The economic impacts of carbon emission trading scheme on building retrofits: A case study with U.S. medium office buildings

Highlights

• Carbon trading increases the return on investment of building retrofits.

• Carbon prices have significant economic impacts on building retrofits.

• The impacts of carbon trading are up to 25% using current price in European Union.

• Carbon trading generates more benefits in locations with more fossil energy.

• Locations with more fossil energy are more sensitive to carbon prices.

Abstract

As a popular emission reduction tool, the carbon emission trading scheme (ETS) can potentially add an economic incentive for building owners to retrofit buildings in addition to the cost savings in energy. However, the additional economic benefits of building retrofits brought by ETS has not been quantitively investigated yet. To fill this gap, this study proposed a systematic economic evaluation method to investigate the economic impacts of ETS on building retrofits. The reduction of the payback period and the increase of the return on investment are adopted as evaluation metrics. Using medium office buildings as an example, this study predicted the economic impacts of ETS on building retrofits at four locations in the U.S., and three different carbon prices were investigated. The results show that carbon prices have significant economic impacts on building retrofits. With the relatively low forecasted time-variant carbon prices (around 10 USD per ton), the economic impacts of ETS on building retrofits are small. When carbon prices increase, the impacts of ETS would be up to 25% for 50 USD per ton (current prices in European Union) and 51% for 100 USD per ton. Furthermore, locations with more fossil energy have higher relative changes in the payback period and ROI but are more sensitive to carbon prices.

Introduction

The Intergovernmental Panel on Climate Change [1] declared that climate change presents one of the world's most pressing challenges. The United States (U.S.) Environmental Protection Agency [2] claimed that carbon dioxide is the primary greenhouse gas contributing to recent climate change. Therefore, reducing carbon emissions is crucial for the mitigation of climate change. In response to that, the U.S. has outlined a pathway to reduce carbon emissions 50% by 2030 [3] and 80% by 2050 [4].

Retrofitting buildings has a great potential to reduce carbon emissions in the U.S. since buildings account for approximately 36% of carbon emissions [5]. Current research shows that many existing buildings have poor energy performance and thus lead to a large amount of carbon emissions [6,7]. Furthermore, most of the existing buildings will still be used until 2050 [8]. Consequently, there is a great potential to reduce carbon emissions by retrofitting buildings. Langevin et al. [9] estimated that this potential can be as large as 80% reduction relative to 2005 levels by 2050.

The carbon emission trading scheme (ETS) has been considered as the top promising instrument to reduce carbon emissions. Thirty-eight national jurisdictions have implemented ETS in 2021, covering 16% of global carbon emissions [10]. The effect of ETS on carbon emission reduction has been studied by existing research. By analyzing the panel data from the German production census, Petrick and Wagner [11] found that ETS caused treated firms to abate one-fifth of their carbon emissions relative to non-treated firms. By studying the city-level panel data in China, Zhang et al. [12] found that ETS adopted in pilot cities reduced carbon emissions by approximately 16%. Villoria-Sáez et al. [13] reviewed the existing ETS from major countries including the EU, Australia, New Zealand, Japan, the U.S., and Canada. They found that carbon emissions decreased around 1.6% per year since ETS implementation and around 23.4% of carbon emission reduction can be reached after 10 years of ETS implementation, compared to the trend when ETS was not implemented. Existing research indicates that ETS can help the reduction of carbon emissions. Therefore, ETS can also potentially help the emission reduction in the building sector by adding additional economic incentives for building owners to retrofit buildings. It's also necessary for building sectors to participate in the ETS since easy measures which were profitable in a short term, “the low hanging fruit”, had already been carried out [14].

There are a few studies about ETS in the building sector. By comparing the existing mechanisms, Wang et al. [15] established a feasible mechanism to improve the ETS for renewable energy application in buildings. Song et al. [16] investigated reasons for the lack of ETS in the building sector in China by exploring building owner's optimal strategies including adopting low-carbon technologies, purchasing emission credits from the ETS market, and non-compliance. Chen et al. [17] analyzed the ETS in the building sector in China and recommended a “step-by-step” approach for promoting ETS.

However, the existing research about ETS in the building sector mainly focuses on qualitative analysis. There is no quantitative prediction on the economic impacts of ETS. ETS can add additional economic incentives for building owners to retrofit buildings. But are these additional incentives big enough to motivate building owners for more retrofits? Before incorporating the building sector into the ETS, it's important to quantitatively investigate the economic impacts of ETS on building retrofits.

To fill this gap, this study developed a systematic economic evaluation method to quantitatively investigate the economic impacts of ETS on building retrofits for the future adoption of this tool. A prototypical U.S. medium-size office building was used as an example to illustrate the method. The following of this paper was organized as follows: section 2 reviews the ETS and its implementation; section 3 introduces the method of evaluating the economic impacts of ETS on building retrofit; section 4 describes the design of the case study including building energy models, investigated locations, and examined building retrofit measures; section 5 presents the results for the economic impacts of ETS on building retrofits; section 6 summarizes key findings and discusses the policy implication, finally, section 7 makes a conclusion.