2018-Turning_green_into_gold_A_review_on_the_economics_of_green_buildings

Journal of Cleaner Production 172 (2018) 2234e2245

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Journal of Cleaner Production journal homepage: www.elsevier.com/locate/jclepro

Review

Turning green into gold: A review on the economics of green buildings Li Zhang, Jing Wu*, Hongyu Liu Hang Lung Center for Real Estate, Department of Construction Management, Tsinghua University, China

a r t i c l e i n f o

a b s t r a c t

Article history: Received 18 August 2017 Received in revised form 22 November 2017 Accepted 23 November 2017 Available online 23 November 2017

Adoption of green design and technology in buildings, which can mitigate negative impacts on the environment, has been recognized as a key step towards global sustainable development. In addition to technology development, economic viability plays a pivotal role in stimulating the design, construction and use of green buildings. This paper provides a comprehensive review of recent studies on the economic viability of “going green”, including cost-benefit analyses from the perspective of building life cycle and from the perspective of major market participants. While “going green” is more likely to be seen as profitable from the building life cycle perspective, economic viability, from the perspective of developers and occupants, remains unclear due to information, behavior and policy factors. Such discrepancy in the results regarding economic viability is one major reason for the “paradox” of the very gradual diffusion of apparently cost-effective green buildings in most economies. We also propose several key topics that merit future research, including more comprehensive evidence about life-cycle costs and benefits of green buildings, the incorporation of ancillary long-term or intangible benefits in the analysis of economic viability for developers and occupants, an investigation on the dynamics of the adoption of green buildings, and institutional arrangements for stimulating green practices in the building sector. © 2017 Elsevier Ltd. All rights reserved.

Keywords: Green building Economics Cost-benefit analysis Life cycle Developer Occupant

Contents 1.

2.

3.

4.

5.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2235 Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2235 Economic viability from the perspective of building life cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2236 3.1.

Incremental costs of green buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2236 3.2.

Incremental benefits of green buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2237 3.2.1.

Lower operating cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2237 3.2.2.

Increased comfort, health and productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2238 3.2.3.

Enhanced corporate reputation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2238 3.2.4.

Increased market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2239 3.2.5.

Positive environmental externality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2240 Economic viability from the perspective of market participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2240 4.1.

Economic viability from the perspective of developers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2240 4.1.1.

Cost-benefit analysis of green building development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2240 4.1.2.

Barriers to economic viability from the perspective of developers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2240 4.2.

Economic viability from the perspective of occupants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2242 4.2.1.

Cost-benefit analysis of green building purchase or lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2242 4.2.2.

Barriers to economic viability from the perspective of occupants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2242 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2243 Acknowledgement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2243 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2243

* Corresponding author.

E-mail address: ireswujing@tsinghua.edu.cn (J. Wu). https://doi.org/10.1016/j.jclepro.2017.11.188 0959-6526/© 2017 Elsevier Ltd. All rights reserved.

L. Zhang et al. / Journal of Cleaner Production 172 (2018) 2234e2245

1. Introduction Buildings and construction activities play an important role in urbanization by creating living and working spaces and contributing to the national economy (Zhang, 2015; Zuo and Zhao, 2014).

However, buildings and associated construction activities can also have profound negative effects on the natural environment and resources. The construction, operation and demolition of buildings lead to massive amounts of noise, dust, water pollution and waste (Tam and Tam, 2008; Zuo and Zhao, 2014). In addition, buildings constitute the largest energy-consuming sector, accounting for 35% of global final energy consumption; further, they make an equally substantial contribution to CO2 emissions (International Energy Agency, 2013). In fact, the International Energy Agency predicts that energy consumption in the building sector will rise by 50% by 2050 if no action is taken to improve building energy efficiency.

Green buildings are an effort to mitigate negative effects on the environment and resources while simultaneously enhancing positive effects throughout the building life cycle. While there are varied definitions and rating systems for green buildings around the world, it is generally accepted that green building activities include the planning, design, construction and operation of buildings with several principal considerations, including efficient use of energy, water and material; improvement of indoor environmental quality; and minimization of negative impacts on the environment (Darko and Chan, 2016; World Green Building Council, 2013; Zuo and Zhao, 2014). It is worth noting that the concept of green building includes not only “sustainability” but also “high-performance”, which means that energy efficiency cannot come at the cost of reduced indoor environmental quality or comfort level (Cole, 2000; World Green Building Council, 2013; Zhu and Lin, 2004).

Governments in major economies have employed a variety of sticks (e.g., mandates) and carrots (e.g., explicit or implicit subsidies) to encourage the adoption and diffusion of green technology in the building sector, but green buildings still account for only a tiny proportion of the total building stock in both developed and developing countries (Fuerst et al., 2014; Zhou, 2015). Some studies suggest that it is vital to establish a market mechanism to boost green building development, while government regulations and subsidies are only necessary in the face of market failures (Fuerst et al., 2014; Kok et al., 2011; Zhu and Lin, 2004). Economic viability - whether benefits are large enough to offset the costs - is the key to the market mechanism. It is noteworthy that the costs and benefits do not necessarily coincide with monetary outflows and inflows, as some costs and benefits may be intangible. In addition, the comprehensive analysis of economic viability should include not only the costs and benefits for (internal) stakeholders, but also the costs and benefits for the (external) society and environment. However, the narrow understanding of economic viability remains a major problem, as the conventional concern of the business sector on the environmental issue is that the additional costs involved (e.g., costs of green materials and equipment) may erode financial performance, and this has undermined the adoption of green buildings (Jakob, 2006; Jiang, 2010; New Ecology and Green CDCs Initiative, 2005). Therefore, in order to promote green buildings in market-oriented economies, market participants must be persuaded that “green can become gold.”

In this paper, we provide a comprehensive review on the existing studies about the costs, benefits and economic viability of green buildings, from the perspectives of building life cycle and market participants, respectively. Our review demonstrates that green building investment is more likely to be seen as profitable

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from the building life cycle perspective, whereas the economic viability of “going green” remains controversial for developers and occupants. We also identify three categories of barriers that limit economic viability from the perspective of developers and occupants. First, some behavioral problems are worth noting, such as developers’ tendency to overestimate costs and occupants’ lack of attention to energy efficiency. Second, information asymmetry makes buyers hesitant about choosing green buildings, resulting in a cost-benefit mismatch for developers or even leading to adverse selection. Third, energy pricing and contract structure hinder occupants from enjoying cost savings due to energy savings. Therefore, integrated and comprehensive policies are essential to cope with these barriers and encourage individuals and enterprises to adopt green practices in the building sector.

This review has profound academic and practical merits. First, it highlights state-of-the-art and future research trends. Second, it helps resolve the nexus of market profit maximization and environmental conservation by alerting market participants to the viability of optimizing the costs and benefits of green buildings.

Third, this review furthers the government’s green building agenda by identifying barriers for green building development, and thus gives direction to improve policies, regulations, and enforcement mechanisms that can drive the green building market forward.

2. Methods The benefits and costs of green buildings have been studied for decades, since they first appeared. Life Cycle Assessment (LCA) is employed to evaluate the sustainability of buildings, which covers all phases throughout the building’s life, including design, construction, operation, and demolition (World Green Building Council, 2013; Wu et al., 2012; Zhang et al., 2011a). Therefore, an integrated economic valuation of green buildings should take into account the entire life cycle of the building. The existing literature adopts the incremental analysis method by using a code-compliant building (of the same size and function, and in the same location) as a baseline to examine the incremental returns from incremental green investment. The seminal study by Kats (2003) suggested that, compared with standard construction, “going green” generally required an initial incremental cost, but also offered cost savings when considered through a life cycle cost methodology. The benefits of green buildings include those that might readily be predicted (e.g., lower energy, water and waste disposal costs; lower operation and maintenance costs) as well as some that are harder to predict and to measure (e.g., increased productivity and health; lower environmental impacts and emissions). Kats (2003) estimated that an incremental green investment of about two percent of construction costs typically yielded life cycle savings of over ten times the initial investment.

While previous studies analyze the benefits and costs over the entire life span of the building, the reality is that green building development is a complicated process involving various stakeholders, such as governments, developers, financial institutions, equipment and material suppliers, consultants, design units, construction and supervising units, property managers, research institutions, and occupants (Zhang, 2015). The existence of multiple stakeholders may result in a split incentive and principle-agent problem (Fuerst et al., 2016; Jaffe and Stavins, 1994). For example, incremental costs are borne by developers while benefits are enjoyed by occupants. Only when all stakeholders find the incremental investment for “going green” to be financially feasible can they be stimulated to voluntarily adopt green practices. Therefore, economic viability should be further analyzed from the perspective

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L. Zhang et al. / Journal of Cleaner Production 172 (2018) 2234e2245

Fig. 1. Common focuses of research on the economics of green buildings.

of all market participants. Among the stakeholders involved in green building development, developers and occupants are ultimate decision makers of green building supply and demand (Zhang, 2015).1 In addition, they are more likely to encounter costbenefit mismatch, as developers bear all upfront costs but occupants enjoy all benefits during the buildings’ operation (Deng and Wu, 2014). Therefore, we focus on developers and occupants in the following cost-benefit analysis from the perspective of market participants.

To provide a holistic and systematic review of the state-of-theart studies on the economic viability of green buildings, we conducted the literature review in the framework of cost-benefit analyses from two perspectives, as shown in Fig. 1, namely perspectives that consider the complete building life cycle and that consider particular market participants. The horizontal axis of Fig. 1 indicates stages of the building life cycle. Dark gray and light gray rectangles are used to represent the incremental costs and benefits from the perspective of building life cycle, which are reviewed in Section 3. These costs and benefits can be categorized as internal and external, and the internal ones can be further categorized as tangible and intangible costs/benefits, as shown on the right of Fig. 1. Then, the costs and benefits from the perspective of main market participants are indicated by arrows with minus and plus signs, respectively. The incremental costs at the stages of design and construction are borne by developers, while the incremental benefits at the operation stage are obtained by occupants. It is noteworthy that the increased asset value is an incremental benefit for developers but an incremental cost for occupants. The economic viability from the perspective of main market participants (i.e., developers and occupants) is analyzed in Section 4.

3. Economic viability from the perspective of building life cycle 3.1. Incremental costs of green buildings There has been a widespread perception in the industry that “going green” is more expensive than traditional building methods

1 Developers in this paper include both the developers of newly-built buildings and building owners that retrofit, namely those who directly assume incremental green costs.

(Bartlett and Howard, 2000; Dwaikat and Ali, 2016; Rehm and Ade, 2013; Zhang et al., 2011b). As most green measures require an investment during the construction stage while maintenance costs are low, the share of incremental costs at the stages before operation accounts for approximately 100% (Jakob, 2006). Incremental costs of green buildings include “soft costs” and “hard costs”. “Soft costs” include the costs associated with intangible items or services that are necessary components of the development process but do not form part of the building, including design and simulation fees, green certification fees, costs of adapting existing processes, etc.; “Hard costs” include costs associated with tangible items that are used to complete the building, including costs of building structure, materials, equipment, landscaping, etc. (Jaffe and Stavins, 1994; Jakob, 2006; World Green Building Council, 2013).

Due to limitations in data access, research on incremental green costs, especially from academic studies, are relatively limited in the growing body of literature on green buildings (Dwaikat and Ali, 2016; Kahn and Kok, 2014; Rehm and Ade, 2013). The main findings from industrial reports and academic studies are summarized in Table 1. The results reveal that the incremental costs for buildings certified as “green” range from 0.4% to 11%, depending on the certification system and the rating level achieved. Some research shows that “going green” does not necessarily cost more (Langdon, 2004, 2007a; U.S. General Services Administration, 2004), particularly when passive measures2 are applied and green strategies are integrated into the development process right from the start (Zhang et al., 2011b; Zhu and Lin, 2004). For instance, natural ventilation is a typical sustainable solution for reducing building energy consumption, improving thermal comfort and providing a healthy indoor environment, but the integration of natural ventilation to buildings actually reduces initial construction costs because of downsizing HVAC systems (Tong et al., 2016). In addition, there has been an overall trend towards reducing incremental green costs, as building codes become stricter, supply chains for green materials and equipment mature, and the industry becomes

2 Green buildings can be achieved by two kinds of measures. One is a passive measure and the other is an active measure. Passive measure refers to optimizing the architectural design and making best use of natural resources to meet the living environment requirements and thus reduce energy consumption. In contrast, active measure refers to using artificial, mechanical or electrical green technology for heating, cooling or lighting, which may be energy-efficient but more expensive than traditional technology (Zhang et al., 2011b; Zhu and Lin, 2004).

L. Zhang et al. / Journal of Cleaner Production 172 (2018) 2234e2245

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Table 1 Incremental costs of green-certified buildings.

Author (Year)

Country

Building Type

Certification

Certification Level

Incremental Cost

Kats (2003)

US

Office building, School

LEED

U.S. General Services Administration (2004)

US

Courthouse

LEED

Office building

LEED

Platinum Gold Silver Certified Gold Silver Certified Gold Silver Certified Gold Silver Certified Average

6.5% 1.8% 2.1% 0.7% 1.4%e8.1% 0.03%e4.4% 0.4%e1.0% 7.8%e8.2% 3.1%e4.2% 1.4%e2.1% 0.0%e6.3% 0.0%e3.0% 0.0%e3.6% Not significant

6 Star 5 Star Platinum Gold Silver Platinum Gold Silver Outstanding Excellent Very good 3-star 2-star 1-star 3-star 2-star 1-star 3-star 2-star 1-star 3-star 2-star 1-star

9.0%e11.0% 3.0%e5.0% 3.2% 1.3% 0.8% 3.4% 1.7% 0.8% 9.8% 0.8% 0.2% 0.1%e6.9% 1.0%e7.9% 0.1%e1.5% 0.5%e7.0% 0.9%e2.6% 0.0%e7.5% 4.2% 2.6% 0.5% 5.4% 2.9% 1.0%

Kats (2006)

US

School

LEED

Langdon (2004), Langdon (2007a)

US

LEED

Langdon (2007b)

Australia

Academic, Laboratory and Library buildings, Community center, Ambulatory care facility Office building

Green Star

Construction Industry Institute (2008)

HKSAR, China

Office building

HK-BEAM

Residential building

HK-BEAM

UK

Office building

BREEAM

China

Public building

CGBLb

Residential building

CGBL

Public building

CGBL

Residential building

CGBL

Target Zero (2012)

Yip et al. (2013)

a

MOHURD of China (2015)

a

China

Note: a The incremental costs reported in RMB/m2 are converted to percentages using the construction costs of ordinary office buildings (3850 RMB/m2) and ordinary residential buildings (2250 RMB/m2) reported by Rider Levett Bucknall (2017). b CGBL indicates “Chinese Green Building Label”.

more skilled at delivering cost-effective green design and technology (Jakob, 2006; World Green Building Council, 2013).

3.2. Incremental benefits of green buildings Benefits from green buildings, which are received by different stakeholders throughout the building life cycle, have been extensively studied (Zhang, 2015; Zhu and Lin, 2004; Zuo and Zhao, 2014), although whether corresponding financial values are attached to the benefits remains unclear. According to the seminal study of Kats (2003), incremental benefits of green buildings include lower operating costs, increased health and productivity, and positive environmental externalities. Then, following the pioneering work of Eichholtz et al. (2010), extensive empirical studies have investigated the increased market value of green buildings. In addition, some studies further suggested that involvement in green building development might affect the corporate reputation (Eichholtz et al., 2010, 2016). Overall, there are five categories of incremental benefits associated with green buildings, namely, lower operating cost, increased comfort, health and productivity, enhanced corporate reputation, increased market value, and positive environmental externality. Other major review papers on the benefits of green buildings also share similar classifications on the benefits of green buildings (Madew, 2006; World Green Building

Council, 2013; Yudelson, 2010; Zhang, 2015; Zuo and Zhao, 2014).

3.2.1. Lower operating cost Cost-savings through reduced energy and water consumption and lower operation and maintenance costs are the main benefits received by green building occupants (Eichholtz et al., 2010; Kats, 2003; World Green Building Council, 2013; Zhang, 2015; Zhu and Lin, 2004). As energy-efficiency is one of the defining features of green buildings, research on cost savings always focuses on assessing the reduction in green buildings’ energy consumption compared with conventional code-compliant buildings. Ries et al.

(2006) assessed that the energy usage of a manufacturing company decreased by approximately 32% on a square foot basis after moving from an old conventional facility to a new LEED-certified facility. Based on a post-occupancy evaluation (POE), Turner and Frankel (2008) found that LEED-certified buildings in the US saved 28% energy on average compared to code baselines, which was close to the 25% savings predicted by modeling in the submittals. Fowler et al. (2010) also conducted a POE of the performance of 22 LEED-certified or energy-efficient buildings in the US, suggesting that on average the aggregate operating cost (including water utilities, energy utilities, general maintenance, grounds maintenance, waste and recycling, and janitorial costs) of green buildings was 19% lower than the industry average, and

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L. Zhang et al. / Journal of Cleaner Production 172 (2018) 2234e2245

particularly, the energy consumption of the studied green buildings was 25% less than the industry average. A study of the Low Energy Office building in Malaysia showed that energy savings for airconditioning, lighting and equipment were 62%, 18% and 20%, respectively, and these cost savings would pay off incremental green costs in only 8.4 years (Lau et al., 2009). Considering that the energy price level is likely to increase in the coming decades as the expected energy production maximum may be reached, energy savings from green buildings can also mitigate the risks of increasing energy prices (Eichholtz et al., 2012).

However, a significant gap between the predicted and actual energy performance of green buildings has also been observed in some recent studies (De Wilde, 2014; Levinson, 2016; Scofield, 2009). Newsham et al. (2009) analyzed 100 LEED-certified commercial and institutional buildings in the US and found that though on average LEED-certified buildings used 18e39% less energy per floor area than their conventional counterparts, 28e35% of them used more energy than their conventional counterparts did.

Reichardt (2014) even found that operating expenses for Energy Star rated buildings were 3.9% higher than comparable conventional buildings. The discrepancy between predicted versus actual energy performance is generated by a series of factors that occur throughout the building lifetime (De Wilde, 2014). First, most energy modeling and simulation during the design stage operate within a range of error based on many assumptions (De Wilde, 2014; Newsham et al., 2009; Zhu and Lin, 2004). Second, building quality may not meet specifications due to changes implemented during cost-cutting exercises (MOHURD of China, 2014). Third, the advanced systems of green buildings may be too difficult for occupants to understand and therefore can hardly be operated and maintained efficiently (Zhang, 2015). The lack of efficient operation and maintenance is often cited as the main reason for the performance gap (De Wilde, 2014). To achieve the predicted performance and reap the maximum benefits of green buildings, effective management is required. In an empirical study by Sabapathy et al.

(2010), the authors noted that LEED-certified facilities could achieve an average energy saving of approximately 34% compared to similar non-LEED facilities if factors associated with equipment, occupancy, operation and maintenance were controlled the same.

3.2.2. Increased comfort, health and productivity Green attributes of buildings can enhance indoor environmental quality, therefore resulting in healthier and ultimately more productive occupants (Issa et al., 2010; World Green Building Council, 2013). Some researchers use surveys to investigate differences in satisfaction levels between green and conventional building occupants (Ries et al., 2006; Zhang and Altan, 2011). Ries et al. (2006) studied a manufacturing company who moved from an old conventional facility to a new green facility. A pre- and post-move survey on the employees’ satisfaction and productivity was conducted using the Likert scale method. The responses from 45 employees in the company were analyzed with paired t-test, showing that employees in the green facility were more satisfied with temperature, humidity, airflow speed, visual conditions and air quality than were employees in the conventional facility. Zhang and Altan (2011) conducted a comparative study of the indoor environment quality in a conventional building and an environmentally-concerned building. Seven-point scale questions were adopted to rate the occupants’ sensation and satisfaction level of their thermal, visual and acoustic comfort. The responses from 35 occupants in the green building and 188 occupants in the conventional building revealed a substantial difference between green and conventional buildings in terms of thermal and visual environment. However, surveys such as these may not be appropriate for the evaluation of the built environment. First, degree of

satisfaction is difficult to measure, especially if separate questions are asked about different parameters of the built environment (Zhang and Altan, 2011). Second, Deuble and de Dear (2012) found that occupants’ satisfaction about the built environment was positively associated with environmental beliefs. Compared with non-green occupants, occupants in green buildings were more inclined to overlook and forgive less-than-ideal conditions and thus presented a higher degree of satisfaction (Deuble and de Dear, 2012). Conducting an objective test of the indoor environment may eliminate these problems. One test conducted in Beijing showed that green buildings significantly outperformed non-green ones in terms of temperature, relative humidity, background noise, and luminance under natural lighting conditions (Zhang et al., 2016a), but statistically robust information based on larger samples about improvements in the built environment caused by green buildings are few and far between.

Some studies suggest that green design and technology, especially those that improve visual acuity, thermal comfort and personal control of ambient conditions, result in increasing productivity by 6%e25% and decreasing absenteeism by 15%e25% (Brager and de Dear, 1998; Kats, 2003; Paul and Taylor, 2008; Ries et al., 2006; Rocky Mountain Institute, 1998). A recent study by Harvard found that occupants in green-certified buildings could score 26% higher in cognitive function tests, report 30% fewer symptoms of sick building syndrome, and enjoy 6% higher sleep quality than those in high-performing but non-certified buildings (Harvard gazette, 2017). As a result, industries dependent on high levels of human capital, such as the service sector, will be more likely to rent office space in green buildings (Eichholtz et al., 2016).

Nevertheless, a full financial accounting of the value of enhanced comfort, health, and productivity is hard to measure due to lack of well-defined metrics and data (Issa et al., 2010; Jakob, 2006). Kats (2003), assessing employee compensation costs, estimated that the benefits from productivity and health improvement could constitute about 70% of total cost savings during the life cycle of a building. A recent study by Zhang et al. (2017) introduced an innovative method to quantify benefits due to increased comfort by analyzing online reviews of hotel customers. The results indicated that the rate of complaints regarding the indoor environmental quality of green-certified hotels was approximately 19% lower than that for non-green hotels, leading to a significant room rate premium of 6.5% without reducing occupancy rates.

3.2.3. Enhanced corporate reputation Developing, purchasing or renting green buildings may signal an enterprise’s commitment to the environment and compliance with Corporate Social Responsibility (CSR) requirements. As a result, the enterprise can gain a superior corporate reputation and some indirect benefits. It is found that publicly-traded firms or environmentally sensitive industries (e.g., mining, oil and construction industries) have a significantly higher propensity to rent green office space, either to demonstrate their commitment to sustainability or to offset negative reputation effects (Eichholtz et al., 2016; Robinson et al., 2016). A case study by Zhang et al. (2011a) indicated that some local and provincial governments offered favorable land price to developers who promised to adopt green standards in the project’s development. Improved corporate reputation may also enable firms to attract investors more easily and at better market rates. Some empirical studies suggest that companies having superior CSR performance are able to reduce their capital costs (Bassen et al., 2006). In addition, environmentally legitimate companies, those whose environmental performance conforms to stakeholders’ expectations, incur less unsystematic risks in the stock market than companies that do not conform (Bansal and Clelland, 2004). However, there is a lack of direct quantitative

L. Zhang et al. / Journal of Cleaner Production 172 (2018) 2234e2245

analysis of the benefits of enhanced corporate reputation associated with green building investments.

3.2.4. Increased market value The aforementioned benefits of green buildings, namely lower operating costs, increased comfort, health and productivity, and enhanced corporate reputation are believed to be capitalized into the market value of green buildings, which may lead to a premium in rent or sale prices. Following the pioneering work of Eichholtz et al. (2010), studies on the economics of green buildings over the past decade have mainly concentrated on estimating the green rental or sale price premium. Green price premium indicates the difference in rental or sale prices between green buildings and their non-green counterparts. To ascertain the green price premium, researchers have typically employed two methods: stated preference method and revealed preference method (Heinzle et al., 2013).

The stated preference method is a survey-based economic technique for the valuation of non-market resources, including contingent valuation and choice-based conjoint analysis (Bateman et al., 2002). Contingent valuation refers to directly asking individuals how much they would be willing to pay for “greenness” in buildings. This highly-stylized survey setting allows researchers to eliminate many of the factors that complicate consumer decisions in real-world settings. Nevertheless, such direct questioning may lead participants to focus more on “greenness” than they otherwise would (Davis and Metcalf, 2014), and this method is susceptible to the social desirability response bias (Fisher, 1993). In addition, a building is a bundle of characteristics which cannot be purchased separately, so it is difficult for consumers to answer their Willingness-To-Pay (hereafter, WTP) directly for a specific building characteristic, such as energy efficiency or sustainability (Scotchmer, 1985). Hence, the choice-based conjoint analysis may be a better method to evaluate the price premium that consumers are willing to pay for the “greenness” of buildings (Heinzle et al., 2013; Hu et al., 2014). The choice-based conjoint experiment considers a quasi-realistic buying situation where consumers choose between several products from a restricted product set, and assumes that consumers make trade-offs between product characteristics to choose the bundle with the greatest utility, so the respondents’ preferences can be derived (Heinzle et al., 2013; Hu et al., 2014; McFadden, 1973).

The results of the stated preference studies are presented in Table 2. The majority of these studies focus on the residential market. Heinzle et al. (2013) and Wiencke (2014) asked residents or occupants about their WTP for green buildings, which ranges from approximately 3%e8%. The other studies investigate residents’ WTP for different green attributes. Although the amounts of WTP differ greatly, almost all of them suggest that residents are willing to pay significant price premiums for green attributes. However, it is worth emphasizing that such stated preference may somewhat exaggerate consumers’ actual valuation, because consumers do not have to pay real money when they take the survey (Park et al., 2013).

In order to overcome the shortcomings of the stated preference method, in the past decade researchers have sought to estimate the green price premium using the revealed preference method. They explore the relation between green practices and the market value of buildings using the hedonic model. The studies cover various countries, different building types and diverse rating systems. Results presented in Table 3 show that the overwhelming majority of studies suggest a positive price or rent premium for green-certified buildings, though a few argue that the premium is not significant or even negative (Fuerst and McAllister, 2011a; Yoshida and Sugiura, 2014). In general, the green price premium increases with the certification level. However, some empirical studies report lower

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price premiums for higher certification levels (Deng et al., 2012; Hyland et al., 2013; Kok and Jennen, 2012), and the coefficients of high-level certification even turn out to be not significant in several studies (Fuerst and McAllister, 2011b; Kok and Jennen, 2012; Zhang et al., 2016b). One possible explanation for this phenomenon may be the small sample of buildings with high-level certifications (Zhang et al., 2016b). Some studies also highlight the differences in premiums during different stages (e.g., presale and resale) (Bruegge et al., 2015; Deng and Wu, 2014; Zheng et al., 2012) or for different market conditions (Das et al., 2011; Eichholtz et al., 2013), but there is no consensus. Moreover, growth in the green building supply has been documented to have a negative effect on the green price premium because of market competition, but a positive impact on average rents and prices of all buildings in a given neighborhood, a phenomenon known as “green gentrification” (Chegut et al., 2014).

It is noteworthy that in developing countries, such as China, green building certification had not been launched until very recently and thus many developers just differentiated their buildings from others by actively advertising the green technology employed in their buildings (Zhang et al., 2016a, 2016b). Some studies compared the effectiveness of official green certification and developers’ selfadvertised greenness based on the price premium (Zhang et al., 2016b; Zheng et al., 2012). Zheng et al. (2012) found that in China’s nascent green building market, developers could presell housing units at a price premium by self-advertising their housing as “green”, but these housing units would subsequently be resold or rented at a price discount once homebuyers realized that the housing units were fake- or over-advertised. Zhang et al. (2016b)’s empirical study on the “Chinese Green Building Label” suggested that after the introduction of official green certification, developers’ self-advertisements had little effect.

Compared with the growing body of literature on the existence and magnitude of the green price premium, an even more important research question is the sources of such premium. The existing literature mainly focuses on two mechanisms. First, from the financial perspective, a green building can be expected to produce operating cost savings, and increased comfort, health and productivity, which can be discounted in the present value, and thus in equilibrium occupants are willing to pay a higher price for green buildings (Eichholtz et al., 2010; Kahn and Kok, 2014). Second, from the ideology perspective, individuals who evaluate energy savings and sustainability as important can be expected to prefer green buildings, even if they have to pay higher prices (Dastrup et al., 2012; De Silva and Pownall, 2014; Kahn and Kok, 2014). Understanding the sources of the green price premium is of great importance for testing the rationality of the aforementioned premium results and providing a reference through which to enhance the economic profitability of green investments, but the existing research is still scarce. In addition, while the overwhelming majority of the existing studies were conducted in developed economies, different conclusions may be reached by studies in developing countries. Hu et al. (2014)’s survey in Nanjing, China, indicated that only the rich were prepared to pay more for green attributes that improve their living comfort, and they were only willing to pay either for unpolluted environment or non-toxic construction materials. Zhang et al. (2017)’s comparative study on green and non-green hotels in Beijing, China, also suggested that consumers paid a significant room rate premium for green hotels mainly for improved indoor environmental quality, while the environmental responsibility did not play a significant role in customers’ evaluation of green hotels. One possible explanation is that the living conditions in developing countries are still much worse than those in developed countries, and thus living comfort plays a crucial role in individuals’ housing choice in developing countries (Ouyang et al., 2010).

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Table 2 Green price premiums estimated by stated preference method.

Author (Year)

Country

Building Type

Green Attributes

WTP

Banfi et al. (2008)

Switzerland

Residential building

Korea

Residential building

HKSAR, China

Residential building

Achtnicht (2011) a Park et al. (2013)

Germany Korea

Residential building Residential building

Heinzle et al. (2013)

Singapore

Residential building

Wiencke (2014)

Switzerland

Commercial building

Enhanced facade insulation Ventilation system Enhanced facade insulation Ventilation system Increase landscape and physical activity area 20% water consumption reduction 20% energy consumption reduction Reduce noise level from an unacceptable to acceptable level Improve air quality from an unacceptable to acceptable level 1% reduction of CO2 emission from heating system 1% energy bills reduction 1% CO2 emissions reduction 1% VOC emissions reduction Green Mark Certified Green Mark Platinum Energy-efficient or green building

China

Residential building

1.0%e3.0% 4.0%e12.0% 0.5%e7.2% 4.9% 4.2%e8.4% 4.3%e4.7% 13.5%e14.8% 4.7%e5.2% 7.1%e7.8% 0.8%e1.0% 0.09% 0.10% 0.05% 3.8% 8.0% 3.0% (lease) 4.8% (buy) 5.0% (retrofit) 6.4%e22.9% 2.1%e5.8% Not significant

US

Office building

Kwak et al. (2010) Chau et al. (2010)

Hu et al. (2014)

a

b

a

Robinson et al. (2016)

Unpolluted environment Non-toxic construction materials Energy and water cost reduction; Enhanced thermal insulation; Sound insulation; Ventilation LEED certification Energy Star certification

0.8% 0.6%

Note: a The WTP magnitudes are converted to percentages using the median prices in the paper. b The WTP magnitudes are converted to percentages using the average rent available at the Rating and Valuation Department of Hong Kong (http://www.rvd.gov.hk/en/ property_market_statistics/index.html).

3.2.5. Positive environmental externality In addition to benefits received by different stakeholders throughout the building life cycle, green buildings also produce considerable positive environmental externalities (Cole, 2000).

First, green buildings help protect the eco-system and biodiversity by means of sustainable land use (Bianchini and Hewage, 2012; Henry and Frascaria-Lacoste, 2012). Second, green buildings reduce waste and carbon dioxide emissions during construction, operation and demolition phases (Jo et al., 2009; Yeheyis et al., 2013). Some studies evaluate environmental externality by employing the costs of environmental damage caused by conventional buildings or the market value of traded emissions, but these efforts have not achieved a consensus (Kats, 2003). However, since the technical difficulty in calculating the value of environmental externalities and the different objective functions of private and public economy, most practices ignore environmental externalities or value it at zero (Cole, 2000; World Green Building Council, 2013).

4. Economic viability from the perspective of market participants While green building investment seems financially feasible or even profitable from the perspective of the building life cycle, it is more crucial to investigate whether the benefits are large enough to offset costs from the perspective of different market participants.

Developers and occupants have been the focus of research on the economic viability of green buildings, as they are the ultimate decision makers of the supply and demand of green buildings.

4.1. Economic viability from the perspective of developers 4.1.1. Cost-benefit analysis of green building development Jaffe and Stavins (1994) first proposed a theoretical framework for decision-making regarding the incorporation of energy-efficient technology in new structures and in existing ones. Developers are stimulated to adopt green design and technology only when the

economic returns, including price or rent premiums, enhanced corporate reputation and government subsidies, exceed the incremental costs of “going green”. A comparison of Table 1 with Table 3 implies that the green price or rent premiums generally exceed the incremental costs for developers, confirming the back-of-theenvelope calculation by Kahn and Kok (2014). For those developers who hold and lease, rather than sell, green buildings, in addition to the rental rate premium, they may also be able to command a higher occupancy rate, lower volatility and slower depreciation (Fuerst and McAllister, 2011c; Hyland et al., 2013; Wiley et al., 2010; World Green Building Council, 2013; Yoshida and Sugiura, 2014). However, due to a lack of systematic evidence regarding incremental green costs, it is still open to debate whether such benefits to developers are large enough to offset the incremental costs. In addition, Issa et al. (2010) suggested that incremental green costs varied widely from company to company, and the costs and complexity of green buildings might be prohibitive both for first-time adopters and for those starting with low standards. Therefore, taking heterogeneity into consideration, the economic viability of green building development requires more empirical evidence at the micro-level.

4.1.2. Barriers to economic viability from the perspective of developers Some studies further investigate the factors hindering developers from achieving economic viability in green building development (Bartlett and Howard, 2000; Deng and Wu, 2014; Jaffe and Stavins, 1994; Jakob, 2006; Simcoe and Toffel, 2014; Zhang et al., 2011b). Firstly, the perception that “going green” is too costly has been pervasive among developers and weakened their initiative (Bartlett and Howard, 2000). The perceived incremental costs, as described by developers, vary from 0.9% to 29%, and these are typically higher than the actual incremental costs reported in Table 1 (World Green Building Council, 2013). Developers overestimate incremental green costs for two primary reasons. First, in addition to the incremental costs associated with specific buildings,

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Table 3 Green price premiums estimated by revealed preference method.

Author (Year)

Country

Building Type

Market Type Certification

Eichholtz et al. (2010)

US

Office building

Rent Sale

Wiley et al. (2010)

US

Office building

Rent Sale

Fuerst and McAllister (2011c) US

Office building

Rent

Sale

Fuerst and McAllister (2011b) US

Office building

Rent

Sale

Eichholtz et al. (2013)

US

Office building

Rent Sale

Kahn and Kok (2014) US Koirala et al. (2014) US Fuerst and McAllister (2011a) UK

Residential building Sale Residential building Rent Retail, office and industrial buildings Rent Sale Office building Rent Sale Residential building Sale

Chegut et al. (2014)

UK

Fuerst et al. (2015)

UK

Brounen and Kok (2011)

Netherlands Residential building

Sale

Kok and Jennen (2012)

Netherlands Office building

Rent

Chegut et al. (2016)

Netherlands Residential building

Sale

Deng et al. (2012)

Singapore

Residential building

Sale

Deng and Wu (2014)

Singapore

Residential building

Sale

Hyland et al. (2013)

Ireland

Residential building

Rent

Sale

Yoshida and Sugiura (2014) Zhang et al. (2016b)

Japan China

Residential building Residential building

Sale Sale

Note: a IECC indicates “International Energy Conservation Code”. b EPC indicates “Energy Performance Certificate”, with A being the highest level. c BER indicates “Building Energy Rating”, with A being the highest level. d TGBP indicates “Tokyo Green Building Program”. e CGBL indicates “Chinese Green Building Label”, with 3-star being the highest level.

Certification Level Green Price Premium

Energy Star Average LEED Average Energy Star Average LEED Average Energy Star Average LEED Average Energy Star Average LEED Average Energy Star Average LEED Average Dual certified Average Energy Star Average LEED Average Dual certified Average Energy Star Average LEED Average LEED Platinum LEED Gold LEED Silver LEED Certified Energy Star Average LEED Average LEED Platinum LEED Gold LEED Silver LEED Certified Energy Star Average LEED Average Energy Star Average LEED Average LEED, Energy Star, GreenPoint Average IECCa Average EPCbBREEAM Average EPC, BREEAM Average BREEAM Average BREEAM Average EPC A/B C EPC A/B/C A B C EPC A B C EPC A/B A B Green Mark Average Platinum Gold Plus Gold Certified Green Mark Average Platinum Gold/Gold Plus Certified BERc A B C BER A B C TGBPd Average CGBLe Average 3-star 2-star 1-star

3.4%e10.5% 9.9% 21.0% Not significant 7.6%e9.0% 16.4%e18.9% 5.1% 22.0% 3.0%e4.1% 4.1%e5.1% 9.4% 19.7% 28.4% 32.3%e33.6% 4.1% 5.1% 17.4% Not significant Not significant 9.4% 31.0% 28.4% 95.4% 29.7% 39.1% Not significant 2.1%e6.7% 6.0%e6.2% 13.8% 11.7% 2.1%e5.4% 26.1% Not significant Not significant 21.7% 15.8% 5.1% 1.8% 3.7% 10.7% 5.7% 2.1% Not significant 5.5% 10.2% 2.1%e2.6% 5.8%e6.5% 1.1%e2.0% 4.3% 15.4% 2.3% 5.7% 0.8% 4.0%e13.9% 10.3%e12.4% 4.2%e15.6% 1.3%e10.1% 1.8% 4.0% Not significant 9.7% 5.3% 1.7% 10.2%e13.8% 6.9% Not significant 8.7% 5.8%

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developers bear the R&D costs and technical risks at the initial stage of green building development (Jakob, 2006; Zhang et al., 2011b). Second, suppliers of green materials and equipment are still scarce. Specifically, there may be a coordination problem such that developers are waiting for key suppliers to invest in green building expertise, while those same suppliers are waiting for evidence of ample demand (Simcoe and Toffel, 2014). Some studies explored how to solve these problems, so as to encourage more developers to participate in green practices. Simcoe and Toffel (2014)’s empirical analysis suggested that policies requiring governments to construct green buildings had a significant impact on the adoption of green building standards in the private sector for two main reasons. First, government procurement policies might solve the coordination problem between developers and key suppliers, jump-starting the development of specialized input markets by providing a guaranteed source of demand. Second, government procurement policies might lower prices of green building inputs through economies of scale and learning effects.

The second problem is the cost-benefit mismatch caused by information asymmetry. For developers of buildings sold to households or enterprises immediately after completion, the lumpsum payment from buyers is the only opportunity for them to collect the rewards from green building investments. Therefore, market recognition of green buildings at the time of sale is crucial for developers to achieve economic viability. A principal-agent problem can arise if the developer of a new building cannot credibly represent its “greenness” to potential buyers (Jaffe and Stavins, 1994). Ordinary buyers do not have the specialized knowledge to assess the “greenness” of buildings, and buildings are a typical experience good - their qualities, such as energy efficiency, are only revealed gradually upon consumption (Nelson, 1970; Shapiro, 1983). This viewpoint is also supported by recent studies.

Brounen et al. (2013) showed that energy literacy and awareness among Dutch households were rather low: 44% of the surveyed households had no idea about their energy consumption, and 40% could not appropriately evaluate energy-efficiency investments.

Residents’ knowledge about greenness of buildings is especially scarce in developing countries, such as China (Zhang et al., 2016a; Zhou, 2015). Zhang et al. (2016a)’s survey in Beijing suggested that more than 60% of the respondents do not know about China’s official green building certification. Information asymmetry makes buyers uncertain about the benefits of green buildings and thus hesitant to choose them, which in turn reduces developers’ green initiative and leads to adverse selection (Akerlof, 1970).

Green certifications provided by third parties like governments or independent institutions have been proved to be effective in overcoming information problems and assisting buyers in making a better choice (Banerjee and Solomon, 2003; Heinzle et al., 2013; Kahn and Kok, 2014). Accordingly, the past decade witnessed a proliferation of green labels in major economies, such as LEED and Energy Star in the US, BREEAM in the UK, CASBEE in Japan, and Green Mark in Singapore. However, a survey conducted by Davis and Metcalf (2014) found that the information provided by green labels was often too coarse for buyers to make efficient decisions.

Deng and Wu (2014)’s empirical analysis suggested that the green building price premium increased considerably during the resale phase, relative to the presale stage, implying that while developers paid for almost all of the incremental upfront costs, they only shared part of the benefits associated with the green investments.

Moreover, the study found that green practices did not significantly improve the corporate financial performance of developers. One explanation is that at the presale stage, residents are reluctant to fully trust the green building certification, which is mainly based on design and document reviews. Only when such green buildings have been lived in and utility bills have arrived can residents verify

the “green” claims and may then be willing to pay more. This problem is more noticeable in developing countries where the information transparency in real estate market is insufficient and the public awareness of green buildings is scarce (Zhou, 2015; Zheng, 2007). Therefore, it is crucial to provide more accurate and credible information for consumers and thus help developers reap the benefits of green investments. Zhang et al. (2016a) implemented an experiment in China to measure how consumer decisions would change after being provided with detailed information about green buildings tailored to their situation, and found that the information that was more accurate could increase buyers’ WTP for green buildings.

4.2. Economic viability from the perspective of occupants 4.2.1. Cost-benefit analysis of green building purchase or lease Occupants are buyers or tenants of buildings. Their choice and WTP play an important role in green building development. Only when the price premium is offset by the discounted value of lower operating costs, increased comfort, health and productivity, and potential economic returns produced by enhanced corporate reputation, will they be willing to buy or rent green buildings.

Hyland et al. (2013) compared the estimated green price premium with the hypothetical value of energy savings from Sustainable Energy Authority of Ireland. For example, Hyland et al. (2013) estimated that, for a 3-bedroom semi-detached house, moving from an F to B1 rating would lead to a price premium of V1617 or a rental premium of V1119. However, according to Sustainable Energy Authority of Ireland (2017), the engineering-based model indicated that, for such a property, moving from an F to B1 rating would yield an energy cost saving of V2610, which was 1.61 times the sale price premium, and 2.33 times the rental price premium.

Kahn and Kok (2014) employed the data in California and documented that for a home expected to yield a 30% reduction in energy costs, the payback period was only 12 years given the green price premium estimated in the paper. However, these two calculations were based on hypothetical energy savings from engineering studies, which omitted behavioral and environmental parameters, and thus might overstate actual savings (Hyland et al., 2013).

Koirala et al. (2014) found that reduction in monthly energy expenditure only accounted for 1/18 of the monthly rental price premium. Reichardt (2014) even found that the operating cost of Energy Star rated buildings was 3.9% higher than non-green buildings. Comparisons of the green price premiums with operating costs have not reached a consensus. Furthermore, benefits of improved comfort, health and productivity have not been included in the cost-benefit analysis yet, as they are too difficult to quantify.

4.2.2. Barriers to economic viability from the perspective of occupants One of the barriers to economic viability from the perspective of occupants is the energy pricing mechanism. Sabapathy et al. (2010) indicated that while energy savings for LEED-certified buildings were approximately 34% on average, energy cost savings were only about 8.5%. There are two possible explanations. First, the energy costs have a component of fixed demand charges, which do not depend on energy consumption, and thus the overall energy cost savings are lowered. Second, the type of lease agreement may not pass on the benefits of energy savings to the occupants, which is called the investor-user-dilemma or split incentive problem (Jakob, 2006; Kahn et al., 2014). The “full gross” (all-inclusive) contract provides the weakest incentives for tenants to conserve energy but incentivizes building owners to invest in energy efficiency. In contrast, the “triple net” (excluding utility cost) contract incentivizes tenants to economize on energy but provides weaker

L. Zhang et al. / Journal of Cleaner Production 172 (2018) 2234e2245

incentives for building owners.

Another barrier may be occupants’ behavior. Some studies show that consumers are rationally inattentive to energy costs when they buy energy-using durables (Allcott and Taubinsky, 2015; Sallee, 2014). Energy bills are aggregated and periodic, so consumers have to gather information and perform a sophisticated calculation to compare life-cycle costs. However, many consumers lack the skills, and for others, the amounts saved are too small to justify the efforts. In addition, even if consumers do trade off initial capital costs and expected operating costs in the future, the discount rate they used is approximately 14.6%e28.9%, which substantially exceeds values used in “engineering calculations” to evaluate socalled life-cycle costs (Allcott and Wozny, 2014; Busse et al., 2013; Dubin and McFadden, 1984; Gallagher and Muehlegger, 2011; Hausman, 1979). The reason may be that the present large upfront payment attracts more attention than the smaller and uncertain monthly payments in the future, leading consumers to }szegi overweight the up-front payment (Jaffe and Stavins, 1994; Ko and Szeidl, 2013).

What is more, some studies find that energy efficiency improvement will in turn affect occupants’ behavior (Alcott, 2005; Lin and Liu, 2015; Ouyang et al., 2010). Energy conservation initiated by energy efficiency technology means less energy use, thereby more disposable income if energy prices do not change after efficiency improvements (Ouyang et al., 2010). Then, with more purchasing power, occupants are likely to pursue lifestyles that are more comfortable by consuming more energy and/or employing other energy-consuming appliances. As a result, part or all of energy-saving effects vanishes, and this loss portion is denoted as “rebound effect”. The magnitudes of rebound effect proved to be much larger in developing countries (Ouyang et al., 2010). At present, rebound effects are generally less than 30% for household energy services in developed countries, but in China, the energy rebound effects are 66.5%e88.5% for urban residential buildings, and 127.0%e236.3% for rural residential buildings (Lin and Liu, 2015; Ouyang et al., 2010). The reason is presumably that most households in China do not have enough space-heating, lighting or cooking services, and the demand for a more comfortable household lifestyle increases due to the rapid economic development. This phenomenon also implies that green housing demand can be attributed only in part to energy cost savings (Kahn and Kok, 2014; Khazzoom, 1980; Lin and Liu, 2015; Ouyang et al., 2010). Therefore, the benefits of enhanced comfort, health and productivity should be taken into consideration in the cost-benefit analysis of green buildings.

5. Conclusion By reviewing the existing studies on the economic viability of green buildings from the perspectives of building life cycle and particular market participants, we identify that while “going green” may be financially feasible or even profitable over the entire life span, a number of factors hinder developers and occupants from achieving economic viability in the adoption of green building.

These include overestimates of initial costs, cost-benefit mismatch caused by information asymmetry, split incentives caused by contract structure and energy pricing, and a lack of attention to energy costs. The inconsistency of economic viability from the perspectives of building life cycle and particular market participants may significantly contribute to the “paradox” in the green building market and the slow development of green buildings. Future research is needed to address current barriers and thus hasten the diffusion of green design and technology in the building sector.

Firstly, more comprehensive and robust evidence about lifecycle costs and benefits of green buildings are urgently required.

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Specifically, there should be more elaborate calculations of the incremental initial costs, operating cost savings, comfort and health improvement, corporate reputation improvement, market value increase, and environmental externalities. Furthermore, attention should be paid to the heterogeneity of developers and occupants, and the difference among various locations and conditions. The results would provide guidelines for reforming green building standards and codes, and offer valuable information to market participants to aid in their decision-making, such as mitigating developers’ overestimate of incremental costs.

Secondly, in the cost-benefit analysis of developers and occupants, it is crucial to take those ancillary long-term or intangible benefits into consideration and thus achieve holistic knowledge about the economic returns from green building investment. For developers, while the existing research focuses on the green price premium at the project level, it is more valuable to investigate the accumulative impacts of green practices on the enterprise-level financial performance, risk mitigation and brand value. For occupants, the conventional theory emphasizes incentives from operating cost savings, but occupants’ lack of attention to energy costs and the rebound effect imply that improvements in the built environment may play a more important role. Therefore, it is essential to include the increased comfort, health and productivity in occupants’ benefit analysis, especially in developing countries where rapid urbanization and economic development result in the demand for more comfortable built environment.

Thirdly, it is a promising research area to investigate the dynamics of green building diffusion, namely how economic viability determines the adoption rate of green design and technology, and how the growth of green buildings in turn influences green costs and benefits. The development of green buildings is a complicated process consisting of interactions and feedbacks among market participants, and some problems cannot be solved by mere static analysis. For example, if costs are falling, it can pay to wait, despite the fact that the current net benefit of “going green” is positive. Cost dynamics resulting from learning and experience curves, and price dynamics resulting from market competition and gentrification, deserve further research.

Finally, institutional arrangements for stimulating green building development should be an important part of the future research agenda. Integrated and comprehensive policies play a pivotal role in stimulating a high level of market penetration. While the existing studies have documented the effectiveness of green certification in overcoming the information asymmetry problem, such a role can be further enhanced via several approaches. For instance, the signal quality can be improved through post-occupancy evaluation, which reflects the actual performance of green buildings.

Furthermore, energy pricing, carbon trading and education nudges should be the focus of future policies to shape the behavior of individuals and enterprises to support better building performance outcomes.

Acknowledgement This research is funded by the National Natural Science Foundation of China (Project No: 71373006, 91546113, 71673156), Tsinghua University Initiative Scientific Research Program, Urban China Initiative, China Scholarship Council, and Peking UniversityLincoln Institute Center for Urban Development and Land Policy.

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