Carbon Tax To Spur Remodeling
The built environment is a tool to reduce carbon emissions
Intro
The Intergovernmental Panel on Climate Change (IPCC) recently released a report on the impacts of a 1.5C increase in temperatures above 1970 levels. As part of the report the recommendation was to implement a carbon tax. Another related news item over the last few weeks was that Professor William Nordhaus of Yale received the Nobel Prize in Economics for his work on carbon taxes. Below is a quote from Professor Nordhaus.
“The policies are lagging very, very far — miles, miles, miles behind the science and what needs to be done. It’s hard to be optimistic. And we’re actually going backward in the United States with the disastrous policies of the Trump administration.” — Professor Nordhaus
How to set a price on Carbon
Even if we can get alignment on the idea of a carbon tax we face an iceberg problem where the majority of the challenge lies below the surface. This includes how to price the cost of emissions and what emissions to tax. I’ll focus on how to price carbon emissions in this post.
There are two approaches that could be taken to assess the cost of carbon emissions and thus what to set as a carbon tax. A tax can be adjusted to drive behavior changes, but tax changes are very complicated due to the politics that surround our economy.
1. Cost of Carbon Abatement
One of the most impactful charts for me when I was early in studying the impacts of carbon emissions was a report on the cost of abatement from McKinsey & Company. The below chart lays out the various ways we can mitigate carbon emissions. One of the great aspects is the first 15 GtCO2 have a positive return on investment. At the far extreme the cost of carbon gets up to ~$80 per tCO2e. To achieve the goals of stopping climate change we will likely need to be in the ~30 GtCO2e, which would be a price of around $30/tCO2e.
2. Social Cost of Carbon Emissions
An alternative approach is to evaluate the cost of carbon emissions over time and then discount those impacts to present dollars. Here is an overview statement on how the US Environmental Protection Agency (EPA) has estimated the cost of carbon emissions.
EPA and other federal agencies use estimates of the social cost of carbon (SC-CO2) to value the climate impacts of rulemakings. The SC-CO2 is a measure, in dollars, of the long-term damage done by a ton of carbon dioxide (CO2) emissions in a given year.
The Obama administration had done an assessment that pegged the Social Cost of Carbon at $50 tCO2e and Trump has reduced it to ~$1. The graph below shows how the cost rises over time due to impact and discounting.
Sources of Emissions
Carbon Emissions are largely driven by the burning of fossil fuels, gas, coal, and oil. There are naturally occurring carbon emissions that come from leaves falling off trees and decomposing, forest fires and volcanic eruptions. Animals are another source of emissions, especially livestock used for meat production.
A positive for the construction market is it represents a small percent of the greenhouse gas emissions, though as described below the true cost of a building is the energy usage.
The role of the built environment
The two main drivers of emissions for the built environment are the 1) costs associated with building or remodeling and 2) energy usage of the homes.
- Emissions for a new residential home in the US is ~21 tCO2e (based on EIO-LCA)
- Emissions each year for heating, cooling, power, and cooking is ~ 6 tCO2e (UCS)
Assuming 50 years before a major remodel then <10% of emissions come from building the home. As a result, the focus on the built environment should be around energy efficiency of the home. Here are a few of the systems that could help:
- Windows (see my post on smart windows)
- Heating and Cooling (see my post on smart HVAC systems)
- Lighting (see my post on the history of the light bulb)
- Roofing (see my post on green roofs)
- Water Heater (tankless water heaters mean you only heat water when you need it)
- Insulation (increasing insulation limits heat loss/gain through walls, floors, ceiling that contribute to higher heating and cooling loads)
I also discussed Solar Roofs as a way to generate energy to offset your carbon footprint.
Carbon Tax meet the Built World
If you assumed $50/tCO2e then the cost of a new home could increase $1000 to build and ~$200 for a large remodel. For a new house, this would be less than a 0.3% increase in the price of a new home. On an annual basis, it could cost $300 to handle the emissions due to electricity and gas consumption.
The benefit is that a carbon tax could spur investment in energy efficiency projects and increase the already positive ROI on these projects. Clearly, items like LED lights that have such a high ROI have already taken over the market. Though new roofing and window solutions have a higher investment cost and smaller ROI.
Energy efficient windows can save 12–33% of total energy costs which would lower costs $100-$300 per year (Energy.gov). This could also result in an addition $50 in savings per year due to lower carbon emissions, a 15%-50% increase in the savings.
In Closing
A carbon tax has the power to transform behavior. Taxes are designed to reduce consumption of that good. Unlike income, carbon is something that deserves to be taxed. As a society, we will be better off with lower carbon emissions.
There is still debate to be had on who bears the brunt of this tax. As cities get more expensive the lower incomes are pushed further from their jobs and thus would face a higher burden from a carbon tax. Until the social justice component is solved it is likely that the left will remain divided while the right continues to deny carbon emissions' impact on the climate.
I’m hopeful that we’ll see change. Watch the State of Washington’s carbon fee initiative to see whether a left-leaning state will support an initiative that will raise the costs of living.
