A REVENUE OPTION FOR SCALING UP
GREEN RETROFIT PROGRAMS
T. William Lester
Assistant Professor
Department of City and Regional Planning
University of North Carolina, Chapel Hill twlester@unc.edu


Motivation

Design of an Energy Efficiency Transfer Tax (EETT)

Implementation and political feasibility

How to model net impacts?

Quantitative Exercise from NC

Findings from IMPLAN

Context and conclusion

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

Huge potential of energy efficiency
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


Residential structures consume 22% of all energy (EIA, 2008)
Retrofitting existing structure essential to reduced energy use
What are residential retrofit measures?




HVAC replacement
Windows/Doors
Appliances/Lighting
Weatherization
Potential to save 40% on energy bills from retrofit (McKinsey, 2009)
Most policies offer “carrots”



Utility rebates
Federal Tax credits (e.g. $500 down from $1,500 under ARRA)
…..Failure to achieve critical mass
Historically high unemployment


9.1% overall (May 2011)
16.3% in construction sector (May 2011)


We may need to start using more “sticks”

Real Estate Transfer Taxes (document stamps)

One of the oldest forms of taxation

Originally a federal tax, enacted in 1921
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Repealed in 1965, but devolved
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Currently 37 states have some level of transfer tax
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Ranges from 0.1 (CO) to 2.2 percent (DC) of assessed value

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Level: $25 per $1,000 of assessed valuation, or 2.5%
Home buyers liable
Immediately rebated when a) audit and b) qualifying residential retrofit activities completed
Apply to existing homes built before 2000.
Energy Star homes exempt

Creates seller incentive
Pay or Play

Residual rebates apply to existing LIEE program funds
Pros: Progressive and proportional
Cons: May distort fragile housing market



Option 1: Traditional Transfer Tax

Collected at time of purchase (i.e. on closing statement)

County recorder of deeds and state LIEE agency
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Benefits: Follows existing policy infrastructure

Pitfalls: Lenders may balk at extra closing costs
Option 2: “Synthetic Tax”

Off statement

Administered through income tax code
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2 years to complete the work, or pay the tax

More politically feasible

P d
P
P s
A. Revenue for EE
(from consumer surplus)
B. Revenue for EE
(from producer surplus)
δ =Deadweight loss of tax
Q ’ Q


Positive

Investment dollars for construction and energy audits

Energy savings

Negative

Behavioral response in housing market (i.e. price elasticity)

Reduced household spending

Falling demand for energy production

Factor
A. Number of existing home sales in 2011
B. Share of existing homes sold built <2000
C. Average Price of Existing Homes in NC
D. Energy Efficiency Transfer Tax Rate
E. Behavioral Response to EETT increase
(price elasticity of -0.8)
F. Total estimated quantity sold subject to EETT
G. Estimated EETT Tax per home sold
H. Total Investment Level
Value
127,182
60.49%
$203,071
2.5%
-2.0%
75,394
$5,077
$382,757,075

Factor
Average annual household expenditures on electricity and gas in NC
Energy Efficiency Transfer Tax Due on Typical Home
Less $500 Federal Tax Credit
Assumed Energy Efficiency Improvement Level
10%
20%
30%
40% (McKinsey, 2009)
50%
Estimated Post-Project Annual Energy Costs/Household
Annual Savings Per Household
Aggregate Energy Savings
Value
$ 3,014
$ 5,077
$ 4,577
Pay Back Period years
15.19
7.59
5.06
3.80
3.04
$1,808
$1,206
$90,894,698

Summary of IMPLAN Model Inputs
Activities in Scenario 1: Financing Available Activities in Scenario 2: No Financing

Increase demand in construction and energy auditor sectors by $382M.

Decrease in household spending of
$58M to account for net present value of interest payments only, paid over five years.

Decrease in commodity demand of
$90.8M in electricity and natural gas.

Increase demand in construction and energy auditor sectors by $382M.

Increase in household spending of
$90.8M due to energy savings

Decrease in household spending of
$345M (net of Federal rebates).

Decrease in commodity demand of
$90.8M in electricity and natural gas.

Scenario 1: Financed
Impact Type
Direct Effect
Indirect Effect
Induced Effect
Total Effect
Net Fiscal Imact =
Scenario 2: Cash up front
Impact Type
Direct Effect
Indirect Effect
Induced Effect
Total Effect
Net Fiscal Imact =
Employment Labor Income
3,629
854
1,418
5,900
Output
$138,361,004 $291,917,086
$36,170,666
$53,668,747
$ 56,837,225
$92,106,155
$166,687,539
$228,200,417 $550,710,780
Employment Labor Income
3,629
854
-843
3,639
Output
$138,361,004 $291,917,086
$36,170,666 $92,106,155
($31,948,714) ($98,744,653)
$142,582,957 $285,278,588
$ 19,561,586

7 000
6 000
5 000
4 000
3 000
2 000
1 000
-
(1 000)
(2 000)
5,900 Total Jobs
1 418
854
3 629
3,485 Construction
144 Auditors
3,639 Total Jobs
854
3 629
(843)
Scenario 1: Financed
Direct Indirect Induced
Scenario 2: Cash up front


Is 3,485 construction jobs and 5,900 jobs overall in
North Carolina significant?

Compare to current number of unemployed workers

If enacted in 2011, the EETT would:
 Decrease overall unemployment rate from 9.7 to 9.5%
 Decrease construction industry unemployment by 1.2%
 Add $56 million to state and local coffers


Bottom line: EETT can have a net positive impact on job creation

Policy makers shouldn’t be afraid to use the “stick”

Messaging and communication is key

Tied to saving mortgage interest deduction

Responsibility of home ownership

Precedents:

Building codes for new construction

Recycling mandates