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Green Buildings & Perverse Incentives

By: Albert F. Appleton

June 01, 2010

Though hard to do, the key to creating a sustainable world is easy to state. Currently, our economic system regards environmental protection as a cost center, as a burden on wealth creation. But the truth is that protecting and restoring the environment is the ultimate profit center; one that can provide the wealth needed to create a sustainable planet.

The biggest obstacle to building such a sustainable economy is perverse incentives. Incentives, generations of economists have demonstrated, are what drive economic behavior. Perverse incentives are those that reward economic behaviors that are environmentally destructive, destroying more wealth than they create.

Perverse incentives do this in several ways. They produce under-priced products, encouraging overuse. They allow those who profit from a product to displace the costs of using it on someone else, reducing net wealth. They undermine competition and innovation by making it harder for new and better products and services to succeed. As society is trying to redesign its economic systems to reward sustainable behavior, perverse incentives encourage the public to continue to act in unsustainable ways.

Perverse incentives riddle the American economy. Attempts to keep development out of disaster prone coastal zones and flood plains fight low cost householders' insurance and government built infrastructure. Recycling fights against a Federal tax code that promotes the use of virgin materials. The property tax system promotes sprawl and undermines local agriculture.

Perverse incentives are a major obstacle to green buildings. Most practitioners recognize that a builder's incentive is to buy the cheapest possible appliances and heating systems, thereby keeping his sale price as low as possible, even though such utilities are invariably the most wasteful and expensive for the building purchaser to operate. Building codes and industry guidelines preserve norms that once represented cutting edge building practice, but now clash with green building ideals. Even systems like LEEDs can become bureaucratically clumsy and formalistic, discouraging innovation and constraining the ability of green buildings measure to lower total building costs.

Two obstacles that green buildings face deserve special discussion. The first is the deep American cultural bias in favor of making new stuff, instead of better managing what is already there. Many have argued that cultural bias is not strictly a perverse incentive. But one need not take sides in that theoreticians' debate to recognize that the consequences of cultural bias and perverse economic and regulatory incentives are basically the same. If, out of a cultural bias in favor of the new, one opts for a non-sustainable course of action, the result is the same as if that choice was driven by a perverse economic structure.

At least one recent study has suggested that many LEED building have not obtained their anticipated energy use savings due to failures of routine building systems management. Sophisticated managers know that many small operational changes consistently pursued often add up to more savings than facility retrofits, and are easier and faster to implement. They also know that supposedly cutting edge technologies must be designed with an eye to ease of operation. But making something new too often seems more exciting than making something existing work better.

The second obstacle is, by any definition, a perverse incentive. Green energy and energy conservation are at the heart of societal hopes for green buildings. But they directly compete on price against black energy, the various forms of hydrocarbon combustion. Black energy sources all benefit from a large array of perverse incentives, including the greatest perverse incentive of all, externalization of pollution costs. The more the costs of black energy are lowered by perverse incentives, the harder it is to make green energy economically viable, even with its own subsidies.

Where this is of the most immediate concern for the New York green buildings industry is in the support the New York State government is currently giving to the development of what the natural gas industry calls unconventional natural gas sources meaning natural gas obtained by new technologies of shale fracking. Unfortunately, unlike conventional natural gas sources, shale fracking comes with major environmental costs, in damage to water resources and rural landscapes. This gives natural gas from shale fracking (and 90% of future natural gas drilling is projected to be shale gas fracking) an enormous price subsidy, one that represents nothing less than a stab in the back for green energy, and thus for green buildings.

For New York State to be promoting shale fracked natural gas obtained at the price of water resources such as the New York City watershed and rural landscapes such as the Finger Lake wine country is an extraordinary example of perverse incentives. The green buildings industry needs to recognize this and, as a matter of pure self-interest, join in the battle to stop pollution-externalizing shale fracking. For if shale fracked natural gas succeeds in fighting off the current efforts to halt its externalization of its pollution costs, its artificially low price will drain the economic viability out of the green energy that is an essential component of green buildings, ghettoizing it as a sideshow incapable of reaching critical mass for decades.

The green buildings movement needs to devote the same level of intensity it currently focuses on technological innovation to addressing these issues of perverse incentives. No amount of technological ingenuity will enable green buildings to succeed if they must compete against pollution-subsidized shale fracked natural gas energy or the forces of perverse incentives and counterproductive cultural biases.

Albert F. Appleton (Al Appleton) is currently an international consultant on the economics of environmental sustainability and a Special Advisor to the Cooper Union Institute for Sustainable Design. He is a former Commissioner of the New York City Department of Environmental Protection where he was noted for his cost saving environmental policy innovations such as the New York City watershed protection program, New York's water conservation program and the Staten Island Bluebelt.

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