Making our homes greener: Impact of minimum energy efficiency regulations

Governments’ Efforts to Address Climate Change in the Residential Buildings Sector

Governments around the world are tackling climate change in various sectors, often relying on targeted regulations to reduce carbon emissions. One critical sector is residential buildings, which is responsible for approximately 22% of global energy consumption and 17% of greenhouse gas emissions (United Nations Environment Programme 2020). Government interventions in this sector frequently revolve around regulations that mandate a minimum level of energy efficiency in buildings, often accompanied by subsidies (Fowlie et al. 2018, Hahn and Metcalfe 2021, Hausman and Joskow 1982, Allcott and Greenstone 2017). These policies aim to enhance both energy efficiency and environmental performance by targeting a subset of the sector. Therefore, understanding the efficacy of such policies is of first-order importance for both policymakers and academics, as it sheds light on the nature of energy-efficiency investments made by households in response and the policies’ effectiveness for tackling climate change.

Examining the Minimum Energy Efficiency Standard (MEES) in the UK

In our paper (Clara et al. 2022), we address this question by examining the Minimum Energy Efficiency Standard (MEES) introduced in the UK. The Standard mandates minimum energy efficiency standards for rented residential properties in England and Wales, requiring all such properties to achieve an Energy Performance Certificate rating of at least band E by April 2020. Energy Performance Certificates provide a composite numeric rating on a scale from 1 to 100, indicating a property’s energy efficiency, which are a function of the associated operating costs. The numeric rating is converted to a letter rating, with A representing the most efficient and G the least efficient. This regulation in effect prohibits properties with a rating of F or G from establishing or renewing tenancies until energy improvements are made to achieve an E rating. (Listed properties are exempt since aesthetic norms restrict the retrofits that owners may undertake [Fetzer 2023].)

Analysis of Data and Findings

We compile data for nearly 14 million unique properties in England and Wales from 2008 to 2021, which includes both rental and owner-occupied properties. Our initial analysis focuses on understanding the rationale behind the regulation’s emphasis on renters rather than homeowners. When we compare rental properties to owner-occupied ones, we observe that the former are generally more energy-efficient. However, this masks substantial heterogeneity in the type of properties in each group. For instance, rental properties are more likely to be condominiums or flats, which typically have fewer external walls and are, therefore, more energy-efficient compared to houses more commonly owned by homeowners.

Once we account for property type, we find that rental properties, on average, tend to be less energy-efficient than owner-occupied properties of the same type. This suggests that prior to the introduction of regulations, rental properties might have been underinvesting in energy efficiency.

One key advantage of the Energy Performance Certificates is that, for some properties, we have multiple certificates, allowing us to track investments made between any two pairs of certificates. Additionally, these certificates provide information on indicative capital expenditures and the associated savings resulting from these retrofits. These data allow us to offer new insights into the nature and financial viability of the investments made by households in response to the regulations.

Within the subset of properties with multiple certificates, we observe that the regulation improved energy efficiency for rental properties relative to owner-occupied properties (Figure 1). Moreover, it spurred investments, particularly in areas like lighting, main heating controls, and pitched roof insulation.

Figure 1: Changes in energy efficiency around the Minimum Energy Efficiency Standard regulations

Using the information on savings and capital expenditures, we calculate the internal rates of return on these investments for various discount rates, as suggested by prior research. Our analysis reveals that these retrofits typically yield a higher internal rate of return on investment and require lower initial outlays. An exception is the installation of double glazing for windows, which is a common investment despite its comparatively lower financial attractiveness. This suggests that homeowners and landlords may be motivated by factors such as improved home comfort (e.g. noise reduction) or enhanced aesthetics. Overall, our analysis offers novel, large-sample evidence regarding the types of retrofits undertaken by both homeowners and landlords.

An immediate question that arises is whether landlords increase rents to recoup their investments in response to the regulation. To better understand whether this is indeed the case, we combine the Energy Performance Certificates with listing data. Focusing on properties listed for rent, we find that landlords who made investments to comply with the Minimum Energy Efficiency Standard are associated with an average rent increase of approximately 1%. Furthermore, when we compare the estimates of capital expenditures to the increase in rents, we find that investments in most retrofits do not fully offset the substantial initial costs, even after accounting for the standard rental market adjustments due to inflation. This suggests that landlords perhaps may not have made these investments without the regulatory intervention.

Finally, we investigate how the investments made in response to the regulations are related to the secondary objective of reducing carbon emissions from residential buildings. To do this, we again leverage the granularity of the Energy Performance Certificates and the composite numerical scores, ranging from 1 to 100, on the environmental performance of buildings. This score reflects the type and quantity of energy used in the operation of the building and the associated carbon emissions based on the energy sources. Our findings show that improvements in energy efficiency for rental properties, compared to owner-occupied ones, were not accompanied by similarly substantial improvements in environmental performance (Figure 2).

Figure 2: Changes in environmental performance around the Minimum Energy Efficiency Standard regulations

This divergence between energy efficiency and environmental performance can be attributed to two key factors. First, energy efficiency primarily emphasizes cost reduction by optimizing energy consumption and favoring cost-effective energy sources. In contrast, the carbon footprint not only considers energy consumption but also factors in the carbon emissions associated with energy sources. Consequently, while the regulations successfully motivated landlords to invest in energy-efficient measures, their primary motivation was cost reduction rather than a transition to cleaner energy sources.

Second, the tension between policies addressing energy consumption and those targeting energy production within energy markets results in a disconnect between energy efficiency and carbon emissions. For example, the introduction of a carbon tax on electricity production in the UK in 2013 led to a significant reduction in coal-based electricity and increased use of gas and renewables. However, this shift may have resulted in higher electricity prices as additional costs were passed on to consumers. This, in turn, made properties using electricity as their primary fuel source less energy-efficient due

SDGs, Targets, and Indicators

1. SDG 7: Affordable and Clean Energy

   • Target 7.3: By 2030, double the global rate of improvement in energy efficiency
   • Indicator 7.3.1: Energy intensity measured in terms of primary energy and GDP

2. SDG 11: Sustainable Cities and Communities

   • Target 11.6: By 2030, reduce the adverse per capita environmental impact of cities, including by paying special attention to air quality and municipal and other waste management
   • Indicator 11.6.1: Proportion of urban solid waste regularly collected and with adequate final discharge out of total urban solid waste generated, by cities

3. SDG 13: Climate Action

   • Target 13.2: Integrate climate change measures into national policies, strategies, and planning
   • Indicator 13.2.1: Number of countries that have communicated the establishment or operationalization of an integrated policy/strategy/plan which increases their ability to adapt to the adverse impacts of climate change, and foster climate resilience and low greenhouse gas emissions development in a manner that does not threaten food production

Analysis

The article addresses several Sustainable Development Goals (SDGs) and their corresponding targets:

1. SDG 7: Affordable and Clean Energy

The article discusses the importance of energy efficiency in residential buildings to reduce greenhouse gas emissions. This aligns with SDG 7, which aims to ensure access to affordable, reliable, sustainable, and modern energy for all. Specifically, the article focuses on the efficacy of regulations and policies in improving energy efficiency in residential buildings.

Targets:

• Target 7.3: By 2030, double the global rate of improvement in energy efficiency

Indicators:

• Indicator 7.3.1: Energy intensity measured in terms of primary energy and GDP

2. SDG 11: Sustainable Cities and Communities

The article examines the impact of regulations on rental properties in England and Wales, which are part of urban areas. It highlights the importance of reducing the environmental impact of cities, including air quality and waste management. This aligns with SDG 11, which aims to make cities and human settlements inclusive, safe, resilient, and sustainable.

Targets:

• Target 11.6: By 2030, reduce the adverse per capita environmental impact of cities, including by paying special attention to air quality and municipal and other waste management

Indicators:

• Indicator 11.6.1: Proportion of urban solid waste regularly collected and with adequate final discharge out of total urban solid waste generated, by cities

3. SDG 13: Climate Action

The article emphasizes the need for coordinated policies to address climate change in the residential sector. It discusses the relationship between energy efficiency and carbon emissions, highlighting the importance of reducing carbon emissions from residential buildings. This aligns with SDG 13, which aims to take urgent action to combat climate change and its impacts.

Targets:

• Target 13.2: Integrate climate change measures into national policies, strategies, and planning

Indicators:

• Indicator 13.2.1: Number of countries that have communicated the establishment or operationalization of an integrated policy/strategy/plan which increases their ability to adapt to the adverse impacts of climate change, and foster climate resilience and low greenhouse gas emissions development in a manner that does not threaten food production

Table: SDGs, Targets, and Indicators

Behold! This splendid article springs forth from the wellspring of knowledge, shaped by a wondrous proprietary AI technology that delved into a vast ocean of data, illuminating the path towards the Sustainable Development Goals. Remember that all rights are reserved by SDG Investors LLC, empowering us to champion progress together.

Source: cepr.org

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