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0% APR Financing. Green buildings deserve to cost the same amount up front as the least costly alternative.


Description

The fact that official organizations within the United States exist for the certification of what is known as a 'green' building facilitates a process whereby an interest-free financial scheme can be set up for artificially leveling the playing field for architects and construction firms.

The basic idea is a basic effort by both parties, preferably one financial specialist within the construction firm responsible for the majority of the work and one financial specialist within an organization (such as the USGBC or green building firms), to develop a best-estimate for conventional construction cost estimates in a parallel-blind fashion. Eventually, after a randomly chosen maturation time by an arbitrator (e.g., government or NGO or NPO), the two estimates are evaluated. The prices are then averaged out, regardless of disparity.

The cost of the estimation is not thought to be drastically more involved than conventional work in cost estimation before construction. 

This occurs while the construction contractor and subcontractors all design the sustainable design, to the most superlative rating (for example, a LEED-platinum building).

Then, using a regulated electronic accounting process, the customer (who oversees and pays for the entire project) only pays the equivalent non-sustainable cost up front, without any interest on the amount owed indefinitely. This is because the money to be payed back is only stagnated in a "negative reserve" without being exploited by any other financial motive. Another way to view this is that because the owed money is being payed for only virtual sustainable progress (e.g. decarbonizing energy usage in the non-sustainable building that would have been otherwise built), that money should be interest-free. The only change in the owed money should be adjustment due to inflation.

So long as the engineering time to produce a sustainable (e.g., LEED-platinum) building is identical to that required to produced a non-sustainable building, and given the labor in financial cost difference estimation by both parties amounts to roughly two orders of magnitude smaller than the project cost, this scheme is a worthy goal.

The full cost of the sustainable building is paid off slowly by regular payments priced up to non-sustainable energy consumption by the tenant(s) occupying the building (most likely the customer), even though the building is really saving energy from the start. The electronic accounting body is then able to track the difference between the sustainable and non-sustainable payments on recurring resource usage, and this amount is regularly subtracted off the money owed (the "negative reserve"). Different intensities of payment can also be expected, from customers that can afford more per payment.

In the end, businesses don't care about what's right or wrong. Customers want to pay for projects which does not have a frightening up-front principal, instead preferring to finance projects over the long-term.

Summary

Currently, the installment of environmentally sound features in green buildings cause the price of the building to be substantially greater than the conventional.

We shall attempt to eliminate this up-front cost by virtually "masking" the process: one tries to pay for what is in reality a green building as closely as possible to how one actually prices out a conventional building.


Category of the action

Building efficiency, Social Action


What actions do you propose?

The fact that official organizations within the United States exist for the certification of what is known as a 'green' building facilitates a process whereby an interest-free financial scheme can be set up for artificially leveling the playing field for architects and construction firms.

The basic idea is a basic effort by both parties, preferably one financial specialist within the construction firm responsible for the majority of the work and one financial specialist within an organization (such as the USGBC or green building firms), to develop a best-estimate for conventional construction cost estimates in a parallel-blind fashion. Eventually, after a randomly chosen maturation time by an arbitrator (e.g., government or NGO or NPO), the two estimates are evaluated. The prices are then averaged out, regardless of disparity.

The cost of the estimation is not thought to be drastically more involved than conventional work in cost estimation before construction. 

This occurs while the construction contractor and subcontractors all design the sustainable design, to the most superlative rating (for example, a LEED-platinum building - a building certified at the highest level according to the Leadership in Energy and Environmental Design ratings).

Then, using a regulated electronic accounting process, the customer (who oversees and pays for the entire project) only pays the equivalent non-sustainable cost up front, without any interest on the amount owed indefinitely. This is because the money to be payed back is only stagnated in a "negative reserve" without being exploited by any other financial motive. Another way to view this is that because the owed money is being payed for only virtual sustainable progress (e.g. decarbonizing energy usage in the non-sustainable building that would have been otherwise built), that money should be interest-free. The only change in the owed money should be adjustment due to inflation.

So long as the engineering time to produce a sustainable (e.g., LEED-platinum) building is identical to that required to produced a non-sustainable building, and given the labor in financial cost difference estimation by both parties amounts to roughly two orders of magnitude smaller than the project cost, this scheme is a worthy goal.

The full cost of the sustainable building is paid off slowly by regular payments priced up to non-sustainable energy consumption by the tenant(s) occupying the building (most likely the customer), even though the building is really saving energy from the start. The electronic accounting body is then able to track the difference between the sustainable and non-sustainable payments on recurring resource usage, and this amount is regularly subtracted off the money owed (the "negative reserve"). Different intensities of payment can also be expected, from customers that can afford more per payment.

The banks, being worried that ceasing an interest on a loan may not generate enough revenue, are instead offered some other form of incentive to grant such loans. These are "green credits" which is almost like imaginary money, but holds considerable public influence over whether the bank is eco-conscious. It may be possible to define such "green credits" basically as the sum of all planetary environmental savings (e.g., fractional natural disaster prevention) which are accumulated over the lifetime of the building.  When a bank actually advertises it has a hand in preventing disaster, that image conjures up the equivalent to lives saved or, likewise, donations to a charity.

More detailed definitions of such a "green credit" system remains elusive to define. It could be accounted for by the government or a third party. It could even be defined as a bank's stakeholder share in utilities, which reap immediate benefits off of a zero-interest scheme.

In the end, businesses don't care about what's right or wrong. Customers want to pay for projects which do not have a frightening up-front principal, instead preferring to finance projects over the long-term.


Who will take these actions?

There would be six major parties in the execution of this idea, and their responsibilities will be as follows:

First, the customer(s) initiate the demand to create a new building, solicit engineering contractor bids, and eventually rent the space or occupy it themselves.

Second, engineering contractors are responsible for the building design. They must first seek the appropriate design materials and processes according the USGBC guidelines.

Third, the financial entity - most commonly banks - will participate in granting the appropriate costs during the contruction to reflect zero interest. Their main incentive for granting these projects is based upon a "green credits" standard which is held to high esteem and defined initially by an economics working group. 

Fourth, the auditing organization - which could be NGOs, the USGBC, or sustainable consulting firms - shall provide the double-blind cost estimates prior to the granting of the escrow or construction loan granted by the financial entity.

Fifth, the utility which supplies energy to the green building shall preserve the charge rates for the regular equivalents of non-sustainable energy options. While virtually overcharging for the loan period, they can take a percentage of the difference as commission, while they simultaneously participate in the green credits systems used to rate banks. The less the commission, the better the rating.

Sixth (maybe optional), the government's involvement with 0% financing is expected to be minimal. They may provide incentives, but such measures may face objections from taxpayers who have entirely nothing to do with a private construction project. A more ameliorable approach is to set up a "green credits rating system" similar to what is done for private credit ratings, in order to establish a metric on how much banks and other businesses actually "care for the environment."

The following graphic below summarizes the interaction between different parties:


Where will these actions be taken?

The above descriptions frequently mentioned the United States Green Building Council, which is a US organization, but applies standards throughout the world.

The plan can be extended to most countries with urbanized environments, a developed financial loan system, and reliable accounting processes.


How much will emissions be reduced or sequestered vs. business as usual levels?

Relaxing 0% interest, i.e., status quo, we list the following assumption:

1. A $5,000,000 construction project requires a 2% increased up-front cost of $100,000.

2. The payback period is about 5 years and building life is 50 years [2].

3. Just over half (60%) of the savings are related to energy costs.

4. No acceleration in price difference and a linear relation. 

5. No savings or deficit are accrued during construction.

6. There are currently 50,000 green building ([3], non per se).

7. There would be 50% more green buildings if there was 0% APR. ([4], non per se).

8. Cost of electricity is $0.14 / kW-hr [5].

9. Emissions rate is 0.000196 metric tons CO2 / kW-hr [6].

Then:

$60,000 / 5 yr = $12,000 / yr = $1.37 / hr

($1.37 / hr)  /  ($0.14 / kW-hr) = 9.78 kW

9.78 kW * 8760 hr / yr = 85.67 MW-hr / yr

50,000 projects * 50% = 25,000 projects

25,000 * 85.67 MW-hr / yr = 2.14 TW-hr / yr = 7.71 PJ / yr

7.71 PJ / yr * 50 yr = 386 PJ

0.000196 tons CO2 / MJ * 386 PJ = 75.7 megatons CO2.


What are other key benefits?

Other benefits include the improvement of the quality of life of the tenants, living in a healthier space. The green building objective is holistic in fashion, meaning that the individuals occupying the building enjoy emergent benefits such as improved mental conditions and long-term health benefits. These are all well-known and are in addition to the greenhouse gas emissions savings. 


What are the proposal’s costs?

This is a complex systems problem. At this point, it is difficult to estimate the true costs of the administrative restructuring that is fundamental to this idea.

The administrative re-structuring involves convincing power companies, banks, and engineering firms altogether to think differently, and provided that their cooperation is pending, they may decide to figure any downtime due to such restructuring as a cost. These may lead to different figures depending on the definition one chooses.

Purely speaking, a rough-order-of-magnitude cost, as compared to certain government initiatives, may cost between 

$1,000,000 and

$10,000,000

to successfully enact.


Time line

Phase 1: Working Group Formation (1-2 years)

A working group is established to help disseminate the idea of zero-interest green buildings. The working group sets up in-person meetings with the US Green Building Council or other consultants before going forward with the plan.

Phase 2: Discussion Rounds (3-4 years)

Discussions are held with ordinary bank employees as to their willingness and terms regarding the concept of not asking for any interest, in exchange for, possibly, green credits (which is a system that has yet to be established or economically defined).

Utilities will be approached next. The idea should be acceptable to them, as they earn more money under this plan in the short term.

Phase 3: Execution (open period)

This will be done mainly through publicity. Fundraising efforts and other support will be garnered to display the option of a zero-interest option whenever construction loans exist, mainly in banks, and where green building interest exists, as on the USGBC website.

The different parties with whom the working group held discussions with will enact a dormant "trial" period where they can offer both options - what is done today, versus what can be done under this plan.

If successful, then the working group reports its success to green consultants, the USGBC, and/or social media to spread awareness about the feasibility of the plan.


Related proposals

The UK Green Deal is a very similar system where homeowners or businesses can avoid the up-front cost of installing energy-efficient features in a building [7]. The similarity of this system involves the payments being made through regular installments on an electricity bill. A dissimilarity with this system is that there is non-zero interest, which may negatively affect public opinion in light of the fact that the plan was backed by Goldman-Sachs [8].

To be fair, this zero-interest scheme relies on a loose end involving the creation of a unified "green credits" system, which appears to be ill-defined somewhat of an abstraction for now. But it does have real potential in public perception, hence advertising, hence the economy, as discussed in the "What actions do you propose?" section.

The European Union's Energy Performance of Buildings Directive also serves as a model in which this plan can be extended to existing buildings in need of an environmental revamp.


References

1. "Green Building Costs." City of Bloomington, Indiana. http://bloomington.in.gov/green-building-costs Retrieved June 2013.

2. Lee, Nancy. "Q&A: Understanding LEED Certification." LarsonAllen LLP. http://www.larsonallen.com/EFFECT/Q_A_Understanding_LEED_Certification.aspx Retrieved June 2013.

3. "List of Top 10 States for LEED Green Buildings Released." US Green Building Council (March 2011). http://www.usgbc.org/Docs/News/List%20of%20Top%20Ten%20States%20for%20LEED%202011.pdf Retrieved June 2013.

4. "Smarter Buildings," IBM Corporation. http://www.ibm.com/smarterplanet/us/en/green_buildings/overview/index.html Retrieved June 2013.

5. "Electric Power Monthly." Independent Statistics and Analysis, U.S. Energy Information Administration, U.S. Department of Energy. http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_3 Retrieved June 2013.

6. "Green Power Equivalency Calculator Methodologies." 
http://www.epa.gov/greenpower/pubs/calcmeth.htm Retrieved June 2013.

7. "Green Deal: energy saving for your home or business." Gov.uk (May 2013).
https://www.gov.uk/green-deal-energy-saving-measures/how-the-green-deal-works Retrieved June 2013.

8. Greyson, James. Comment on: forespidy, "0% APR Financing on Green Buildings." MIT Climate CoLab. 
https://www.climatecolab.org/web/guest/plans/-/plans/contestId/11/planId/15509/tab/COMMENTS Retrieved June 2013.