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Should the six star rating be dumped?

Annual per capita energy consumption of an average greenfield house (from Fuller & Crawford)

The Fairfax press reported yesterday the Victorian Government is considering a proposal to abolish the mandatory 6 star energy rating for new houses and renovations, and replace it with a voluntary industry code. This morning however, The Age reports the Premier, Ted Baillieu, has done an about-face and ruled out any change.

If the Government really was seriously contemplating removing the mandatory rating, I think Mr Baillieu has made the right decision – it should stay. The improvement in the energy efficiency of new homes over the last ten years has been dramatic. A recent study shows the per capita operating energy required by the average new greenfield dwelling in 2008 was about a third lower than it was in 2000 (see exhibit).

In fact it was lower than it was in 1960, nearly 50 years earlier, notwithstanding the size of the average new greenfield dwelling more than doubled over this period, from 112 m2 to 238 m2. It seems quite plausible the mandatory rating system is a key driver of these improvements.

It’s nevertheless worth looking further at the idea of abolishing the mandatory six star rating because all regulations have costs that policy makers should understand. The idea is probably also indicative of the sorts of changes the new Liberal-National Governments in Qld, NSW and Victoria are likely to examine under their red tape reduction programs. In any event, organisations like the Master Builders Association aren’t likely to forget about this one any time soon.

A key argument in support of abolishing the mandatory rating is that the carbon tax will make the need for regulation redundant – the increase in price will provide the appropriate incentive for those who value energy efficiency. Another is that removing the rating would lower the threshold cost of building a home (The Age cites a figure of around $5,000), thereby improving affordability and enhancing choice.

Were the mandatory rating removed, a price on carbon set at a level that reflects its full social cost would still provide many households with sufficient incentive to invest voluntarily in building their new home to six star standard. After all, saving money on energy bills in the medium and long term is a very attractive proposition for households who can find the extra cash up-front and who can afford to think long term. Business is pretty good at up-selling buyers on optional extras so under this scenario I expect there’d be a fair take-up of ‘six star energy packages’ (although builders would apply an added margin).

Some households, though, would jump at the chance of a reduction of up to $5,000 if it were the difference between getting into home ownership or remaining in the rental sector. Some others might use a $5,000 reduction to get into a location closer to key services where they could save on transport costs and emit lower tailpipe emissions, perhaps achieving much the same financial and environmental outcome as under the mandatory code.

Still others – possibly quite a few – might simply apply the $5,000 to buying a bigger or better house. Thanks to the carbon tax, they’d at least be paying a price reflecting the extra cost they impose on society. Moreover, they’d still have a clear price incentive to manage their consumption with care and to retro-fit energy conserving measures down the track as their financial circumstances improved.

There’s a segment of the market – renters – whose options for responding to price incentives is much more limited. It’s harder for them to have a rental property upgraded for greater thermal efficiency.

But assuming the existence of a price on carbon seems academic. Tony Abbott has promised to roll back the carbon tax if, as seems almost certain, he wins the election due by 30 Nov 2013. Perhaps there’s some chance it will remain in place – removing the compensation package might be harder than Mr Abbott expects – but the odds must be pretty long.

If it’s assumed there’s no price on carbon, the mandatory six star rating can be seen as an alternative, ‘second best’ solution. It makes buyers pay some of the social costs of energy consumption. It’s not as economically efficient as a price on carbon, but it has a similar general effect of reducing consumption and hence emissions.

Households enjoy lower ongoing operating costs, eventually getting the $5,000 back, and more. Humans are rather poor at valuing future benefits so some will undervalue the future savings from a six star rating and, given the choice, would forego it. A mandatory system brings greater economic rationality to the decision – it “saves them from themselves”, albeit at the cost of limiting personal choice.

New home buyers and renovators could argue the mandatory six star system is inequitable. The owners of established houses, which are much more numerous, aren’t obligated to upgrade their houses to a similar standard, even on sale or purchase. However that’s not an argument against the mandatory rating – it’s an argument for extending it.

Given Tony Abbott’s undertaking to roll back the carbon tax, I think Ted Baillieu has made the right call.

Update: Today’s editorial in The Age also canvasses this issue.

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  • 1
    IkaInk
    Posted April 17, 2012 at 11:18 am | Permalink

    I wholeheartedly agree with your overall hypothesis. Scrapping the mandatory energy rating is stupid. The carbon-price does not make the mandatory energy efficiency scheme redundant, as the tools work just as well side-by-side as they do together.

    “New home buyers and renovators could argue the mandatory six star system is inequitable. They could, but that argument could be countered by renters, or anyone that doesn’t have much choice with what they purchase.

    Some level of mandatory energy/efficiency/emissions ratings is nearly always a good idea. Far from “hurting the poor, through reduced choice” they instead drive prices of energy efficient products/houses/cars/etc down. If anyone ever visited Bangkok in the 90s and has visited again the last 5 years the power of minimum standards can be seen and breathed. Bangkok is still polluted, but the air quality is much better than it once was. California, despite its growth and the huge increase is wealth and consumption has the same energy use per capita as it did 30 years ago; almost certainly as a result of minimum standards. This LA Times piece on Arthur Rosenfeld summarises it well.

    On one point I’d like some clarification though Alan. “It’s not as economically efficient as a price on carbon, but it has a similar general effect of reducing consumption and hence emissions”. It seems that $5,000* per house is an extremely low price to pay to make homes roughly 30% more energy efficient**. I’d imagine that sort of price is a much better bang-for-your-buck than the carbon price’s effect on the economy.

    *Using your suggested price difference for the price of homes if the plan is scrapped.
    **Again using your figures on the 2008 and 2000 greenfield sites.

  • 2
    suburbanite
    Posted April 17, 2012 at 12:46 pm | Permalink

    It seems to be a simplistic ratings system and my preference would be to let a carbon price sort it out in the market. The two problems with that approach are that renters have to foot the cost of heating and cooling poorly built dwellings and it seems many builders in Australia have poor records in implementing basic energy saving improvements such as not leaving gaps in insulation.

    The other problem is that the peak cost of electricity, made high by air-conditioners, is spread across all consumers, not just the ones cooling badly constructed houses. The reality is so far from ideal that this ratings system looks essential.

  • 3
    eli greg
    Posted April 17, 2012 at 2:13 pm | Permalink

    A carbon price will not sort it out; it is not desinged to drive change in the rsidentail property marklet (from a supplier perspective) – the two regulatory mechanisms are complementary, rather than overlapping or doubling up

    A carbon price provides the macro mechanism to move broader markets and incentivises both emitters to change the source of their energy and consumers to choose, where appropriate more energy efficient products (through a price signal)

    The six star mandatory house (thermal efficiency) complements the carbon price but takes the uncertainty (and choice) away from the consumer. It drive measurable efficiency gains at the micro level

  • 4
    Edwin McLean
    Posted April 17, 2012 at 2:17 pm | Permalink

    Ths only problem about letting a carbon tax settle it out in the market, is that the time of paying 5k on your new house and the time you get it back are two very seperate times. We as human beings are proven to be pretty good at focusing on the shart term while ignoring the long term.
    There must be incentives to retrofit. Some way of reminding people that there is a reason that house is 5k more expensive than this 2000 model. The owners of rental houses would improve energey efficiencey if renters would pay extra for the property unlikely. It is in all our interestest to have old homes bought up to the most cost effective star rating possible.

  • 5
    Microseris
    Posted April 17, 2012 at 4:46 pm | Permalink

    I don’t think we should assume the carbon price is here to stay. Abbott has made it quite clear he intends to get rid of it at the first opportunity and even if he doesn’t control the senate, a double dissolution is not out of the question especially if he wins in a landslide.

    I find it ironic that the industry can whinge about their customers having to scrape up the money for an average 238M2 house but quibble over $5,000 for the 6 star rating which will pay for itself in the long run. $5,000 equates to around 3m2 on current rates. The only conclusion you can draw from this is either most of their customers are stupid or they are talking shite.

  • 6
    galeg
    Posted April 18, 2012 at 3:45 pm | Permalink

    I would suggest that the Carbon Tax will not solve this problem, and so a 6 star energy rating is probably the way to go.

    In fact the Carbon Tax will not do much if anything to reduce the emissions, as the polluters will be passing increased costs to the Electorate (actually all businesses will be passing on their cost increases as acknowledged by the Fed Gov), and to try to stay in power, the Fed Labor Gov will be compensating the electorate for the increased costs.

    Businesses will not be able to finance emission reducing infrastructure, so the Fed Gov has had to create a body to lend money to business for new infrastructure (with the hook that the loans have to be commercially viable, and projects well advanced). All of this financed ($10 b over 5 years), by hopefully the repayment of loans, but more likely the taxpayer.

  • 7
    suburbanite
    Posted April 18, 2012 at 4:22 pm | Permalink

    I wonder if the carbon tax is already having an effect. I have no figures on this, but I have heard a few people saying they are looking at ways to reduce their energy consumption because prices will be higher under the carbon tax. The biggest barrier to reducing energy consumption is the dearth of expertise in reducing energy wastage in buildings – due to the decades of free pollution and the low cost of energy. This will be partly solved by higher energy prices but training is desperately needed.

  • 8
    IkaInk
    Posted April 18, 2012 at 4:58 pm | Permalink

    @galeg – Some businesses will pass the full increased costs to consumers, which will push down demand, others will fully mitigate increased costs by pursuing more efficient practice. The vast majority will fall somewhere in between. Consumer demand will change as a result of different prices too, which will further assist reductions in emissions. Carbon prices might increase costs to both businesses and consumers, but that of course is the point.

    A family that is suffering higher energy prices, and getting government subsidies can actually end up well ahead by simply taking measures to reduce energy expenditure. I’ve for example bought energy saving powerboards, becoming much more aware about turning off and unplugging devices when not in use and ensuring my new tv (old one died) was as power efficient as I could afford. Now when the prices rise, they will probably only rise to roughly what I was paying beforehand anyway (in the meantime my bills are a bit cheaper). Once the compensation comes in I’ll be ahead.

    I think other measures should certainly be taken, but the carbon price will help drive a cleaner economy.

  • 9
    Dudley Horscroft
    Posted May 25, 2012 at 9:34 am | Permalink

    Your contributors seem pretty well convinced that a ‘carbon tax’ is desirable. But you say “a price on carbon set at a level that reflects its full social cost”. Which leaves the unanswered questions – what is the ‘full social cost’ and how can it be measured? [Answers: "We dont know", and "It can't".]

    I can accept that a government might well consider a tax on energy consumed is a desirable tax as it is exceedingly broad-based, can be levied at a low level and still rake in billions, is easy and cheap to collect (as there are few energy wholesalers) and has low distorting properties. As such it is an efficient (economically speaking) tax. But the current carbon tax is only good at raking in the lolly, and should be a good candidate for abolition. A better change would have been to restore the indexation of fuel excise unfortunately scrapped 12(?) years ago.

    That said, we bought a new house in the ACT some years ago, and our old house had to be rated before being sold. In my view there was little merit in the assessment used, a clipboard for ticking this and that with very little measurement or checking. IIRC, no credit for double glazing or exterior shutters – in the ACT the one is necessary for the winter and the other for the summer. And here in the Tweed, none of the suppliers of blinds appear to market exterior blinds which can be opened or shut from inside. Perhaps I have not noticed them, but they do not seem to be on display in shopping malls, where they would attract attention.

    But I venture to suggest that $5000 is really neither here nor there when a swimming pool, as many new houses have, costs rather more, and then consumes substantial power to keep the pool clean. If people are willing to pay for a pool, who worries about the cost of building energy efficient houses?

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