deployment and diffusion of these technologies across a number of sectors.35
For governments, the critical hurdle is to develop mitigation policies and instruments that are both cost-effective and politically feasible.36 The mix of policies that will work will vary from country to country and from sector to sector depending on local circumstances.37 New Zealand’s choice of mitigation policies will need to reflect both (i) the fact that it is primarily an international technology taker in many areas (most notably for road vehicles) and therefore some mitigation avenues are outside its control, and (ii) its unusual GHG profile as compared to other developed countries.38 With respect to this latter point, indicative of the economic predominance of agriculture, non-energy emissions from farming account for 49.4 per cent of New Zealand’s gross domestic emissions.39 In comparison, the average non-energy emissions from agriculture in other developed countries are 12 per cent, with the UK at 6.9 per cent and the US at 5.9 per cent.40 The consequence of this is that the two primary GHGs from agriculture (methane and nitrous oxide) play a significant role in New Zealand’s gross emissions, together accounting for more warming influence than the CO2 portion of New Zealand’s emissions.41 This significance of methane and nitrous oxide also reflects the relatively low share of CO2 emission from the energy sector because of the comparatively large percentage of electricity generated from renewable sources.42 However, while agriculture is the largest emitter, the
317, 430.
energy sector is the fastest growing, with emissions having increased by 33.8 per cent between 1990 and 2004, as compared to a 14.8 per cent increase from agriculture over the same period.43 Most of this increase in the energy sector is due to more emissions from transportation (62.7 per cent increase) and thermal electrical generation (73.6 per cent increase).44
The prominence of agriculture and the already relatively high percentage of energy from renewable sources have significant implications for New Zealand’s mitigation options and the cost of those options. First, given the current state of technology, there are not expected to be cost-effective mitigation options for the agriculture sector in the near future.45 Moreover, because New Zealand is a price taker for agricultural products on international markets, price-based mitigation measures that increase the cost of farm production will raise competitiveness issues for this key part of the economy.46 Second, the potential to reduce emis- sions by switching to more renewable fuels — a critical part of the climate strategy of many other developed countries — is limited given that a relatively high percentage of New Zealand’s energy is already generated by renewable sources.47 As a result, increasing energy efficiency and, relatedly, decoupling energy use from economic growth, will play a critical element in mitigation efforts in the near term.48
Another prominent feature of New Zealand’s climate change profile is that while New Zealand’s total emissions contribute much less than 1 per cent of total global emissions, its per capita emissions rank as one of the highest — 12th in the world on this scale.49 On the one hand this means that mitigation efforts in New Zealand will have little influence on the overall trajectory of climate change. On the other, the high per capita emissions necessitate that New Zealand heed the global political imperatives for action on climate change.
2.3 Existing Regulatory Context
Existing legal obligations have, for the time being, resolved the question as to whether New Zealand should undertake mitigation measures, though the issues of timing, cost distribution, and means remain far from settled.
Foremost are New Zealand’s international legal commitments on climate change. Under the Kyoto Protocol, New Zealand, like other developed coun- tries, has a binding obligation to reduce its emissions.50 Specifically, New Zealand must reduce its average annual GHG emissions between 2008 and 2012 (referred to as the “first commitment period”) to its emission levels in 1990. New Zealand is currently forecasted to have a substantial emissions liability at the end of the first commitment period (i.e. gross emissions in excess of the Protocol target).51 New Zealand will be obligated to purchase emission credits on the international market (or acquire them via one of the flexible mechanisms under the Protocol) to cover this deficit.
Consistent with the Protocol’s reliance on the use of market incentives, the centrepiece of New Zealand’s domestic emissions reduction plan has been to legislate a mechanism that sends price signals throughout the economy indi- cating to business and individuals the cost of their GHG emissions in light of New Zealand obligations under the Protocol. The underlying idea is to use price incentives to shift the economy efficiently away from producing and using GHG-intensive goods and services and to encourage investment in GHG- reducing technology.
The first attempt at such a measure was a so-called carbon tax (i.e. a tax on emissions), but this was abandoned before it was ever implemented. The second, just recently enacted, is a GHG emissions trading scheme (“ETS”), to mirror and be connected with the international trading system initiated by the Protocol.52 The ETS will be phased in over five years, with all the major sectors of the economy to be incorporated by 2013. At this point the impact of the ETS on domestic emission levels remains somewhat uncertain as the scheme does not contain a binding emissions cap and the plans for allocating free emission credits to certain key sectors, at the time of writing of this article, have not been fully developed. Nevertheless, and of particular relevance for addressing emissions attributable to buildings, it is currently expected that the ETS will cause the price of electricity to rise by five per cent from 2010.53
The policy debate surrounding both the carbon tax and trading scheme
reflected the difficulties New Zealand’s unique GHG profile creates for devolv- ing the costs of emissions across all sectors of the economy. Principally, making the agriculture sector absorb the full cost of its emissions at this time would have significant negative repercussions for the economy because farmers currently have no commercially available means to reduce their emissions significantly (other than reducing stock).54 The flip side of this is that to the extent agriculture is exempted from facing the full cost of its emissions those costs will be shifted onto other sectors.55
New Zealand’s policy approach to reducing emissions has not been limited to a single price-base measure. There have been additional, narrower and more targeted, governmental programmes, policies, and legislation, though all of these are in the main voluntary, incentive, planning, and public information-based measures.56 Of particular note for this article is Parliament’s recent commitment to make one billion dollars available over the next 15 years “for the purpose of reducing non-transport household [GHG] emissions through the promotion of household energy efficiency and conservation and household renewable energy technologies”.57 This “Household Fund”, as it has been labelled, arose from the political compromise needed to pass the ETS legislation. In that regard it is intended not only to reduce emissions from the household sector but also to serve as a mechanism for offsetting the disproportionate impact that the higher energy prices caused by the ETS will have on lower-income households and those households for which energy is a high proportion of expenditure.58 The authorising legislation for the Household Fund, however, provides little guidance for how the funds are actually to be spent,59 and at the time of writing of this article the initial regulatory plans for spending the funds were still being developed by the government and the Energy Efficiency and Conservation
59 Section 223(3) of the ETS Act, supra note 16, does provide that funds “may be used for purposes that include (but are not limited to) the delivery, marketing and promotion of, and provision of grants relating to (a) household insulation and clean heat retrofits; (b) energy efficient appliances and lighting; (c) space and water heating efficiency improvements”.
Authority (“EECA”). It is noteworthy, though, that the legislation does require that cost-effectiveness be a consideration when developing the criteria by which the funds will be spent.60
Underlying these existing policies and legal obligations to address climate change is New Zealand’s international commitment to sustainable development. This is not a binding commitment in the way that the commitments under the Kyoto Protocol are binding, but rather involves a so-called “soft law” obligation under international law. New Zealand has taken this obligation seriously and has been a global leader in incorporating principles of sustainability in its environmental and natural resource policies.61 References to “sustainability” can be found in a wide range of statutes covering such matters as forestry, buildings and, most notably, “land, air and water” under the Resource Management Act 1991 (“RMA”).62 Though the express purpose of these statutes is not the reduction of GHGs, they can be synergistic with this objective.63 Unmitigated anthropogenic climate change is necessarily unsustainable development.
3. REDUCING EMISSIONS FROM EXISTING BUILDINGS: THE OPPORTUNITIES AND OBSTACLES
The GHG emissions attributable to buildings, and particularly existing build- ings, provide critical opportunities for cost-effective near-term climate change mitigation efforts in New Zealand. Yet there are multiple market, social, and institutional barriers to reducing these emissions. This section will describe these opportunities, outline why they are greater with existing buildings, and highlight the hurdles that need to be overcome to take advantage of these opportunities.
3.1 Emissions Attributable to Buildings and the Opportunities to Reduce Them
The IPCC estimates that in 2004 approximately a quarter of all global CO2 emissions were attributable to buildings.64 In terms of energy use, in OECD
countries the operation of existing buildings accounts for between 25 per cent and 40 per cent of final energy consumption.65 Despite efforts at improving energy efficiency over the last several decades, global CO2 emissions from building operations grew 2.0 per cent annually between 1971 and 2004, which is about the same rate as the overall growth in global CO2 emissions.66 The IPCC has projected under several emission scenarios that buildings will represent approximately 30 per cent of world CO2 emissions in 2030.67
In New Zealand, the operation of buildings is responsible for a relatively
smaller portion of domestic CO2 emissions, approximately 17 per cent in 2001, due to the comparatively high percentage of electricity generated from renew- able sources.68 Buildings, though, use 22 per cent of all energy consumed in New Zealand and over half the electricity.69 The opportunities for reducing GHG emissions related to buildings fall into one of three categories:
Though in general these opportunities apply equally to residential and commer- cial buildings, it is necessary to split the discussion here between the two, as their differences have important implications for policy design. These differences primarily stem from the nature of building owners: mainly individual consumers own residential buildings and firms own commercial buildings.71 Policies have to account for the differences in technical knowledge between the two types of owners, their differing motivations, and the social implications of policies that increase costs for homes as opposed to those that increase costs for commercial buildings. First, though, a few clarifications need to be made about several basic
energy-efficiency/energy-efficiency.pdf> at 11.
issues: energy efficiency; energy savings; price elasticity of energy demand; and the extent to which energy savings mean a reduction in GHG emissions.
Improvements in energy efficiency result from “a change to energy use that results in an increase in net benefits per unit of energy”.72 However, increased energy efficiency does not always mean equivalent energy savings because of factors such as the “take-back” effect, which results in efficiency gains being offset to some degree by greater energy usage because of lower energy costs.73 Similarly, energy savings may not necessarily be caused by improvements in energy efficiency but may result from behaviour changes (e.g. conservation) or lower economic activity.74 The key measure for the building sector therefore is sustainable energy savings — actual savings from improvements in energy efficiency measured from a baseline level, and savings from behaviour and economic changes that are sustainable.75
Price elasticity is relevant because it speaks to the extent to which sustainable energy savings can be realised by simply increasing the cost of energy. The extent to which energy price increases in and of themselves cause sustainable energy savings in the building sector is subject to a number of factors (e.g. price of substitute energy sources or fuels) that make it difficult to predict with specificity.76 In New Zealand, the price elasticity for the residential sector is estimated to be relatively low.77 The energy demand in commercial buildings (e.g. retail buildings) is generally thought to be similarly inelastic, though not necessarily to the same degree.78 Low elasticity means that price incentives (i.e. higher energy prices) resulting either from general market forces or a government policy, such as an energy tax or carbon pricing, would on their
<http://www.med.govt.nz/templates/MultipageDocumentTOC 21862.aspx> at 107.
own have relatively little overall impact on the barriers that need to be reduced or eliminated to cause sustainable energy savings.79
In New Zealand, the reduction in GHG emissions resulting from sustainable energy savings is similarly difficult to project with specificity. Foremost, energy savings from buildings will not result in a proportional reduction in energy- related GHG emissions. This is particularly the case with respect to savings in electricity use because of the high portion of New Zealand’s electricity generated by renewable sources. Rather, emission reductions from reduced electricity use will be a function on the marginal electricity generation capacity (i.e. the generation plant that will first cease or reduce output in response to reduced demand or the new generation plant that will be delayed or avoided because of reduced energy use).80 New Zealand’s marginal electricity capacity currently is and will primarily be for the near term non-renewable thermal (coal and natural gas), which is GHG intensive. However, over the longer term, renewable sources (particularly wind) are expected to play an increasing role in the marginal generation capacity, though the extent of this role depends on government policies, structural changes in the economy, and the rate of economic growth. Consequently, New Zealand’s marginal emission factor for electricity (i.e. the ratio by which reductions in electricity use reduce C02 emission from electricity generation) is, for analysis purposes, higher in the short term than it is in the long term.
Of the 17 per cent of New Zealand’s CO2 emissions estimated to be attributable to the operation of buildings, 9 per cent stems from residential buildings.81 Energy use in homes has been relatively well studied in New Zealand and numerous reports point to the overall poor energy performance of New Zealand’s residential building stock in comparison to other developed countries.82 The chief steps considered for increasing residential energy efficiency include:
(i) improving the thermal envelope of existing residential buildings through retrofitting;
(ii) improving the thermal envelope of new residential buildings through increased building code requirements;
(iii) installation of solar water heaters in new and existing buildings;
(iv) minimum performance requirements for home appliances;
(v) draught-proofing windows and doors; and
(vi) use of low-flow shower heads.83
Several preliminary cost-benefit studies have been done of these measures in New Zealand.84 The studies use different underlying assumptions and have different scopes of analysis, and therefore their respective results are not directly comparable. Nevertheless, the results of these studies are consistent and point to several general conclusions, as follows.
First, when incorporating the energy cost-saving and health benefits, reducing energy use in residential buildings is one of the most cost-effective ways to reduce emissions on a per CO2-equivalent basis. For example, under one study, the Ministry of Economic Development calculated that improving the energy performance of existing residential buildings was by far the most economical way to reduce GHG emissions on a per ton of CO2-equivalent basis, having a negative cost that was well below the cost for a range of other studied measures.85 This result can be attributed to, among other things, the mature technologies on which these measures are based and the high value of the co- benefits associated with these measures.86
Second, these studies show that the potential amount of gross emission reductions through energy efficiency measures in residential buildings is relatively modest, in the context of New Zealand’s overall gross emissions.87
(BRANZ, Porirua, New Zealand, 2006); Centre for Housing Research, supra note 17; BRANZ, “New Zealand House Condition Survey” (BRANZ, Porirua, New Zealand, 2005) at 10–11; MFE Climate Change Policy Review, supra note 7, at 114. Studies suggest that New Zealand homes are often colder than the World Health Organization’s recommended healthy temperatures. EECA, “The Dynamics of Energy Efficiency Trends in New Zealand: A Compendium of Energy End-Use Analysis and Statistics” (2000) <http://www.eeca.govt. nz/eeca-library/eeca-reports/report/dynamics-of-energy-efficiency-trends-in-nz-2000.pdf> at 33.
87 Ibid, reports that if 17,000 houses were retrofitted per year for five years this would result in a reduction of 3.847 million kt CO2 of emissions as compared to a business-as-usual scenario; COVEC, supra note 6, at vi.
Third, measures targeted at existing buildings have a greater potential for reducing emissions cost-effectively than those aimed at new buildings, due to the high costs of further increasing the energy efficiency of new homes and the declining marginal efficiency gains that can be made in new homes.88
Eight per cent of New Zealand’s CO2 emissions are estimated to be attribut- able to the operation of commercial buildings.89 Many of the same measures that would improve the energy performance of residential buildings will improve the performance of commercial buildings. However, there are several physical and use features that distinguish the potential to reduce emissions from commercial buildings.90 One is the extent to which increasing efficiency results from improving the performance of lighting systems. For example, it is estimated that New Zealand office buildings use just as much energy for lighting as for heating.91 A second difference, given the greater floor area of commercial buildings, is the importance of the age, operation, and maintenance of the heating, ventilation, and air-conditioning (“HVAC”) systems for overall energy performance.92 A third differing feature is non-CO2 GHG emissions from leaking refrigerants.93
As with residential buildings, several preliminary cost-benefit studies have shown that energy efficiency measures targeting commercial buildings, such as increased lighting, insulation, and HVAC performance requirements, yield significant energy and emission reductions at a negative cost.94
3.2 Why Target Existing Buildings?
Much of the potential to reduce emissions attributable to buildings lies with incorporating new technologies into the building (e.g. more efficient lighting, better insulation, solar water heaters, etc.). It is much easier and cheaper to incorporate these technologies at the design and construction stage. Con- versely, it is typically physically more difficult and the fixed costs are higher to incorporate new technologies into existing buildings. Moreover, there are fewer technological options with existing buildings, the contractors involved are generally less sophisticated, the assessment of energy performance is more involved, and owners generally have less contact with building experts.95 This practical and economic reality is reflected in building codes, which traditionally have only had energy efficiency requirements for new construction.96
These factors, combined with the long-lived and durable nature of buildings, mean obsolete technologies get locked into the bulk of the building stock.97 New Zealand’s housing stock is indicative of this dynamic. There are approximately
1.6 million homes in New Zealand, with the average home expected to last 90 to 110 years.98 Of these, over one million were constructed before insulation was mandatory.99 Some 375,000 New Zealand homes are now estimated to have inadequate ceiling insulation and over one million are thought to have inadequate underfloor insulation.100 In recent years, about 30,000 new dwellings have been added per year, while only about 7,700 have been removed from the market each year.101 As a result, existing inefficient homes will remain the predominant portion of New Zealand’s housing stock for years to come.
Consequently, though it is often easier and cheaper to target new buildings for energy savings, their small share of the building stock means they have a limited impact on the overall performance of the sector in the near term. Furthermore, as the efficiency requirements for new buildings become greater, the marginal cost of meeting those objectives becomes higher. Once the gap between the performance of existing and new buildings is sufficiently large, it becomes more cost-effective for the sector as a whole to target existing buildings.102 The New Zealand building sector has likely reached this stage.
Therefore, while it is more challenging from both a policy and physical
perspective to incorporate new technologies into existing buildings, the potential energy savings gains in the near term are much larger with existing buildings. Moreover, because these potential efficiency gains are so substantial and attainable with mature technologies and include significant co-benefits, they often have a negative cost associated with them.
3.3 The “Efficiency Gap” and the Obstacles to Energy Efficiency in Existing Buildings
The obvious question is if energy efficiency opportunities in existing buildings are so highly cost-effective why have they not been realised already? If these measures have a negative cost to building owners (i.e. they are profitable) why has the market not captured them? This phenomenon is referred to as the “effi- ciency gap” and has been documented in many arenas where consumers and businesses choose not to purchase and invest in highly cost-effective energy technologies, though it is in their interest to do so.103
There are various explanations for the persistence of the efficiency gap. For buildings the most persuasive explanations point to the multiple market failures104 and market barriers105 systemic to the building sector that create non- economic obstacles to investment in energy efficiency. With respect to existing buildings, these barriers and failures include:
Market failures
This problem arises when an agent acts on behalf of a consumer, but does not fully reflect the consumer’s best interest. In the building context, this occurs when the party not responsible for paying the energy bill makes choices about the energy features of the building.
Information about energy efficiency options, the energy use of buildings, and the cost of energy can often be incomplete, expensive, and difficult to obtain for both consumers and providers of building services. This compounds the fact that energy efficiency decisions can be complex because they often require the owner to look beyond the
first-cost basis and weigh the time-discounted value of energy savings with the present cost of new equipment.
There are a wide range of negative impacts from energy production that are not reflected in energy costs paid by consumers, causing the undervaluation of energy efficiency measures.
Most energy efficiency projects in individual existing buildings are relatively small and therefore do not attract the attention of investors and financial institutions. Coupled with this is the relatively high level of transaction costs associated with such projects, including obtaining quotes, selecting contractors, and negotiating contracts.
Market barriers
Most buildings were constructed in a “custom-made” manner, to fit the site, local climate, and desires of the first owner. As a result there is a low level of standardisation among buildings, particularly in the features that affect energy performance.
Because of the high cost of buildings, consumers tend to have fewer opportunities to participate in the market, relative to their participation in markets for less expensive goods. This limits the opportunities con- sumers have to accumulate information through a series of transactions (i.e. learning by buying).
The building sector is characterised by a myriad of intersecting decision-makers and stakeholders. The numerous building owners represent the consumption side. On the building services side, the building industry is dominated by a large pool of small firms. Energy suppliers represent another set of decision-makers that impact efficiency investments.
For many consumers, energy is a relatively small cost of owning and operating a building, and therefore a low priority. Further, low energy price elasticity means there must be a substantial increase in the price of energy to change behaviour.
Consumers may overdiscount the value of energy efficiency improve- ments because of a perceived risk that energy and technology prices may fall.106
The net effect of these market failures and barriers is an underinvestment in energy efficiency in existing buildings, below both the socially and economi- cally optimal levels.107 The persistence of such underinvestment is the classic rationale for public policy intervention.108
Intervention with owners of existing buildings is, however, complicated business for governments. Building owners typify the problem of so-called “micro-polluters”: a vast number of small dispersed actors who are difficult to monitor and who individually do not cause much environmental harm but do on a collective basis.109 Moreover, building owners, though not formally organised, have a broad enough political base to have the capacity to create powerful populist obstacles to government action. Lastly, the desired outcome of government action is for building owners to invest in their buildings, which requires affirmative action and capital expenditure by owners.
Thus governments need cost-effective tools that not only address these market inadequacies but also motivate a broad number of building owners while not engendering widespread political opposition. The next section will examine the role of the law in this endeavour.
4. ENVIRONMENTAL LAW AND BUILDINGS
In a capitalistic society, the presence of market imperfections is the typical basis for justifying government regulation of social and economic affairs. This section discusses the role the law plays in government intervention for the protection of the environment, the ongoing evolution of the means by which the law acts to change behaviour in this context, and what this means for using the law to improve the energy performance of buildings.
4.1 Command-and-Control (“Substantive Law”) versus Economic Incentives (“Formal Law”)
In the modern context, traditional governmental regulation has been achieved through the prescriptive and coercive features of law: establishing a standard
of behaviour for market participants to redress a particular market failure or barrier, backed by a system of liability and sanctions for failure to comply with the standard. This is often referred to as “substantive law” and is characterised by the government’s use of detailed rules and administrative mechanisms to conform economic and social behaviour to achieve specific government- determined goals.110
With respect to environmental protection, substantive law is expressed in the command-and-control form of regulation.111 The government commands a certain conduct with respect to the environment (e.g. pollution limits, prod- uct energy efficiency requirements, etc.) and controls compliance through monitoring, inspection, and enforcement via elaborate and often highly discretionary administrative systems.112 Command-and-control regulations have achieved considerable success with respect to the environmental harms stemming from single-media point sources such as industrial smokestacks. However, these conventional regulatory regimes have come under strong normative and empirical criticism, especially since the deregulation climate of the 1980s, as being inefficient, ineffective, rigid, and undemocratic.113 These criticisms gained traction particularly as regulators began tackling more complex environmental problems, stemming from more transitory and numerous sources. It is a truism of conventional command-and-control regulation that as the targeted environmental harms become more difficult to monitor and are from more sources, the regulations must intervene to a greater degree into the conduct of businesses and individuals in order to achieve their objective. This higher- level intervention and the related increasing complexity of the regulations raised concerns about the “juridification” of society and the economy in the name of environmental protection.114 As a practical matter, such concerns pointed to the limits of using substantive law to manage environmental problems.115
In reaction, a number of alternative regulatory approaches have been
proffered, falling mostly under the rubric of economic incentive measures.116 The core idea of these tools is for the government to devolve the machinations of environmental protection to private parties. Rather than affirmative and detailed government management, environmental objectives are achieved by harnessing the economic incentives of private parties through adjustments in the rules of the marketplace. The legal mechanisms for accomplishing this vary from creating new private property rights to imposing new liability regimes. In some respects these proposals cast back to older notions of the role of law, often referred to as “formal law”, in which the law is conceived of as the reservoir of the basic rules by which private parties interact, with government (and its legal institutions) as a secondary and more limited actor, serving as the neutral umpire overseeing the system and resolving conflicts.117
The underlying premise of these economic incentive measures is to conceive of harmful environmental effects as externalities that need to be internalised into the decision-making of private parties.118 Engaging in activity that has a negative effect on the environment comes at a social and environmental cost. By having the marketplace recognise or internalise these costs, price signals will communicate among private parties the marginal cost of avoiding or abating the harmful effects and they will respond accordingly based on the market incentives those price signals create.
The ability of markets, in their ideal state, to communicate information efficiently is the fundamental theoretical advantage of such measures. Markets can acquire and convey information more quickly and effectively via their decentralised system of price signals, in comparison to the time-consuming and costly centralised information collection and distribution process under a command-and-control regime. Accordingly, economic incentive measures are thought to be more efficient and effective in addressing complex modern environmental problems, such as climate change, that are characterised by a large number of diffuse sources of harm arising from a wide range of economic and social activities. The role of the law in these measures is to structure the marketplace artfully to capture the externalities of these activities.
Economic incentive mechanisms, though, have faced their own considerable criticism.119 These include the simple recognition that it is more difficult to rearrange the marketplace artfully than legal and economic theory suggests, particularly without running afoul of other principles such as social justice and equity. Experience with these mechanisms has also led to the recognition that, among other things, they are not self-enforcing and often involve considerable administrative involvement and enforcement costs in their own right. Most
117 Ibid, at 1239 & 1255.
importantly, though, from an environmental perspective, these mechanisms have not proven that they are as reliable in achieving their objectives as compared to command-and-control systems.120
During the last three decades, advocates of command-and-control regulation and economic incentive measures — and by proxy those advocating formal law versus substantive law as the theoretical base of environmental law — have engaged in a debate about the respective merits of these two forms of regu- lation. This debate has been described as the “ceaseless sport of environmental law”.121 Neither side has gained the definitive upper hand.
4.2 Smart Regulation and Reflexive Law
While there has been no clear victor in this contest, the debate has been fruitful if for no other reason than from it has emerged a movement to transcend the ideological divide.122 This so-called “third path” rests on the pragmatic recognition that each regulatory instrument (broadly conceived) has strengths and weaknesses, and that no single instrument is the best for all purposes.123 Rather, instrument choice depends on the context at hand: the environmental harm being addressed; the sources of the harm; the cost society is willing to pay to reduce or eliminate that harm; the available institutional frameworks, and so on.
While no single instrument is uniformly optimal and instrument choice is contingent on context, some things can nevertheless be said about instrument choice on a normative basis.124 Neil Gunningham and Darren Sinclair in their effort to design what they refer to as “smart regulations” have arrived at several cogent principles and presumptions:
801.
124 Neil Gunningham & Darren Sinclair, “Integrative Regulation: A Principle-Based Approach to Environmental Policy” (1999) 24 Law & Soc Inquiry 853, 855.
cost-effective and least coercive, but they are the least reliable in terms of their outcomes when used on their own.
Underpinning these “smart regulation” principles and presumptions is the recognition that regulation must be more flexible, integrated, and dynamic to meet the current environmental challenges — to steer and facilitate rather than prescribe environmentally responsible behaviour. Government regulatory posture must be one of finesse rather than force. The need for this new posture is a reflection of several influences, as follows.126
First is the shift in the sources and types of environmental harms. Rather than pollution from a limited number of fixed sources that cause localised impact, the harms that now need to be addressed are latent and diffuse, coming from a large number of dispersed sources that individually do not cause much harm but collectively cause problems on a regional and global scale. Moreover, these harms often stem from the very structures underlying economic activity, rather then the behaviour of certain discrete actors. Therefore they are more difficult to monitor and their management has the potential for wide economic implications.
Second is the scientific complexity and the related uncertainty surrounding current environmental problems and their solutions. Fiscal and administrative
constraints mean that governments cannot be the only source and clearing house for the massive amount of scientific and technical expertise needed to assess and address these problems. Non-governmental actors must also be engaged.
The third influence is a broader shift in the law itself. Ideas of legal pluralism and “reflexive law”127 (as opposed to substantive and formal law) have gained increasing traction in the face of an increasingly complex and dynamic world.128 Legal pluralism on the one hand acknowledges that the law is one among many social, cultural, and economic institutions that shape the conduct of individuals and businesses.129 On the other hand, reflexive law — in recognition of the law’s limits — seeks to systematically and effectively enlist these institutions outside the legal system to achieve desired outcomes.130 It does this not by static prescriptions but by steering these other institutions with self-reflexive processes and procedures that can adjust to and accommodate the rapid changes, technological and otherwise, of an increasingly complex world. As one commentator has described it, reflective law is about social guidance rather than social planning.131
4.3 Existing Buildings and the Principles of Smart Regulation and Reflexive Law
The starting point for applying this abstract analysis to existing buildings is the recognition that achieving energy savings from existing buildings is an archetypical win-win outcome. That is, the self-interest of building owners is aligned with the desired environmental improvement. However, as discussed in the previous section, this outcome is unrealised because of certain market failures and barriers. Government intervention, at some level, is necessary to compensate for the inadequacies of the market and the bounded rationality of business and individuals.
What do the normative ideas of reflexive law and smart regulation say about how government should go about doing this? Foremost, conventional command-and-control regulations (e.g. mandated energy improvements) may
be unnecessary and ineffective, and perhaps even counterproductive in terms of political acceptability and legitimacy.132 Building owners already have an economic incentive to invest in energy efficiency. Why use prescription and coercion when what is required is more along the lines of a prodding?133 Further, outside of basic health and safety, government has not traditionally intervened in the operation of existing buildings. Building owners, and particularly homeowners, generally have had (and have relied on having) a choice of not doing anything with respect to the energy performance of their building after initial construction.134 Forcefully undoing this expectation would be politically difficult.
Similarly, since the inelasticity of energy demand in buildings is itself one of the obstacles to improving building performance, classic economic mechanisms such as an energy tax are by themselves likely to be insufficient or socially problematic or both. That is, the level of price signals necessary to overcome the inelasticity of energy demand sufficiently would raise concerns about the distributional equity of the cost of such an instrument.
Rather than using these broad traditional instruments, smart regulation suggests that there needs to be multiple smaller but complementary instruments. Individual instruments may have command-and-control features or economic incentive features, but the character of the overall policy will be mixed. Some building owners will be sufficiently motivated by one instrument while other owners will not. Combining several instruments will widen the net and mitigate the weaknesses of individual instruments.
In turn, reflexive law suggests that each instrument needs to be more flexible, dynamic, and indirect; more concerned with managing processes, realigning incentives, and co-opting surrogate regulators than direct prescrip- tion and coercion.
5. EXISTING BUILDINGS AND ENERGY SAVINGS: THE CURRENT LEGAL INSTRUMENTS
Given this normative approach, this section will review the current state of legal instruments in New Zealand for reducing GHGs attributable to existing buildings, and then explore what innovative approaches have been introduced in other countries. The purpose of the section is to outline where New Zealand currently is and to point to relevant examples from overseas that may provide examples for improvement. Given space constraints, the review presented here
is not intended to be exhaustive. Rather, it will focus on three types of legal instruments:
(i) command-and-control;
(ii) informational; and
(iii) economic incentives.
5.1 The New Zealand Situation
From a macro-policy perspective, improving overall energy efficiency, including the efficiency of buildings, has been and is a key part of New Zealand’s climate change strategy.135 This stems from the prioritisation of so-called “no-regret” climate change policies, among which increased energy efficiency is the touchstone.136
The release in 2001 of the whole-of-government National Energy Effi- ciency and Conservation Strategy (“NEECS”) reflected this thinking. The 2001 NEECS set an ambitious goal of increasing economy-wide energy efficiency by 20 per cent by the end of the first commitment period under the Kyoto Protocol (2012).137 This increase in efficiency was to be achieved across a broad range of sectors, including buildings, through wide-ranging planning, regulatory, and incentive measures.
A 2006 review report, however, found that over the first four years of the NEECS the rate of actual efficiency gains (0.4 per cent per annum) was well short of the rate necessary to meet this 2012 goal.138 Consequently, the goal is not expected to be reached.139 The report cited that little progress had been made on improving the energy performance of buildings.140 Critically, it concluded that the institutional reforms needed to support energy efficiency gains in buildings had been “negligible and currently shows little progress of acceleration”.141 The report also cited that New Zealand’s energy efficiency measures for buildings were below international best practices.142 Nevertheless,
discussion-paper-post-2012-dec06.pdf> at 12, 17–18.
assessment-report-neecs-06.pdf> at 9.
140 Ibid, at 52–53.
141 Ibid, at 53.
142 Ibid, at 52–53.
the second NEECS (2007) did not initiate any new innovative measures targeting existing buildings.143
The recent creation of the Household Fund confirmed that improving the energy efficiency of and reducing emissions from the building sector is a national policy priority. Yet the question remains what instruments will be used to implement this policy in a cost-effective manner.
The Building Act 2004 is the cornerstone of New Zealand’s regulatory system for buildings. The Act covers all building, both new and existing, and its pur- pose includes “ensur[ing] ... that buildings are ... able to be used in ways that promote sustainable development”.144 Among other things, it is the basis for the nationwide Building Code.145
As a general matter, a mandatory building code is typically the most certain way to achieve a particular level of energy performance. It works by requiring all covered building work to meet certain technical or performance requirements, with non-compliance subject to legal penalties. A code involves significant administrative costs as buildings must be individually inspected to ensure compliance. A code’s capacity to make significant improvements in overall energy performance can be somewhat limited. First, because it must necessarily apply with a certain level of uniformity across a given class or sub-class of buildings, there is often difficulty in making the standards strict enough to result in substantial improvement in performance, primarily due to industry resistance and cost-effectiveness issues.146 As a result, the requirements are often set below existing industry best practices and are generally easily attained. Second, given the time-consuming administrative and public consultation procedures involved in changing regulations, a building code often lags behind the development of new technologies.147
The New Zealand Building Code requires that buildings satisfy certain performance criteria for health, safety, access, and durability as well as energy efficiency.148 Though it covers both new and existing buildings, the focus of both the Building Act 2004 and the Code is on the construction and performance of new buildings. Only in a few instances does either the Act or the Code intervene in the performance of existing buildings. The most common is when an existing
building undergoes alterations.149 In such cases, the portion of the building being altered must generally be upgraded to comply with the Code. For example, if an extension is added to a building the extension area must generally meet all the applicable requirements to the same extent as a new building. However, the entire building does not need to be upgraded to meet the same performance requirements as new buildings. With respect to energy performance, the requirement is only that after the alterations the building must comply with “the building code to at least the same extent as before the alteration”.150 In other words, neither the Act nor the Code requires that an existing building’s overall energy performance be improved in connection with alterations.151
Another point of intervention the Building Act 2004 has with existing buildings is the compliance schedule and building warrant of fitness regime that applies to all buildings other than single-family homes.152 Under this regime, the local building authority issues a schedule for each building listing that build- ing’s systems that must be regularly inspected and serviced to maintain a certain performance level. This regime, though, only applies to a limited number of building systems, and HVACs are the only systems covered that significantly influence energy performance.153 Beginning in 2009, HVAC systems will be subject to minimum energy performance standards, but these standards will only be mandatory for new buildings and new HVAC systems installed in existing buildings.154 As a result, compliance schedules and warrants of fitness have limited direct impact on the energy efficiency of the existing building stock in the near term.155
151 An exception to this is if the building undergoes a change of use that results in an additional residential unit. In such event, the owner must bring the building into compliance with the Code, including energy efficiency requirements, to the extent “reasonably practicable”. Ibid, s 115.
Building use is also subject to the RMA. The Act expressly requires the consideration of the “efficiency of the end use of energy”.156 Local authorities, though, have not used the RMA to regulate the energy efficiency of existing buildings and it is unclear whether they have the statutory authority to do so.157 But even assuming local authorities had this authority, the RMA generally allows existing uses to continue even if they violate a district or regional plan.158 Therefore an attempt to use the RMA to target existing buildings would likely be ineffective.
A command-and-control scheme that does directly influence the perfor- mance of existing buildings is the system of Minimum Energy Performance Standards (“MEPS”). Under the Energy Efficiency and Conservation Act 2000, the government may administratively establish minimum energy performance requirements for energy-using products.159 The standards are mandatory, meaning that no covered product may be sold in New Zealand that does not meet the minimum requirements.160 The current MEPS regulations cover a number of appliances and systems used in residential and commercial buildings.161
There are no statutory limits to the number of products subject to MEPS and the strictness of the standards.162 But currently only eight categories of products are covered, including air conditioners and hot-water cylinders. Products and performance requirements are administratively chosen on the basis of:
The fit with the Australian energy efficiency system is also a consideration as the New Zealand and Australian governments work together to develop joint
at 8.
standards. Importantly, though, MEPS only apply to new products.164 Therefore their impact is subject to variable product uptake rates which create some uncertainty as to the rate they will improve overall efficiency. Nevertheless, several studies show MEPS can have a significant and cost-effective impact on energy use.165
Information tools include appliance labelling and building energy certifications. The purpose of these is to overcome market barriers and failures resulting from a lack of information due to high information acquisition cost.166 These costs are particularly high for prospective purchasers and tenants of existing buildings given the heterogeneous design of buildings and their often invisible energy performance qualities.167 Information tools theoretically have the advantage of improving efficiency at a low cost and at a low level of government involve- ment.168 However, given that the use of information tools in the building sector has only begun recently, there is little evidence yet as to the effect they have on energy efficiency on a macro scale.169
In 2007 the government initiated the Home Energy Rating Scheme (“HERS”).170 Under this programme, a homeowner may have their home assessed by a licensed energy assessor who prepares a report rating the home’s energy performance on a standardised scale so that it can be compared with other rated homes. The report also provides energy improvement recommendations. Whether to have the assessment and whether to perform the recommended improvements is voluntary.171
As a voluntary programme, HERS is only expected to have a modest and slow impact on the housing market.172 Moreover, previous experience with similar programmes overseas and in New Zealand suggests such voluntary programmes tend to have relatively low participation rates, which limits their
effectiveness.173 The impact of these programmes, though, increases if the assessment and labelling component are mandatory and are coupled with other mechanisms such as incentive programmes.174
With respect to commercial buildings, the government currently has no labelling or certification programmes. The possibility of a Building Energy Rating Scheme (“BERS”) is being investigated as part of the 2007 NEECS.175 The private sector is working on the development and deployment of the “Green Star NZ” system which evaluates commercial buildings based on their envir- onmental impact.176
The MEPS system includes manufacturer labelling requirements for certain new appliances used in buildings such as refrigerators and freezers.177 These labels allow consumers to compare the relative efficiency of products, with the goal of pushing the purchasing behaviour of consumers towards more efficient appliances and in turn pushing manufacturers towards the production of more efficient products.
Economic incentives schemes take many different forms but in the context of buildings and energy efficiency they generally have involved the govern- ment providing direct financial support to building owners to make energy efficiency improvements. Possible forms of incentives include rebates, grants, or tax credits.178 The purpose is to encourage efficiency investments by reducing initial capital costs.
Financial incentives have been the centrepiece of the New Zealand government’s plan for improving the efficiency of existing residential buildings, and the incentive programmes are only likely to increase with the implemen- tation of the Household Fund.179 Currently, there are a number of programmes that provide grants and subsidies to offset the cost of home insulation projects and solar water heater installation. Some of these programmes target older buildings (pre-1978) and low-income owners, while others target landlords
174 Ibid, at 40–41.
179 See EECA, “Residential Projects” <http://www.eeca.govt.nz/residential/index.html> EECA, “ENERGYWISE™ funding for insulation and clean household heating” <http:// www.eeca.govt.nz/residential/energywise-funding/index.html> Efficiency Strategy 2007, supra note 7, at 18; Centre for Housing Research, supra note 17, at 26–27.
in order to overcome the principal-agent problem.180 Accordingly, the primary advantage of such programmes is that they can be specifically targeted at a particular energy efficiency issue (e.g. home insulation) and a particular market (e.g. landlords or low-income owners).
On the other hand, the major disadvantage of these programmes is their high cost, both to fund and administer, relative to their narrow scope. Moreover, given fiscal and political constraints, it is unlikely that these programmes could be sufficiently funded in New Zealand to have a major impact on the overall efficiency of the building stock, particularly if they are not coupled with other programmes.181
The cost-effectiveness of these programmes is also limited by the “free- rider” problem as well as low participation levels historically. The free-rider problem refers to the situation that arises when financial incentives go to parties to undertake an action that they would have undertaken even without the incentive.182 In the New Zealand residential sector, the free-rider effect is thought to be considerable given the popularity of home renovating.183 As to partici- pation levels, data from overseas and New Zealand reflects that even generous incentive programmes struggle to attract a large percentage of homeowners.184 In sum, New Zealand has relatively few existing instruments in place expected to have a significant sector-wide impact on existing buildings.185 The Building Act 2004 and the Building Code, as well as the RMA, do not target existing buildings. A voluntary energy labelling mechanism has been started in the residential sector, but it is not tied to any other programmes. There are several financial incentive programmes but they are narrowly tailored for certain portions of the residential market and suffer from low participation rates. The most notable programme is the MEPS regime, though it does not address the
physical structure of buildings and is dependent on turnover rates.
5.2 Innovative Measures from Overseas
In response to the need to reduce GHG emissions and otherwise increase energy efficiency, a number of countries and regional bodies with institutional circumstances similar to New Zealand’s have introduced measures targeting
136–37.
184 Ibid, at 23–25.
185 As discussed above, at the time of writing this article the plans for spending the first appropriation to the Household Fund have yet to be developed by the government and the EECA. Such plans may involve new types of instruments to address the energy efficiency of existing residential buildings.
existing buildings. This subsection will review the legal instruments underlying these measures.
This is not intended as an exhaustive review. The selection criteria was the absence of a similar measure already in New Zealand, the extent to which such instruments could work in New Zealand on an institutional level, and innovativeness, particularly in light of the principles of smart regulation and reflexive law discussed in the previous section.
The European Union (“EU”) has what is considered to be the most advanced and cohesive regulatory framework for improving the energy efficiency of buildings.186 The centrepiece is the Directive on the Energy Performance of Buildings (the “Directive”).187 The Directive requires that EU member states enact legislation to implement the Directive’s requirements for building performance. These requirements require five actions that affect existing buildings, as follows.
First, the Directive requires member states to establish a common system for rating the energy performance of all buildings (existing and new, residential and commercial).188
Second, based on this rating system, minimum energy performance requirements must be established for all buildings.189 These minimum require- ments may differentiate between new and existing buildings. The requirements must be reviewed and updated at least every five years.
Third, the Directive then requires that whenever an existing building with a floor area over 1000 m2 undergoes major renovation it must also be upgraded to meet the minimum energy performance requirements.190 This represents one of the first efforts worldwide to impose comprehensive energy requirements on existing buildings.191
Fourth, when any existing building, regardless of size, is sold or rented it must have an energy performance certificate (“EPC”).192 The EPC is required to do two things: (1) inform consumers of the energy efficiency of the particular building on a standardised scale so that it may be compared with other buildings;
and (2) advise the consumer of cost-effective improvements for increasing the energy performance of the building.193 As a practical matter, this means all buildings must have an energy inspection and audit, triggered at the time of sale or lease.
Fifth, the Directive requires that boilers and air-conditioning units over a certain size be inspected regularly and that boilers over a certain age be assessed for replacement.194
The chief innovation of the Directive is the combining of instruments, which individually may not have much effect but together may. For example, energy certificates are an important information tool to help consumers evaluate existing buildings. Yet certificates in and of themselves do not create incentives for investment in energy performance. Thus from a cost-effectiveness perspective, there is no assurance that the expense (both to consumers and the government) of having certificates is matched by an increase in energy savings. However, when the certificates are combined with minimum performance requirements, consumers are given both information to evaluate those investments and a firm incentive to make them.
The Directive is expected to have far-reaching impact on building operators and owners, including residential owners.195 The Directive’s aim is to reduce energy consumption in EU buildings by 22 per cent by 2010, representing approximately 20 per cent of the emission reductions the EU needs to meet its Kyoto Protocol target.196
Market-based instruments (e.g. cap-and-trade systems) are widely cited as being the most cost-efficient system for reducing GHG emissions. The basis for this claim is that in theory market instruments minimise the total cost of reducing emissions in a particular sector by equalising among emitters the marginal cost of compliance with emissions reduction targets, while also creating incentives for innovation and performance improvement. However, introducing a type of trading system among building owners is not considered feasible because of
<http://www.euroace.org/reports/CIBSE_EUBD.pdf> 1; Rod Janssen (The European Alliance of Companies for Energy Efficiency in Buildings), “Towards Energy Efficient Buildings in Europe” (2004) <http://www.euroace.org/EuroACE%20documents/ 040617%20Towards%20Energy%20Efficient%20Buildings%20in%20Europe.pdf> at 15–16.
the high administrative and transaction costs arising from the large number of building owners and the heterogeneous nature of buildings.197
Rather than use a market system engaging building owners, several countries have developed systems that engage the suppliers of energy to buildings. The United Kingdom has been a leader in this area.198
The basic outline of the UK approach is to set a mandatory quantitative requirement by which energy providers must reduce their emissions within a certain time period.199 The government does not dictate the methods providers use to achieve these reductions, only that the reductions must be made via improvements to the energy efficiency of their customers’ buildings, by reducing their customers’ energy consumption, or by having customers generate on-site energy with renewable resources.200
Energy providers will recover their costs for these efforts by either charging an individual customer for specific actions taken on their building or by increasing energy costs to the customer base as a whole. Because the providers operate in a competitive market they are incentivised to keep prices down (i.e. find the most cost-effective ways to achieve the reductions) in order to retain and attract customers.201 To further encourage innovation and give the system flexibility, a particular provider may transfer some or all of its reduction obligation to another provider, on the theory that some providers may be able to achieve reductions more efficiently than others. To the extent a particular provider cannot meet their reduction obligation and cannot get another to take it on, they will be subject to enforcement actions by the government.202
Considerable success has been achieved with the mechanism, with it being one of the UK’s most cost-effective policies for reducing emissions.203 It just completed its second three-year cycle and is now going on to its third, during which the government is targeting to maximise the currently estimated reductions that can be obtained with this policy.204 During the first cycle,
providers met their requirements, with a number of providers overshooting (i.e. achieving more reductions than necessary).205
Since the reduction requirements must be met by a certain date, this allows the government to adjust the reduction requirement periodically as well as adjust the design of the system without upsetting the investment-backed expectations of the providers. The flexibility to adjust the scheme periodically has proven important as it allows the government to address some of the practical challenges raised by the scheme.
One of these is equity in the distribution among homeowners of the benefits of the scheme. In order to limit the amount of costs that needs to be spread across their customer base as a whole, providers look to maximise the extent to which individual building owners contribute to the cost of investments taken with respect to their individual building. However, the ability and willingness to contribute is not equally distributed among building owners.206 To mitigate this, the scheme requires that energy providers achieve a certain percentage of their reductions from low-income and elderly customers.207 Such a requirement also helps avoid the undesirable outcome of low-income customers paying a disproportionate share of the system-wide costs of the scheme that are passed on via energy prices (i.e. subsidising the efficiency improvements in the homes of those with higher incomes).
Such intricacies of the scheme point to its main disadvantage. The scheme involves high upfront institutional design costs to ensure that the operation of market forces do not cause the programme to conflict with other policy goals. Moreover, there are significant administrative costs that must be considered, as a regulator needs to monitor and verify that energy savings are achieved in the intended manner. Despite these administrative costs, the UK experience suggests that if the system is well designed and there is adequate compliance and enforcement, these disadvantages are outweighed by the system’s overall cost-effectiveness and the degree of certainty in achieving the targeted level of emission reductions.
In 2007 Canada started the ecoENERGY Retrofit programme to provide financial incentives for homeowners and business owners to make energy efficiency
<http://www.ofgem.gov.uk/Sustainability/Environmnt/EnergyEff/Documents1/11254- 18105.pdf> Summary.
improvements to their buildings.208 Many other countries have financial incentive programmes targeting existing buildings. Canada’s residential programme is different from most others in that the level of incentive is not targeted at any particular class of buildings or type of owner (e.g. low-income).209 Rather, the touchstone of the programme is actual energy saved, with the amount of the subsidy a function of the energy savings achieved by the retrofit.210 To do this requires that an owner who wants to receive a subsidy have an energy audit, pre- and post-retrofit, to determine the amount of the subsidy.211 Requiring these audits increases the direct relationship between the subsidy and the amount of increased efficiency.
The Canadian programme again highlights the advantage of financial incentive instruments in that they can be narrowly designed to target specific objectives. By targeting actual improvements in energy efficiency from a baseline level, the Canadian programme addresses the differences in marginal cost of efficiency improvements among buildings as well as provides ongoing incentives for improving efficiency in the same building.
On the other hand, the programme also shows the limitations of financial incentive programmes. One is the high transaction costs and administrative involvement required. Specifically, in this case, the costs of the necessary pre- and post-retrofit building inspections are significant.212 A second is that these programmes do not overcome the principal-agent problem and therefore generally are not effective in rented buildings. A third drawback is the risk that the beneficiaries of these programmes are often free-riders.
These drawbacks, when combined with the fact that programmes are funded by tax revenues and therefore fiscally constrained, point to financial incentive measures having only a limited impact on improving building energy performance on a sufficiently large scale, even when they have the design advantages of the Canadian programme.
While the United States has not been a leader at the national level on climate change policies, at the state and local level there has been a wealth of policy
<http://www.oee.nrcan.gc.ca/corporate/retrofit-summary.cfm> .
efforts to reduce emissions. Energy Conservation Ordinances (“ECOs”) are illustrative of such local and state initiatives.213 In general, ECOs are laws that require that, whenever a building is sold or substantially renovated, it must meet certain basic efficiency requirements, such as minimum insulation.214 To enforce the requirement, in the case of a sale, the transfer of the property will not be recorded in the land records until the owner shows proof of compliance or, in the case of a refurbishment, the building compliance certificate will not be issued until the building complies.215
The stringency and scope of ECO requirements vary among jurisdictions and climate conditions, and can apply to either residential or commercial buildings.216 Their general purpose is to provide a relatively straightforward mechanism to ensure that the entire building stock has a certain minimum level of efficiency standards.217 These minimum standards can be raised over time as technology improves, much like a building code. ECOs can be particularly effective in improving the efficiency of the residential rental stock because they overcome the principal-agent problem.218
The drawbacks to ECOs include that, to be effective, there must be an admin- istrative bureaucracy for performing inspections and tracking compliance. In addition, in order to avoid making transaction costs too high for property sales and renovations, particularly for older buildings, the efficiency requirement must necessarily be relatively minimal or alternatively there needs to be a cap on the cost of compliance (e.g. percentage of property value). In this regard, ECOs do not provide a least-cost solution or necessarily encourage innovation.219
Despite these drawbacks, ECOs can be an effective lever for raising the baseline performance of a large number of older existing buildings, particularly residential rentals that cannot be reached by other mechanisms.220
These few examples from overseas illustrate the extent to which other countries view existing buildings as a significant opportunity for reducing energy consumption, and the investments that have been made to use innovative
instruments to pursue these opportunities. They also point to the extent to which New Zealand’s current set of instruments fall short of international best practices.
6. CONCLUSION
Given the structure of its economy and energy sector as well as the current state of technologies, New Zealand has few options for cost-effectively reducing emissions quickly. Existing buildings are one of these few options. There is a large gap between the current energy performance of buildings and that which could be achieved by a level of investment in energy-saving technology that is cost-beneficial, both from society’s perspective and the individual building owner’s perspective.221 Though closing this gap would result in only a relatively modest cut in emissions, it is an opportunity that New Zealand must vigorously pursue given its cost-effectiveness and technical feasibility in the near term. The recent enactment of the Household Fund indicates the government’s intention to pursue this opportunity, at least in the residential sector. However, the current toolbox of legal instruments for realising this opportunity is both inadequate and not state of the art, both on an empirical and a normative basis. The ideas of smart regulation and reflexive law, seen in the light of overseas examples, provide some guidance to remedy this situation.
First is the need for a well-articulated mix of complementary instruments. This means not only must there be more than one instrument but that multiple instruments need to be designed to augment each other. While New Zealand currently has several measures directed at existing buildings (e.g. HERS, subsidy programmes targeted at older buildings and low-income owners), they are essentially scattershot, not designed to have the weaknesses of one instrument mitigated by the strengths of another. For example, information programmes such as HERS are typically not very effective instruments on their own. They are generally only effective in an underpinning role to other instruments (e.g. used to confirm compliance with a command-and-control scheme). Yet the HERS programme essentially stands in isolation, untethered to any other instrument. Compare this to the EU’s approach to building labelling. The EU has not only made its labelling mandatory but concurrently tied it to both minimum building performance requirements and certain mandatory inspection requirements.
Second, instruments should involve as little government intervention (substantive law) as possible. All legal instruments by definition entail some government intervention. The issue, though, is degree, in terms of
both prescription and coercion. Generally speaking, there is often a positive relationship between the level of intervention and certainty of outcome: the greater the intervention, the more reliable the effect instrument will be, and vice versa.222 In that regard, low-interventionist instruments should not be used solely because they involve a light government footprint. They must actually be effective.223 The aim is to strike a balance between certainty of outcome and level of intervention to yield the highest result. Importantly, this point of balance may move over time, meaning that legal instruments need to have the capacity to react as circumstances change (reflexivity).
A method to achieve this is to regulate indirectly by co-opting third parties to change the behaviour of the ultimate regulatory targets. The UK’s enlistment of energy providers serves as an excellent example of this, and one that could be employed in New Zealand. Under such an instrument, energy retailers would be obligated to reduce the energy use of customers through energy efficiency measures in existing buildings, in effect becoming surrogate regulators but equipped with better incentives and information than the government. New Zealand has competitive electricity and natural gas retail sectors224 to facilitate such a scheme, along with the existing regulatory framework through which to coordinate retailers.225 Such a programme would involve significant upfront administrative design costs, but the UK shows this can be successfully done with features to ensure equitable distribution of benefits and costs among customers. Further, as is the case with the UK scheme, the instrument can be designed to operate for a limited duration, thereby allowing an opportunity for periodic review and adjustment.226
This preference for less interventionist and more responsive tools suggests that the Building Code should not be a first-choice instrument. The experience in the US with energy conservation ordinances — which essentially serve as building code requirements for existing buildings — does show that such instruments can be used successfully to raise the baseline performance of the residential rental stock. However, because such an instrument would likely need to have a blanket application across the entire residential sector to be effective (and therefore have relatively low achievable requirements), and because there are no existing administrative systems in place for such an instrument, the additional compliance and administrative costs may not justify the relatively small portion of the energy gap this instrument would capture. Such costs
could be lowered if minimum performance requirements were integrated with a mandatory building certification requirement as under the EU model.
There may a better basis for using the Building Code to target the per- formance of existing commercial buildings. The compliance schedule and warrant of fitness regime provides an in-place framework, both statutory and administrative, to implement mandatory performance and inspection requirements along the lines of those required under the EU’s Directive. In that regard, such requirements would involve less change to the regulatory expectations of commercial building owners, as compared to the adjustment that residential performance requirements would have for homeowners’ expecta- tions. Nevertheless, the additional compliance costs and further extension of the Building Code’s command-and-control reach (i.e. regulatory accretion) would need to be weighed against the achievable benefits and the potential for less interventionist and more flexible instruments to achieve the same level of benefits.
Third, the mix of instruments should be designed to maximise win-win outcomes. Improving the energy performance of buildings is a classic example of a win-win opportunity. But to maximise this opportunity, the mix of instru- ments must not only pursue compliance with a minimum performance level but must also pursue “beyond compliance” actions by owners in order to capture the greatest possible share of the efficiency gap.227 In other words, instruments must not just raise the level of the poorest-performing buildings but also incentivise energy improvements across the range of existing performance levels.228
The Canadian ecoENERGY Retrofit programme illustrates how this principle can be incorporated into a financial incentive programme. Under this scheme, the amount of the subsidy is tied to the amount of actual savings achieved by the energy improvements made. Owners can participate in the programme multiple times with respect to the same building and the programme is not limited to any particular type of building. Consequently, the instrument provides an ongoing incentive for all owners across the range of the building sector.
Climate change mitigation requires urgent government action on multiple fronts and in numerous sectors. In New Zealand the number of available regulatory targets that provide cost-effective opportunities to reduce emissions in the near term is comparatively few. Existing buildings feature prominently on this short-
list. But to realise this opportunity with existing buildings in a cost-effective manner the government must use new and innovative regulatory approaches.
This article, drawing on international experience and the literature on smart regulation and reflexive law, points to three broad normative principles for doing so:
(i) a mix of interfacing instruments is required to reach and improve the entire scope of the building sector, not just the poorest-performing buildings;
(ii) each individual instrument must be dynamic and flexible, having a capacity to adjust over time as its effectiveness changes over time; and
(iii) direct government intervention with building owners themselves (via the Building Code or direct subsidies) should be limited to the extent possible with the government instead harnessing third parties, such as energy providers, as surrogate regulators.
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URL: http://www.nzlii.org/nz/journals/NZJlEnvLaw/2008/8.html