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Buildings--the Biggest Bang for the Buck in Global CO2 Abatement
Jeremy Faludi, 6 Aug 08

The Vattenfall/McKinsey Report "A Cost Curve for Greenhouse Gas Reduction" contains a graph (below) that everybody needs to see. The graph shows how much greenhouse gas abatement potential lies in some popular strategies/technologies, and simultaneously shows the monetary cost of each strategy.


The first thing you notice when you see the graph is that the cost for many abatement strategies is negative. That means these strategies make money, they don't cost money. The second thing that you notice is most of the money-making strategies are in the building industry: better insulation, better HVAC, better lighting, better water heating. Also in the money-making realm are better vehicle fuel efficiency and sugarcane ethanol. Forestry has perhaps the largest single abatement potential but is one of the more expensive methods; the power industry has the largest total abatement potential, but different technologies have different costs. There are some aspects of the graph I am skeptical about. For instance, the extremely high price of biodiesel--in San Francisco right now, biodiesel is cheaper than petro-diesel. (But Jørgen Vos of Sustainability Planning Partners and Natural Logic has done a paper indicating biodiesel makes less sense ecologically than we might think.) Also, nuclear power shows up as cheaper than wind, which is not true according to Rocky Mountain Institute's Winning the Oil Endgame. And finally, sequestration by plankton in oceans and biochar in soils do not even appear on the graph. But still, the graph is a fantastic visualization of most strategies and their costs. It should inform strategic planning in companies and governments.

Planning Effective Emission Trading Schemes

One governmental strategy for CO2 abatement is cap-and-trade systems. Emissions trading schemes in the EU and US currently only count CO2 abatement at the source--energy generation. But anyone who knows about efficiency (such as Amory Lovins, LBL, LLNL, NREL, and many other research labs) will be quick to point out that avoiding one unit of end-user electricity use avoids three units of primary energy use, due to the inefficiencies of generating electricity. Therefore, end-user efficiency should be valued right alongside clean power generation.

A movement has started to get efficiency equal footing in emissions trading schemes. Lend Lease Corporation, Lincolne Scott, and Advanced Environmental (a subdivision of Lincolne Scott) have proposed an Integrated Emissions & Efficiency Trading Scheme (EETS). The 70-page document details both the rationale of the system and how it would work. For instance, they quote the Stern Report and Bill Clinton, saying:

"If upstream emissions from heat and electricity are included, emissions from buildings total 40% of global emissions and up to 80% of total greenhouse gas emissions in our cities and towns. The building sector provides more potential for quick, deep and cost effective greenhouse gas mitigation than any other industry..."
"An integrated EETS will... improve the energy efficiency of the vast majority (98%) of building stock: existing buildings which hold the lowest cost abatement opportunities in the world."

They also quote the McKinsey study, saying "High value carbon credits of AUD $34 per ton of carbon dioxide equivalent (tCO2-e) could realistically achieve a carbon zero position in commercial office buildings at nil cost and, based on the McKinsey cost curves, energy efficiency in buildings represents an estimated cost negative abatement of US$45 billion to the United States economy, and $5.2 billion to the Australian economy."

How would cap-and-trade work for efficiency? It would be similar to emissions trading, but instead of caps on emission from power generation, building owners would calculate the amount of CO2-equivalent emissions their buildings use (adding up all their electricity, oil, gas, and other energy use), and there would be a cap for an allowable amount of CO2 emission per square meter of building. This would not replace normal emission trading. The integrated EETS system would have an efficiency cap-and-trade market in addition to the power generation emission cap-and-trade market, working in parallel.

Detractors have argued against efficiency counting for emissions offsets because of concerns about double-counting. (If a building uses less energy, couldn't the building owner trade abatement credits while the power company also trades abatement credits for not generating the additional power that would have been used?) The EETS avoids this by having the two separate buckets, one for power generation and one for building energy use. Each is its own separate market, and efficiency credits would not count toward a nation's Kyoto Protocol goals.

Another argument against such a scheme is that cap-and-trade schemes are a form of tax and subsidy, and there is no need to subsidize CO2 abatement methods that are already money-makers (and they clearly are, by the McKinsey graph above). Architect and consultant Huston Eubank, formerly of the World Green Building Council and Rocky Mountain Institute, explained that in existing emissions trading schemes, "A project only qualifies... if it can prove that the emissions reduction would not have occurred without the project. In its strictest sense, this means that the project must not have been financially feasible without carbon credits." This causes the unintended consequence of not encouraging financially sustainable strategies for environmental sustainability. True sustainability needs to be commercially viable as well as ecologically helpful: isn't it a much better use of taxpayer money to launch an industry that will become self-sustaining rather than spend money on things which would never be economically feasible by themselves? Obviously the scale of our environmental challenge is large enough that we can't limit ourselves to money-making schemes--we need to pump money into every technology that works--but it would be foolish for us to skip over the low-hanging fruit in favor of more expensive, slower, and less proven strategies. That is effectively what we are doing with the emissions trading schemes that exist now.

The exclusion of money-making strategies for CO2 abatement in the building industry also ignores the perverse incentives of the building industry's economy. This is an industry where the people paying for a building's energy use are not the same people who built the building, where first cost is nearly always at odds with life-cycle cost. A cap-and-trade scheme is perfect for an industry like this, because it introduces a new feedback loop that counteracts (and in the long run overwhelms) the existing perverse incentives. It effectively rationalizes the economy of the industry, internalizing some of the externalities of inefficiency.

Steps To Implementation

How likely is an EETS to be implemented? Eubank provided me with documents from the UNEP's Sustainable Buildings & Construction Initiative, which said, "At the moment, a number of projects regarding energy efficiency in buildings - such as those that introduce solar power, more efficient lighting devices, HVAC systems, and cooking devices, such as stoves in rural areas that require less biomass in their operation - are eligible for the flexible instruments of the Kyoto Protocol, particularly under the CDM. These projects are, however, still rather few in number and limited to active solutions, such as PV cells, or other technological options. Passive solutions, such as the design of better oriented and ventilated buildings, are not yet applicable under the instruments of the Kyoto Protocol." What's required for passive systems to count are universally agreed-upon benchmarks and measurement standards, so that legitimate quantitative values can be established for energy savings. Luckily, data and calculation methods for this have been built and refined for over a decade in the US, as part of the LEED rating system, and have been worked on by some of the best labs and consultancies in the industry. The World Green Building Council and other groups can work together to establish similar benchmarks and measurement systems for national and international EETS systems. However, as Eubank pointed out, "Getting UNFCCC approval for a new methodology is a long and arduous process. Thus the importance of supporting this initiative."

Encouragingly, one of the UNEP's documents said that "At a June side event in Bonn, Germany, the UNFCCC [United Nations Framework Convention on Climate Change] secretariats requested UNEP-SBCI's to assist in reviewing how to put the building sector on the agenda at the upcoming Conference of the Parties 14 in Poznan, Poland in December 2008." Public awareness of Lend Lease, Lincolne Scott, and Advanced Environmental's integrated efficiency and emissions trading scheme is still slim, however, and it needs to come to the attention of more policymakers. It would be foolish of us to bypass the low-hanging fruit of 40% of the world's CO2 emissions, which can be abated not only without economic hardship but with economic gain.

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Great article! Many thanks, especially for the quick rundown of how an EETS would work and, more importantly, become implemented.


Posted by: Kyle Taylor on 6 Aug 08

An interesting article, but I have reservations about the graph. It shows a remarkably smooth trend that suggests that more effective abatement measures necessarily cost more. Is this truly axiomatic?

I suspect a bit of positive sum thinking would liven the results up a bit! What do other people think?

Posted by: Tony Fisk on 6 Aug 08

The vertical dimension is cost, including negative cost per unit CO2 at the left. The horizontal dimension is cost again, in that the CO2 reducers believed to be cheapest are farthest to the left. The only way it could be unsmooth would be if only a few different things were plotted.

Posted by: G.R.L. Cowan, H2 energy fan 'til ~1996 on 6 Aug 08

Correction to graph reading: the horizontal axis is amount of CO2 potentially abated by the strategy, so the wider a bar, the more abatement that item can perform. The diagonal progression is simply putting the bars in order from least cost to most cost, it doesn't have anything to do with the width of the individual bars.

So the graph does not imply the things with the most abatement potential cost the most. It just assumes we'll be rational and do the cheapest things first, so if you want to get to X total abatement, you can see all the strategies you need (and all the cost incurred).

Posted by: jeremy Faludi on 6 Aug 08

Great post. In studying the graph it looks to me like the first four "money making things" would more than doubly pay for the cost for the avoided deforestation. Is that the way other people read this graph? Because if so, it seems like the most direct way to get at this would be legislatively mandated changes to building codes for new construction and required retrofits for renovation permits.

Posted by: Joe Bell on 7 Aug 08

Thanks for this post, I'll re-read it to be sure I understand what you're suggesting- it sounds like the EETS system should be a utility run compliance mechanism.

I am reacting to the cost curve, and the McKinsey report.

The McKinsey curve is clever, but at best tells half of the story.

Ask yourself this question: whose money is being saved and what is not being purchased.

Nearly all of the "negative costs" are (or embed) revenue losses for someone. Choosing to display them as savings is, mostly, an arbitrary choice. This technique (cost abatement curves) is useful to compare choices and priorities if (big if here) all of the money involved is fungible (that is, if it is all the same and belongs to one entity). Unfortunately, savings on my energy bill is a revenue loss for the utility I (would have) paid.

Look at the net effect of air conditioning and lighting and the increased investment in clean coal and coal to gas conversion. All of those are costs to the utility sector. The approach described in the graph would cut their revenue at the same time capital costs would rise. This means that their financing costs would rise, most likely so would their rates. This in turn, eliminates what I would have saved.

There are other issues relating to how the team developed "marginal" costs, and how capital costs are embedded, but I'll leave those to others to discuss.

I would like to see how this curve looks on a sector by sector basis, so that the real dynamics can be displayed. My sense is that this report (which is a truly profound and thoughtful analysis of what can be done and I recommend it to all) has important clues as to how utility business models can be re-worked to provide services (not necessarily electrons or natural gas) in a carbon-constrained world.

The original study is here:

Posted by: j david on 7 Aug 08

"Unfortunately, savings on my energy bill is a revenue loss for the utility I (would have) paid."

But most likely a gain for someone else when you spend the money elsewhere, so pretty much a moot point, no?

Posted by: Alex Steffen on 7 Aug 08


My point is that I would not likely have any savings to spend anywhere else.

If my bill is a function of the utility company's costs, and those costs increase (due to the clean coal technologies, new gas plants and so on), as their revenues fall (due to efficiency), my rates will rise. Given how the capital expenses and revenue declines interact, it is highly likely that there is no savings at all. If there is a moot point, it is probably that the graphic is a poor way to summarize what they found.

This dynamic is not reflected in the analysis. The net effect is that this work overstates savings and understates costs. I have discussed this with those involved in the work, and they left these linkages out by design. It does, however, showcase what can be done, and is a very conservative estimate of carbon reduction opportunities.

Posted by: j david on 7 Aug 08

This is a marvellous and useful chart, but it has one significant shortcoming: it looks at technologies on an isolated, case-by-case basis, and fails to account for the potential interactions between them, or other ways in which their impact might spread beyond the narrow confines of the technology itself.

The McKinsey graph assumes that these technologies are applied to our existing lifestyle: the same single-family homes, but with better insulation and lighting; the same single-occupant-vehicle commute, but with an electric car; and so forth. These assumptions are not necessarily warranted.

If builders are given increasing incentives to build green, then one of the best ways to do this is through building larger multifamily structures. This is for two reasons. First, residences in multifamily structures tend to use space more efficiently, and second, most energy loss occurs through the skin of a building, so that maximizing the ratio of habitable volume to surface area -- which larger structures intrinsically do -- increases the energy efficiency. There's no need to be theoretical about the magnitude of this effect; hard statistics are available. According to this report by the Energy Information Administration, multifamily structures with five or more units are, on average, 61% more energy-efficient than single-family houses:

61% is a *dramatic* difference -- and keep in mind that this is merely the national average, without any special attention paid to the energy-saving technologies shown in the McKinsey graph. Add those in, and improvements of 70% to 80% become feasible.

Of course, as long as builders are building larger structures, it's profitable to make them mixed-use. This, in turn, creates walkable neighbourhoods, and reduces the amount of driving that must be done -- whether in electric or fuel-efficient vehicles, or not. Higher-density neighbourhoods are more effectively and economically serviceable by public transit, further reducing energy consumption.

Multifamily housing, mixed-use neighbourhoods, and public transit aren't on the McKinsey chart, however, because they aren't isolated technologies. Yet in the long run -- particularly when accounting for the rapid urbanization in the developing world -- they probably account for the bulk of energy-saving potential.

Posted by: Nathan Koren on 8 Aug 08

Hi Jeremy:

Great article.

Another missed and misunderstood energy intensive industry sector that is not on the McKinsey Chart is Advertising and Media.

According to recent analysis by Veronis Suhler Stevenson (VSS) total advertising and marketing communications spending in the US is projected to be $924 billion in 2008 and is forecast to expand at a CAGR of 6.1% from 2007- 2012 to $1.2 trillion.

That $1.2 trillion in economic activity depends upon supply chains and media channels including papermaking, printing, mail, data centers, computers, cellphones, game consoles, LED bilboards, set top boxes and TVs. Together these supply chains and media channels consume hundreds of billions of kilowatt hours of electricity and emit hundreds of millions of tons of greenhouse gasses.

Neither print nor digital media supply chains or media channels are currently sustainable or carbon neutral, but they could be within ten years if advertisers and consumers make it a priority.

Two advertisers in particular are the two candidates for President of the United States. Each candidate will spend hundreds of millions of dollars on advertising this year. Over $4.5 billion will be spent on political advertising in 2008!

McCain and Obama should join in setting a nonpartisan example for other politicians as well as for all advertisers by making their ad campaigns carbon neutral and leading the way in terms of reducing the carbon footprint of media supply chains.

Imagine. Advertising supply chains as a driver of change in the energy Americans use by using Green IT and turning papermills into biorefineries.

ISC has written to both candidates but so far has gotten no response. Any suggestions?

Don Carli
Senior Research Fellow
The Institute for Sustainable Communication

Posted by: Don Carli on 8 Aug 08

While this seems to be a very rational approach, the problem here is that essentially nothing happens in the US and less so in other countries if someone can't make a profit. This extends to the Governmant as well in that the same forces are pressuring any plan tht will again make them a profit and pols are similarly responsive to lobbying and getting votes.
The building trades will support higher efficiency building codes etc. if they're made aware of this and will pressure the government to enact changes to the code --to their benefit etc!
Michael Rogers

Posted by: Michael Rogers on 10 Aug 08

Thanks, Jeremy. Viewing the horizontal as a scale rather than an absolute axis does clear things up a little, and makes the result for building insulation much more exciting. (It still suggests the results need presenting in a clearer fashion, though)

Posted by: Tony Fisk on 11 Aug 08



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