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84 PROPOSAL TO REVISE ENERGY EFFICIENCY REQUIREMENTS OF THE BUILDING CODE OF AUSTRALIA FOR COMMERCIAL BUILDINGS 6000 5000 Observations 4000 3000 2000 1000 0 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 BCR Note: All variables tested in comparison to the parameters used in the central case (most likely value). Results based on 10 000 iterations. Source: CIE estimates. Discount rate The timing factor of the amendments is very important to the analysis. Capital outlays are relatively large and take place at the beginning of the period, while energy savings are small but are enjoyed over the life of the building. The dynamic nature of this analysis will therefore mean that the discount rate employed is likely to significantly influence the results. In present value terms, the further out are energy savings, the lower their value. The discount rate used to calculate the net impact for the central case was 5 per cent. Table 7.7 reports the net impact of the amendments, together with the BCR, measured using the alternative discount rates recommended by OBPR (3, 7 and 11 per cent real). 7.7 Sensitivity analysis — discount rate Discount rate Net impact BCR Per cent $ million BCR 3 3872 2.73 5 (central case) 2131 2.05 7 1138 1.61 11 188 1.11 Source: CIE estimates. www.TheCIE.com.au
PROPOSAL TO REVISE ENERGY EFFICIENCY REQUIREMENTS OF THE BUILDING CODE OF AUSTRALIA FOR COMMERCIAL BUILDINGS 85 The results in table 7.7 show that net impact of the amendments is still positive at a higher discount rates of 7 and 11 per cent. (At 3 per cent, the net impact almost doubles.) This suggests that while the findings of the analysis are influenced by the choice of discount rate (which is generally true in every analysis), the view that the amendments are welfare improving is likely to be valid using alternative rates. Distribution of impacts between landlords and tenants The analysis presented in previous sections of the report mainly focuses on the impacts of the proposed BCA amendments on owners–occupiers of commercial buildings. However, a major concern relating to the proposed energy efficiency measures is the existence of split incentives (commonly referred to as the landlord–tenant problem). As mentioned before, split incentives is a key market barrier to the provision of energy efficient buildings. This impediment refers to the fact that the costs and benefits of energy efficiency investments may accrue to different agents. In this case, the problem is that the first owner of a commercial building will be deemed responsible for the investment in higher cost energy efficiency technologies and practices (that is, for building a more energy efficient building than they would otherwise), while the tenant will receive the benefits of these measures in the form of reduced energy bills. Arguably, owners of new commercial buildings will be disadvantaged by the proposed BCA measures due to one of the underlying market failures that motivated the amendment of the code in the first place. However, this will only be the case if potential tenants and buyers of commercial buildings systematically undervalue the improvements in energy efficiency. While the existence of rental premiums and additional capital gains for energy efficiency buildings are not yet proven in all cases, efforts are underway to quantify these benefits and many studies have analysed how ‘green’ attributes of buildings are valued by tenants and investors. For instance, the Green <strong>Building</strong> Council’s (GBC) report Valuing Green (2008) analyses how a Green Star rating can affect property values based on case studies of Green Star buildings and interviews with <strong>Australian</strong> property owners, valuers and developers.32 Key findings of the GBC survey are that: 32 Green Star is a comprehensive, national, voluntary environmental rating system that evaluates the environmental design and construction of buildings. www.TheCIE.com.au
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