Journal of Cleaner Production xxx (2017) 1e12
Contents lists available at ScienceDirect
Journal of Cleaner Production
journal homepage: www.elsevier.com/locate/jclepro
Review
Turning green into gold: A review on the economics of green buildings
Li Zhang, Jing Wu*, Hongyu Liu
Hang Lung Center for Real Estate, Department of Construction Management, Tsinghua University, China
a r t i c l e i n f o
a b s t r a c t
Article history:
Received 18 August 2017
Received in revised form
22 November 2017
Accepted 23 November 2017
Available online xxx
Adoption of green design and technology in buildings, which can mitigate negative impacts on the
environment, has been recognized as a key step towards global sustainable development. In addition to
technology development, economic viability plays a pivotal role in stimulating the design, construction
and use of green buildings. This paper provides a comprehensive review of recent studies on the economic viability of “going green”, including cost-benefit analyses from the perspective of building life
cycle and from the perspective of major market participants. While “going green” is more likely to be
seen as profitable from the building life cycle perspective, economic viability, from the perspective of
developers and occupants, remains unclear due to information, behavior and policy factors. Such
discrepancy in the results regarding economic viability is one major reason for the “paradox” of the very
gradual diffusion of apparently cost-effective green buildings in most economies. We also propose
several key topics that merit future research, including more comprehensive evidence about life-cycle
costs and benefits of green buildings, the incorporation of ancillary long-term or intangible benefits in
the analysis of economic viability for developers and occupants, an investigation on the dynamics of the
adoption of green buildings, and institutional arrangements for stimulating green practices in the
building sector.
© 2017 Elsevier Ltd. All rights reserved.
Keywords:
Green building
Economics
Cost-benefit analysis
Life cycle
Developer
Occupant
Contents
1.
2.
3.
4.
5.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Economic viability from the perspective of building life cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1.
Incremental costs of green buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2.
Incremental benefits of green buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2.1.
Lower operating cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2.2.
Increased comfort, health and productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2.3.
Enhanced corporate reputation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2.4.
Increased market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2.5.
Positive environmental externality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Economic viability from the perspective of market participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.1.
Economic viability from the perspective of developers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.1.1.
Cost-benefit analysis of green building development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.1.2.
Barriers to economic viability from the perspective of developers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2.
Economic viability from the perspective of occupants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2.1.
Cost-benefit analysis of green building purchase or lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2.2.
Barriers to economic viability from the perspective of occupants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acknowledgement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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* Corresponding author.
E-mail address: ireswujing@tsinghua.edu.cn (J. Wu).
https://doi.org/10.1016/j.jclepro.2017.11.188
0959-6526/© 2017 Elsevier Ltd. All rights reserved.
Please cite this article in press as: Zhang, L., et al., Turning green into gold: A review on the economics of green buildings, Journal of Cleaner
Production (2017), https://doi.org/10.1016/j.jclepro.2017.11.188
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L. Zhang et al. / Journal of Cleaner Production xxx (2017) 1e12
1. Introduction
Buildings and construction activities play an important role in
urbanization by creating living and working spaces and contributing to the national economy (Zhang, 2015; Zuo and Zhao, 2014).
However, buildings and associated construction activities can also
have profound negative effects on the natural environment and
resources. The construction, operation and demolition of buildings
lead to massive amounts of noise, dust, water pollution and waste
(Tam and Tam, 2008; Zuo and Zhao, 2014). In addition, buildings
constitute the largest energy-consuming sector, accounting for 35%
of global final energy consumption; further, they make an equally
substantial contribution to CO2 emissions (International Energy
Agency, 2013). In fact, the International Energy Agency predicts
that energy consumption in the building sector will rise by 50% by
2050 if no action is taken to improve building energy efficiency.
Green buildings are an effort to mitigate negative effects on the
environment and resources while simultaneously enhancing positive effects throughout the building life cycle. While there are
varied definitions and rating systems for green buildings around
the world, it is generally accepted that green building activities
include the planning, design, construction and operation of buildings with several principal considerations, including efficient use of
energy, water and material; improvement of indoor environmental
quality; and minimization of negative impacts on the environment
(Darko and Chan, 2016; World Green Building Council, 2013; Zuo
and Zhao, 2014). It is worth noting that the concept of green
building includes not only “sustainability” but also “high-performance”, which means that energy efficiency cannot come at the
cost of reduced indoor environmental quality or comfort level
(Cole, 2000; World Green Building Council, 2013; Zhu and Lin,
2004).
Governments in major economies have employed a variety of
sticks (e.g., mandates) and carrots (e.g., explicit or implicit subsidies) to encourage the adoption and diffusion of green technology
in the building sector, but green buildings still account for only a
tiny proportion of the total building stock in both developed and
developing countries (Fuerst et al., 2014; Zhou, 2015). Some studies
suggest that it is vital to establish a market mechanism to boost
green building development, while government regulations and
subsidies are only necessary in the face of market failures (Fuerst
et al., 2014; Kok et al., 2011; Zhu and Lin, 2004). Economic
viability - whether benefits are large enough to offset the costs - is
the key to the market mechanism. It is noteworthy that the costs
and benefits do not necessarily coincide with monetary outflows
and inflows, as some costs and benefits may be intangible. In
addition, the comprehensive analysis of economic viability should
include not only the costs and benefits for (internal) stakeholders,
but also the costs and benefits for the (external) society and environment. However, the narrow understanding of economic
viability remains a major problem, as the conventional concern of
the business sector on the environmental issue is that the additional costs involved (e.g., costs of green materials and equipment)
may erode financial performance, and this has undermined the
adoption of green buildings (Jakob, 2006; Jiang, 2010; New Ecology
and Green CDCs Initiative, 2005). Therefore, in order to promote
green buildings in market-oriented economies, market participants
must be persuaded that “green can become gold.”
In this paper, we provide a comprehensive review on the
existing studies about the costs, benefits and economic viability of
green buildings, from the perspectives of building life cycle and
market participants, respectively. Our review demonstrates that
green building investment is more likely to be seen as profitable
from the building life cycle perspective, whereas the economic
viability of “going green” remains controversial for developers and
occupants. We also identify three categories of barriers that limit
economic viability from the perspective of developers and occupants. First, some behavioral problems are worth noting, such as
developers’ tendency to overestimate costs and occupants’ lack of
attention to energy efficiency. Second, information asymmetry
makes buyers hesitant about choosing green buildings, resulting in
a cost-benefit mismatch for developers or even leading to adverse
selection. Third, energy pricing and contract structure hinder occupants from enjoying cost savings due to energy savings. Therefore, integrated and comprehensive policies are essential to cope
with these barriers and encourage individuals and enterprises to
adopt green practices in the building sector.
This review has profound academic and practical merits. First, it
highlights state-of-the-art and future research trends. Second, it
helps resolve the nexus of market profit maximization and environmental conservation by alerting market participants to the
viability of optimizing the costs and benefits of green buildings.
Third, this review furthers the government’s green building agenda
by identifying barriers for green building development, and thus
gives direction to improve policies, regulations, and enforcement
mechanisms that can drive the green building market forward.
2. Methods
The benefits and costs of green buildings have been studied for
decades, since they first appeared. Life Cycle Assessment (LCA) is
employed to evaluate the sustainability of buildings, which covers
all phases throughout the building’s life, including design, construction, operation, and demolition (World Green Building
Council, 2013; Wu et al., 2012; Zhang et al., 2011a). Therefore, an
integrated economic valuation of green buildings should take into
account the entire life cycle of the building. The existing literature
adopts the incremental analysis method by using a code-compliant
building (of the same size and function, and in the same location) as
a baseline to examine the incremental returns from incremental
green investment. The seminal study by Kats (2003) suggested that,
compared with standard construction, “going green” generally
required an initial incremental cost, but also offered cost savings
when considered through a life cycle cost methodology. The benefits of green buildings include those that might readily be predicted (e.g., lower energy, water and waste disposal costs; lower
operation and maintenance costs) as well as some that are harder
to predict and to measure (e.g., increased productivity and health;
lower environmental impacts and emissions). Kats (2003) estimated that an incremental green investment of about two percent
of construction costs typically yielded life cycle savings of over ten
times the initial investment.
While previous studies analyze the benefits and costs over the
entire life span of the building, the reality is that green building
development is a complicated process involving various stakeholders, such as governments, developers, financial institutions,
equipment and material suppliers, consultants, design units, construction and supervising units, property managers, research institutions, and occupants (Zhang, 2015). The existence of multiple
stakeholders may result in a split incentive and principle-agent
problem (Fuerst et al., 2016; Jaffe and Stavins, 1994). For example,
incremental costs are borne by developers while benefits are
enjoyed by occupants. Only when all stakeholders find the incremental investment for “going green” to be financially feasible can
they be stimulated to voluntarily adopt green practices. Therefore,
economic viability should be further analyzed from the perspective
Please cite this article in press as: Zhang, L., et al., Turning green into gold: A review on the economics of green buildings, Journal of Cleaner
Production (2017), https://doi.org/10.1016/j.jclepro.2017.11.188
L. Zhang et al. / Journal of Cleaner Production xxx (2017) 1e12
3
Fig. 1. Common focuses of research on the economics of green buildings.
of all market participants. Among the stakeholders involved in
green building development, developers and occupants are ultimate decision makers of green building supply and demand
(Zhang, 2015).1 In addition, they are more likely to encounter costbenefit mismatch, as developers bear all upfront costs but occupants enjoy all benefits during the buildings’ operation (Deng and
Wu, 2014). Therefore, we focus on developers and occupants in
the following cost-benefit analysis from the perspective of market
participants.
To provide a holistic and systematic review of the state-of-theart studies on the economic viability of green buildings, we conducted the literature review in the framework of cost-benefit analyses from two perspectives, as shown in Fig. 1, namely
perspectives that consider the complete building life cycle and that
consider particular market participants. The horizontal axis of Fig. 1
indicates stages of the building life cycle. Dark gray and light gray
rectangles are used to represent the incremental costs and benefits
from the perspective of building life cycle, which are reviewed in
Section 3. These costs and benefits can be categorized as internal
and external, and the internal ones can be further categorized as
tangible and intangible costs/benefits, as shown on the right of
Fig. 1. Then, the costs and benefits from the perspective of main
market participants are indicated by arrows with minus and plus
signs, respectively. The incremental costs at the stages of design
and construction are borne by developers, while the incremental
benefits at the operation stage are obtained by occupants. It is
noteworthy that the increased asset value is an incremental benefit
for developers but an incremental cost for occupants. The economic
viability from the perspective of main market participants (i.e.,
developers and occupants) is analyzed in Section 4.
3. Economic viability from the perspective of building life
cycle
3.1. Incremental costs of green buildings
There has been a widespread perception in the industry that
“going green” is more expensive than traditional building methods
1
Developers in this paper include both the developers of newly-built buildings
and building owners that retrofit, namely those who directly assume incremental
green costs.
(Bartlett and Howard, 2000; Dwaikat and Ali, 2016; Rehm and Ade,
2013; Zhang et al., 2011b). As most green measures require an investment during the construction stage while maintenance costs
are low, the share of incremental costs at the stages before operation accounts for approximately 100% (Jakob, 2006). Incremental
costs of green buildings include “soft costs” and “hard costs”. “Soft
costs” include the costs associated with intangible items or services
that are necessary components of the development process but do
not form part of the building, including design and simulation fees,
green certification fees, costs of adapting existing processes, etc.;
“Hard costs” include costs associated with tangible items that are
used to complete the building, including costs of building structure,
materials, equipment, landscaping, etc. (Jaffe and Stavins, 1994;
Jakob, 2006; World Green Building Council, 2013).
Due to limitations in data access, research on incremental green
costs, especially from academic studies, are relatively limited in the
growing body of literature on green buildings (Dwaikat and Ali,
2016; Kahn and Kok, 2014; Rehm and Ade, 2013). The main findings from industrial reports and academic studies are summarized
in Table 1. The results reveal that the incremental costs for buildings
certified as “green” range from 0.4% to 11%, depending on the
certification system and the rating level achieved. Some research
shows that “going green” does not necessarily cost more (Langdon,
2004, 2007a; U.S. General Services Administration, 2004), particularly when passive measures2 are applied and green strategies are
integrated into the development process right from the start
(Zhang et al., 2011b; Zhu and Lin, 2004). For instance, natural
ventilation is a typical sustainable solution for reducing building
energy consumption, improving thermal comfort and providing a
healthy indoor environment, but the integration of natural ventilation to buildings actually reduces initial construction costs
because of downsizing HVAC systems (Tong et al., 2016). In addition, there has been an overall trend towards reducing incremental
green costs, as building codes become stricter, supply chains for
green materials and equipment mature, and the industry becomes
2
Green buildings can be achieved by two kinds of measures. One is a passive
measure and the other is an active measure. Passive measure refers to optimizing
the architectural design and making best use of natural resources to meet the living
environment requirements and thus reduce energy consumption. In contrast, active
measure refers to using artificial, mechanical or electrical green technology for
heating, cooling or lighting, which may be energy-efficient but more expensive
than traditional technology (Zhang et al., 2011b; Zhu and Lin, 2004).
Please cite this article in press as: Zhang, L., et al., Turning green into gold: A review on the economics of green buildings, Journal of Cleaner
Production (2017), https://doi.org/10.1016/j.jclepro.2017.11.188
4
L. Zhang et al. / Journal of Cleaner Production xxx (2017) 1e12
Table 1
Incremental costs of green-certified buildings.
Author (Year)
Country
Building Type
Certification
Certification Level
Incremental Cost
Kats (2003)
US
Office building, School
LEED
U.S. General Services Administration (2004)
US
Courthouse
LEED
Office building
LEED
Platinum
Gold
Silver
Certified
Gold
Silver
Certified
Gold
Silver
Certified
Gold
Silver
Certified
Average
6.5%
1.8%
2.1%
0.7%
1.4%e8.1%
0.03%e4.4%
0.4%e1.0%
7.8%e8.2%
3.1%e4.2%
1.4%e2.1%
0.0%e6.3%
0.0%e3.0%
0.0%e3.6%
Not significant
6 Star
5 Star
Platinum
Gold
Silver
Platinum
Gold
Silver
Outstanding
Excellent
Very good
3-star
2-star
1-star
3-star
2-star
1-star
3-star
2-star
1-star
3-star
2-star
1-star
9.0%e11.0%
3.0%e5.0%
3.2%
1.3%
0.8%
3.4%
1.7%
0.8%
9.8%
0.8%
0.2%
0.1%e6.9%
1.0%e7.9%
0.1%e1.5%
0.5%e7.0%
0.9%e2.6%
0.0%e7.5%
4.2%
2.6%
0.5%
5.4%
2.9%
1.0%
Kats (2006)
US
School
LEED
Langdon (2004), Langdon (2007a)
US
LEED
Langdon (2007b)
Australia
Academic, Laboratory and Library buildings,
Community center, Ambulatory care facility
Office building
Green Star
Construction Industry Institute (2008)
HKSAR, China
Office building
HK-BEAM
Residential building
HK-BEAM
UK
Office building
BREEAM
China
Public building
CGBLb
Residential building
CGBL
Public building
CGBL
Residential building
CGBL
Target Zero (2012)
Yip et al. (2013)
a
MOHURD of China (2015)
a
China
Note:
a
The incremental costs reported in RMB/m2 are converted to percentages using the construction costs of ordinary office buildings (3850 RMB/m2) and ordinary residential
buildings (2250 RMB/m2) reported by Rider Levett Bucknall (2017).
b
CGBL indicates “Chinese Green Building Label”.
more skilled at delivering cost-effective green design and technology (Jakob, 2006; World Green Building Council, 2013).
3.2. Incremental benefits of green buildings
Benefits from green buildings, which are received by different
stakeholders throughout the building life cycle, have been extensively studied (Zhang, 2015; Zhu and Lin, 2004; Zuo and Zhao,
2014), although whether corresponding financial values are
attached to the benefits remains unclear. According to the seminal
study of Kats (2003), incremental benefits of green buildings
include lower operating costs, increased health and productivity,
and positive environmental externalities. Then, following the pioneering work of Eichholtz et al. (2010), extensive empirical studies
have investigated the increased market value of green buildings. In
addition, some studies further suggested that involvement in green
building development might affect the corporate reputation
(Eichholtz et al., 2010, 2016). Overall, there are five categories of
incremental benefits associated with green buildings, namely,
lower operating cost, increased comfort, health and productivity,
enhanced corporate reputation, increased market value, and positive environmental externality. Other major review papers on the
benefits of green buildings also share similar classifications on the
benefits of green buildings (Madew, 2006; World Green Building
Council, 2013; Yudelson, 2010; Zhang, 2015; Zuo and Zhao, 2014).
3.2.1. Lower operating cost
Cost-savings through reduced energy and water consumption
and lower operation and maintenance costs are the main benefits
received by green building occupants (Eichholtz et al., 2010; Kats,
2003; World Green Building Council, 2013; Zhang, 2015; Zhu and
Lin, 2004). As energy-efficiency is one of the defining features of
green buildings, research on cost savings always focuses on
assessing the reduction in green buildings’ energy consumption
compared with conventional code-compliant buildings. Ries et al.
(2006) assessed that the energy usage of a manufacturing company decreased by approximately 32% on a square foot basis after
moving from an old conventional facility to a new LEED-certified
facility. Based on a post-occupancy evaluation (POE), Turner and
Frankel (2008) found that LEED-certified buildings in the US
saved 28% energy on average compared to code baselines, which
was close to the 25% savings predicted by modeling in the submittals. Fowler et al. (2010) also conducted a POE of the performance of 22 LEED-certified or energy-efficient buildings in the US,
suggesting that on average the aggregate operating cost (including
water utilities, energy utilities, general maintenance, grounds
maintenance, waste and recycling, and janitorial costs) of green
buildings was 19% lower than the industry average, and
Please cite this article in press as: Zhang, L., et al., Turning green into gold: A review on the economics of green buildings, Journal of Cleaner
Production (2017), https://doi.org/10.1016/j.jclepro.2017.11.188
L. Zhang et al. / Journal of Cleaner Production xxx (2017) 1e12
particularly, the energy consumption of the studied green buildings
was 25% less than the industry average. A study of the Low Energy
Office building in Malaysia showed that energy savings for airconditioning, lighting and equipment were 62%, 18% and 20%,
respectively, and these cost savings would pay off incremental
green costs in only 8.4 years (Lau et al., 2009). Considering that the
energy price level is likely to increase in the coming decades as the
expected energy production maximum may be reached, energy
savings from green buildings can also mitigate the risks of
increasing energy prices (Eichholtz et al., 2012).
However, a significant gap between the predicted and actual
energy performance of green buildings has also been observed in
some recent studies (De Wilde, 2014; Levinson, 2016; Scofield,
2009). Newsham et al. (2009) analyzed 100 LEED-certified commercial and institutional buildings in the US and found that though
on average LEED-certified buildings used 18e39% less energy per
floor area than their conventional counterparts, 28e35% of them
used more energy than their conventional counterparts did.
Reichardt (2014) even found that operating expenses for Energy
Star rated buildings were 3.9% higher than comparable conventional buildings. The discrepancy between predicted versus actual
energy performance is generated by a series of factors that occur
throughout the building lifetime (De Wilde, 2014). First, most energy modeling and simulation during the design stage operate
within a range of error based on many assumptions (De Wilde,
2014; Newsham et al., 2009; Zhu and Lin, 2004). Second, building
quality may not meet specifications due to changes implemented
during cost-cutting exercises (MOHURD of China, 2014). Third, the
advanced systems of green buildings may be too difficult for occupants to understand and therefore can hardly be operated and
maintained efficiently (Zhang, 2015). The lack of efficient operation
and maintenance is often cited as the main reason for the performance gap (De Wilde, 2014). To achieve the predicted performance
and reap the maximum benefits of green buildings, effective
management is required. In an empirical study by Sabapathy et al.
(2010), the authors noted that LEED-certified facilities could achieve an average energy saving of approximately 34% compared to
similar non-LEED facilities if factors associated with equipment,
occupancy, operation and maintenance were controlled the same.
3.2.2. Increased comfort, health and productivity
Green attributes of buildings can enhance indoor environmental
quality, therefore resulting in healthier and ultimately more productive occupants (Issa et al., 2010; World Green Building Council,
2013). Some researchers use surveys to investigate differences in
satisfaction levels between green and conventional building occupants (Ries et al., 2006; Zhang and Altan, 2011). Ries et al. (2006)
studied a manufacturing company who moved from an old conventional facility to a new green facility. A pre- and post-move
survey on the employees’ satisfaction and productivity was conducted using the Likert scale method. The responses from 45 employees in the company were analyzed with paired t-test, showing
that employees in the green facility were more satisfied with
temperature, humidity, airflow speed, visual conditions and air
quality than were employees in the conventional facility. Zhang and
Altan (2011) conducted a comparative study of the indoor environment quality in a conventional building and an
environmentally-concerned building. Seven-point scale questions
were adopted to rate the occupants’ sensation and satisfaction level
of their thermal, visual and acoustic comfort. The responses from
35 occupants in the green building and 188 occupants in the conventional building revealed a substantial difference between green
and conventional buildings in terms of thermal and visual environment. However, surveys such as these may not be appropriate
for the evaluation of the built environment. First, degree of
5
satisfaction is difficult to measure, especially if separate questions
are asked about different parameters of the built environment
(Zhang and Altan, 2011). Second, Deuble and de Dear (2012) found
that occupants’ satisfaction about the built environment was
positively associated with environmental beliefs. Compared with
non-green occupants, occupants in green buildings were more inclined to overlook and forgive less-than-ideal conditions and thus
presented a higher degree of satisfaction (Deuble and de Dear,
2012). Conducting an objective test of the indoor environment
may eliminate these problems. One test conducted in Beijing
showed that green buildings significantly outperformed non-green
ones in terms of temperature, relative humidity, background noise,
and luminance under natural lighting conditions (Zhang et al.,
2016a), but statistically robust information based on larger samples about improvements in the built environment caused by green
buildings are few and far between.
Some studies suggest that green design and technology, especially those that improve visual acuity, thermal comfort and personal control of ambient conditions, result in increasing
productivity by 6%e25% and decreasing absenteeism by 15%e25%
(Brager and de Dear, 1998; Kats, 2003; Paul and Taylor, 2008; Ries
et al., 2006; Rocky Mountain Institute, 1998). A recent study by
Harvard found that occupants in green-certified buildings could
score 26% higher in cognitive function tests, report 30% fewer
symptoms of sick building syndrome, and enjoy 6% higher sleep
quality than those in high-performing but non-certified buildings
(Harvard gazette, 2017). As a result, industries dependent on high
levels of human capital, such as the service sector, will be more
likely to rent office space in green buildings (Eichholtz et al., 2016).
Nevertheless, a full financial accounting of the value of enhanced
comfort, health, and productivity is hard to measure due to lack of
well-defined metrics and data (Issa et al., 2010; Jakob, 2006). Kats
(2003), assessing employee compensation costs, estimated that
the benefits from productivity and health improvement could
constitute about 70% of total cost savings during the life cycle of a
building. A recent study by Zhang et al. (2017) introduced an
innovative method to quantify benefits due to increased comfort by
analyzing online reviews of hotel customers. The results indicated
that the rate of complaints regarding the indoor environmental
quality of green-certified hotels was approximately 19% lower than
that for non-green hotels, leading to a significant room rate premium of 6.5% without reducing occupancy rates.
3.2.3. Enhanced corporate reputation
Developing, purchasing or renting green buildings may signal an
enterprise’s commitment to the environment and compliance with
Corporate Social Responsibility (CSR) requirements. As a result, the
enterprise can gain a superior corporate reputation and some indirect benefits. It is found that publicly-traded firms or environmentally sensitive industries (e.g., mining, oil and construction
industries) have a significantly higher propensity to rent green
office space, either to demonstrate their commitment to sustainability or to offset negative reputation effects (Eichholtz et al., 2016;
Robinson et al., 2016). A case study by Zhang et al. (2011a) indicated
that some local and provincial governments offered favorable land
price to developers who promised to adopt green standards in the
project’s development. Improved corporate reputation may also
enable firms to attract investors more easily and at better market
rates. Some empirical studies suggest that companies having superior CSR performance are able to reduce their capital costs
(Bassen et al., 2006). In addition, environmentally legitimate
companies, those whose environmental performance conforms to
stakeholders’ expectations, incur less unsystematic risks in the
stock market than companies that do not conform (Bansal and
Clelland, 2004). However, there is a lack of direct quantitative
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L. Zhang et al. / Journal of Cleaner Production xxx (2017) 1e12
analysis of the benefits of enhanced corporate reputation associated with green building investments.
3.2.4. Increased market value
The aforementioned benefits of green buildings, namely lower
operating costs, increased comfort, health and productivity, and
enhanced corporate reputation are believed to be capitalized into
the market value of green buildings, which may lead to a premium
in rent or sale prices. Following the pioneering work of Eichholtz
et al. (2010), studies on the economics of green buildings over the
past decade have mainly concentrated on estimating the green
rental or sale price premium. Green price premium indicates the
difference in rental or sale prices between green buildings and their
non-green counterparts. To ascertain the green price premium,
researchers have typically employed two methods: stated preference method and revealed preference method (Heinzle et al., 2013).
The stated preference method is a survey-based economic
technique for the valuation of non-market resources, including
contingent valuation and choice-based conjoint analysis (Bateman
et al., 2002). Contingent valuation refers to directly asking individuals how much they would be willing to pay for “greenness” in
buildings. This highly-stylized survey setting allows researchers to
eliminate many of the factors that complicate consumer decisions
in real-world settings. Nevertheless, such direct questioning may
lead participants to focus more on “greenness” than they otherwise
would (Davis and Metcalf, 2014), and this method is susceptible to
the social desirability response bias (Fisher, 1993). In addition, a
building is a bundle of characteristics which cannot be purchased
separately, so it is difficult for consumers to answer their
Willingness-To-Pay (hereafter, WTP) directly for a specific building
characteristic, such as energy efficiency or sustainability
(Scotchmer, 1985). Hence, the choice-based conjoint analysis may
be a better method to evaluate the price premium that consumers
are willing to pay for the “greenness” of buildings (Heinzle et al.,
2013; Hu et al., 2014). The choice-based conjoint experiment considers a quasi-realistic buying situation where consumers choose
between several products from a restricted product set, and assumes that consumers make trade-offs between product characteristics to choose the bundle with the greatest utility, so the
respondents’ preferences can be derived (Heinzle et al., 2013; Hu
et al., 2014; McFadden, 1973).
The results of the stated preference studies are presented in
Table 2. The majority of these studies focus on the residential
market. Heinzle et al. (2013) and Wiencke (2014) asked residents or
occupants about their WTP for green buildings, which ranges from
approximately 3%e8%. The other studies investigate residents’ WTP
for different green attributes. Although the amounts of WTP differ
greatly, almost all of them suggest that residents are willing to pay
significant price premiums for green attributes. However, it is
worth emphasizing that such stated preference may somewhat
exaggerate consumers’ actual valuation, because consumers do not
have to pay real money when they take the survey (Park et al.,
2013).
In order to overcome the shortcomings of the stated preference
method, in the past decade researchers have sought to estimate the
green price premium using the revealed preference method. They
explore the relation between green practices and the market value
of buildings using the hedonic model. The studies cover various
countries, different building types and diverse rating systems. Results presented in Table 3 show that the overwhelming majority of
studies suggest a positive price or rent premium for green-certified
buildings, though a few argue that the premium is not significant or
even negative (Fuerst and McAllister, 2011a; Yoshida and Sugiura,
2014). In general, the green price premium increases with the
certification level. However, some empirical studies report lower
price premiums for higher certification levels (Deng et al., 2012;
Hyland et al., 2013; Kok and Jennen, 2012), and the coefficients of
high-level certification even turn out to be not significant in several
studies (Fuerst and McAllister, 2011b; Kok and Jennen, 2012; Zhang
et al., 2016b). One possible explanation for this phenomenon may
be the small sample of buildings with high-level certifications
(Zhang et al., 2016b). Some studies also highlight the differences in
premiums during different stages (e.g., presale and resale) (Bruegge
et al., 2015; Deng and Wu, 2014; Zheng et al., 2012) or for different
market conditions (Das et al., 2011; Eichholtz et al., 2013), but there
is no consensus. Moreover, growth in the green building supply has
been documented to have a negative effect on the green price
premium because of market competition, but a positive impact on
average rents and prices of all buildings in a given neighborhood, a
phenomenon known as “green gentrification” (Chegut et al., 2014).
It is noteworthy that in developing countries, such as China, green
building certification had not been launched until very recently and
thus many developers just differentiated their buildings from
others by actively advertising the green technology employed in
their buildings (Zhang et al., 2016a, 2016b). Some studies compared
the effectiveness of official green certification and developers’ selfadvertised greenness based on the price premium (Zhang et al.,
2016b; Zheng et al., 2012). Zheng et al. (2012) found that in
China’s nascent green building market, developers could presell
housing units at a price premium by self-advertising their housing
as “green”, but these housing units would subsequently be resold or
rented at a price discount once homebuyers realized that the
housing units were fake- or over-advertised. Zhang et al. (2016b)’s
empirical study on the “Chinese Green Building Label” suggested
that after the introduction of official green certification, developers’
self-advertisements had little effect.
Compared with the growing body of literature on the existence
and magnitude of the green price premium, an even more important research question is the sources of such premium. The existing
literature mainly focuses on two mechanisms. First, from the
financial perspective, a green building can be expected to produce
operating cost savings, and increased comfort, health and productivity, which can be discounted in the present value, and thus in
equilibrium occupants are willing to pay a higher price for green
buildings (Eichholtz et al., 2010; Kahn and Kok, 2014). Second, from
the ideology perspective, individuals who evaluate energy savings
and sustainability as important can be expected to prefer green
buildings, even if they have to pay higher prices (Dastrup et al.,
2012; De Silva and Pownall, 2014; Kahn and Kok, 2014). Understanding the sources of the green price premium is of great
importance for testing the rationality of the aforementioned premium results and providing a reference through which to enhance
the economic profitability of green investments, but the existing
research is still scarce. In addition, while the overwhelming majority of the existing studies were conducted in developed economies, different conclusions may be reached by studies in
developing countries. Hu et al. (2014)’s survey in Nanjing, China,
indicated that only the rich were prepared to pay more for green
attributes that improve their living comfort, and they were only
willing to pay either for unpolluted environment or non-toxic
construction materials. Zhang et al. (2017)’s comparative study on
green and non-green hotels in Beijing, China, also suggested that
consumers paid a significant room rate premium for green hotels
mainly for improved indoor environmental quality, while the
environmental responsibility did not play a significant role in
customers’ evaluation of green hotels. One possible explanation is
that the living conditions in developing countries are still much
worse than those in developed countries, and thus living comfort
plays a crucial role in individuals’ housing choice in developing
countries (Ouyang et al., 2010).
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L. Zhang et al. / Journal of Cleaner Production xxx (2017) 1e12
7
Table 2
Green price premiums estimated by stated preference method.
Author (Year)
Country
Building Type
Green Attributes
WTP
Banfi et al. (2008)
Switzerland
Residential building
Korea
Residential building
HKSAR, China
Residential building
Achtnicht (2011) a
Park et al. (2013)
Germany
Korea
Residential building
Residential building
Heinzle et al. (2013)
Singapore
Residential building
Wiencke (2014)
Switzerland
Commercial building
Enhanced facade insulation
Ventilation system
Enhanced facade insulation
Ventilation system
Increase landscape and physical activity area
20% water consumption reduction
20% energy consumption reduction
Reduce noise level from an unacceptable to acceptable level
Improve air quality from an unacceptable to acceptable level
1% reduction of CO2 emission from heating system
1% energy bills reduction
1% CO2 emissions reduction
1% VOC emissions reduction
Green Mark Certified
Green Mark Platinum
Energy-efficient or green building
China
Residential building
1.0%e3.0%
4.0%e12.0%
0.5%e7.2%
4.9%
4.2%e8.4%
4.3%e4.7%
13.5%e14.8%
4.7%e5.2%
7.1%e7.8%
0.8%e1.0%
0.09%
0.10%
0.05%
3.8%
8.0%
3.0% (lease)
4.8% (buy)
5.0% (retrofit)
6.4%e22.9%
2.1%e5.8%
Not significant
US
Office building
Kwak et al. (2010)
Chau et al. (2010)
Hu et al. (2014)
a
b
a
Robinson et al. (2016)
Unpolluted environment
Non-toxic construction materials
Energy and water cost reduction; Enhanced thermal insulation;
Sound insulation; Ventilation
LEED certification
Energy Star certification
0.8%
0.6%
Note:
a
The WTP magnitudes are converted to percentages using the median prices in the paper.
b
The WTP magnitudes are converted to percentages using the average rent available at the Rating and Valuation Department of Hong Kong (http://www.rvd.gov.hk/en/
property_market_statistics/index.html).
3.2.5. Positive environmental externality
In addition to benefits received by different stakeholders
throughout the building life cycle, green buildings also produce
considerable positive environmental externalities (Cole, 2000).
First, green buildings help protect the eco-system and biodiversity
by means of sustainable land use (Bianchini and Hewage, 2012;
Henry and Frascaria-Lacoste, 2012). Second, green buildings
reduce waste and carbon dioxide emissions during construction,
operation and demolition phases (Jo et al., 2009; Yeheyis et al.,
2013). Some studies evaluate environmental externality by
employing the costs of environmental damage caused by conventional buildings or the market value of traded emissions, but these
efforts have not achieved a consensus (Kats, 2003). However, since
the technical difficulty in calculating the value of environmental
externalities and the different objective functions of private and
public economy, most practices ignore environmental externalities
or value it at zero (Cole, 2000; World Green Building Council, 2013).
4. Economic viability from the perspective of market
participants
While green building investment seems financially feasible or
even profitable from the perspective of the building life cycle, it is
more crucial to investigate whether the benefits are large enough to
offset costs from the perspective of different market participants.
Developers and occupants have been the focus of research on the
economic viability of green buildings, as they are the ultimate decision makers of the supply and demand of green buildings.
4.1. Economic viability from the perspective of developers
4.1.1. Cost-benefit analysis of green building development
Jaffe and Stavins (1994) first proposed a theoretical framework
for decision-making regarding the incorporation of energy-efficient
technology in new structures and in existing ones. Developers are
stimulated to adopt green design and technology only when the
economic returns, including price or rent premiums, enhanced
corporate reputation and government subsidies, exceed the incremental costs of “going green”. A comparison of Table 1 with Table 3
implies that the green price or rent premiums generally exceed the
incremental costs for developers, confirming the back-of-theenvelope calculation by Kahn and Kok (2014). For those developers who hold and lease, rather than sell, green buildings, in
addition to the rental rate premium, they may also be able to
command a higher occupancy rate, lower volatility and slower
depreciation (Fuerst and McAllister, 2011c; Hyland et al., 2013;
Wiley et al., 2010; World Green Building Council, 2013; Yoshida
and Sugiura, 2014). However, due to a lack of systematic evidence
regarding incremental green costs, it is still open to debate whether
such benefits to developers are large enough to offset the incremental costs. In addition, Issa et al. (2010) suggested that incremental green costs varied widely from company to company, and
the costs and complexity of green buildings might be prohibitive
both for first-time adopters and for those starting with low standards. Therefore, taking heterogeneity into consideration, the
economic viability of green building development requires more
empirical evidence at the micro-level.
4.1.2. Barriers to economic viability from the perspective of
developers
Some studies further investigate the factors hindering developers from achieving economic viability in green building
development (Bartlett and Howard, 2000; Deng and Wu, 2014; Jaffe
and Stavins, 1994; Jakob, 2006; Simcoe and Toffel, 2014; Zhang
et al., 2011b). Firstly, the perception that “going green” is too
costly has been pervasive among developers and weakened their
initiative (Bartlett and Howard, 2000). The perceived incremental
costs, as described by developers, vary from 0.9% to 29%, and these
are typically higher than the actual incremental costs reported in
Table 1 (World Green Building Council, 2013). Developers overestimate incremental green costs for two primary reasons. First, in
addition to the incremental costs associated with specific buildings,
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L. Zhang et al. / Journal of Cleaner Production xxx (2017) 1e12
Table 3
Green price premiums estimated by revealed preference method.
Author (Year)
Country
Building Type
Market Type Certification
Eichholtz et al. (2010)
US
Office building
Rent
Sale
Wiley et al. (2010)
US
Office building
Rent
Sale
Fuerst and McAllister (2011c) US
Office building
Rent
Sale
Fuerst and McAllister (2011b) US
Office building
Rent
Sale
Eichholtz et al. (2013)
US
Office building
Rent
Sale
Kahn and Kok (2014)
US
Koirala et al. (2014)
US
Fuerst and McAllister (2011a) UK
Residential building
Sale
Residential building
Rent
Retail, office and industrial buildings Rent
Sale
Office building
Rent
Sale
Residential building
Sale
Chegut et al. (2014)
UK
Fuerst et al. (2015)
UK
Brounen and Kok (2011)
Netherlands Residential building
Sale
Kok and Jennen (2012)
Netherlands Office building
Rent
Chegut et al. (2016)
Netherlands Residential building
Sale
Deng et al. (2012)
Singapore
Residential building
Sale
Deng and Wu (2014)
Singapore
Residential building
Sale
Hyland et al. (2013)
Ireland
Residential building
Rent
Sale
Yoshida and Sugiura (2014)
Zhang et al. (2016b)
Japan
China
Residential building
Residential building
Sale
Sale
Certification Level Green Price Premium
Energy Star
Average
LEED
Average
Energy Star
Average
LEED
Average
Energy Star
Average
LEED
Average
Energy Star
Average
LEED
Average
Energy Star
Average
LEED
Average
Dual certified
Average
Energy Star
Average
LEED
Average
Dual certified
Average
Energy Star
Average
LEED
Average
LEED
Platinum
LEED
Gold
LEED
Silver
LEED
Certified
Energy Star
Average
LEED
Average
LEED
Platinum
LEED
Gold
LEED
Silver
LEED
Certified
Energy Star
Average
LEED
Average
Energy Star
Average
LEED
Average
LEED, Energy Star, GreenPoint Average
IECCa
Average
EPCbBREEAM
Average
EPC, BREEAM
Average
BREEAM
Average
BREEAM
Average
EPC
A/B
C
EPC
A/B/C
A
B
C
EPC
A
B
C
EPC
A/B
A
B
Green Mark
Average
Platinum
Gold Plus
Gold
Certified
Green Mark
Average
Platinum
Gold/Gold Plus
Certified
BERc
A
B
C
BER
A
B
C
TGBPd
Average
CGBLe
Average
3-star
2-star
1-star
3.4%e10.5%
9.9%
21.0%
Not significant
7.6%e9.0%
16.4%e18.9%
5.1%
22.0%
3.0%e4.1%
4.1%e5.1%
9.4%
19.7%
28.4%
32.3%e33.6%
4.1%
5.1%
17.4%
Not significant
Not significant
9.4%
31.0%
28.4%
95.4%
29.7%
39.1%
Not significant
2.1%e6.7%
6.0%e6.2%
13.8%
11.7%
2.1%e5.4%
26.1%
Not significant
Not significant
21.7%
15.8%
5.1%
1.8%
3.7%
10.7%
5.7%
2.1%
Not significant
5.5%
10.2%
2.1%e2.6%
5.8%e6.5%
1.1%e2.0%
4.3%
15.4%
2.3%
5.7%
0.8%
4.0%e13.9%
10.3%e12.4%
4.2%e15.6%
1.3%e10.1%
1.8%
4.0%
Not significant
9.7%
5.3%
1.7%
10.2%e13.8%
6.9%
Not significant
8.7%
5.8%
Note:
a
IECC indicates “International Energy Conservation Code”.
b
EPC indicates “Energy Performance Certificate”, with A being the highest level.
c
BER indicates “Building Energy Rating”, with A being the highest level.
d
TGBP indicates “Tokyo Green Building Program”.
e
CGBL indicates “Chinese Green Building Label”, with 3-star being the highest level.
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developers bear the R&D costs and technical risks at the initial
stage of green building development (Jakob, 2006; Zhang et al.,
2011b). Second, suppliers of green materials and equipment are
still scarce. Specifically, there may be a coordination problem such
that developers are waiting for key suppliers to invest in green
building expertise, while those same suppliers are waiting for evidence of ample demand (Simcoe and Toffel, 2014). Some studies
explored how to solve these problems, so as to encourage more
developers to participate in green practices. Simcoe and Toffel
(2014)’s empirical analysis suggested that policies requiring governments to construct green buildings had a significant impact on
the adoption of green building standards in the private sector for
two main reasons. First, government procurement policies might
solve the coordination problem between developers and key suppliers, jump-starting the development of specialized input markets
by providing a guaranteed source of demand. Second, government
procurement policies might lower prices of green building inputs
through economies of scale and learning effects.
The second problem is the cost-benefit mismatch caused by
information asymmetry. For developers of buildings sold to
households or enterprises immediately after completion, the lumpsum payment from buyers is the only opportunity for them to
collect the rewards from green building investments. Therefore,
market recognition of green buildings at the time of sale is crucial
for developers to achieve economic viability. A principal-agent
problem can arise if the developer of a new building cannot credibly represent its “greenness” to potential buyers (Jaffe and Stavins,
1994). Ordinary buyers do not have the specialized knowledge to
assess the “greenness” of buildings, and buildings are a typical
experience good - their qualities, such as energy efficiency, are only
revealed gradually upon consumption (Nelson, 1970; Shapiro,
1983). This viewpoint is also supported by recent studies.
Brounen et al. (2013) showed that energy literacy and awareness
among Dutch households were rather low: 44% of the surveyed
households had no idea about their energy consumption, and 40%
could not appropriately evaluate energy-efficiency investments.
Residents’ knowledge about greenness of buildings is especially
scarce in developing countries, such as China (Zhang et al., 2016a;
Zhou, 2015). Zhang et al. (2016a)’s survey in Beijing suggested
that more than 60% of the respondents do not know about China’s
official green building certification. Information asymmetry makes
buyers uncertain about the benefits of green buildings and thus
hesitant to choose them, which in turn reduces developers’ green
initiative and leads to adverse selection (Akerlof, 1970).
Green certifications provided by third parties like governments
or independent institutions have been proved to be effective in
overcoming information problems and assisting buyers in making a
better choice (Banerjee and Solomon, 2003; Heinzle et al., 2013;
Kahn and Kok, 2014). Accordingly, the past decade witnessed a
proliferation of green labels in major economies, such as LEED and
Energy Star in the US, BREEAM in the UK, CASBEE in Japan, and
Green Mark in Singapore. However, a survey conducted by Davis
and Metcalf (2014) found that the information provided by green
labels was often too coarse for buyers to make efficient decisions.
Deng and Wu (2014)’s empirical analysis suggested that the green
building price premium increased considerably during the resale
phase, relative to the presale stage, implying that while developers
paid for almost all of the incremental upfront costs, they only
shared part of the benefits associated with the green investments.
Moreover, the study found that green practices did not significantly
improve the corporate financial performance of developers. One
explanation is that at the presale stage, residents are reluctant to
fully trust the green building certification, which is mainly based on
design and document reviews. Only when such green buildings
have been lived in and utility bills have arrived can residents verify
9
the “green” claims and may then be willing to pay more. This
problem is more noticeable in developing countries where the information transparency in real estate market is insufficient and the
public awareness of green buildings is scarce (Zhou, 2015; Zheng,
2007). Therefore, it is crucial to provide more accurate and credible information for consumers and thus help developers reap the
benefits of green investments. Zhang et al. (2016a) implemented an
experiment in China to measure how consumer decisions would
change after being provided with detailed information about green
buildings tailored to their situation, and found that the information
that was more accurate could increase buyers’ WTP for green
buildings.
4.2. Economic viability from the perspective of occupants
4.2.1. Cost-benefit analysis of green building purchase or lease
Occupants are buyers or tenants of buildings. Their choice and
WTP play an important role in green building development. Only
when the price premium is offset by the discounted value of lower
operating costs, increased comfort, health and productivity, and
potential economic returns produced by enhanced corporate
reputation, will they be willing to buy or rent green buildings.
Hyland et al. (2013) compared the estimated green price premium
with the hypothetical value of energy savings from Sustainable
Energy Authority of Ireland. For example, Hyland et al. (2013)
estimated that, for a 3-bedroom semi-detached house, moving
from an F to B1 rating would lead to a price premium of V1617 or a
rental premium of V1119. However, according to Sustainable
Energy Authority of Ireland (2017), the engineering-based model
indicated that, for such a property, moving from an F to B1 rating
would yield an energy cost saving of V2610, which was 1.61 times
the sale price premium, and 2.33 times the rental price premium.
Kahn and Kok (2014) employed the data in California and documented that for a home expected to yield a 30% reduction in energy
costs, the payback period was only 12 years given the green price
premium estimated in the paper. However, these two calculations
were based on hypothetical energy savings from engineering
studies, which omitted behavioral and environmental parameters,
and thus might overstate actual savings (Hyland et al., 2013).
Koirala et al. (2014) found that reduction in monthly energy
expenditure only accounted for 1/18 of the monthly rental price
premium. Reichardt (2014) even found that the operating cost of
Energy Star rated buildings was 3.9% higher than non-green
buildings. Comparisons of the green price premiums with operating costs have not reached a consensus. Furthermore, benefits of
improved comfort, health and productivity have not been included
in the cost-benefit analysis yet, as they are too difficult to quantify.
4.2.2. Barriers to economic viability from the perspective of
occupants
One of the barriers to economic viability from the perspective of
occupants is the energy pricing mechanism. Sabapathy et al. (2010)
indicated that while energy savings for LEED-certified buildings
were approximately 34% on average, energy cost savings were only
about 8.5%. There are two possible explanations. First, the energy
costs have a component of fixed demand charges, which do not
depend on energy consumption, and thus the overall energy cost
savings are lowered. Second, the type of lease agreement may not
pass on the benefits of energy savings to the occupants, which is
called the investor-user-dilemma or split incentive problem (Jakob,
2006; Kahn et al., 2014). The “full gross” (all-inclusive) contract
provides the weakest incentives for tenants to conserve energy but
incentivizes building owners to invest in energy efficiency. In
contrast, the “triple net” (excluding utility cost) contract incentivizes tenants to economize on energy but provides weaker
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L. Zhang et al. / Journal of Cleaner Production xxx (2017) 1e12
incentives for building owners.
Another barrier may be occupants’ behavior. Some studies show
that consumers are rationally inattentive to energy costs when they
buy energy-using durables (Allcott and Taubinsky, 2015; Sallee,
2014). Energy bills are aggregated and periodic, so consumers
have to gather information and perform a sophisticated calculation
to compare life-cycle costs. However, many consumers lack the
skills, and for others, the amounts saved are too small to justify the
efforts. In addition, even if consumers do trade off initial capital
costs and expected operating costs in the future, the discount rate
they used is approximately 14.6%e28.9%, which substantially exceeds values used in “engineering calculations” to evaluate socalled life-cycle costs (Allcott and Wozny, 2014; Busse et al., 2013;
Dubin and McFadden, 1984; Gallagher and Muehlegger, 2011;
Hausman, 1979). The reason may be that the present large upfront payment attracts more attention than the smaller and uncertain monthly payments in the future, leading consumers to
}szegi
overweight the up-front payment (Jaffe and Stavins, 1994; Ko
and Szeidl, 2013).
What is more, some studies find that energy efficiency
improvement will in turn affect occupants’ behavior (Alcott, 2005;
Lin and Liu, 2015; Ouyang et al., 2010). Energy conservation initiated by energy efficiency technology means less energy use,
thereby more disposable income if energy prices do not change
after efficiency improvements (Ouyang et al., 2010). Then, with
more purchasing power, occupants are likely to pursue lifestyles
that are more comfortable by consuming more energy and/or
employing other energy-consuming appliances. As a result, part or
all of energy-saving effects vanishes, and this loss portion is
denoted as “rebound effect”. The magnitudes of rebound effect
proved to be much larger in developing countries (Ouyang et al.,
2010). At present, rebound effects are generally less than 30% for
household energy services in developed countries, but in China, the
energy rebound effects are 66.5%e88.5% for urban residential
buildings, and 127.0%e236.3% for rural residential buildings (Lin
and Liu, 2015; Ouyang et al., 2010). The reason is presumably that
most households in China do not have enough space-heating,
lighting or cooking services, and the demand for a more comfortable household lifestyle increases due to the rapid economic
development. This phenomenon also implies that green housing
demand can be attributed only in part to energy cost savings (Kahn
and Kok, 2014; Khazzoom, 1980; Lin and Liu, 2015; Ouyang et al.,
2010). Therefore, the benefits of enhanced comfort, health and
productivity should be taken into consideration in the cost-benefit
analysis of green buildings.
5. Conclusion
By reviewing the existing studies on the economic viability of
green buildings from the perspectives of building life cycle and
particular market participants, we identify that while “going green”
may be financially feasible or even profitable over the entire life
span, a number of factors hinder developers and occupants from
achieving economic viability in the adoption of green building.
These include overestimates of initial costs, cost-benefit mismatch
caused by information asymmetry, split incentives caused by contract structure and energy pricing, and a lack of attention to energy
costs. The inconsistency of economic viability from the perspectives
of building life cycle and particular market participants may
significantly contribute to the “paradox” in the green building
market and the slow development of green buildings. Future
research is needed to address current barriers and thus hasten the
diffusion of green design and technology in the building sector.
Firstly, more comprehensive and robust evidence about lifecycle costs and benefits of green buildings are urgently required.
Specifically, there should be more elaborate calculations of the incremental initial costs, operating cost savings, comfort and health
improvement, corporate reputation improvement, market value
increase, and environmental externalities. Furthermore, attention
should be paid to the heterogeneity of developers and occupants,
and the difference among various locations and conditions. The
results would provide guidelines for reforming green building
standards and codes, and offer valuable information to market
participants to aid in their decision-making, such as mitigating
developers’ overestimate of incremental costs.
Secondly, in the cost-benefit analysis of developers and occupants, it is crucial to take those ancillary long-term or intangible
benefits into consideration and thus achieve holistic knowledge
about the economic returns from green building investment. For
developers, while the existing research focuses on the green price
premium at the project level, it is more valuable to investigate the
accumulative impacts of green practices on the enterprise-level
financial performance, risk mitigation and brand value. For occupants, the conventional theory emphasizes incentives from operating cost savings, but occupants’ lack of attention to energy costs
and the rebound effect imply that improvements in the built
environment may play a more important role. Therefore, it is
essential to include the increased comfort, health and productivity
in occupants’ benefit analysis, especially in developing countries
where rapid urbanization and economic development result in the
demand for more comfortable built environment.
Thirdly, it is a promising research area to investigate the dynamics of green building diffusion, namely how economic viability
determines the adoption rate of green design and technology, and
how the growth of green buildings in turn influences green costs
and benefits. The development of green buildings is a complicated
process consisting of interactions and feedbacks among market
participants, and some problems cannot be solved by mere static
analysis. For example, if costs are falling, it can pay to wait, despite
the fact that the current net benefit of “going green” is positive. Cost
dynamics resulting from learning and experience curves, and price
dynamics resulting from market competition and gentrification,
deserve further research.
Finally, institutional arrangements for stimulating green building development should be an important part of the future research
agenda. Integrated and comprehensive policies play a pivotal role
in stimulating a high level of market penetration. While the existing studies have documented the effectiveness of green certification in overcoming the information asymmetry problem, such a
role can be further enhanced via several approaches. For instance,
the signal quality can be improved through post-occupancy evaluation, which reflects the actual performance of green buildings.
Furthermore, energy pricing, carbon trading and education nudges
should be the focus of future policies to shape the behavior of individuals and enterprises to support better building performance
outcomes.
Acknowledgement
This research is funded by the National Natural Science Foundation of China (Project No: 71373006, 91546113, 71673156),
Tsinghua University Initiative Scientific Research Program, Urban
China Initiative, China Scholarship Council, and Peking UniversityLincoln Institute Center for Urban Development and Land Policy.
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