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green@work : Magazine : Back Issues : May/Jun 2004 : Special Section

Special Section

Are Green Buildings Cost-Effective?
By Greg Kats

Special Section

There is a widespread perception that green buildings—though more attractive from an environmental and health perspective—are substantially more costly than conventional design and may not be justified from a cost benefits perspective. But green or “high-performance” buildings use key resources including energy, water, materials and land more efficiently than buildings that are just built to code. This results in tangible financial benefits that offset increased building costs. Consider that U.S. buildings, which represent about half of the nation’s wealth, consume 70 percent of the nation’s electricity, generate 30 percent of waste, and are responsible for more global warming than any other nation’s economy except China. In contrast, green buildings—with more natural light, better air quality and greater comfort—typically also contribute to improved occupant health, comfort and productivity. A more complete accounting of these costs and benefits demonstrates that green buildings are generally cost effective today, with average financial benefits exceeding additional costs by a factor of 10 to one.

Historically, neither private firms nor public agencies have recognized the full financial value of green buildings. They usually acknowledge some benefits from lower energy and water use, but ignore other significant, financial benefits of green buildings.

The following information draws predominantly on the October 2003 report entitled, “The Costs and Financial Benefits of Green Buildings, A Report to California’s Sustainable Building Task Force,1 which is an influential attempt to develop a rigorous analysis of the costs and benefits of green buildings. For example, a draft of the report helped persuade the University of California Board of Regents to adopt a state-wide university policy for the design of green buildings, and the report was cited as the financial rationale in 2004 legislation for New York City to require green design for all public buildings from 2006 on. (see www.cap-e.com).

The analysis presented here assumes a nominal discount rate of seven percent (including two percent inflation) and a 20-year term in developing a present value and net present value estimates for green buildings’ financial benefits. This is conservative since many buildings last 50 years or longer.

THE COST OF GREEN BUILDINGS

Cost data for the 2003 report was gathered on 40 individual, generally LEED™-registered projects—32 office buildings and eight school buildings—with actual or projected dates of completion between 1995 and 2004. These 40 projects were chosen because relatively solid cost data for both actual green design and conventional design was available for the same building.2

The eight Bronze level-rated buildings had an average cost premium of 0.7 percent, while 21 Silver-level buildings averaged a 1.9 percent cost premium. Nine Gold-rated buildings had an average premium of 2.2 percent, and the two Platinum buildings were at 6.8 percent. The average reported cost premium for all 40 buildings, then, is almost two percent. Assuming construction costs of $150 per square foot to $250 per square foot, a two percent green building premium is equivalent to $3 to $5 per square foot. (See chart1).

A trend of declining costs associated with increased experience in green building construction has been experienced in Pennsylvania,3 as well as in Portland and Seattle. Portland’s three reported completed LEED Silver buildings were finished in 1995, 1997 and 2000 and incurred cost premiums of two percent, one percent and zero percent, respectively.4 Seattle has seen the cost of LEED Silver buildings drop from three to four percent several years ago to one to two percent today.5

The cost of green buildings generally rises as the level of greenness increases, while the premium to build green is generally coming down over time. Development of multiple green buildings by a particular corporation or public entity can be expected to result in declining costs per building to that organization.

Reduced Energy Use and Costs

Green buildings use an average of 30 percent less purchased energy than conventional buildings.6 In addition, green buildings are more likely to purchase “green power” or green certificates for electricity generated from renewable energy sources. (See chart2).

For energy costs of $1.47 a square foot per year for California public buildings, this indicates savings of about $0.44 a square foot per year,7 with a 20-year present value of $5.48 per square foot. A national average of $1.55 per square foot for commercial buildings indicates a present value of $5.78 per square foot.

By encouraging integrated design and awarding credit for optimization of building energy systems, LEED also provides strong incentives to cut peak demand uses. LEED encourages:

  • High Performance Lighting: Incorporation of more efficient lights, task lighting, use of sensors to cut unnecessary lighting, use of daylight harvesting and other advanced lighting techniques and technologies. These measures can significantly reduce power demand and heating loads in a building, which in turn reduces required air conditioning.
  • Increased Ventilation Effectiveness: Helps cut air
    conditioning load during peak times through improved
    system optimization.
  • Heat Island Reduction Measures: By increasing the reflectivity of roofs and other typically dark surfaces, it is possible to lower building and urban temperatures, thus reducing air conditioning loads and peak demand.

Evaluation of LEED certification documentation for over a dozen buildings, analyzed by Capital E in 2002 from data supplied by the USGBC, indicates an average reduction in energy use of 30 percent, but an average peak reduction of up to 40 percent.8 The data set is limited and this is a rough estimate. Nonetheless it seems clear that green buildings generally reduce peak demand to a greater degree than total energy consumption: green buildings have proportionately larger reductions in peak demand.

The benefits of reduced consumption are largest during periods of peak power consumption—avoided congestion costs, reduced power quality and reliability problems, reduced pollution, and additional capital investment to expand generation and transmission and distribution infrastructure.

A 20-year present value of the peak demand reduction attribute of green buildings at $0.31 per square foot ($0.025 per year, at five percent real discount rate over 20 years). These are preliminary approximations based on limited data. The value of peak demand and peak capacity reduction is likely to be higher than estimated here.

Together, the total 20-year present value of financial energy benefits from a typical green California public building is $5.79 per square foot. For U.S. commercial buildings, the NPV of energy savings is $6.09 per square foot. Thus, on the basis of energy savings alone, investing in green buildings appears to be cost-effective.

Emissions from Energy

Buildings use 70 percent of the nation’s electricity. Air pollution from burning fossil fuels to generate electricity imposes very large health, environmental and property damage costs. Demonstrated health costs include tens of thousands of additional deaths per year and tens of millions of respiratory incidents and ailments.9 The health, environmental and property damages associated with pollution from burning fossil fuels—commonly referred to as externalities—are only very partially reflected in the price of energy.10

Air pollutants that result from the burning of fossil fuels include:

  • oxides of nitrogen (NOx), a principal cause of smog;
  • particulates (including PM10), a principal cause of
    respiratory illness (with associated health costs) and an important contributor to smog;
  • sulfur dioxide (SO2 or SOx), a principal cause of acid rain (SOx and SO2 are functionally the same for the purposes of this report);
  • and carbon dioxide (CO2), the principal greenhouse gas and the principal product of combustion.

Additional fossil fuel-related pollutants include reactive organic compounds (ROC) and carbon monoxide (CO). Volatile organic compounds (VOCs) may have significant value, but are not calculated in this report. A more comprehensive analysis should evaluate the costs of a fuller set of these additional pollutants, including mercury.

Calculations of the costs of NOx, particulates and SOx is based on California emissions trading prices. It is important to note that because the current market for emissions is driven by caps set by regulations, and not the actual costs (e.g., the morbidity impacts of emissions), it does not directly reflect the externalities of health impacts, and the value of reductions is generally understated.

The vast majority of the world’s climate change scientists have concluded that anthropogenic emissions—principally from burning fossil fuels—is the root cause of global warming.11 The United States is responsible for almost one-quarter of global greenhouse gas (GHG) emissions. As a recent study notes, U.S. buildings alone are responsible for more CO2 emissions than those of any other country in the world except China.12

A report published in July 2002 for the United Nations Environment Programme’s Finance Initiatives Climate Change Working Group, Climate Change and the Financial Services Industry, warns that the “increasing frequency of severe climatic events, coupled with social trends, has the potential to stress insurers, reinsurers and banks to the point of impaired viability or even insolvency.” The United Nations estimates the potential cost of global warming at over $300 billion per year, as reported in a September 6, 2001 New York Times article entitled, “Global Warming May Bring New Variety of Class Action.” The article went on to say that insurance firms are becoming concerned about the possibility of lawsuits due to damage from human-induced global warming.

Recognizing the cost of global warming by assigning a dollar value of some amount is preferable to the current practice of assigning no value—effectively $0—to CO2 reductions. It is also economically efficient for states and public bodies to explicitly recognize a value for CO2 in order to ensure a more cost-effective decision-making process about building design choices. Yet, determining a value for CO2 reduction is a difficult proposition. For example, a recent Intergovernmental Panel on Climate Change (IPCC) report cites a range of values between $5 and $125 per ton of CO2.13 This analysis assumed a price of $5 and $10 per ton for CO2. (See chart 3).

Detailed calculations in the Task Force Report indicates a present value of reduction in emissions of the four pollutants discussed above of about $1 per square foot. This is almost certainly very low.

Water Conservation

Much of the United States, including most of California, is facing the prospect of worsening water shortages and sinking aquifers. Green buildings typically use half as much water as conventional buildings and can, therefore, play a substantial role in cutting the costs of water supply and the costs of waste water treatment.

Green building water conservation strategies generally fall into four categories:

  • Efficiency of potable water use through better design/technology;
  • Capture of gray water—non-fecal waste water from
    bathroom sinks, bathtubs, showers, washing machines, etc.—used for irrigation;
  • On-site storm water capture for use or groundwater recharge;
  • and recycled/reclaimed water use.

Taken together, these strategies can reduce water use below code/common practice by over 30 percent indoors and over 50 percent for landscaping.14 Of 21 reviewed green buildings submitted to the U.S. Green Building Council (USGBC) for LEED certification, all but one used water efficient landscaping, thus cutting outdoor water use by at least 50 percent. Seventeen buildings, or 81 percent, used no potable water for landscaping. Over half cut water use inside buildings by at least 30 percent. Typical green buildings cut water use by about half.

The California report provides an estimate 20-year PV of $0.51 per square foot for water savings from green buildings in California. These costs are very likely conservative.

Waste Reduction

Green buildings recycle and divert substantially higher levels of waste, and incorporate greater amounts of recycled or “re-used” materials than conventional buildings. Waste reduction strategies—such as reuse and recycling, as promoted in green buildings—help to divert waste from being disposed of in landfills and result in savings associated with avoided disposal costs, as well as in reduced societal costs of landfill creation and maintenance. Of 21 green buildings submitted to USGBC for certification, 17 (or 81 percent) reduced construction waste by at least 50 percent, while 38 percent reduced construction waste by 75 percent or more.

In the absence of good data on present rates of waste diversion in green and conventional buildings during both their construction and operation, it is difficult to quantify the full value of lower waste generation. The one year value of reduced construction waste from green buildings in California is estimated to be $0.03 per square foot and this (very low) waste benefit number is included in this analysis.

It appears probable that the net value of green building waste reduction in California would not exceed about $0.50 per square foot, because of California’s already aggressive waste reduction targets. Nationally, waste diversion and recycling levels are on average significantly lower than California and the benefits of reduced waste associated with green construction higher. A thorough analysis is likely to find average national waste related financial benefits over $0.50 per square foot.

Productivity and Health

There is growing recognition of the large health and productivity costs imposed by poor indoor environmental quality (IEQ) in commercial buildings. This is not surprising as people typically spend 90 percent of their time indoors, according to the U.S. Environmental Protection Agency, and the concentration of pollutants indoors is typically higher than outdoors, sometimes by as much as 10 or even 100 times. The costs of poor indoor environmental and air quality—including higher absenteeism and increased respiratory ailments, allergies and asthma—are hard to measure and have generally been “hidden” in sick days, lower productivity, unemployment insurance and medical costs. Health and productivity issues, often addressed separately, are combined here because both relate directly to worker well-being and comfort and both can be measured by their impacts on productivity.

The discussion of IEQ and productivity issues in industry publications expanded rapidly in the last decade and has spilled over into popular media. Business Week’s cover for its June 5, 2000 issue, for example, features a picture of a large menacing office building to accompany the feature story: “Is Your Office Killing You? The Dangers of Sick Buildings.” The article cites potential benefits of up to $250 billion per year from improved indoor air quality in U.S. office buildings.

Gary Jay Saulson, the senior vice president and director of corporate real estate for PNC Realty Services, describes the benefits of the LEED Silver PNC Firstside Center building in Pittsburgh as follows: “People want to work here, even to the point of seeking employment just to work in our building. Absenteeism has decreased, productivity has increased, recruitment is better and turnover less.” Two business units experienced 83 percent and 57 percent reductions in voluntary terminations after moving into the new Firstside facility.15
Attributes common in green buildings that promote healthier work environments include more daylighting and improved thermal and ventilation control and comfort. Much lower source emissions from measures such as better siting (e.g., avoiding locating air intakes next to outlets, such as parking garages), and better building material source controls. Certified and Silver level green buildings achieved 55 percent of possible LEED credits and Gold level LEED buildings achieved 88 percent for use of a range of IEQ related measures, including the following:

  • less toxic materials
  • low-emitting adhesives & sealants
  • low-emitting paints
  • low-emitting carpets
  • low-emitting composite wood
  • indoor chemical and pollutant source control

There is a large body of technically sound studies and documentation linking health and productivity with specific building design operation attributes, such as indoor air quality and tenant control over work environment, including lighting levels, air flow, humidity and temperature. For example, two studies of over 11,000 workers in 107 European buildings analyzed the health effect of worker-controlled temperature and ventilation. They found significantly reduced illness symptoms, reduced absenteeism and increases in perceived productivity over workers in a group that lacked these features.17

Productivity Benefits for Specific Worker Control/Comfort Upgrades

One of the leading national centers of expertise on the benefits of high performance buildings is the Center for Building Performance (BIDS™) at Carnegie Mellon University. This program has reviewed over 1,000 studies that relate technical characteristics of buildings in areas (such as lighting and ventilation) to tenant responses (such as productivity). Collectively, these studies demonstrate that better building design and performance in areas such as lighting, ventilation and thermal control correlate to increases in tenant/worker well-being and productivity.18

Increases in tenant control over ventilation, temperature and lighting each provide measured benefits from 0.5 percent up to 34 percent, with average measured workforce productivity gains of 7.1 percent with lighting control, 1.8 percent with ventilation control, and 1.2 percent with thermal control. Additionally, measured improvements have been found with increased daylighting, as discussed in the following section.

Eight studies measured the relationship between increased lighting control and productivity, finding productivity gains ranging from three percent up to 34 percent, with a mean of 7.1 percent. The subsequent figure was supplied by the Department of Architecture at Carnegie Mellon University. This represents ongoing research, and as such should be considered interim. (See chartt 4).

A study by the Heschong Mahone Group evaluated the test score performance of over 21,000 students in three school districts in California, Colorado and Washington. The study found that in classrooms with the most daylighting, students’ learning progressed 20 percent faster in math and 26 percent faster in reading than similar students in classrooms with the least daylighting.19 A follow-up study, employing an independent technical advisory group to reanalyze the data confirmed the initial study’s findings with a 99.9 percent confidence level.20 Note that the study compares performance between students with the greatest amount of daylighting and those with the least daylighting—two extremes. The productivity benefits that could conservatively be expected are much less than 26 percent (which reflects extremes in daylighting), perhaps on the order of several percent.

At least four of the attributes associated with green building design—increased ventilation control, increased temperature control, increased lighting control and increased daylighting—have been extensively and significantly correlated with increased productivity. There are also quantifiable green building gains in attracting and retaining a committed workforce—an aspect beyond the scope of this report.

Given the studies and actual green building IEQ design data reviewed above, this report attributes a one percent productivity and health gain to Certified and Silver level buildings and a 1.5 percent gain to Gold and Platinum level buildings. These percentages are at the low end of the range of productivity gains for each of the individual specific building measures—ventilation, thermal control, light control and daylighting—analyzed above. They are consistent with or well below the range of additional studies cited above.

For state of California employees, a one percent increase in productivity (equal to about five minutes per working day) is equal to $665 per employee per year, or $2.96 per square foot per year.21 A 1.5 percent increase in productivity (or a little over seven minutes each working day) is equal to $998 per year, or $4.44 per square foot per year. The PV of the productivity benefits is about $35 per square foot for Certified and Silver level buildings, and $55 per square foot for Gold and Platinum level buildings. Assuming a longer building operational life, such as 30 or even 50 years, would result in substantially larger benefits.

OPERATIONS AND MAINTENANCE

LEED requires measurement and verification and “Fundamental Building Systems Commissioning,” which currently entails hiring a commissioning expert, developing a commissioning plan and completing a commissioning report.22 Detailed analysis of several hundred million dollars of energy building upgrades demonstrate that rigorous measurement and verification of energy and water efficiency and system retrofits tend to:

  • increase initial savings level;
  • increase persistence of savings; and
  • and reduce variability on energy and water savings.

Commissioning and metering allows building managers to better manage upgrades and maintenance, helping to anticipate and avoid equipment failure, leaks and other costly operations and maintenance (O&M) problems.

O&M costs in California state buildings are about $3,000 per person per year, according to data provided in December 2002 by the California Department of General Services, Real Estate Division, or nearly five times larger than energy costs. There is not enough data to estimate with any precision the reduction in O&M costs that would occur in green buildings. This analysis conservatively assumes that green buildings experience an O&M cost decline of five percent per year. This equals a savings of $0.68 per square foot per year, for a 20-year PV savings of $8.47 per square foot.

Valuing Green Buildings

Pension funds may be beginning to recognize that green and energy efficient design can provide higher return, greater asset appreciation and lower risk to their real estate holdings. Notably, Phil Angelides, the California Treasurer, recently announced that $1.5 billion (one to two percent) of the state’s pension funds may be shifted to invest in more environmental and greener technologies. For pension funds and real estate owners, high performance and energy efficient buildings can provide higher net operating margins, increased asset value and lower risk.

Public institutions, including cities, states and local entities, can also potentially gain a great deal from increasing the portion of new construction and retrofits of existing buildings to met green standards. These benefits may include:

  • lower peak demand and reduced pressure on transmission and distribution systems, including lower line losses and avoided or delayed construction;
  • improved power quality and reliability;
  • reduced emissions (including NOX and particulates) both from lower energy use and lower peak and consequently lower use of sometimes relatively dirty peaking and back
    up power;
  • lower water use and water treatment and avoided or delayed required investment in water treatment and
    supply costs;
  • improved health and productivity of occupants, including student test performance on standard tests; and
  • greater grid-wide and system reliability and security.

Tools that public institutions can use or have used include accelerated permitting, allowing increased density of construction—floor area ratio (FAR) and permitting increased construction density around public transport nodes (metro stops) and corridors (bus lines).

Lawrence Berkeley National Laboratory has mapped approximately 80 energy efficiency and renewable energy measures onto specific “lines” of insurance benefited by their use.24 Of the 64 LEED points possible in Design Areas 1-5 (excluding the Innovation and Design Process category, which is non-specific), 49 (77 percent) are associated with measures that have potential risk-management and here. Doing so would increase the recognized financial benefits of green design.

Our major religious faiths all emphasize the moral importance of environmental stewardship of the earth. Many religious groups advocate broader adoption of green design as a way to address the issues of environmental degradation and associated human health impacts as it relates to their religious values. For example, the National Council of Churches, in an April 28, 2004 letter to President G.W. Bush, criticized the administration’s environmental policies, citing Genesis 9:12: “[W]e have a solemn duty to the future well-being of Earth and all life within it, ‘the covenant which I make between me and you and every living creature for perpetual generations...’”. (See: www.ncccusa.org/news/04 bushonair.html) For many Americans, the large reduction in resource consumption and waste and the reduced health damages associated with green design has real moral and spiritual value that, though difficult to quantify, is of enormous value.

Conclusions

Most benefits described in this report, including lower energy and water costs, lower operations and maintenance costs, some waste reduction benefits and most health and productivity benefits accrue to owner occupants of buildings. For non-occupying tenants many of these benefits may not be experienced. As the brand value of LEED buildings increases, builders may be more likely to expect to have their green building investment translate into higher occupancy, higher lease rate, lower operations and maintenance costs and/or higher asset value.

While a government entity should care about the environmental or power grid benefits their building may have for society, a private commercial entity may not. Private sector building owners, for example, may be less likely to care about health and environmental impacts, and hence might perceive lower financial benefits of building green. In addition, because of higher capital costs and hurdle rates, future financial benefits are generally discounted more heavily by private entities than by public ones.

This report began with an aggregation of data on actual or modeled costs for 40 green buildings. Largely derived from several dozen conversations with architects, developers and a literature search, the data indicates that the average construction cost premium for green buildings is about two percent, or about $4 per square foot, substantially less than is generally perceived.

The body of this report focused on determining the financial benefits of a range of green building attributes, with the findings summarized below. (See chart 5).

Net financial benefits of green design are estimated to be about $50 per square foot for Certified- and Silver-level green buildings, and about $65 per square foot for Gold- and Platinum-level buildings. This is over 10 times larger than the average two percent cost premium (about $4 per square foot) for the 40 green buildings analyzed. Despite gaps in data and analysis, the findings of this report point to a clear conclusion: building green up to and including the LEED Gold-level generally makes financial sense today.



Greg Kats is cofounder and principal of Capital E (www.cap-e.com), a national clean energy and green development services firm. From 1996 to 2001, Kats served as the director of financing for Energy Efficiency and Renewable Energy at the U.S. Department of Energy. With a $1 billion budget, it is the country’s largest clean technology development and deployment program. He co-founded and, from 1995 to 2001 chaired, the national building performance measurement and verification standard (www.ipmvp.org), which has served as a technical basis for over $5 billion in building upgrades. He currently serves as chair of the Energy and Atmosphere Technical Advisory Group for LEED and is on the LEED Steering Committee. He holds an MBA (Stanford) and an MPA (Princeton), serves on a half dozen corporate and public boards, and lectures widely on green buildings, energy, financing and environmental issues.

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