Price Carbon; Shift Houses?

4. Will there be any new financial options?

One problem with environmental investments is that the party who controls the initial investment (the builder/developer) can’t necessarily pass on the cost to the party who recoups the benefit (the home occupier), because the up–front price hike may be too great. New financial instruments are being investigated by banks and energy retailers to close this gap. For example, the additional costs of rooftop PV solar and other more expensive investments may be added to a mortgage, and energy bills kept at the pre–existing level despite the energy savings. The energy retailer then agrees with the bank to apply the ‘overpayment’ for energy directly to the mortgage, so that the underlying mortgage is paid off more quickly than otherwise. 

5. Is the house at risk from climate change?

There is no question that some of Australia’s beautiful though low–lying seaside areas may not be the wisest place to build new houses or buy existing ones for the longer term. Councils are taking legal advice on their liability if they approve a new construction in an area at risk. The larger real estate groups may be seeking similar advice on potential liabilities for selling houses in the same areas, without disclosure the risks. 

Insurance companies are under no doubt where those risks are, and are in constant talk with their reinsurers about whether they can remain insurable. Similar concerns have been raised in councils and insurers of the ability of our housing stock to stand up to more frequent and more extreme storms. 

Is this all a little unreal? Not this decade or perhaps the next, but after that there could be some rude awakenings. The 2011 report by the Australian Government on “Climate Change Risks to Coastal Buildings and Infrastructure” went through the evidence. While our shoreline rose only 3cm over the last decade, the rate of sea–level rise is accelerating and is now faster than at any time in the last several thousand years. It is predicted to rise by about 1.1 metres through to 2100. If major slices of the Greenland or Antarctic ice sheets calve off, as many anticipate, that rise will occur more quickly.

At last count, there are between 187,000 and 274,000 residential buildings at risk of such a seal–level rise, valued at between $51 billion and $72 billion. New South Wales and Queensland would be most affected.

6. Yes, yes. But what about a carbon price?

The HIA has recently said that the average $300,000 house has 240 tonnes of embodied CO2e emissions, so with a carbon price of $25/tonne, the cost of building the average home would increase by $6000 – a 2% rise.

This simple calculation may be correct. Treasury puts the carbon price’s overall effect at about 1.25%, but building materials would be hit harder, so 2% sounds about right. (By comparison, when the GST was introduced, prices rose by 2.8% on average, so the carbon price will have a much lesser effect.

But a straight dollar–per–tonne calculation is not how a carbon price would work through the building industry. A carbon price is intended to drive innovation, and so reduce carbon emissions and so the total carbon bill:

How does a carbon price work?

A carbon price changes the business case equation for what technologies are commercially viable, and what are not. High–emission products and services become a little more expensive. Low–emission technologies and energy–saving solutions that deliver the same service to the consumer become that much more cost–competitive. They become that little bit more attractive for investment. 

As investment flows, the scale of production increases and distribution channels improve. As prices to consumers then fall and margins for suppliers rise, there is further investment in the low–emission technologies. Further innovation results, continuing the cycle, until the newer technologies are common and cheap. The stone age didn’t end because they ran out of stone.

The carbon price idea is not new. When acid rain threatened in the 1980s, the US Clean Air Act 1990 set a price on its cause: the NOx and SOx emissions from US coal plants. The price was modelled to be about $200 a ton. Energy plants screamed blue murder, but then brought in new technology that before long cut the traded price to about $4 a ton. Salinity in NSW’s Hunter River was managed in the same way.

Greenhouse emissions are a far more complex problem. Nonetheless, Australia’s neutral economic umpire, the Productivity Commission, confirmed in its 9 June 2011 report that a carbon price is the cheapest and most effective way to reduce emissions. Though a carbon price will likely increase in the medium term, there is every reason to believe that by midway this century, competing technologies will make it almost negligible.

So, it may be that, before long, the price rise for new homes is less than the expected 2%. How would that happen? Either by innovation in our existing plants and mills, or by replacing them with newer ones, or by replacing traditional materials with new substitutes. All would reduce carbon emissions and so the additional carbon cost. There is room for innovation in all of the major material segments – particularly in the potential use of fly–ash (a by–product of coal burning) for cement and bricks. New competitive cladding materials are already commonplace. 

Or, it is possible that the government will compensate these industries, giving them no reason to pass on a carbon cost to consumers (though taking away their incentive to innovate). Without compensation, materials may be sourced more cheaply overseas. An international carbon price may tip trade to the newer, larger, cleaner cement plants in South East Asia that would then be able to deliver cement more cheaply in Australia, even after shipping costs. 

Or, the government may decide that compensation is not sustainable. For example, the Grattan Institute has calculated that the compensation sought by the aluminium sector amounts to $161,000 per job per year, which is a lot for other taxpayers to pay.

7. How might a buyer view a carbon price?

As seen above, the ‘assumed’ building cost rise of 2% may well not occur, but let’s assume that it does. How might the buyer look at it? 

Firstly, such a rise would only be in keeping with recent rises in building costs. In the 11 years since 2000, housing construction costs in Queensland have risen by about 82%, according to the Master Builders–Cordell Housing Cost Index. They have run at double the CPI, and outstripped wages by 20%. A 2% rise is certainly significant, but would it change a decision to build or buy? 

If it did, the homebuyer might think of reducing the size of their intended home a little. In the 20 years between 1984 and 2003, the average floor area of new Australian homes increased by 40%, from 162m2 to 227m2, with NSW homes growing from 159m2 to 245 m2 in the same period. They have levelled out since then, but remain easily the world’s largest, with the US next at 201 m2. Shaving a metre of two off that total area may well be possible.

Finally, it’s worth keeping in mind that the federal government’s stated policy is that 50% of any income it receives from a carbon price scheme will be returned to consumers as compensation. They then have the choice as to where to spend that compensation – against their house or somewhere else.

The residential housing sector contributes about 10% of Australia’s greenhouse gas emissions. Every study into the issue has suggested that these might be reduced by 60 to 80 percent, at little cost. So policy makers will continue to look at ways to trigger those reductions. A carbon price is the most efficient way of doing that, though energy–efficiency regulation and disclosure will become stricter to assist in the process. Those who build, buy or sell houses – and particularly those who do so for a living – are opening their eyes to that future. 

Josh Dowse is the principal of Dowse CSP, a Sydney–based consulting firm that works on sustainability and “ESG” (environment, social and governance) issues. Dowse CSP serves companies and investors on ESG/sustainability strategies and actions, on ESG due diligence, capacity building, measures, KPIs and related communication. Josh has practiced and written extensively on these issues over 20 years’ related work with Dowse CSP, McKinsey & Co, Macquarie Group, publisher Allen & Unwin, and legal firm Minter Ellison. He is a frequent commentator on sustainable business through Business Spectator and his regular blog The Grill. Josh is a director of the biofuel company Cleanstar Australia Pty Ltd and the disability advocacy non–profit Accessible Arts, and would love a house with an average NSW floor area. For more information, visit www.dowse–csp.com.au.