Mandatory European home energy ratings = Potential paper for aspiring economist

The European Union’s commitment to fighting global warming has meant a growing trend in European countries of incorporating energy audits and ratings as part of the home sales process. Relative to other options, boosting buildings efficiency standards is usually the most attractive economic and political option to policymakers because of the large piece of the energy pie that buildings take up. (In the EU, buildings account for 40 percent of energy consumption.) As part of the European Union’s Directive on The Energy Performance of Buildings, all member countries are expected to have energy performance certificates available as part of a required information packet when a new home is sold or leased.

The directive goes into full effect in January 2009, but already some countries have implemented the plan. Currently, Germany, Denmark, and Britain have mandatory requirements for energy ratings for new and existing homes. In the Netherlands and Ireland, ratings are voluntary for existing homes and required for new ones. (The Australian Capital territory has mandatory requirements and other Australian territories have a policy similar to the Netherlands. New Zealand is considering it as a compulsory policy as well.) Energy ratings range from A to G and come on colorful cards, like the British ones shown below, inside the official Home Information Pack. In the U.S., Massachusetts is considering a similar policy.

You would expect that a mandatory energy rating policy would (eventually) affect home prices – conditional on other factors like public awareness, enforcement, the number of energy efficient homes on the market, income, preferences for environmentally friendly living quarters, and so forth – leading to a “green premium” for A and B grade homes. Measuring people’s willingness to pay a “green premium” on other products has been a challenge for researchers everywhere, but the European Union’s policy is a nice natural experiment. It would certainly make for an interesting paper by any enterprising economics Ph.D. student who wants to tackle it.

All that appears to be available now are anecdotes and (unreliable) surveys abound about the positive effects of mandatory energy ratings on home prices. In Australia, for instance, a recent survey conducted by real estate agents found 25 per cent of home buyers saying they would pay up to 10 per cent more, and 11 per cent saying they’d pay up to 20 per cent more for a “green” property. But these wishes weren’t showing up in prices yet. An older 2002 study by the Victoria Building Commission in Australia forecasted a roughly 1-2 percent increase in price for a top-rated home over a comparable average energy efficient home. Low market penetration at the time of the study (less than 10 percent of new Victorian homes were rated 4 or 5 on a 5-point scale) might have deflated the premium. We look forward to some solid empirical findings. (Or if you know someone working on this subject, please send an email.)

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