On the economics of energy labels in the housing market

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Abstract

Energy efficiency in the residential housing market can play an important role in the reduction of global carbon emissions. This paper reports the first evidence on the market adoption and economic implications of energy performance certificates implemented by the European Union. The results show that adoption rates are low and declining over time, coinciding with a negative sentiment regarding the label in the popular media. Labels are clustered among smaller, post-war homes in neighborhoods with more difficult selling conditions. We also document that geographic variation in the adoption rate of energy labels is positively related to the fraction of “green” voters during the 2006 national elections. Within the sample of labeled homes, the energy label creates transparency in the energy efficiency of dwellings. Our analysis shows that consumers capitalize this information into the price of their prospective homes.

Introduction

The current focus on carbon abatement has lead to increased attention on energy efficiency in the built environment, which offers substantial opportunities for the reduction of greenhouse gasses [12], [28]. Although building codes have generally been mildly effective in reducing energy consumption [3], [18], globally policy makers target the real estate sector with stricter energy-efficiency standards and mandates. For instance, the European Union implemented the Energy Performance of Buildings Directive (EPBD) in January 2003 with the explicit goal of promoting energy performance improvements in buildings. The Directive, which was recently recast, includes an explicit element on the disclosure of energy performance in buildings: “…Member states shall ensure that, when buildings are constructed, sold or rented out, an energy performance certificate is made available to the owner or by the owner to the prospective buyer or tenant.”1 The Directive has lead to the implementation of national Energy Performance Certificates (EPCs) for residential dwellings as well as utility buildings (e.g., office, retail, schools, and healthcare facilities) across the European Union.

The introduction of energy labels can be viewed as an additional step to enhance the transparency of energy consumption in the real estate sector. Greater transparency may enable private and corporate occupiers to take energy efficiency into account when making housing decisions. Recent evidence shows that providing feedback to private consumers with respect to their energy consumption is an effective “nudge” to improve energy efficiency [4], [8]. From an economic perspective, the energy label could have financial utility for both real estate investors and tenants, as the energy savings resulting from more efficient building may result in lower operating costs and higher property values.

However, evidence regarding the implementation and valuation of energy labels is limited, the diffusion and uptake of energy labels across Europe has been slow, and private consumers are uncertain about the value represented by labels that indicate some level of modeled energy efficiency.

This paper is the first to empirically address the implementation of energy labels under a large-scale certification program in the European Union. Using a standardized measure to reflect the thermal efficiency of a structure, we study the determinants of the adoption of energy performance certificates and the consequent economic implications in the residential housing market. We use the Netherlands as a laboratory, as energy performance certification for homes was introduced in the Netherlands in January 2008, one year before the official introduction date prescribed by the European Union. Energy conservation is presumably quite important for Dutch residents, as the average energy bill of a Dutch household was €152 per month in 2009 (€53 for electricity and €99 for gas), ranging from €105 for the most energy efficient homes to €231 for the least energy efficient homes. For some households, energy costs represent almost half of the total monthly housing expense.

Energy performance certification is not fully mandatory in the Netherlands: homebuyers are allowed to sign a waiver that obviates the seller's obligation to certify the dwelling. Based on some 177,000 housing transactions from January 2008 through August 2009, we find that during the first three months of 2008, more than 25 percent of all housing transactions had an energy label. Soon after, the adoption rate of energy labels started to decline, eventually reaching an adoption rate of less than seven percent of the 150,000 homes that were for sale as of September 2009. This sharp decrease in the adoption rate coincides with a negative sentiment created by the main bodies in the real estate industry, such as the Association of Realtors and the Association of Homeowners. Our “News Index,” based on counts of negative or positive reporting on the energy label in the popular press, leads the energy label adoption curve by some three months.

Our empirical results show that the choice of certification is also determined by the quality of a dwelling. We find that more heterogeneous homes, constructed post-war and during the seventies and eighties, located in high-density and low-income areas are significantly more likely to obtain an energy label. The thermal characteristics of a dwelling, like insulation and the heating system, do not influence the certification decision. Our results also provide some indication of ideology as an explanation for the adoption of energy labels: adoption rates are higher among homeowners that voted for “green” political parties during the 2006 national elections.

We then turn to the market implications of the energy label. The label seems to fulfill its informational role and has a moderately powerful market signal. We track the transaction process of some 32,000 labeled homes and document a positive relation between the energy efficiency of a dwelling and its transaction price. Using the Heckman [17] two-step method, we find that homes with a “green” label sell at a premium of 3.6 percent relative to otherwise comparable dwellings with non-green labels. This transaction premium varies with the outcome of the label, and calculations indicate that this variation can be partially explained by the underlying energy consumption of the dwelling.

This paper contributes to the early literature on the capitalization of thermal efficiency in residential dwellings [9], [14], [22]. It also contributes to a more recent, growing literature on the economic implications of energy efficiency and sustainability labels in the real estate sector, which has thus far predominantly addressed the commercial property market [10], [11], [13]. The paper also relates to the fast-growing literature on environmentalism and consumer choice [16], [19] that increasingly focuses on residential energy consumption [7], [8]. For policy makers, the results of this paper may shed light on the main assumption underlying the widespread implementation of energy rating systems: the ability of the market to capitalize energy efficiency in investment decisions. It may also help to further refine energy performance certification programs and stimulate increased market demand for energy labels.

The next section of this paper is a brief review of the literature on energy efficiency in the built environment. Section 3 discusses the various programs of energy performance certification in the real estate sector and provides more details on the European energy performance certification program. Section 4 describes the data and provides descriptive statistics. Section 5 discusses the empirical results and Section 6 concludes.

Section snippets

Related literature

Models attempting to predict future residential energy consumption not only take the housing stock and its projected growth into account, but also demographic, social, and behavioral characteristics of the occupants [5], [20]. To ultimately reduce the carbon footprint of the real estate sector, demand from occupiers and investors for more energy-efficient real estate is necessary. Glaeser and Kahn [15] argue that if the carbon externality were appropriately priced, costs per household would

Energy performance certification and the EPBD

Various national governments have initiated rating systems that measure the extent to which both residential dwellings and commercial buildings adhere to energy efficiency standards. The Energy Star program, a joint initiative by the U.S. Department of Energy and the U.S. Environmental Protection Agency, is a long-running and notable example. Residential buildings can receive an Energy Star certification if they are at least 15 percent more energy efficient than homes built to the 2004

Data sources

Agentschap NL, an agency of the Dutch Ministry of Economic Affairs, exerts quality control and maintains registration of the energy performance certificates in the Netherlands. We have access to the database of this organization, which provides information on the energy performance rating, the address, and some physical building characteristics of all buildings with an energy performance certificate. As of September 2009, more than 100,000 residential homes (rental and owner-occupied) had been

The adoption process of energy performance certificates

To better understand the adoption process of energy performance certificates in the Dutch housing market, and to more formally explore the determinants of label adoption, we estimate the following logit model:Pr(EPC)i=α+βiXi+δnLn+ρgc+pp=1λppp+εiwhere EPCi is the binary variable with a value of one if transacted dwelling i has an energy performance certificate, and zero otherwise. Xi represents a vector of quality characteristics of a dwelling, such as size, age, and building quality. Ln is a

Conclusions

Energy efficiency improvements in the residential housing market can play an important role in the reduction of global carbon emissions. Besides more traditional policies, such as stricter buildings codes, energy labels can be instrumental in resolving information asymmetries regarding the energy performance of private dwellings and commercial buildings. The information provided by energy labels may thus encourage energy conservation in the housing sector. This paper reports the first evidence

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Financial support for this research has been provided by the Mistra Foundation, Sweden, the Royal Institution for Chartered Surveyors, and RSM Erasmus, the Netherlands. Nils Kok is grateful for the financial support from the Netherlands Organization for Scientific Research (NWO). We thank the editor, two anonymous referees, Christopher Knittel, Matthew Turner, John Quigley, and participants at the 2009 Berkeley Conference on “Green Building, The Economy, and Public Policy,” for helpful comments. We are grateful to Agentschap NL, the Dutch Association of Realtors (NVM), and the Central Bureau of Statistics (CBS) for their generous supply of data. Jacco Menne provided excellent research assistance. All errors pertain to the authors.

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