American Enterprise Institute (!) endorses tax credits for super-efficient, furnace-free homes

If the American Enterprise Institute (AEI) starts acknowledging that residential energy efficiency has a “positive rate of return” — and advocating federal support to capture the full energy savings possible — perhaps the world is changing.

Then again, it may just be temporary institutional schizophrenia, since others in AEI continue to assert (without any supporting evidence), “No matter what you’ve been told, the technology to significantly reduce emissions is decades away and extremely costly” (see “AEI: Still crazy with denial and delay after all these years“).

Kevin Hassett, AEI’s director of economic-policy studies, has a Bloomberg News column I am excerpting below, because of its surprising degree of common sense — and because he cites actual research:

President-elect Barack Obama has pledged to commit billions of dollars to providing America with a greener future. A big part of that agenda will be an effort to reduce the amount of energy that is consumed heating and cooling our houses.

Public policy generally proceeds in two steps. First, identify the objective. Then, craft policies to achieve it.

In the sphere of green building, the first step is easy. German engineers have identified and produced successful models of energy Nirvana. The question for policy makers is, how can we bring Nirvana to Newark? Given Obama’s strong commitment to a greener future, I expect we will see an answer soon.

Energy Nirvana is what Germans call the Passivhaus, or passive house. It accomplishes the almost unthinkable: During cold months, it maintains an acceptable temperature without relying on a traditional furnace. During hot months, it cools itself without relying on air conditioning.

How have German engineers done this? The basic design principle is that passive houses are airtight and very well- insulated. Because of this, they effectively retain energy from sunlight, large appliances and body heat.

Year-Round Comfort

Passive houses also use a mechanical ventilation system, coupled with a heat exchanger, to regulate the air temperature and provide fresh air. The system can both heat and cool the air, making a house comfortable year-round.

It is estimated that passive houses in the U.S. would be about 10 percent more expensive than less-efficient buildings.

Proponents say passive houses use, conservatively, about 60 percent less energy than normal buildings. Let’s say every residential building in the U.S. had achieved that gain in 2008. According to my calculations, that would have meant 496.8 million fewer metric tons of carbon dioxide emitted — a reduction of 8.4 percent, the equivalent of using 1.56 billion fewer barrels of crude oil. Such gains are not available overnight, of course, but they do provide a glimpse of the scale of the opportunity.

Conservatives often argue that the free market should be left to itself in cases like this; if passive houses are such a good idea, then people will buy them. There is no reason, the argument goes, for government to intervene.

Laissez-Faire Exception

This is one of those rare cases where the laissez-faire approach is incorrect. Policies to encourage the adoption of these technologies are justified, even within free-market orthodoxy.

Take the case of simple insulation. More than a decade ago, Gilbert Metcalf of Tufts University and I set out to study the rate of return that homeowners receive on energy conservation investments. The study was published in the Harvard University- edited Review of Economics and Statistics.

We obtained data that provided intricate details about thousands of houses that allowed us to identify which ones had made home-improvement investments, such as putting so-called Pink Panther insulation in the attic. We also tracked weather conditions and utility bills to estimate the reduction in heating costs associated with the improvements.

Our findings suggested that the positive rate of return of these investments wasn’t much different from the returns available on other assets. That is, investing in energy savings provides a solid, though not extraordinary, net profit.

Walls and Windows

The returns we found were smaller than we, and activists in the green community, expected. One reason: The energy improvements in old houses often turn out to depend on multiple, confounding factors. If you replace windows with more thermally efficient ones — but stick them in walls that were built in the 1920s — then the heat loss through the walls reduces the impact of the windows.

Still, our research provides strong support for home-improvement subsidies. Here’s why: Individuals might invest up to the point where they get a reasonable return, but if they stop there, they aren’t doing enough. That’s because the reduction of energy consumption also has benefits to society, through reduced pollution. A typical homeowner will not take society’s benefit into account when deciding how much to conserve.

The research also supports having government pursue dramatic targets such as the passive house. The fact is, you can save a little bit of energy by tinkering with your house, but really reducing your heating and cooling costs will, in many cases, require a massive overhaul.

We need to avoid spending too much time weather-stripping around thermally inefficient windows. Big achievements will be possible only if new construction is encouraged to veer significantly in the direction of the passive house.

To date, Obama’s environmental agenda has shown an impressive attention to rational economic details. He argues, correctly, that any cap-and-trade system should auction off 100 percent of the carbon permits rather than give some away to companies that will be hardest-hit by mandatory reductions. Tax subsidies for passive houses deserve a spot in that agenda.

I agree that “Obama’s environmental agenda has shown an impressive attention to rational economic details,” though I wonder if AEI realizes that Obama has pledged to return U.S. greenhouse gas emissions to 1990 levels by 2020, and then cut them another 80% by 2050.

I suspect AEI’s honeymoon with Obama won’t last long, but for now we should enjoy the champagne and caviar.

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10 Responses to American Enterprise Institute (!) endorses tax credits for super-efficient, furnace-free homes

  1. Dano says:

    This was also an arty recently in the NYT. The square feet/person is a little low for families, but in the US this will only be ~25% of demand by 2050 anyway. So this would be a good opportunity for condos and townhomes, provided the residents were able to think and change their behavior.

    Nonetheless, we are starting to see more efficient homes, adoption of IBC codes (e.g. R-19 walls, R-35 roofs), so we are getting there. Is it fast enough? IMHO no.



  2. It looks like conservatives now see their persistent support of irrational denialism as a dead-end trap that allows no escape.

    They know they must put forth real solutions in order to be taken seriously.

    Faced with endorsing green construction or banning carbon fuels, it is an easy choice.

  3. tidal says:

    “I wonder if AEI realizes that Obama has pledged to return U.S. greenhouse gas emissions to 1990 levels by 2020, and then cut them another 80% by 2050.”

    Well, their current author has never been too good with math or economics anyway.

  4. Neven says:

    I’m simply amazed that someone at the AEI is capable of writing such intelligent stuff!

    Passive houses are definitely the houses of the future. I’ve actually moved with my family to Germany so that we could afford building a passive house or renovating an old house to passive house standards. It’s not perfect but very exciting stuff.

    Very nice article. Thank you, Mr Romm.

  5. Christopher Yaun says:

    EARTH MATTERS – My partner is building a “passiv haus” in Portsmouth NH. The last of the insulation was installed this week. We left the house last night and it was 56 degF inside. We returned this morning and it was 54 degF. It has been cloudy, sleet/snow and 32 degF during that time period. A blower door test and infrared imaging will be performed on Monday to identify air leaks and cold spots that can be fixed before the sheetrock is installed. Check back in 1-2 weeks and I will be able to tell you more about the performance of the house. Heather is telling me that the construction cost are roughly $180 per square foot which is consistent with standard stick construction. We are estimating that the house will require less than the equivilant of 50 gallons of fuel oil per year to heat. Chris

  6. Jim O'Rourke says:

    Well, this is a thought provoking post.

    Here in Connecticut we have a problem with sprawl, and high property taxes, as do many other states. The housing market, like the rest of the country is heading into depression.

    It may be an opportune time to encourage green homebuilding and efficiency retrofits of existing homes through a revenue neutral system which taxes new, non-green certified homes which would equalize the 10% premium for passiv haus. Any monies raised from this tax could be granted as a credit to owners of existing homes that invest in efficiency measures like additional insulation.

  7. Ronald says:

    It’s not surprising that these guys will call for tax credits for energy efficient houses and other buildings, but it’s part of their overall strategy, not because they believe in energy efficiency.

    What they will do is write articles on all subjects that people might be interested in and value calling for tax credits whether health care, transportation, education, horse riding, bicycling, etc. That way they get you thinking that they have your interests at heart. What they really want to do is reduce all taxes, then when what’s left to tax is to expensive and people complain about those taxes and they are also reduced, they have their libertarian like tax structure. Don’t fall for it.

    If they really wanted energy efficient houses, the best way to do that would be to tax fossil fuels and reduce that same amount in property taxes. Then people will have the incentive to build energy efficient buildings and fund government at the same time.

    These ideas about Passive houses that is being promoted from Germany isn’t anything different than the stuff that was worked out in the US by the mid 1980’s. The Passivhaus that are being described are just combinations of superinsulated, passive solar houses that were engineered back then. Some of these German designs are a lot less good looking as well.

  8. Mike says:

    An unfortunate aspect of last week’s NY Times article was the scant attention paid by the author to the rapidly growing Passive House movement here in the US, limited to one recent project in the mild San Francisco Bay area. Had the author taken the time to contact the Passive House Institute US (PHIUS), she would have discovered that: a) we have been building to the standard here in the US since 2003, b) we have successfully built in a wide range of climates, c) requisite components are becoming available here, d) Passive Houses have been built and sold for low-income housing programs here, e) Passive Houses can indeed “work in a shady valley(…) or on an urban street with no south-facing wall” and finally, f) there is a vibrant and rapidly expanding movement of U.S. building professionals who are working to realize the great promise that Passive House construction holds for our economy, our energy needs, our workforce, and our environment.

    Mike Kernagis
    Passive House Institute US

  9. Mark Shapiro says:

    Thank you Joe, Christopher, Ronald, and Mike.

    Can’t wait to see more efficient, and even net-zero energy houses.

  10. ken levenson says:

    The passive house standard is the future.

    We would be well served if new optional (for the moment) building codes were developed to meet passive house standards that were then coupled with government incentives.

    And the government should incentivise American window /door and hvac manufacturers to provide cost effective components that meet the passive house standards…..