The unintended effects of green building certification
Agarwal, Araral, Fan, Qin and Zheng (2024) find persistently elevated water and electricity consumption among households in retrofitted residential buildings following green certification.
Wong Wei Chen
27 February 2024
Accounting for nearly 40% of global carbon dioxide emissions, real estate has a tremendous role to play in climate mitigation and adaptation efforts. Governments worldwide, including Singapore, have adopted green building certification programmes, both for new constructions and existing buildings.
In Singapore, the Green Mark scheme was launched in 2005 by the Building and Construction Authority (BCA), and certification for residential buildings was subsequently rolled out in 2012.
The Green Mark is a point-based rating system to evaluate a building’s environmental impact and performance against a prescribed set of building codes i.e. criteria that specify minimum standards for constructed objects such as buildings and other infrastructure. The scheme offers multiple levels of awards, including Certified, Gold, Gold Plus, and Platinum, which progressively require higher number of points.
While Green Mark certification is broadly perceived as a sign of improved sustainability, in their working paper “From Efficiency to Excess: Understanding Utility Usage in Green-Certified Homes”, Agarwal, Araral, Fan, Qin and Zheng (2024) find persistently elevated water and electricity consumption among households in retrofitted residential buildings post-certification.
This phenomenon – along with its explanation via a wealth effect mechanism – is unexpected and nontrivial. Hence, the study furnishes robust evidence to support these hypotheses.
Empirical design
The baseline sample consisted of public housing buildings constructed between 1981 and 2010 that did not implement other major efficiency improvement programs to ensure similarity in building characteristics between the control and treatment groups.
Treated buildings were those that attained Green Mark between 2012, the start of Green Mark for existing residential buildings, and 2017, to ensure at least three years of utility consumption observed post-certification. Never-certified residential buildings made up the control group.
Data for water consumption was obtained from anonymised account-level monthly water consumption data between 2011 and 2020 from PUB, Singapore’s national water agency. Electricity consumption data, provided by the Energy Market Authority (EMA), contained monthly electricity use by block-flat type for non-landed residential buildings from 2011 – 2020.
To factor out the effects of outliers (which could be due to errors such as problematic meter readings, water leakage etc.), water consumption values in the top and bottom one percentiles were excluded from the sample.
Findings
Using a staggered difference-in-differences approach to control for temporal variations arising from different certification timings over 2012 to 2017, Agarwal et al. found that treatment households increased water consumption by 3.3% per month on average.
With a pre-certification mean consumption of 18.4 m3 per household per month, and an average block size of 88 households, the 3.3% uptick translated into a monthly increase of 53.3 m3 in water use per block.
After deploying a series of robustness tests – which included altering sample restrictions (e.g. to include the top and bottom one percentiles), controlling for building age, location and weather conditions – the consumption increase remained statistically significant and tightly clustered around 3.3%, ranging between 3.2% and 3.6%.
The researchers observed a similar trend in electricity consumption. Post-certification, treated blocks displayed a 1.5% increase in electricity consumption relative to the control group. Due to limited data availability, the researchers were not able to drill down to household level observations, but anticipate that the treatment effect would be further amplified at a more granular level of analysis.
Shortlisting explanations
Competing explanations for the observed phenomenon include the consumer’s behavioural response towards perceived higher resource efficiency. A perception of improved household water and energy efficiency could lead to expectations of lower utility costs, which could in turn trigger higher consumption levels. Intuitively, such a “rebound” effect would be temporary at best, and would recalibrate upon an actual increase in utility bills. Agarwal et al. in fact found elevated consumption behaviours among treated households to continue persisting even 5 years after green-certification, and the evidence therefore ruled out this explanation.
The researchers also ruled out substitution between common area and household utilities post-certification. A possible explanation along this line could be that households which were previously taking advantage of common-area facilities now switched back to utilities back at home because of lower utility prices. However, whereas post-certification water savings for common areas were estimated to be about 10.5 m3 per month, the increase in household consumption averaged out to 53.3 m3 per block, which was five times more than the savings. This disparity weakened the explanation, and also given that unauthorised use of common-area utilities is illegal, substitution became highly implausible and was rejected.
Wealth effect and its corollaries
Green building certification, on the other hand, leads to higher rental rates and property values. In a 2016 survey, BCA found that over 70% of respondents agreed that green buildings offer better resale value. After analysing resale transaction data for public housing, Agarwal et al. found flats in certified blocks to command a 1.1% premium over their uncertified counterparts. This green premium was estimated to last at least five years post-certification and could eventually increase to 6.3%. A wealth effect arising from appreciating properties could therefore account for higher household consumption, including water consumption.
A corollary of the wealth effect hypothesis is that renters, who do not benefit from appreciating property values unlike their landlords, would not display any elevation in consumption behaviour. Data analysis showed that the change in renters’ water consumption was minimal (-0.1%) and statistically insignificant.
To further isolate and test the wealth effect, Agarwal et al. investigated existing non-residential buildings and new residential buildings. As the researchers explain in the study, occupants of these building types tend not benefit from the wealth effect. Occupiers of commercial space tend to be tenants, and while new home owners may enjoy higher resale value for their properties, their eventual profit margins would be eroded by the premiums they had to pay to developers for new projects. In both building categories, where the certification-led wealth effects were missing, no increase in household utility consumption was observed.
Additionally, the price elasticity of water for households residing in green buildings post-certification ought to be lower: residents who feel wealthy could remain indifferent to relatively small price changes. Using the 2017 countrywide water-price increase as an exogenous shock, the researchers found that though households generally cut back on water consumption, those in certified buildings appeared more resilient to the shock and displayed less reduction.
The convergence of evidence thus supports the wealth effect arising from green-certification as the best explanation for post-certification household consumption patterns.
Implications
Through an in-depth analysis of data, the study had uncovered unanticipated outcomes. In a nuanced interplay between sustainability and economics, a green premium on certified buildings had in fact churned out an unintended externality in the form of increased household consumption of utilities, which merits further study and finetuning of policy tools.
Agarwal, Sumit is the Low Tuck Kwong Distinguished Professor at the School of Business and Professor in the departments of Economics, Finance and Real Estate at the National University of Singapore.
Araral, Eduardo is an associate professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.
Fan, Mingxuan is a visiting assistant professor, Department of Real Estate, NUS Business School, National University of Singapore.
Qin, Yu is the Dean’s Chair and associate professor (with tenure) in the Department of Real Estate, NUS Business School, National University of Singapore.
Zheng, Huanhuan is an assistant professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.