The Economics of Green Buildings that are Both Low Carbon and Resilient to Natural Disaster Risk
Who Certifies Quality for Infrequent Purchases?
Politico recently published a great piece focusing on a paradox regarding how do we rate a building’s “greenness”?
“The U.S. Green Building Council’s LEED rating system is the gold standard for environmental design. But more than 800 LEED-certified buildings are at risk from climate-related disasters.”
Up until recently, LEED focused on the social costs of building, operating and demolishing buildings. A building was more likely to be certified as “green” if it’s social costs to society in terms of its carbon footprint and its use of materials was low. I have published a couple of LEED papers.
Kahn, Matthew E., and Ryan K. Vaughn. "Green market geography: The spatial clustering of hybrid vehicles and LEED registered buildings." The BE Journal of Economic Analysis & Policy 9, no. 2 (2009).
Kahn, Matthew E., and Nils Kok. "The capitalization of green labels in the California housing market." Regional Science and Urban Economics 47 (2014): 25-34.
In an economy that does not feature carbon taxes, there are many building occupants who will only care about the building’s energy consumption if the price of energy is high. Free riders, free ride! Many people ignore the fact that their actions exacerbate the global warming challenge because each of us is too small in terms of our contribution to the problem to make any difference at the global level. This is the core of the free rider hypothesis.
In contrast, every occupant of a building wants to be safe and comfortable. If climate change is making areas hotter, or makes a specific building’s location face more disaster risk from wildfires, wildfire smoke or flooding then potential home buyers will want to have this information.
Just as home buyers want to know where are good schools and safe neighborhoods, people (both Red and Blue) want to know where are the climate safe areas. Our recent Redfin/First Street Foundation study documents this.
Fairweather, Daryl, Matthew E. Kahn, Robert D. Metcalfe, and Sebastian Sandoval-Olascoaga. "PRELIMINARY: The Impact of Climate Risk Disclosure on Housing Search and Buying Dynamics: Evidence from a Nationwide Field Experiment with Redfin." (2023).
The point of the Politico piece is that the current LEED metric of “green” does not include resilience criteria. What criteria should be included?
Possibilities include;
Count of days over 90 degrees each summer.
Count of days below 20 degrees each winter
PM2.5 levels at the 95th percentile of nearby monitoring stations
flood risk
fire risk
An index numbers problem will arise. Suppose a data scientist collects these 5 variables and geocodes them for every building in the United States. A home buyer wants a single index of “resilience”. Which properties receive a “10” and which receive a “5”? The easiest approach would be to weight each of these categories equally but is that the right approach?
As I discuss in my 2021 Adapting to Climate Change book, capitalism helps us to adapt to climate change because home buyers are adults who have strong incentives to do their homework about the different risks that different properties face. They should be willing to pay less for riskier properties. This provides the sellers of such properties with an incentive to improve the property to reduce its risk exposure. Who certifies these improvements? Given that rare disasters are rare, how does a potential home buyer know that the home has been “armor plated” to protect it from Mother Nature’s harder punches?
Trusted information “middlemen” could play this role in a similar way that Moodys and Standard & Poor try to play on Wall Street.
If home buyers are skeptical about this certification of resilience process , then they will bid less aggressively for such assets. Insurance companies could be the Adult in the Room here as they will charge higher premiums for properties that they deem are more risky.
The author of the Politico piece is implicitly assuming that LEED has a monopoly on providing information to “Unsuspecting” home buyers. I do not believe this “suckers hypothesis”. People spend a large amount of $ buying a home. They know that they do not know all of the risks that this place based investment entails. Going forward, adaptation will be accelerated by increased research of pinpoint risk . We are not “passive victims” here. As we discover that specific properties face risks, the demand for engineering solutions will arise and engineers will step up and solve these specific problems. The general lessons they learn can be applied for many other buildings facing slightly similar risks. Ideas are public goods!
The key to starting this optimistic chain is for home buyers to know that they do not know the emerging risks that different properties face. This “trust but verify” mindset fuels the demand for adaptation solutions and in aggregate such demand induces adaptation innovation!
Read my 2021 book that explores this optimistic theme.
A final point to think about. As a real estate developer seeks to build a low carbon AND climate resilient building, are these two goals mutually compatible? It is costly to build a green building in terms of up front cost and it is costly to build a resilient building. Are the costs here additive such that;
$ Cost of Green and Resilient building = $ cost of Green Building + $ Cost of resilient upgrades
Or is it the case that there are economies of scope and scale here? That would be an interesting research question.
In a future post, I will discuss the supply of resilient real estate. Once climate science pinpoints the places with high resilience scores based on the 5 criteria I sketched above, real estate developers will build more housing there if local zoning codes do not block them. We can build taller buildings in such areas as we substitute capital for land and this allows more people to adapt. Developers who want to earn profits will be able to charge more for housing that is proven to be of high climate resilience quality. They have an incentive to profit from our demand to adapt. There is no “free rider” issue in the case of adaptation. This was the logic of my 2010 Climatopolis book.