Energy efficiency in the built environment and the CDM: a fundamental mismatch?

1. Energy efficiency in the built environment and the CDM: a fundamental mismatch? 11th GCET, Bangkok, Thailand 5 November 2010 Dr. Javier de Cendra de Larragán, UCL Energy Institute/ Faculty of Laws, University College London

2. The importance of tackling energy consumption from the building sector • Buildings account for 40 per cent of global energy consumption and resulting emissions. • Energy consumption in buildings is set to increase dramatically, mainly in developing countries, due to population growth and increasing energy usage per person due to rising living standards. • IEA has called for a reduction of 77 per cent in carbon emissions below BAU by 2050 to achieve 450 ppmscenario.

3. Generally assumed that large opportunities for emission reductions exist in the building sector at a negative cost....

4. Many hopes have been placed in the CDM...... ...but projects in the building sector are virtually non-existing... Out of close to 6000 CDM projects in the pipeline only 16 EE projects in households and service sector are registered, 90 in pipeline.

5. Some CDM projects in the built environment • Project 0686 : Improvement in Energy Consumption of a Hotel in India • Project 0079 : Kuyasa low-cost urban housing energy upgrade project, Khayelitsha (Cape Town; South Africa) • Project 0173: Moldova energy conservation and GHG emissions reduction • Several projects related to energy efficient lightning

6. Can the CDM raise to the challenge?... …And more importantly…should it?

7. 2 types of problems to promote energy efficiency in the built environment through the CDM • Related to the CDM rules • Related to the nature of the built environment sector

8. 1. Problems related to the CDM rules • Under CDM, emission reductions need to be: • Project based • Real => baseline methodologies that set accurate project boundary, avoid double counting and leakage • measurable => monitoring methodologies • Verifiable => through DOEs • Additional =>additionality check

9. UNEP study’ list of reasons for CDM’s failure in the building sector • The challenges of proving additionality • 2. Technology-based baseline methodologies reductionist and micro-managing • 3. Combination of different methodologies not allowed for large projects in Programme of activities CDM • 4. Current CDM baseline methodologies not suited for new buildings and there is no sufficient data (yet) to set new ones • 5. Soft measures, such as changing consumer behavior and raising awareness cannot be included in methodologies • 6. Measuring the thermal performance of buildings is complex and does not fit CDM methodologies • =>UNCERTAINTY AND HIGH TRANSACTION COSTS

10. UNEP study’s proposed solutions • Some Short-term solutions • 1. Moving away from technology-based methodologies for small scale projects • 2. Allow performance-based methodologies • 3. Establish standardized baselines, to set both baselines and additionality, through computer simulation programmes • Long-term solutions: • 1. Expanding the CDM to a sectoral crediting scheme with additionality based on crediting baselines

11. Barriers related to the nature of the built environment 1. Enormous complexity of the building sector, value chain fragmented and not integrated, each actor along the chain (including local authorities) seeks its own interests without regard for energy consumption 2. Underestimation within the sector about contribution of buildings to greenhouse emissions, overestimation of the costs of saving energy measures, lack of know how and experience, lack of conviction and commitment, and lack of leadership WBCSD (2007), ‘Energy Efficiency in Buildings: Business Realities and Opportunities

12. -Millions of buildings, small energy savings can be reaped from each -Construction sector is (legally) very fragmented, with poor integration among key stakeholders -A conservative biasshields investors from risky investments (i.e. energy efficiency) -Split incentives between investors and those who would benefit from the investment -Lack of information, asymmetrical information, and misinformation -General lack of expertise, management tools and indicators for energy management in buildings -High transaction costs of investment projects in energy efficiency in buildings Koeppel, S. and D. Ürge-Vorsatz (2007). Assessment of policy instruments for reducing greenhouse gas emissions from buildings. Budapest, UNEP

13. Preliminary solutions proposed by the WBCSD A mix of instruments is needed, that: 1. Sets a carbon price (through taxes, trading or regulations) 2. Promotes new technologies in the sector (i.e., smart meters) 3. Removes barriers to behavioural changes, (i.e., through information and standard settings)

14. WBCSD (2009), ‘Energy Efficiency in Buildings: Transforming the Market’ -‘False optimism’ pervasive in the sector => =>A ‘revolution’ is needed => mix of instruments -Strengthen building codes and labelling + effective enforcement of building codes. -Frequent Building inspections and energy audits -Tenants must have access to energy controls and must be charged individually -Tax incentives and subsidies must have longer payback periods -Advanced technologies must be made available to all consumers -Integrated design and innovation must be encouraged -More specialized workforce -Absolute cuts in energy consumption are essential

15. Barriers in developed countries are even worst than suggested by the WBCSD: three examples • Modelling the energy efficiency improvement ex ante is very tricky and often leads to less emission reductions than expected => ex-post monitoring crucial • 2. The challenge of more effective enforcement: the UK case • 3. Hidden challenges in providing incentives through public policies

16. 1. Modelling the energy efficiency improvement ex ante is very tricky. • Currently, there are around 30 models to estimate energy consumption of new buildings and energy impacts of retrofitting that are valid under UK buildings regulation, which give differences of more than 200 per cent. • Models are (still) very simplistic, and human factors in their application also play an important role => real data to perfect models is needed. • Legal consequences of misapplying a model are almost non-existing (see below).

17. 2. The challenge of more effective enforcement: the UK case The problem of enforcement in the building sector The Chartered Institute of Building Service Engineers has just launched a study to assess the extent of what appears to be a very serious (and underestimated) problem A brief legal analysis Under English law, a liability case can be built primarily under three banners: breach of statutory duty, tort, and contract

18. Breach of statutory duty Article 38.1 of the Building Act of 1984 sets a civil action for breach of statutory duty: ‘A breach of a duty imposed by building regulations, in so far as it causes damage, is actionable [...] Article 38.4 defines damage as ‘the death of, or injury to, any person (including any disease and any impairment of a person’s physical or mental condition Article 36 introduces the right or local authorities, in case a work contravenes the building regulations, to require the owner to either pull down the work or make necessary alterations as needed. Local authorities do not often exercise this authority. What can be done against them? Nothing, because the Building Act does not create an action, and the House of Lords has considered that no common law duty can be imposed in the absence of legislative intent (Scally v. Southern Health and Social Service Board [1991] 4 All ER 563]

19. Tort law Could the owner of a building that is not in compliance with energy efficiency requirements of building regulations, sue someone? -Inspectors do not have a direct duty of care towards anyone in particular. -Local authorities do not have a duty of care extending to economic losses. -Energy assessors have a duty to perform their functions (issuing energy performance certificates, display energy certificates, carrying inspections), with ‘reasonable care and skill’. Their liability can extend to economic losses. -Developers, contractors and previous owners can only be held liable if cumulatively: (1) there is a duty of care; (2) breach of duty of care; (3) damage; (4) causal link; Key problems here are (1) the nature of damages, and (2) ‘proximity’ =>Liability is almost impossible to establish, so regulations not taken seriously

20. Some challenges of introducing financial mechanisms to promote energy efficiency in buildings Tool proposed: loans to dwellers to install energy saving measures, to be repaid with the economic savings associated with energy savings -As show above, modeling the energy efficiency improvement ex ante is very tricky. -Many factors can impact ex post the extent of energy savings, including in the design, installations, maintenance, and dweller’s behavior. What if the energy savings are not realized, and as a result the loan cannot be repaid? Who is responsible? Models cannot attribute actual responsibility. -Could risk be insured? In the absence of attribution, insurers won’t be able to recoup the payment of compensation, so little incentives to enter the market

21. Interim lessons • The scale of the problem is huge and is structural, comprising much more than lack of economic incentives => • 2. => CDM not enough to overcome multiple and deep barriers. • 3. CDM is but one (financial) tool in the mix, and even then it provides very limited incentives => indirect impact, complex, high TCs => a mismatch?

22. Possible ways forward 1. Focusing efforts on other sectors 2. Marginal amendments to current CDM 3. Expanding the CDM: sectoral CDM 4. Moving towards an ETS 5. Low carbon development plans and NAMAs

23. 1. Not sufficient • 2. Can solve some CDM related problems, but too small scale to change trends • 3. A sectoral CDM (or SNLT) • i. requires major institutional capacity • ii. accurate baselines needed, but massive data requirements, difficult to generate in building sector • iii. Minimizing risk of inflated baselines through performance-based common baselines? But lack of sufficient data might be a fatal flaw • iv. Ex-post monitoring of energy consumption required • v. Risk of flooding carbon markets • 4. An ETS => even larger (legal and technical) challenges, perhaps feasible in the mid-term future in the EU? • 5. NAMAS • UNEP sees it as essential that experience gained by developed countries is transferred instantaneously to developing countries

24. Concrete steps in the context of NAMAs Bali Action Plan called for ‘[NAMAs] by developing countries in the context of sustainable development, supported and enabled by technology, financing and capacity building in a measurable, reportable, and verifiable manner’ Copenhagen Accord encourages developing countries to list their NAMAs and subject them to international MRV. The Accord leaves many things vague, i.e., how to link actions with support. Promoting energy efficiency in buildings has many benefits, but barriers are huge Developing a detailed policy plan for building sector identifying needed support and accepting some sort of international MRV would be a crucial step to take.

25. Some steps in the context of NAMAs 1. Gathering data on energy consumption of buildings, and on developing baselines and methodologies, i.e. by setting up collaborative research projects, co-financed by developed countries. 2. Share experiences with developed countries regarding successful instruments and policies and how to overcome barriers. 3. Determine transfers of technology needed (i.e. regarding technical requirements of smart grids (including smart meters) and associated financial transfers. 4. Map specific barriers within the country itself, including legal ones.