The Cost of Carbon Pricing on Energy-Efficient Housing in Australia

THE COST OF CARBON PRICING ON ENERGY-EFFICIENT HOUSING IN AUSTRALIA

THE COST OF CARBON PRICING ON ENERGY-EFFICIENT HOUSING IN AUSTRALIA In accordance with Australia’s commitment under the Kyoto Protocol, the building materials and construction industries need to reduce CO2-e emissions to no more than 108 per cent of 1990 levels. Assuming uniform contribution will be made across the entire economy, this is the sector’s equitable share. As could be expected however, the Australian Government has stipulated that any specific reduction measures would be introduced only after careful consideration of the capacity for each of the nation’s major sectors to meet emission targets.

For the residential building sector, this is not the case. The proposed Clean Energy Legislative Package establishes a blanket carbon pricing mechanism across the entire Australian economy. Whilst some of the nation’s most heavily burdened sectors will be supported through specific industry assistance, the residential building sector is not and, as a result, will be expected to absorb an imminent increase in the cost of major material and energy inputs. To add to the adversity, for the minority of owners or developers choosing to invest in sustainable housing, the increased energy embodied in the production of many efficient materials is likely to see their total investment rise disproportionately to that of the inefficient alternative. This creates the concern that in an effort to improve the welfare of the environment and the longevity of the Australian economy, the Clean Energy Legislative Package could inadvertently increase the potential for CO2-e emissions from within the building materials and construction industries. Through investigation into the source of emissions and the impact of the proposed legislation on the cost of energy inputs, this report results in several recommended amendments to the Clean Energy Legislative Package aimed at improving the overall stock and value of efficiently designed houses in Australia.

INTRODUCTION In July 2011 the Federal Government announced the details of The Clean Energy Legislative Package (CELP) as the foundation of its comprehensive climate change strategy. Under this proposed plan, by 2020 Australia will have removed a reported 159 million tonnes of greenhouse gas (GHG) emissions from its atmosphere per year, through the introduction of a price on CO2-e emissions (Chamber, 2011, p.1). Since details of the controversial CELP were first released, the carbon pricing mechanism has caused great concern across industry and media outlets as to who exactly will be liable to pay and what extent of impact it will have on Australia’s economic welfare.

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Construction is a primary driver of the Australian economy and the wellbeing of the industry is highly susceptible to the state of domestic markets. The intention of this research is to investigate rising concern that an introduction of the socalled “carbon tax” will be detrimental to the construction industry and, more specifically, the affordability of energyefficient housing in Australia. Housing affordability and the general state of Australian construction economics is of critical importance to future leaders of the architecture and construction management fields.

The impact of carbon pricing on the affordability of efficient housing will depend heavily on the design of the final legislative act and how it prices the embodied energy of the

building materials sector. Manufacturers will need to account for an increase cost of production, both in transport and energy supply, and it is unrealistic to believe that such costs will not be forwarded onto the consumer. If these costs are not properly abated, an introduction of the CELP as currently proposed could result in further increases to what is already reported to be one of the most overpriced property markets in the world (Demographia, 2011, p.9).

The research question imposed by this report is ‘How will the introduction of the Clean Energy Legislative Package 2011, as proposed, impact the cost of building materials and the overall affordability of energy efficient housing in Australia?’

In exploring this issue, the aim of the research is to improve the current stock of energy efficient housing in Australia through a recommended amendment to the Clean Energy Legislative Package 2011 draft.

In arriving at this final outcome, the objectives of this report include the following: Section 2.1 will provide a brief introduction into climate change, with discussion of Australia in respect to the global response; Review the Clean Energy Legislative Package 2011 draft, with specific focus on how its introduction will impact Australia’s building materials and construction industries. This will be carried out in Sections 2.2 – 2.3; Identify key aspects of the legislation likely to affect the residential building sector and the affordability of energy-efficient housing in Australia, covered in Sections 2.4– 2.5; Sections 2.6 – 2.8 will investigate the role of building materials selection on the embodied energy and overall life-cycle cost of a house; and Finally, Section 2.9 will conclude with a recommendation of amendments to be made to the current Clean Energy Legislative Package 2011.

LITERATURE REVIEW The following section provides a summary of current ideas pertaining to the impact of carbon pricing on the affordability of energy-efficient housing. To introduce the context of the CELP, Section 2.1 begins with an introduction of the notion of climate change, with a summary of the Australian and International response.

Section 2.2 follows with an outline of the CELP in relation to building materials, construction and the residential building sector, with a discussion of the impact on these industries in Sections 2.3 and 2.4. In relation to the third objective of the report, Section 2.5 explores the CO2-e emissions contribution of energy production in the context of efficient housing. This is proceeded by a thorough investigation into the impact of building materials selection on the embodied energy and overall life-cycle efficiency of a house in Sections 2.6 – 2.8.

To conclude, Section 2.9 summarises the challenges faced by energy-efficient housing and provides recommendation as to CELP amendments that would provide incentive and improve the efficiency of housing in Australia.

Climate Change Since the beginning of the Industrial Revolution around 1750, an everincreasing combustion of hydrocarbon fuels and depletion of carbon-absorbing forests has contributed to a rise in concentration of greenhouse gas (GHG) in the atmosphere. As a result of the past century in particular, the Earth’s mean surface temperature has risen at an

unusually rapid rate. According to data recorded by the United States’ National Aeronautics and Space Administration (NASA), between 1906 and 2005, the global average surface temperature rose 0.6 to 0.9 degrees Celsius (Administration, 2011). As Figure 1 shows, over the past 50 years the rate of temperature increase has nearly doubled (Administration, 2011).

Whilst the cause, impact and even existence of global warming is often disputed, the common accord amongst (Administration, 2011), the Commonwealth Scientific and Industrial Research Organisation (Preston and Jones, 2006) and almost all reputable scientific sources, is that climate change is real and, for the most part, human activity is to blame. The Intergovernmental Panel on Climate Change echoes this view in their Climate Change 2007 Report, concluding that it is very likely that human activity has caused most global warming since the mid-20th century (Change, 2007). According to NASA, the impact of increased surface temperatures will have far-reaching effects on the planet, with many changes already beginning to take place (Administration, 2011). In Australia, the CSIRO reports irrevocable harm to the country’s natural ecosystems, resources and general prosperity, as well as the increased frequency of extreme weather events (Preston and Jones, 2006). Whatever the impact, the general consensus is that it climate change does exist, it is already occurring and that it is best avoided.

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Global Response The United Nations Framework Convention on Climate Change (UNFCCC) entered into force on the 21st of March 1994 as the international authority in coordinating a global response to climate change. According to the Status of Ratification of the Convention, the UNFCCC enjoys near universal membership, with 195 parties as of May 2011 (Change, 2011). Initially implemented on the 11th of December 1997, the Kyoto Protocol to the UNFCCC (herein, the Protocol), sets compulsory national targets for the reduction or limitation of greenhouse gas (GHG) emissions.

As a means to administer emission targets, the Protocol also established international agreement upon six gases known to contribute to global warming; carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride (Nations, 1998, p.19). To provide a basis for comparing the warming effects of each of these gases, the carbon dioxide equivalency (CO2-e) scale has been developed. For a given type of greenhouse gas, CO2-e describes the concentration of carbon dioxide that would possess the same global warming potential (GWP). It is the internationally accepted standard for which to measure and compare GHG emissions.

These six gases are however not unique in their ability to warm the atmosphere.

As acknowledged by the Department of Climate Change and Energy Efficiency (DCCEE) in their National Greenhouse Gas Inventory, there exist at least six

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other indirect greenhouse gases not covered by the reporting provisions of the Protocol (Efficiency, 2011, p.xii).

For these gases, no GWP is available to enable their conversion to CO2-e and as a result, these emissions sources cannot be aggregated for inclusion in global emission reduction targets.

Australia’s Response As a signatory of the Kyoto Protocol on the 29th April 1998, Australia declared its intent to introduce a cap on the nation’s CO2-e emissions. Under the national obligation, the country is required to reduce current emissions to 108 per cent of its 1990 baseline level by 20082012 (Nations, 1998, p.20). As stated in Article 24 of the Protocol however, in signing, Australia has merely indicated its intention to commit to reducing emissions (Nations, 1998, p.17) and it wasn’t until the 3rd of December 2007 that the nation actually ratified its Kyoto agreement. Figure 2 is reproduced from the Australian Government’s April 2011 submission to the UNFCCC (Efficiency, 2011, p.27). It shows Australia’s 2009 GHG emissions at 30.0 per cent above 1990 levels – 22.0 per cent above Kyoto limits. These figures suggest that it is now seemingly unattainable for Australia to meet its assigned target by the 2012 deadline.

Clean Energy Legislative Package The CELP draft was opened to public comment on 28 July 2011 and has since been introduced into Federal Parliament.

According to the Clean Energy Bill 2011, as read before the House of Representative on the 13th September 2011, the

objective of the package, inter alia, is to “give effect to Australia’s obligations under the Kyoto Protocol” through a reduction in net CO2-e emissions to 80 per cent below 2000 levels by 2050 (Australia, 2011c, p.5). Whilst this revised target falls well outside the deadline set at Kyoto, it does demonstrate an ongoing commitment to reduce carbon pollution in Australia. Proviso that the Federal Government receives the expected ministerial support, the CELP will be put into effect as legislation from the 1st of July 2012.

Carbon Pricing Mechanism A current divide in Australian Parliament has promoted the issue of climate change to the top of the political agenda. Amid immense criticism and uncertainty surrounding its proposed climate change policy, the Federal Government has repeatedly come to the defence of the CELP by stating that only around 500 of the country’s largest polluters will be liable, with nine out of ten households to receive tax benefits to compensate for any passed down costs (Government, 2011a, p.1). According to the legislation, liable entities are those that directly emit GHG with carbon dioxide equivalence (CO2-e) of 25,000 tonnes or more in a single financial year (Australia, 2011c, p.33). The carbon pricing mechanism will require these companies to purchase ‘carbon units’ at a fixed price of $23 for every tonne of CO2-e they emit, with any unused units to be made available for trade with other polluters (Australia, 2011c, p.6).

From July 2015 onward, the pricing mechanism will transition to a trading scheme, whereby the market will determine the cost of carbon units. The

Federal Government has also indicated that it will assist emissions-intensive trade-exposed (EITE) industries through issuance of free carbon units under the Jobs and Competitiveness Program (Australia, 2011c, p.6).

Whilst details of the pricing mechanism are known, John Izzard of the conservative Quadrant magazine rightly states that the big question not being asked is “who are Australia’s 500 largest polluters and what industries are they in?” (Izzard, 2011).

to confidentiality concerns, Section 25 of the NGER Act includes caveats to protect businesses with commercially sensitive production data (Government, 2007, p.38). This means that the CO2-e emissions published by the NGER are not 100 per cent accurate or absolute.

Nevertheless, it is the only publicly available information that provides any real indication as to which companies may be responsible for paying the carbon tax.

The “500 Biggest Polluters”

National Greenhouse and Energy Reporting Scheme

The Federal Government’s ‘500 Biggest Polluting Companies’ fact sheet details a selection of business types liable under the new tax and includes their distribution

by State (Government, 2011a). It does not however list all business types affected, nor does it reveal the actual identity of any specific companies responsible for paying the tax. This fact sheet is perhaps more accurately labelled ‘political spin’ as it clearly aims to deceive the general population into believing that only ‘dirty’ industries such as mining and energy production will be exposed. As Izzard claims, “the focus on these two industries is government-driven” (Izzard, 2011). In the absence of any detailed information, the fact sheet declares that the estimates listed are largely based on emissions data reported under the National Greenhouse and Energy Reporting (NGER) Scheme (Government, 2011a). It further states, “Most Australian businesses that will be liable under the carbon pricing mechanism are businesses that already have reporting obligations under the NGER Act” (Government, 2011a). It is important to note however that due

The National Greenhouse and Energy Reporting Act 2007 establishes a mechanism for collecting and publishing GHG emissions, energy use and production data of Australian corporations (Government, 2007, p.2).

According to the DCCEE, an objective of the Act is to “inform the public about greenhouse gas emissions and energy flows by corporate groups in Australia” (Government, 2010). To facilitate this, corporations that meet the NGER threshold must report their annual totals to the Greenhouse and Energy Data Officer (GEDO) for publication on the DCCEE website. For 2009-10, the most recently published reporting period, the thresholds for reporting emissions and energy data are shown in Table 1. The NGER’s online records show however that the threshold for actually publishing a registered corporation’s reported data is much higher, at 125 kilotonnes (kt) of combined scope one and scope two CO2-e emissions (Government, 2010). As the DCCEE website explains, scope one emissions constitute the release of GHG as a direct result of the

corporation’s daily activities, whereas scope two emissions are those released indirectly in the process of generating electricity or other energy consumed by the corporation (Government, 2010). It also confirms that the NGER Act “will underpin the proposed carbon pricing scheme by providing the emissions data on which to base reporting obligations” (Government, 2010).

Impact on Building Materials and Construction Of 775 officially registered companies, only 299 reported their emissions data in the NGER’s Greenhouse and Energy Information Report 2009-10, released in April this year (Government, 2011d).

Bearing in mind the limitations of this data, it is possible to analyse this report and extrapolate a list of some companies likely to be subject to the carbon-pricing scheme. Table 2 has been prepared from the NGER 2009-10 data, showing some of those companies that operate primarily in the Australian building materials and construction industries. With the carbon price to be imposed at 25kt of scope one CO2-e emissions, the companies listed in this table provide somewhat of an indication as to which businesses are likely to be directly liable under the new tax.

Industry Assistance The NGER data and Table 2 suggest that in the building material and construction industries, large property developers, building contractors and manufacturers of cement, concrete, masonry, timber, plasterboard, steel, aluminium and glass will be most heavily impacted by the

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imposed conditions of the CELP. This is to some extent not surprising due to the energy intensive nature of these trades.

As stated previously, some industries that produce a lot of carbon pollution, but are restricted in their capacity to pass through costs in international markets, will receive assistance through the Jobs and Competitiveness Program (Government, 2011c). According to the Government’s definition of EITE sectors from their 2008 White Paper; steel, aluminum, cement and glass manufacturers will be eligible for assistance by up to 94.5 per cent (Government, 2008, p.28). Many other building material manufacturers however are excluded from this program, as it is believed their output will not be adversely affected by cheaper international competition.

The steel

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industry, as one of the most heavily burdened sectors under the carbon CELP, will also receive a further $300 million in Federal Government assistance through the proposed Steel Transformation Plan Bill 2011 (Government, 2011e).

Fuel Tax Arrangements Another significant source of emissions in the building materials and construction industries is through the use of liquefied fuels, either on site or in transportation.

Whilst the CO2-e emissions produced in the combustion of such fuels are excluded from the carbon pricing mechanism, subsequent fuel tax arrangements do feature as part of the CELP. According to the summary of legislative changes

produced by the Federal Government, amendments to the excise and customs tariff legislation will “impose an effective carbon price” on non-transport gaseous fuels (Government, 2011b, p.2). Similarly, changes to fuel tax legislation will reduce business fuel tax credits for the use of transport fuels to also create a price on carbon through the fuel tax system (Government, 2011b, p.2).

Indirect Impact Whilst not actively involved in building material production or construction per se, Table 3 highlights the potential GHG contributions of other activities and industries through the supply network.

Of the 775 NGER companies; 137 extract

coal and other finite resources (18 per cent); 87 are freight / transport logistics firms (11 per cent); 61 deal in electricity and natural gas (eight per cent); 42 in cement, chemical, metal and other industrial processing (five per cent); and 24 specialise in recycling and waste management (three per cent). These processes are not as prevalent as the Federal Government’s CELP fact sheet might suggest, however they do add significantly to the nation’s CO2-e account and, in some measure, to the indirect emissions of the building materials and construction industries. Although the CELP establishes blanket coverage to a broad range of industries and sectors, it is worth reiterating that the package is designed to target point source emissions, so that only facilities releasing

CO2-e emissions directly will be liable to pay under the new tax.

Impact on Residential Building The residential building industry for the most part adds to GHG emissions indirectly, primarily through the acquisition of materials and resources. For this reason there is uncertainly surrounding the exact impact of the CELP, however according to the HIA, “the residential building industry will be affected more than most” (Association, 2011). This outlook is echoed by Wilhelm Harnisch, Chief Executive Officer of Master Builders Australia (MBA), who in a statement on their website announced that without fundamental change, the MBA “could not

support the introduction of a carbon tax” (Harnisch, 2011). Harnisch explains that the MBA’s concerns stem from research carried out by the independent Centre for International Economics (CIE) in 2008, amid similar industry outcry surrounding the Federal Government’s now defunct Carbon Pollution Reduction Scheme (CPRS). At this time, it was estimated that the introduction of a price on carbon would result in a five per cent increase in the cost of building a new home (Harnisch, 2011). The CPRS was built upon a carbon cap-and-trade mechanism, where heavy polluters are restricted by the total amount of GHG they may emit, and companies that pollute less than their allowance can sell their used permits on the economic market. Whilst similar to the carbon tax in that they

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are both market-based approaches, the failed CPRS is a fundamentally distinct policy and should not influence the MBA’s opinion of the proposed CELP. To their credit, since releasing this online statement the MBA has again commissioned the CIE to research the impact of the new CELP on the building and construction industry. Although the final findings of this research are yet to be released, the preliminary report identifies a number of channels through which the proposed carbon pricing mechanism could impact the sector. According to the MBA’s submission this month to the Senate Inquiry into Carbon Tax Pricing Mechanisms, the CIE report found that the proposed tax would primarily impact the industry through an increase in the “absolute cost of materials and other [energy and labour] inputs” (Australia, 2011b, p.11).

Exposure of these industries is consistent with the findings of the NGER register analysis.

At $25 per tonne CO2-e (the closest scenario to the CELP’s $23 per tonne), CIE modeling found that cost increases would range from: 1.1 per cent for business services; 1.2 per cent for trade services; 1.6 per cent for wood products; 2.0 per cent for transport; 2.1 per cent for metal products; and 3.8 per cent for mineral products (Australia, 2011b, p.12). As a whole, a carbon price of $25 per tonne is expected to increase

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the cost of construction by between 1.1 and 1.6 per cent (Australia, 2011b, p.12). Based on the above data and the assumption of a linear relationship, the Federal Government’s $23 per tonne levy would then equate to an increase of approximately 1.0 and 1.5 per cent on the cost of new homes. Whilst the concerns of the MBA are worthy, with so many variables and uncertainties in the CIE’s modelling, these figures should only be considered arbitrary at best.

What is certain however is that although the industry does not emit significant quantities of GHG directly, the residential building sector will still feel the impact of the CELP. According to modelling undertaken by the Commonwealth Treasury and used by the Federal Government in crafting the CELP itself, an introduction of the proposed carbon pricing mechanism will reduce gross output in construction by 5.6 per cent over the next forty years (Australia, 2011a, p.107). This is notably higher than falls forecast for the mining (4.3 per cent), manufacturing (2.8 per cent) or service sectors (1.2 per cent) (Australia, 2011a, p.107). This imbalance is partially contributed to the fact that, whilst it is primary industries that will most often bear the initial cost of the carbon tax, these costs will inevitably flow down through the supply chain into the cost of housing and out of the pockets of investors. Since

the carbon pricing mechanism assumes a supply-side perspective, aimed at abating GHG emissions when fuel is consumed and energy is produced, the introduction of the CELP as currently drafted is likely to see the residential building industry overlooked. As an indirect recipient of the tax, the industry is not eligible to receive direct compensation but will still pay the carbon price through the higher cost of upstream energy inputs. To better appreciate the overall impact of the CELP and explore how the residential building industry can potentially benefit from its introduction, it is important to understand the relationship between energy production and GHG emissions.

Energy Related CO2-e Emissions The DCCEE’s most recent release of the national GHG inventory reports that in 2009, Australia’s net emissions across all sectors totalled 545.8 million tonnes (Mt) of CO2-e. As shown in Figure 3, carbon dioxide is the most prevalent of GHG’s in Australia’s inventory, comprising 73.4 per cent or 400.6 Mt of total CO2-e emissions.

This is followed by methane at 105.3 Mt or 19.3 per cent (Efficiency, 2011, p.27).

Carbon dioxide is released during the combustion of any carbon-containing material.

According the DCCEE’s National Greenhouse Gas Inventory, most carbon dioxide emissions in Australia arise from the combustion of coal, oil and

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natural gas (Efficiency, 2011, p.28). In fact, Table 4 as reproduced from (Lawson, 1996, p.12), shows exactly just how much CO2 emissions are attributable to these different fuel sources. These figures are complemented by Table 5, as reproduced from DCCEE’s Inventory, which shows that the energy sector is accountable for 380.8 Mt of carbon dioxide emissions and 417.4 Mt of CO2-e emissions in total (Efficiency, 2011, p.28). This equates to 95.0 per cent of Australia’s total carbon dioxide and 76.5 per cent, over three quarters, of Australia’s total CO2-e gases emissions. Whilst these statistics may seem high, when considering Australia’s energy production processes they are not surprising. Table 6 was attained from the Australian Bureau of Statistics (ABS) April 2011 release of the country’s most recent energy production data (Statistics, 2011).

It shows that in 2008-2009, 75.6 per cent of Australia’s energy was generated using heavily emission- intensive processes.

This figure could be as much as 99.6 per cent if the process of actually mining for uranium is taken into account.

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These figures demonstrate the tight correlation between energy production and CO2-e emissions in Australia. With over three quarters of the nation’s total emissions directly attributable to the energy sector, the introduction of the carbon pricing mechanism will generate a increase in energy costs more so than any other external input.

Industry Response The residential building sector, where almost all resources are energy-laden, recognizes the need to address CO2-e emissions not only from the perspective of global warming, but also to reduce the increasing cost of housing in Australia. As a minor contributor to CO2-e emissions directly but significant consumer of emissions-intensive products, the challenge for the industry is not to change the way in which energy is produced, but to change the way in which domestic buildings use it. How the industry might best respond to the consequences of the

CELP is realized through understanding of the sectors energy demands; that is, the life-cycle energy analysis of a residential building.

Life-Cycle Energy Analysis Buildings consume energy during every phase of their life; in material production and supply; construction; daily operation; end of life demolition and in potential re-use.

Most energy consumed by buildings comes in the form of electricity, natural gas or as liquefied fuels. It is what is known as delivered energy and is generally measured at the bowser or by the energy provider at the point of entry into a building or property. However delivered energy is not an accurate reflection of the total energy demand, as it fails to take into account the considerable amount of additional energy consumed in the process of supplying delivered energy to the end user (Fay et al., 2000, p.33). As explained in (Treloar, 1997) and again in (Fay et al., 2000), for every

unit of delivered electricity in Australia, an average of approximately 3.4 units of primary energy (such as coal) is required.

For this reason, life cycle energy analysis measures demand not by delivery, but by the total energy embodied in the production and supply of that consumed by the purchaser (Fay et al., 2000, p.33).

It terms of a building, life-cycle energy can be separated into three distinct energy inputs: initial embodied energy; annual recurrent embodied energy; and annual operating energy.

Embodied Energy Embodied energy is the total energy used in constructing and maintaining a building, from the acquisition of natural resources to their final consumption.

With increasing awareness of the importance of energy efficiency in the built environment, the embodied energy of buildings has been the focus of much research with contributions made by (Worth and Treloar, 1993), (Monahan and Powell, 2010) and (Milne, 2011) among others. One of the challenges of calculating embodied energy is that there are no definitive boundaries as to the extent of the assessment process. For this reason, it can be difficult to compare analysis results. The general consensus however is that the embodied energy analysis process of a building should encompass extensions of the upstream supply network including mining, manufacturing, transport and all other incorporated functions. As stated earlier, this not only includes all procurement in the initial construction of the building but also any recurrent embodied energy from renovation or annual maintenance.

Data from the Australian Bureau of Statistics (ABS) in 2003 show that energy embodied in existing Australian buildings at the time was equivalent to approximately 10 years worth of the total energy consumed by the entire nation (Statistics, 2003b, p.4).

According to (Milne, 2011, p.2), more recent studies by the CSIRO have found that the average household contains about 1,000 gigajoules in the materials used in construction. This is equivalent to approximately 15 years of average operational energy use and, for a house that lasts 100 years, equates to over 10 per cent of its life cycle energy use (Milne, 2011, p.2).

Operating Energy Figure 4.1, reproduced from a 2007 study by the CIE, shows that the operating energy of buildings accounts for nearly a fifth of Australia’s total energy

consumption. According to this data, the energy consumed by residential buildings alone contributes as much as 13 per cent to the country’s total GHG emissions. As shown in Figure 4.2, almost two-thirds of operating energy is used in heating water and maintaining thermal comfort and, according to many sources; this demand will continue to grow.

(Pears, 2003) suggests that as the mean surface temperature of the Earth rises, so too will the use of energy for cooling residential buildings as occupants attempt to maintain comfort. This theory is supported by official government energy use projections first published in (Economics, 2006) and reproduced in (Economics, 2007). According to this data, GHG emissions from the building sector are expected to increase from 130 Mt per annum in 2005 to as much as 210 Mt by 2030.

Current Trends in Residential Housing With so much investment now directed toward reducing energy use in all its forms, it is somewhat surprising to consider that residential emissions are forecast to rise. This is partly attributed to a growing population and the subsequent changing trend in residential housing. As cities become increasingly crowded, the market is experiencing a shift toward more medium and highdensity housing (Statistics, 2003a). This type of construction has limited potential for passive heating and cooling and generally requires more energy- intensive materials to satisfy strict Building Code of Australia (BCA) fire and sound transmission requirements. At the same time, traditional houses are increasing in size whilst household sizes decline (Statistics, 2007). As Alan Pears of RMIT University explains, this trend increases the per capita energy consumption of a house (Pears, 2003, p.4). Finally, with growing production of volume-built homes, the residential building sector is increasing its dependence on central heating and cooling.

It is important to note that heating and cooling still account for less than half of total energy demand, with the remainder consumed in the production of hot water and the use of lighting, appliances and other equipment (Figure 4.2). As such, reducing the high-emission energy used to power these services has been the subject of much research and development in the industry. The contribution of a building’s operating energy to GHG emissions is well documented, with recent contributions made by (Fay et al., 2000), (Pears, 2003),

(Economics, 2007) and (Committee, 2010). However, as previously indicated, there is a significant amount of additional emissions embodied in the delivery of operating energy to the end user.

Pricing Embodied Energy The CELP recognises the environmental implications of energy production through use of the NGER data and its segregation of scope one and scope two emissions.

Due to the nature of procurement in the building materials and construction industries, it is important to understand that the scope two emissions of an end user constitute some or all of the scope one emissions from their first tier suppliers. In brick making for example, the energy consumed by a company producing the bricks is metered at the factory boundary and is recorded as the brick maker’s direct, or scope one, energy requirement. According to the Life Cycle Energy Analysis process however, such measurement is incomplete because it fails to consider, for example, the energy required to extract clay from the earth and transport it to the factory gate. This is the indirect, scope two energy of the brick maker, and the direct, scope one energy of the excavation and transportation companies. With one supplier generally serving multiple consumers and any one process often requiring multiple suppliers, it becomes difficult trying to accurately quantify the exact embodied energy input of a company. For this reason, the CELP is well planned in that it is designed to consider scope one emissions only.

The advantage of this approach is that double counting of emissions is avoided, whilst the end user is still liable for the environmental implications of their energy demand, through an effective carbon tax passed down the supply chain. The other benefit of this system is that by relying on emissions data, as opposed to the energy data also available in the NGER register, the carbon pricing mechanism is imposed fairly across all CO2-e intensive energy production types. As Fay, Trelour and Iyer-Raniga explain, “if competing building materials or systems are manufactured using different fuel sources, then a comparison in delivered energy is likely to be invalid” (Fay et al., 2000, p.33).

Strategic Significance Life-cycle energy can be used to determine the overall environmental impact of a building. The aim of the analysis is to facilitate decision making concerning energy efficiency. Comparison of a building’s embodied energy to its operating energy can highlight possible life cycle energy conservation strategies.

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For example, as demonstrated in (Fay et al., 2000, p.31), thermal insulation has an embodied energy cost, but savings in operational energy as a result of its use will accrue over time. In fact, studies show that the embodied energy of insulation in Australia is paid back through life-cycle energy savings in around 12 years (Fay et al., 2000, p.31). Therefore, life-cycle energy analysis can be used to calculate total energy savings over a building’s useable life and the energy payback period of decisions made during the design phase. As explained in (Milne, 2011, p.2), the embodied energy levels in materials and delivered energy will be reduced as the efficiency of the industries producing them is improved. However the residential building industry could expedite this process by generating a demand for materials low in embodied energy.

Embodied Energy of Common Materials A typical embodied energy content of common residential building materials in Australia is provided in (Lawson, 1996) and (Milne, 2011), as reproduced in Table 7. Generally speaking, it shows the more highly processed a material the higher its embodied energy content (Milne, 2011, p.5). These figures should be used with caution however because, as noted by Milne, they do not take into account transportation, distance or recycled content (Milne, 2011, p.4). It is also important to note that materials with lower embodied energy, such as timber, concrete and bricks, may require higher levels of maintenance and are usually consumed in larger quantities. Materials such as aluminium or steel on the other hand, have much higher embodied energy but have a longer lifespan and are generally used in far smaller amounts.

As explained by Milne, this means that a building’s embodied energy can be inflated by either its high use of low energy materials such as concrete, or from a small quantity of high energy materials such as steel (Milne, 2011, p.5).

Embodied energy also varies significantly with different construction types and it is often more beneficial to assess alternatives as complete assemblies rather than individual materials. Table 8 lists approximate figures that have been calculated for a range of typical Australian construction systems by (Lawson, 1996).

These are complemented by the lifecycle energy of common housing types as reported by (Victoria, 2006) and reproduced in Table 9.

Assessing Embodied Energy Statistics from the Australian Greenhouse Office show that the embodied energy of a home’s construction, maintenance and renovations, generally equates to only around 40 per cent of the total operating energy consumed over a 100year life (Office, 1999, p.5). As explained in (Milne, 2011, p.1) however, operating energy depends on occupants and, as such, can be influenced throughout the building’s life. Disregarding maintenance and renovations, embodied energy is, on the other hand, incurred only once and should therefore be justified at the design stage in terms of its life-cycle cost. As Milne explains, in many cases a higher embodied energy level is acceptable if it contributes to a lower overall operating energy (Milne, 2011, p.2). To illustrate this point, research published in (Statistics, 2003b, p.4) shows the principal material used for the outside walls of 41 per cent of dwellings in Australia is cavity clay brick. As show in Table 8, when combined with an internal plasterboard lining with acrylic paint finish, this common assembly has one of the highest embodied energy amounts at 906 MJ / m2. Bricks used in this application have no structural role and although they embody more energy than say, weatherboard construction, in the right climatic conditions bricks provide higher savings in operating energy (Victoria, 2006, p.3). Alternatively life-cycle energy analysis could reveal that a lightweight cladding such as fibre cement has similar structural and thermal performance to bricks with a lower overall embodied energy (Reardon, 2011, p.4).

As the carbon pricing mechanism comes into effect and the cost of inputs rise, the efficiency and embodied energy of houses will become increasingly significant. The application of life-cycle energy analysis could therefore result in substantial savings in the cost of energy use over the projected life of a building (Fay et al., 2000, p.31). For example, use of materials high in thermal mass can significantly reduce heating and cooling demands in well designed and insulated passive solar homes (Milne, 2011, p.2).

Choosing the most efficient materials for a building takes consideration, as each material used needs to satisfy not only the design but also the location and expected lifetime of the dwelling.

The Downside of Efficient Materials In the southeast and southwest corners of Australia, where day and night temperatures vary greatly, higher levels of insulated thermal mass can significantly reduce the energy used for heating and cooling. In these areas, as the efficiency

of buildings increase, so too does the ratio of embodied energy (O’Brien, 2010). This means that when the carbon pricing mechanism is introduced in July next year, the cost of building an efficient house in the temperate regions of Australia will rise disproportionately to that of an inefficient, low thermal mass dwelling. The concern is that savings in upfront cost may persuade uninformed homeowners or conservative developers into specifying poorly insulated cladding that ends up costing the occupant more in operating energy over the life of the building.

As highlighted in (Milne, 2011), there are situations however where a lightweight building could result in the lowest overall life-cycle energy use.

For example, there is little sense in building a house of heavyweight construction high in thermal mass when heating and cooling requirements are minimal, or when other necessary passive design principals cannot be applied (Milne, 2011, p.6).

In this circumstance the homebuilder may benefit from a lower cost of both construction and in maintaining thermal comfort, but would have to tolerate lower structural integrity and a higher cost of maintenance.

Towards Energy Efficiency Energy efficiency is best achieved through intelligent material selection, based on climate, location, availability and budget, balanced against life cycle energy cost. With almost a fifth of energy consumed in Australia attributable to the building sector, it is acknowledged that the industry must face the challenge of becoming more environmentally sensitive whilst remaining economically efficient (Office, 1999). According to Harnisch however, what should be recognised is that the building industry is already playing a proactive role through increased mandatory efficiency measures (Harnisch, 2011).

The Building Code of Australia The concept of energy efficiency has been promoted on the industry’s agenda by the inclusion of minimum sustainability requirements in the BCA. According to (O’Brien, 2010), by simply relying on increased energy efficiency however, the BCA requirements as currently written are placing an inequitable burden on the sector. O’Brien suggests that through better communication and education within the sector, significant sustainability improvements can be achieved at no additional cost by consideration of the operational and embodied energy

The Cost of Carbon Pricing on Energy-Efficient Housing in Australia | 12

impacts (O’Brien, 2010). These measures will see CO2-e emissions reduce over time and, in the opinion of some, should be taken into account in the design of the CELP (Harnisch, 2011). As Harnisch explains, “clients, investors and new home buyers are already paying for a lower carbon emissions future [through requirements of the BCA] and from the 1st of July 2012, will be asked to pay even more” (Harnisch, 2011).

Barriers to Change There are significant challenges preventing an extensive adoption of energy efficiency measures in the residential building sector. As discussed by (Economics, 2007) and reiterated by (O’Brien, 2010), one such barrier is education. At the present time, too many consumers don’t understand the consequences of their energy use or how to improve their energy habits.

Furthermore, as the CIE explains, if building users wanted to better their energy efficiency, or specifically select a building based on energy performance, they currently face problems in accessing information about a building’s efficiency (Economics, 2007, p.10).

Another widely recognised barrier to achieving energy efficiency in residential buildings is the issue of split incentives, with contributions on the matter made by (Pears, 2003), (Economics, 2007), (Committee, 2010) and (Garnaut, 2011).

Split incentives, also at times referred to as the principal–agent problem, arise when one individual is charged with making a decision about a building, but another individual is responsible for the ongoing cost of that decision. As Garnaut explains, “the party who makes a decision (for example, the landlord) is not driven by the same considerations as another party who is affected by it (for example, the tenant)” (Garnaut, 2011, p.163). Typically it is building owners that bear the expense of raising energy efficiency whilst users receive the benefit.

As noted by Pears, in 2003 over a quarter of houses in Australia were rented, with occupants having little influence on the energy efficiency of the building whilst landlords had little interest in reducing energy bills (Pears, 2003, p.4). As the number of rented properties in Australia increases in wake of ever-inflating house prices, there is concern among some that the issue of split incentives will continue to hinder the adoption of energy efficiency measures within the industry. It is worth noting however that the perception of split incentives as a barrier to improving energy efficiency is disputed by some industry sources. As acknowledged by (Committee, 2010, p.10), a 2010 report

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by Citigroup Global Markets claims that if an owner invests in energy efficiency measures to save the tenant’s energy costs, this should eventually be reflected in increased rent. The reality of the issue however is that until GHG emissions are priced, measures to reduce them generally go unrewarded without some form of additional government or industry based incentive (Economics, 2007, p.10).

Recommended Amendments to the Clean Energy Legislative Package To overcome these barriers and stimulate energy efficiency within the residential building sector, a sensible policy framework is required. Mandatory programs are good for achieving their intended results, but if poorly designed or implemented, can also deliver unintended consequences. In the case of the CELP, by blindly targeting all emission sources without considering their potential for creating life-time CO2-e savings, the carbon pricing mechanism could inadvertently increase emissions in the building sector by decreasing the life-cycle benefit of building energy efficient homes. To resolve this oversight and improve Australia’s prohibitive housing market, it is recommended that additional government incentives be introduced via the following amendment to the proposed CELP. Offsetting the Impact on Affordability With the NGER policy already in place, targeting scope one emissions is still the fairest and most easily implemented method of introducing a price on carbon.

Since it is unlikely that the policy could be distorted to avoid taxing emissions known to contribute to greater energy efficiency processes, it is inevitable that cost of producing energy intensive materials will rise. The issue is not whether such costs are more than offset by the total value of life-cycle energy saved, but instead whether or not investors can continue to afford the upfront expense of building sustainable homes. Reality is that there currently exists very little direct incentive within the market to improve housing efficiency, especially when large costs are involved. With an overriding desire to minimise capital expense, investors rarely insist on measures that directly improve the energy efficiency of a building. As previously discussed, the issue of splitincentives also means that unless the eventual occupant commissions the build, there is little motivation to improve home energy performance.

The Australian Greenhouse Office notes that there would be some indirect market pressure if energy efficient homes commanded a higher price (Office, 1999, p.6). This is

one objective of building energy rating programs such as Green Star in Australia, however in the eight years since its launch this initiative has yet to show any major influence on market behavior.

Considering the CO2-e contributions of energy use in residential buildings, there has been very little emphasis placed on supporting the construction of energy-efficient homes. There are many suggested avenues available to government energy-intervention, with ideas ranging from the simple mandatory disclosure of environmental performance (2008), to discounted taxes and subsidized mortgages (Hal, 2007), to economic subsidiaries and low-interest government loans (Ashe, 2003). In an idea proposed by (Pears, 2003, p.5), the level of energy efficiency of a building should be reflected in the amount of payment received via the Federal Government’s First Home Owner Grant (FHOG).

What Pears neglects to consider however, is that the FHOG is floated against the political and economic climate of the day and, when raised too high, it is attributed to having drastically inflated the housing market.

However the support be provided, it needs to be carefully targeted to the point that the government can guarantee any compensation will be utilized to the benefit of reduced energy consumption.

To offset the impact on affordability, it is hereby recommended that a dedicated portion of revenue from the CELP go to a series of unique home-efficiency grants.

These grants should be payable directly to the owner or developer of a property, thus independent of industry or other investment schemes.

It is proposed that the grant could instead be linked to the existing Green Star Energy Rating Scheme, with each grant made payable as the next level of energy star-rating is achieved. As acknowledged by (Office, 1999, p.7), (Economics, 2007, p.10) and (O’Brien, 2010, p.1) among others, many energy-efficient measures can be implemented during the design process at close to zero cost. By linking the grants to the home energy-rating scheme, this means that new home builders would be rewarded for the inclusion of key energy efficiency measures at the time of construction and would be encouraged to continue to invest further into the energy efficiency of their home. The value of each grant would increase proportionately to suit the total cost of achieving higher star ratings, with the intention that the money would assist in offsetting costs thus bring energy-efficient measures closer in line to lesser-efficient alternatives. A fluctuating political atmosphere should not influence home- efficiency, therefore unlike the FHOG, the proposed grants would remain

static. They should however decrease in line with innovation and the expected payback period of energy investment; similar to current schemes aimed at offsetting the cost of photovoltaic cells and solar hot water.

Residential buildings have a long useful life and consequently, new buildings account for only around one to two per cent of total stock in any given year (Economics, 2007, p.10). Furthermore, according to (Office, 1999, p.6), the net demolition rate is far lower – in the order of 0.5 per cent. This means that decisions made during construction will continue to impact energy and emissions for many years to come and, to achieve meaningful change in the energy consumption of residential buildings, significant reinvestment in Australia’s existing housing stock is required. The benefit of linking incentives to the home energyrating scheme is that, unlike the FHOG where over ten years only around 20 per cent of total housing stock is affected, the proposed CELP amendment provides 100 per cent of home owners with a stimulus to improve the energy efficiency of their property (Office, 1999, p.6). At the same time, the grant should be seen by the government as a significant investment; not only through boosting turnover and employment in one of the nation’s largest sectors but also working toward removing old, inefficient dwellings from Australia’s housing stock.

Complementary Measures Perhaps the single most affordable and effective measures of reducing CO2-e emissions in residential buildings is by promoting the significance of energy use.

One such method of improving consumer awareness previously trialled in the Australian Capital Territory is through the mandatory disclosure of energy efficiency performance upon sale or lease of a new home. Results from the trial, as published in (2008) showed that when buyers were informed of a building’s certified energy performance, the potential cost saving of efficient dwellings reflected in higher average sale prices. In effect, this process allows sellers to share the high cost of energy efficient investment across multiple owners over the life of the building. A similar mandatory energy reporting process could be implemented as part of the CELP amendments, with the benefit of increasing value in efficiency and deflating the exorbitant cost of poorly designed homes. In addition, this strategy would allow the government to develop a database of home efficiency across Australia.

CONCLUSION The CELP is an opportunity for Australia to demonstrate to the world its progression in responding to the global challenge of climate change. According to the current knowledge of the proposed legislation, it is understood that the introduction of the carbon pricing mechanism will go a long way to securing Australia’s economic future, through a blanket reduction in the nation’s most significant CO2-e outputs. Independent investigation into the NGER’s list of most heavily polluting companies confirms that building materials and construction industries will be liable under the proposed tax, as both a source of direct emissions and a heavy consumer of indirect energy inputs. As for the residential building sector, manufacturers of materials high in embodied energy will be especially hard hit, as will consumers with particularly high operating energy demands.

In line with the overarching intention of the carbon pricing mechanism, the most effective way to lessen the impact of the CELP is to reduce consumption and subsequently minimize production of Australia’s CO2-e intensive energy. With regard to housing, this can be achieved through increased investment in the energy- efficiency of residential dwellings.

However under the currently proposed carbon pricing mechanism, the cost of developing efficient housing is likely to rise due to the energy-intensive nature of the construction process. With little in the way of incentives for investing in energyefficient housing, the CELP possesses the potential to act detrimentally to the reduction of CO2-e emissions from the Australia’s residential building stock, by promoting the construction of cheap, inefficient housing.

To avoid this outcome and instead work toward stimulating investment in sustainable housing, it is recommended that the CELP include provisions to offset the increased cost of energyefficient materials. Such incentives could be financed through a portion of the revenue earned from the carbon pricing strategy, and implemented in the form of home-efficiency grants. It is further recommended that the proposed grants be linked to existing home-energy rating schemes, so to provide varying levels of incentive for all home owners to invest in the long-term energy improvement of their property. The benefits of such a system as discussed, are that it would remain static amid changes in the market and could be slowly phased out over time as the general efficiency of technologies and processes improve. A governmentbased incentive such as this would help to

eradicate the current barriers to change within the industry and would go a long way to improving the overall efficiency and lowering the CO2-e emissions of Australia’s present and future housing stock.

Through the implementation of complementary energy disclosure measures, the introduction of the CELP could be used to highlight the perceivable value of energy-efficient houses and bring into line the excessive cost of inefficient homes.

Recommendations for further research Whilst this study used existing ideas and sources of data in constructing the recommended changes, further research could be useful in validating or quantifying the specific changes to the CELP. As alluded to in the report, outside the NGER data, the availability of information regarding the CO2-e emissions of Australian companies is sparse, and even the NGER data that is made publicly available can be deceiving at times. For this reason, further research could be beneficial in uncovering exactly which companies and industries are most heavily burdened by the conditions of the CELP. A further study of the more significant building elements is also recommended to ascertain which materials most notably benefit the efficiency of residential housing. This research could also be extended to quantify the exact impact of the embodied energy in relation to the life-cycle cost.

Finally, current levels of public and industry awareness suggest that the significance of embodied and operating energy in contributing to the nation’s CO2-e emissions is not well understood. To effectively change the marketplace over time, strategies need to be developed to inform, educate and ultimately empower consumers.

This dissertation was submitted in fulfillment of the requirements for the degree of Bachelor of Design (Architecture) / Bachelor of Construction Management, Deakin University, Oct 2011.

The Cost of Carbon Pricing on Energy-Efficient Housing in Australia | 14

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