4 March 2014 — In part 3 of this short series on decarbonising cities, Dr Vanessa Rauland examines the barriers currently preventing low carbon development and identifies a range of incentives that could help encourage developers to pursue this form of development.
In Part 1, Dr Rauland discussed opportunities to decarbonise cities at the precinct scale, while Part 2 looked at how carbon reduction in urban development can be acknowledged and potentially certified to promote the achievements of progressive developers.
Barriers to low carbon development
There are many outstanding examples of low carbon cities, districts and urban development around the world that demonstrate that the knowledge and technologies required to decarbonise the built environment already exists. However, these concepts and low carbon approaches have not yet become mainstream.
In Australia, many factors prevent developers and local governments from pursuing low carbon urban development. Some of the main obstacles include: high capital costs; split incentives; information barriers; longer approvals process; first mover disadvantage; policy and pricing uncertainty; lock-in; credibility of carbon claims; multiple stakeholders; and regulatory issues. It is worth noting that the majority of the obstacles have some form of economic impact, making it hard for low carbon developments to compete financially with standard, business-as-usual development.
High capital costs
Low carbon developments often have higher upfront costs associated with them, as they usually include new and emerging technologies and greener materials that are more expensive. It is expected that the costs associated with greener building products and technologies will decrease in time as increased demand creates economies of scale and brings new producers into the market (thus driving competition), though in the short term, these higher costs can be a significant barrier.
New technologies also often carry greater financial risk due to the uncertainty associated with their performance.
Although the higher upfront costs are usually balanced out by long-term savings, the initial investment is perceived to be risky and a barrier by the development industry, which is concerned that these costs may not be able to be passed on to the buyer. This problem, also known as “split incentives”, is discussed below.
Another important issue is the ability of property buyers to afford the higher upfront costs. Purchasers may be aware of the long-term benefits but not have enough capital to meet the additional upfront costs associated with more efficient products (in this case a house) and are therefore forced to accept a more inefficient alternative. Green mortgages (discussed later) can help to overcome this.
The notion of split incentives involves a situation where the costs of an action (for example, an energy efficient upgrade) are borne by one party (such as the building owner), while the benefits accrue to another party (for example, the tenant). In terms of low carbon urban development, the higher upfront costs associated with green infrastructure are borne initially by the developer, while the eventual owners/residents receive the long-term benefit. This in itself is not a problem if a developer can pass on the higher upfront costs associated with the green infrastructure. However, if the owner/occupant is not convinced of the financial (and other) benefits of green infrastructure (which is often the case due to insufficient information), they will be reluctant to pay the higher upfront costs needed to cover the developer’s additional upfront costs. This creates substantial risk for developers trying to sell higher quality, low carbon developments.
Information barriers distort and often negatively affect decisions made on a range of economic issues, leading to various market failures. They are often discussed in relation to energy efficiency and commonly refer to the situation where a lack of appropriate information prevents consumers from making optimal purchasing choices.
In relation to low carbon urban development, information barriers exist at all levels of the development process, from the design and construction of developments and the marketing and selling of properties, to the operation of houses, buildings and appliances by owners and the lifestyle options adopted by residents and occupants.
Longer approvals process
Developments that demonstrate innovative low carbon technologies, new efficient green infrastructure and alternative designs are more likely to require longer periods for development approval, which ultimately represents significant additional costs to a developer and a major disincentive.
First mover disadvantage
Also referred to as the free-rider problem, the first-mover disadvantage occurs when an individual or business shoulders large initial costs associated with introducing a new technology or concept that subsequent businesses may benefit from. For the development industry, this may involve one developer having to jump through a variety of regulatory hoops in order to get a new technology approved, thus facing significant additional costs associated with the delayed approvals process. Subsequent developers then benefit from the precedent set by the initial developer, thus shortening approval times and cutting costs.
Policy and pricing uncertainty
The fact that Australia’s carbon price, introduced in July 2012, did not have bipartisan support (and is currently in the process of being repealed) has created uncertainty for developers ready and willing to invest in low carbon alternatives.
Infrastructure lock-in is a serious issue and a significant barrier for retrofitting low carbon infrastructure in existing cities. Large infrastructure generally requires large capital investments and thus has relatively long lifetimes (often 50-100 years). Examples of infrastructure with long lifetimes include large-scale coal-fired power plants, freeways and desalination plants.
Decisions to build low-density housing developments on the fringe of cities is also locking-in patterns of infrastructure that will be hard to retrofit into the future. All these infrastructure choices have shaped Australian cities for more than half a century. As most have considerable emissions attributed to them, they have essentially locked substantial emissions into our cities for a significant time period.
Small-scale distributed systems, which require lower capital investment, will be easier to retrofit in the future when newer, more efficient technologies become available.
Credibility of carbon claims
As noted in Part 2, credibility of low carbon and carbon neutral claims for development remains a key issue in relation to wider adoption. Even those working within the industry are often dubious of claims, largely because of the lack of accreditation/certification systems and consistent methods for measurement of carbon reduction.
The design and construction of precinct-scale urban development has numerous stakeholders that, if not managed well, can act as a barrier to achieving low carbon or carbon neutral land development. Success requires significant collaboration between the various stakeholders, in particular, between utilities and developers.
Utility regulatory barriers, particularly around energy, pose a significant problem for low carbon urban development. As highlighted in Part 1, new low carbon infrastructure is likely to increasingly be based around decentralised systems for resource management. However, as cities are currently dominated by centralised infrastructural systems, most of the governing regulations are designed for this level of supply. Consequently, various regulatory issues currently prevent or make it difficult for small-scale energy generators to enter the market and access the electricity grid. With substantial investment in the infrastructure associated with current large-scale energy networks, there is a natural reluctance – particularly by those with vested interests – to make changes that could threaten these incumbent assets.
There is also a range of other regulatory issues, which can act as a disincentive. For example, the requirement for developers to pay for centralised services (for example, connection to sewerage systems) even if they don’t connect to the systems. Overly strict health regulations can also inhibit the uptake of small-scale, onsite wastewater recycling (for non-drinking purposes), with such projects becoming too costly to be viable.
Opportunities to address barriers to decarbonising cities
Dealing with the obstacles can be difficult and is likely to require new governance and participatory models specially designed for the development industry. Ensuring a successful transition to low carbon infrastructure within our cities will also require changes in regulations, information campaigns, leadership (particularly from government) and a range of incentives.
Government leadership has been identified as a key factor in driving innovation in low carbon development, as government’s have the ability to change legislation and regulations.
Some governments are leading by example and demonstrating how to create low carbon precincts. These include the City of Sydney with their Green Infrastructure Plan, Places Victoria, who implemented Australia’s first precinct-scale trigeneration system, and City of Fremantle in Western Australia, who removed the requirements for developers in the city’s CBD to provide car parking in new developments.
The TravelSmart and Living Smart programs in Western Australia are examples of information campaigns that have aimed to increase awareness about sustainability and active travel to allow the public to make more educated decisions. Both programs have experienced broad success largely due to their tailored and interactive approach.
Information campaigns aimed at educating the public about the long-term savings associated with low carbon/sustainability initiatives in urban developments could help to increase acceptance around the larger upfront investment needed.
Energy efficiency standards and mandatory disclosure
Mandatory disclosure of energy use in commercial offices already exists, which is helping to promote energy efficient buildings. Ideally this sort of public disclosure should be applied not just to commercial offices over 2000 square metres but to buildings of all shapes and sizes, including residential buildings and mixed-use developments.
- See The Fifth Estate article Mandatory disclosure of energy ratings for shopping centres is off the table
Without adequate information about the environmental or cost saving benefits of certain features, particularly those related to energy efficiency, higher quality products will continue to be driven out of the market because of a lack of understanding of their benefits.
The lack of knowledge transfer around what has and has not worked within innovative, low carbon urban development projects can prevent greater learning among the development and property industry. While sharing success is vital and can help promote new technologies and designs, sharing the lessons learnt from what has not worked and why is just as important to ensure that mistakes are not replicated.
Providing a platform where all stakeholders can openly share knowledge and experience around new technologies, planning guidelines and various precinct-scale innovations would go a long way in progressing the transition towards low carbon cities.
Energy market reform
Regulatory changes to the energy industry (currently designed around large-scale, centralised energy generation and distribution networks) will be essential to allow and encourage new types of energy generation for the market and allow for new economic models that can facilitate this.
Developers currently lack meaningful baselines by which to compare their developments at the precinct level. While several baselines and benchmarks exist for buildings, transport, waste and water, nobody really knows what the combined effect of these various sectoral emissions are at the precinct scale, despite the potential for developers to influence the outcomes of each element.
Therefore, creating baselines for this sector would be very useful, not least because it would show the difference between current and best practice (in terms of greenhouse gas emissions). By having well-established baselines, a variety of incentives and disincentives can also be applied to developers (discussed later under energy efficiency trading schemes).
Creating different types of baselines for different urban typologies based on a mixture of features would provide valuable information for comparisons and general knowledge sharing.
New funding models for developments
There are various funding arrangements that can help to facilitate the shift to low carbon infrastructure within our built environment. Environmental upgrade agreements, or EUAs, are currently available in NSW and Victoria, which can help fund retrofits in existing buildings. The use of Energy Service Companies or ESCos (for more info see page 175 of this report) can help to make low carbon, decentralised energy options for developments more commercially viable. The concept of Business Improvement Districts (BIDs), which is an alternative, privately funded, independent and participatory governance mechanism for improving specific precincts of cities, could potentially be adapted to assist in greening urban development. These concepts will be discussed in a forthcoming article.
Currently, few incentives exist to reward innovative, low carbon developments in Australia. Indeed, on the contrary, and as demonstrated above, various obstacles inhibit such developments. The following provides some examples of incentives that could be offered to low carbon developments, once they have credibly demonstrated their carbon reductions, ideally through some form of certification as discussed in Part 2.
Land tax exemptions
The tax system could be used to incentivise low carbon development in various ways. Land tax exemptions (the removal of an annual fee generally paid to state governments by owners of property) are just one example of this. These exemptions could be applied to developments that demonstrate credible and quantifiable reductions in GHGs.
Removal of stamp duty
The possibility of removing stamp duty (a fee levied on properties at the time of purchase or lease) for developments that can demonstrate certifiable carbon reductions could help to incentivise prospective property owners to buy within low carbon/carbon neutral developments. Since such developments may be more expensive in the short term due to the adoption of new technologies, materials, innovative designs and lengthy approval processes, the reduction in cost due to the removal of this fee could help to offset the higher prices.
Fast track approval process
Fast-tracking the approval process (also known as the “Green Door”) for development applications that demonstrate sustainability features can help reward and encourage this type of development. Traditionally, these innovative development applications have been held up during the approvals stage, which can add significant costs to a development’s project budget. Therefore, creating a process that can expedite the process is a valuable incentive for developers.
Labelling and certification schemes
The concept and use of eco-labelling and certification has grown in recent years in line with consumers’ willingness to pay extra for products that demonstrate environmental benefits. Labelling and certification provides a vehicle by which producers, or in the case of this research, developers, can share important information with the public about the environmental attributes and eco-qualities of their product. This is particularly important as these features and processes are often unseen. Providing branding opportunities allows innovative developers to differentiate themselves from their business as usual competitors.
The concept of a “green mortgage” has been around for several years, and has been particularly popular in the United States. A green mortgage essentially allows a buyer to take out a larger house loan than they could normally afford if the house meets higher energy efficiency standards or has a range of sustainability features that will result in reduced operational costs. Under this scheme, the money expected to be saved on utility bills from a more energy efficient home is essentially added to a buyer’s income, and thus, valued into the mortgage.
Increasing the affordability of housing within low-carbon urban developments is a critical issue to address and an essential element in the provision of long-term sustainability in our cities.
Energy efficiency trading schemes and carbon trading for the built environment
Energy efficiency trading schemes, also known as white certificate schemes, are another market mechanism that rewards energy efficiency in the built environment. Although the current energy efficiency schemes target individual buildings, the concept could be extended to a broader scale (such as precinct-scale urban development) and applied to a broader set of criteria (water, waste, transport, etc). The metric would then become “carbon” rather than purely “energy efficiency”.
Developed into a baseline and credit scheme specifically designed for urban development, this could help to reward progressive developers who are below (that is, better than) the baseline by allowing them to sell carbon credits, while penalising developers who are above the baseline (more carbon intensive) by requiring them to purchase credits to meet their liability. This will be discussed further in the next article.
These baselines could also potentially create opportunities for the built environment to be eligible for funding through the Coalition’s Direct Action Plan.
Mainstreaming low carbon urban development
Although several barriers are currently preventing greater adoption of the concept of low carbon and carbon neutral urban development in Australia, various opportunities also exist to assist in overcoming the barriers.
As many of the barriers result in additional development costs, economic incentives are seen as an important short-term measure to encourage developers to pursue this form of development. Carbon certification for urban development, as highlighted in Part 2, could be a useful way of determining the eligibility of developments for receiving the range of financial incentives proposed.
Thus, carbon certification, combined with the opportunities presented above, could provide a powerful framework and roadmap to facilitate greater uptake of low carbon development, thereby helping to mainstream the decarbonisation process in cities across Australia.
A forthcoming article will discuss alternative mechanisms and financial models for funding low carbon development.
Dr Vanessa Rauland is a lecturer and project coordinator at Curtin University Sustainability Policy (CUSP) Institute. She recently completed her PhD on “decarbonising cities”. Dr Rauland is the co-founder of SimplyCarbon, which helps to reduce organisations’ carbon footprint and improve the efficiency of their operations.
A full list of references can be found in Dr Rauland’s PhD thesis, Decarbonising cities: certifying carbon reduction in urban development.