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The Economics of Green Buildings

Lecture 7
General assumptions made by contemporary
(neoclassical) economics
A new field of economics: ecological
Applications to the built environment
Life Cycle Costing (LCC) approach
Neoclassic Economics
Nature is a sector of the economy
Nature does not support the economy, but it
simply is a sector of it
Economy will grow around / develop / evolve to
overcome any scarcity that may develop based
on nature
Unimportance of Nature
Prevailing Economic System

Private ownership of material resources

Public ownership of sinks
Perfect functioning of the market
Infinite substitutability of resources
Subsidized disposal, energy, water
Economy The ecosystem
is seen sector of
the Economy

Environmental Economics
Three steps
assessing the economic importance of environmental
finding the economic causes of degradation
designing economic incentives to slow, halt, and reverse
environmental degradation
Assumption: the environment is not a separate entity
from the economy
Environmental changes have economic impact
Ecological Economics
A new transdisciplinary field addressing the
relationship between ecosystems and economic
systems in the broadest sense.
Uses the tools of conventional economics and ecology
as appropriate.
Need to establish institutions that take the long term
view, a la biology
Economics as an ecological system
R. Costanza, Ed. Ecological Economics, The Science and Management
of Sustainability, Columbia University Press, 1991, 3-7.
Hicksian Income
...income that
can be
income that
does not
forego future
for others.
Sustainable Economic System
Understands primary role of natural systems
in the economy
Integrates functions of industrial and natural
Accounts for true costs of waste and disposal
Cradle-to-Grave responsibility for products
Penalizes waste, rewards efficiency
Understands that everything is connected
Current vs. Ecological
The current economic system is not sustainable
Depends on the scale of material/energy throughput
Subsidizes resource extraction and pollution
Taxes productive activities
Does not measure welfare
A system based on Ecological Economics would:
Shift taxes to waste, inefficiency, and pollution, away from wages, profits,
productivity, and investment
Focus on dematerialization, deenergization, decarbonization, and
Measure welfare instead of absolute monetary transactions
Support an EcoIndustrial revolution
Changing the Signals to the Economy
Currently taxes are applied to positive aspects of
behavior: wages, productivity, profit
It would be better to tax aspects that are negative:
waste, inefficiency, pollution
Possible mechanisms:
Pollution taxes
Tradable pollution permits
Deposit fees
Shifting impacts of production to producers is called
Internalize the Externalities polluter pays
Assessing Building Economics
Depends on the owner: private or public
Speculative buildings: minimize capital or first cost
of the building
Commercial owner: minimize capital costs, some
consideration of operating costs, issue is length of
Federal government: minimize sum of capital and
operating costs
The economics of green building is predicated on
minimizing the total cost of the building over its life
cycle: Life Cycle Costing (LCC)
Considering the Environment Integrated
Decision Making
Since Financial and Economic Analysis are conducted in terms of
money, environmental considerations must be somehow turned into
monetary items
Analysis Options
1. Omit environmental considerations
2. Recognize them but do not integrate them into the decision
3. Describe them list with appropriate monetary values
4. Qualitative Comparison describe and compare monetary and
non monetary effects
5. Quantitative Non-monetary assessment assess and record
effects in non monetary units
6. Quantitative monetary assessment Evaluate in money terms
and integrate into decision
Wild Card IEQ
Indoor Environmental Quality (IEQ):
comfort, air quality, lighting, noise,
connection to nature
Cost of building lease: $22/SF
Cost of employee (typical): $124
Benefit of healthy building: $12/SF (assumes
a 10% productivity increase)
Note: for Federal government: $350/SF
Perceived High Cost
It cost more to buy / use that
Initial Cost
Life Cycle Cost
Cradle to Cradle
Cradle to Grave
Full Cost Accounting
Embodied Energy - subjective
Life Cycle Costing
Life Cycle Costing (LCC) is used to determine the
total cost of a building for the purpose of selecting
LCC adds together the construction or capital or
first cost of a building to the total operating costs
Operating costs could include
Energy: electricity, natural gas, fuel oil, other
Water and wastewater
Maintenance: function of quality, durability, complexity
Total cost of people in building
LCC Process
Determine the building lifetime & discount rate
Estimate the capital cost for construction
Run simulation to determine operating costs (typically
energy, can include water, wastewater treatment,
maintenance, IEQ impacts)
Determine annual building cost
Amortize capital cost over building lifetime or other period of time
Input operating costs and adjust for inflation
Sum amortized capital cost and operating costs for each year
Use discount rate to determine the present worth of annual costs
Discount Rates
Used in economic analysis and LCC
Discount rate if the alternative investment
The discount rate is the way society views the
The higher the discount rate, the lower will be
the worth of future savings or earnings
Discount Rate Formula

Future Value
Present Value
(1 Discount Rate) year

Present Value
(1 .08) 20

= $2,051.10
Discount Rate Formula


$2,051.10 i = 8%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Inflation Rate Formula

Inflated Value Initial Value * (1 Inflation Rate) year

Inflated Value $200 * (1 0.03) 10


Cost of a $200 item in 10 years if the annual

inflation rate is 3%
LCC Tableau
(1) Net Annual Savings = Savings Costs

Net Annual Savings=Energy SavingsLoan O&M Misc

(2) PW of Savings = Net Annual Savings discounted to


(3) Total PW of Savings = Sum over lifetime of the system

(4) Savings to Investment Ratio (SIR)

SIR= Initial Cost/Total PW of Savings

Example: Window Replacement

For year 10:

Annual Savings=$2960.49 - $1490.29 - $268.78 - 0.00


PW of Savings = $1,201.42/(1+.04)10 = $811.63

Total PW of Savings = $4,109.51 (add PW of Savings


SIR = $4,109.51/$10,000 = 0.41

FDOE Research Study
Service Life Cycle Cost Analysis

Lowering the initial cost of a facility by

selection of lower initial cost materials will
likely result in higher life cycle cost of the

Show that low initial cost was not always best

FDOE Required Assumptions
Building Service Life = 50 years
Inflation Rate = 3.0%
Disregard Bonding Issues
Discount Rate = 0.0%
No Salvage Value when systems are replaced
FDOE Requirements
Evaluate commonly selected building materials
Limited the amount of new materials that were
introduced into the study
Primary goal was to show low initial cost was not
always the lowest total cost over the life of the
Analyzing individual components or material
systems of schools not the school as a system
Needed for Analysis
Identify all costs for selected materials
on a per square foot basis
Initial Cost
O & M Cost
Determine the number of replacements
Service LCC Analysis
LCC moving money through time
Net Present Worth convention
Operation Cost
Replacement Cost Maintenance Expenses
Purchase Price

0 10 20 30 40 50

Low initial cost vs. low LCC
Initial Cost
Life Cycle Cost


$35.00 Large
$30.00 between
Cost and LIFE
$15.00 difference
and LIFE

Ideal Alternative Low initial Cost
Calculation Results
System Number of Annual COST OF
Identification Capital Service Replacement % Maintenance SYSTEM IN
Number Material System Cost Life Systems maintenance Cost NPW
($/unit) (years)
Ceramic Tile (6"x6"x1/2" )
1 Mortar & Grout $7.31 50 0 1.00% $0.07 $15.56
Ceramic Tile (6"x6"x1/2" )
2 Mastic & Grout $6.69 30 1 2.00% $0.13 $38.02
Quarry Tile
3 Mortar & Grout $6.70 35 1 2.00% $0.13 $40.67
Exposed Concrete
4 Sealant (2 coats) $0.79 50 0 76.00% $0.60 $68.51
Terrazzo (1 3/4")
5 Cast in place $7.10 50 0 8.00% $0.57 $71.17
6 Epoxy resin $1.60 12 4 37.00% $0.59 $85.16
Laminated wood (synthetic core)
7 vapor barrier & adhesive $12.00 20 2 5.00% $0.60 $140.50
Wood plank (2 1/4")
8 vapor barrier & urethane $9.31 30 1 24.00% $2.23 $283.94
Bamboo flooring
vapor barrier & adhesive
9 $13.22 25 1 17.00% $2.25 $294.40
Increasing Initial Cost vs. LCC
Initial Cost
Life Cycle Cost

Cost ($/SF)




Exposed Epoxy resin Ceramic Quarry Tile Terrazzo Ceramic Wood plank Laminated Bamboo
Concrete Tile (Mastic) Tile (Mortar) wood flooring
Calculation Procedure
Ceramic Tile Exposed Concrete
Capital Cost $7.31 $0.79
Service Life 50 50
# Replacements 0 0
NPW of $0.00 $0.00
O&M (%) 1.0% 76.0%
O&M ($) $0.07 $0.60
NPW O&M $8.25 $67.72
TOTAL NPW $15.56 $68.51
Exposed Concrete vs. Ceramic Tile
with mortar
Initial Cost
Life Cycle Cost






Exposed Concrete Ceramic Tile (Mortar)
Cost savings from selecting low
LCC vs. low initial cost
Option 1: Low Option 2: Low Life
2,000 SF Initial Cost Cycle Cost
Concrete Ceramic Tile
Initial Cost $0.79 / SF $7.31 / SF
Total NPW $68.51 / SF $15.56 / SF
Total Initial Cost $1,585 $14,620
Total Life Cycle
$137,020 $31,120

Additional Initial Cost $13,035

Total Savings from Purchasing Lower LCC
Increasing Initial Cost vs. LCC
Initial Cost
Life Cycle Cost

Cost ($/SF)




Exposed Epoxy resin Ceramic Quarry Tile Terrazzo Ceramic Wood plank Laminated Bamboo
Concrete Tile (Mastic) Tile (Mortar) wood flooring
Increasing O&M vs. LCC
Total O&M
Life Cycle Cost


Cost ($?SF)




Ceramic Tile Ceramic Tile Quarry Tile Terrazzo Epoxy resin Laminated Exposed Wood plank Bamboo
(Mortar) (Mastic) wood Concrete flooring
Calculation Procedure
Ceramic Tile (Mortar) Terrazzo
Capital Cost $7.31 $7.10
Service Life 50 50
# Replacements 0 0
NPW of $0.00 $0.00
O&M (%) 1.0% 8.0%
O&M ($) $0.07 $0.57
NPW O&M $8.25 $64.07
TOTAL NPW $15.56 $71.17
O&M vs. LCC
Total O&M
Life Cycle Cost







Ceramic Tile (Mortar) Terrazzo
Calculation Procedure

2,000 SF Terrazzo Ceramic Tile

Initial Cost $7.10 / SF $7.31 / SF
Total NPW $71.17 / SF $15.56 / SF
Total Initial Cost $14,200 $14,620
Total Life Cycle Cost $142,340 $31,120

Additional Initial Cost $420

Total Savings from Purchasing Lower
LCC alternative
Concluding Thoughts
The economy responds to signals it is sent
Cheap waste disposal
Low costs for emissions (air, water, land)
Low cost for environmental impacts
Cheap and subsidized resources
Tax benefits for resource depletion
Green building is inherently based on Ecological
Capital Cost of green buildings can be lower than
conventional construction
Life Cycle Costing is a necessary step in assessing
buildings and promoting green buildings