stimulating sustainable construction in the uk. do we need a - gva

Stimulating sustainable construction in the UK

Do we need a scrappage scheme for buildings?

Thought Leadership

Spring 2011

02 I GVA 10 Stratton Street London W1J 8JR Stimulating sustainable construction in the UK – Do we need a scrappage scheme for buildings?Stimulating sustainable construction in the UK – Do we need a scrappage scheme for buildings?

Executive summary

The UK economy and property markets remain fragile, particularly outside London and the South East. Forecasters are expecting an anaemic recovery, but there is a significant risk of slow economic growth and stubbornly high unemployment as the government implements £81bn worth of spending cuts.

The construction sector is a major part of the economy and, despite bouncing back surprisingly strongly in 2010, there is recent evidence of a new slowdown. The sector, which relies heavily on publicly funded projects, has already shed around 280,000 workforce jobs since 2008. A decline in output from the sector is expected to intensify as public spending cuts bite and property markets remain fragile.

The weakness in construction is also exacerbating the failure to make the required improvements to the UK’s building stock fast enough to hit emissions reduction targets. Recent research by the independent advisory body, the Committee for Climate Change, suggests that additional incentives are needed if legally binding carbon reduction commitments are to be hit.

At the moment there is a bewildering array of government incentives and initiatives designed to address these issues. But the existing or proposed schemes are generally complex, vary in their market coverage, and are not clearly directed. Despite significant levels of funding (around £1bn pa) they may not be achieving maximum benefit from their investments.

A central plank of the Government’s plans for dealing with these issues, the Green Deal, is currently passing though Parliament. But it is not clear if take-up of the scheme will be sufficient and if it will achieve improvements on the scale required. This report discusses the Green Deal, the options for what could be done to revive construction and

meet sustainability commitments, and examines a possible novel solution in the form of a scrappage scheme for buildings.

The current political climate suggests the use of subsidies in the Green Deal will be ruled out. But on many aspects a

scrappage scheme for buildings seems preferable to the current mix of incentives and the Green Deal. It should therefore be at least considered as part of a ‘plan B’ should the government’s current ‘plan A’ fail.

Stimulating sustainable construction in the UK – Do we need a scrappage scheme for buildings? 10 Stratton Street London W1J 8JR GVA I 03Stimulating sustainable construction in the UK – Do we need a scrappage scheme for buildings?

The scale of the problem and the need to stimulate sustainable construction

The construction industry is an important part of the UK economy but it is in a fragile state and the outlook is for weakness to persist.The UK construction industry is vital to the UK economy, accounting for around six per cent of national Gross Value Added, some £71bn, in 2010. It has been especially important in sustaining the economic recovery of 2010 accounting for a significant proportion of total GDP growth.

Having been hit hard by the recent financial crisis, construction output bounced back surprisingly strongly in 2010. But with the removal of funding for public sector projects, weakness in the private sector and a high level of spare capacity, only moderate output growth is expected in 2011-2012. Construction employment is now well below pre-crisis levels following the reduction of around 280,000 workforce jobs since 2008 (see chart 1). The private sector needs to enhance its output to offset lost public sector work if stagnation in construction is to be averted.

The construction industry is intrinsically linked to efforts to hit sustainability targets, but the necessary improvements are not being made fast enough.

Under the Climate Change Act of 2008, the UK is committed to reducing its carbon emissions on 1990 levels by 80% by 2050. With around two thirds of total CO2 emissions in the UK released from buildings and industry, they are primary sources for potential carbon savings. Residential property accounts for the largest share of emissions (41% in 2008), followed by industrial (38%), commercial (15%) and the public sector (6%).

The Committee on Climate Change (CCC), an independent body that advises the UK government on meeting carbon budgets, has found that, although there has been some progress implementing building improvements,

the overall rate of progress is too slow. The CCC recommends that a step change in implementation measures is required, with key areas for savings coming from better insulation, boiler replacement, energy efficient lighting, renewable heating technologies and the spread of less energy intensive appliances.

The government department for Business, Innovation and Skills (BIS) recently published in-depth research into whether or not the construction industry is fit for purpose for the transition to a low carbon economy. The Low Carbon Construction report makes 65 separate recommendations to address

the challenges faced in achieving a low carbon construction industry. They are wide ranging, falling under the general themes of clarity, co-operation and confidence. But fundamental to them all is the need to stimulate market demand for low carbon construction.

There’s slow progress in the construction sector in tackling the carbon agenda. We are starting to address matters in the new build housing market, but the commercial sector is faced with a confusing non-mandatory code. The focus is also on the new build market, rather than the existing stock – which is where the real issue is.

Paul Edwards, Hammerson

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Government incentives and the Green Deal

There is currently a bewildering array of measures, incentives and initiatives designed to address the need to stimulate sustainable construction. The existing or proposed measures by government are generally complex, vary in their market coverage, do not address stimulation and sustainability issues, and, despite significant levels of funding (around £1bn pa), may not be achieving maximum benefit from their investments. Furthermore, business and individuals may not always be aware of all the available schemes. Summary details are provided in an appendix at the back of this report.

We need to look at metrics, and address the current alphabet soup of measures. A portfolio of simple measures is required.

Paul McNamara, Prupim

A central plank of the coalition Government’s plans for dealing with the above issues is the Green Deal, which was at the core of the Energy Bill introduced to Parliament in December 2010. The Green Deal is a new pay-as-you-save finance scheme through which grants will be available for energy efficiency improvements made to homes and small businesses. Repayment obligations will be tied to individual buildings over periods of up to 25 years.

The keys benefits of this arrangement are twofold. Firstly, the deal allows energy efficiency improvements to be made to homes and businesses at no up front cost. Secondly, only those individuals who directly benefit from the improvements have to pay for them because the obligation to repay loans will be tied to the building itself and will not follow occupiers who move on.

Initially aimed at the residential sector, the Green Deal scheme is to be extended

to the non-domestic sector, but due to the high level of diversity and turnover in commercial property it is likely there will be some differences in structure. The Green Deal is due to be launched in the second half of 2012 following a period of consultation and production of the required secondary legislation.

Will the Green Deal deliver?The Green Deal is central to the Government’s sustainable building agenda but there is uncertainly about how it will operate and if it will achieve improvements on the scale required.

A number of questions regarding the current proposals arise:

• Will the terms of Green Deal finance packages be good enough to encourage sufficient take-up?

• Will a financial liability attached to a building have an effect on its capital and rental value?

• Will the administration of the Green Deal be simple and low cost?

• How will landlord and tenant relationships impact upon the effectiveness of the Green Deal?

• How will reductions in emissions resulting from the Green Deal be measured and benchmarked?

• How does the Green Deal link up with the Government’s other emission reduction measures?

If the government is looking to make £80+bn of spending cuts, is it going to fund non-voter schemes? [Energy efficiency in buildings] is going to remain the private sector’s responsibility.

Nigel Godfrey, Gazeley

An attractive proposition?

The central premise of the Green Deal is that ‘the expected financial savings must be equal to or greater than the repayment costs attached to the energy bill’. But actual cash savings cannot be guaranteed and repayments will have to be made regardless of fluctuations in energy bills due to other factors, such as energy prices and occupier behaviour. This may make the concept harder to sell to the general public. The accuracy of building assessments made by Green Deal providers to calculate the scale of works, estimated energy savings and repayment periods, will therefore be highly important.

A key concern is who will hold responsibility for loans? Easier on the residential side, but not so in the commercial sector. A lot of questions still need to be answered in order to be reassured.


There are also question marks over the repayment system and associated interest rates. Repayments will be collected by energy companies directly via energy bills and this should help to lower the interest rates charged in the loans. But the loans are still fundamentally unsecured, and should therefore attract a higher risk premium and hence interest rate. Failure to meet repayments will result in disconnection of supply which could prove to be controversial.

Recent research has been conducted by UKGBC and WWF into public attitudes towards the Green Deal1. It found that only around half (56%) respondents found the proposition to be even fairly attractive. This was despite being given a scenario where energy bill savings are achieved throughout a 25 year team. 28% of respondents said they would not undertake any improvements, under the Green Deal. When attitudes towards interest rates were questioned just 7% of respondents said they would be fairly or very likely to take up the Green Deal if the


finance package had a relatively low interest rate of 6% per year. However, the level of interest increased if a subsidy, such as a council tax rebate, was included as part of the deal.

Potential impact on capital and rental values

Any Green Deal liability attached to a property may have knock-on effects on capital and rental values. When questioned about purchasing a home with a Green Deal scheme attached, some 20% of respondents to the survey said they would either be concerned and would seek a reduction in the sale price, or not purchase at all. Some 21% of respondents would be mildly concerned about the presence of a Green Deal and would seek independent advice. Only 5% would be completely comfortable with it.

Administrative burden

The Green Deal will include significant costs to the government, finance providers and the public. This will include:

• Administering accreditation systems.

• Running customer services operations.

• Developing legislation, training provision, record keeping and enforcing disclosure requirements.

• Finance providers are likely to seek reimbursements for losses incurred as a result of early repayment of loans by customers.

• Energy supply licences may also have to be revised. Energy companies may be required to administer loans, collect payments and track liabilities to properties, while installers will be required to achieve accreditation.

• In addition, the obligation for disclosure of Green Deal information prior to purchase, sale or letting may impact upon conveyance costs.

Landlord and tenant relationships could be problematic

How the scheme interacts with the relationship between landlord and tenant is another area of potential difficulty. Friction may arise between landlords and

tenants, for example, where there is a difference of opinion about whether or not to enter a Green Deal. Negotiating and agreeing the scale and scope of works to be carried out could be problematic.

Further complications

There are also question marks over what would happen in the event of substantial renovation, change of use, demolition, compulsory purchase orders or if a provider of Green Deal finance enters liquidation. These problems have been recognised and the government is currently consulting on options.

In summary, the current suite of measures is not doing enough to stimulate construction and work towards carbon reduction targets. The Green Deal is seen as a solution and has been widely welcomed within the sustainable construction community, but there are doubts about how successful it will be in its current form. Further measures may be needed to give the sustainable construction industry a much needed boost.

1 Green Deal – public appetite market research, Great British Refurb Campaign, September 2010


What should be done?We think the government should be doing more to stimulate construction and work towards carbon reduction targets. As the table at the back of this report shows, there is already a wide range of incentives and schemes to help construction and improve sustainability.

Any of these schemes could be extended or modified. Simple measures could include, for example, cutting VAT further on energy efficient products, extending the enhanced capital allowances scheme or improving the Green Deal. But highlighted problems with the Green Deal and other incentives may need to be enhanced by a more ‘understandable’ scheme.

An alternative to tax incentives could be the use of subsidies for the replacement of inefficient building components, effectively a ‘scrappage’ scheme for buildings. This type of approach has recently been successfully employed in the boiler scrappage scheme. In the United States there are efforts to introduce a much wider-ranging scheme as part of a raft of stimulus measures. The proposed HomeStar initiative will offer cash rebates to homeowners who undertake improvements which result in energy efficiency increases.

An approach is to incentivise people to install LED lighting and similar measures. This will stimulate manufacturers to develop, with major impacts on CO2 reduction. We have carried out simple measures, such as replacement of lighting, and achieved a 21% reduction in the carbon element.


Could a similar scheme help to achieve the twin aims of stimulating construction and improving energy efficiency in the UK? Below, we discuss the pros and cons of such a scrappage scheme, what it could look like, who would benefit and who would pay.

How would it operate?There are various ways in which a scrappage scheme for buildings could operate. In its simplest form it could effectively operate as an extension of the previously successful boiler scheme, but covering a wider range of construction products in both domestic and non-domestic buildings. Essentially, property owners would be offered a rebate (capped either in percentage or absolute terms) when replacing building components which improve energy efficiency.

The proposed US scrappage scheme is based on a two tier system of rebates at the point of sale. Under tier 1, homeowners receive matching funds of between $250 to $1,500 (not to exceed 50% of cost) for the purchase of basic energy saving equipment, with a cap of $3,000 on rebates. Tier 2 would provide incentives for retrofitting an entire home.

The scrappage concept is interesting. One concern, though, is that elements that work fine currently could be taken out and replaced. Therefore we need to think carefully about what parts of a building to address, and how to measure pay-back.


This requires an energy audit and customised refurbishment plan, including calculations of predicted energy savings. Applicants will receive $3,000 for projected savings of 20%, plus $1,000 for each additional 5% of energy savings, with matching incentives of up to $8,000.


The market is already effectively operating a scrappage scheme. This is from government looking to occupy top graded BREEAM space, which is depreciating lower grade buildings quicker. This may help to bring forward the ‘carbon event’ that is development, and so provide opportunity for improving stock.


Whatever type of scrappage scheme might be introduced, there are some common assumptions about its operation:

• Applicants to the scheme would have their building assessed by an accredited assessor who would recommend improvements that could qualify for rebates.

• Work would be carried out only by selected approved installers to ensure quality of service.

• Warranties would be provided to ensure quality of fittings and work carried out.

• Limitations would exist on how much discount could be claimed for any given property.

A targeted approach (to scrappage) would be needed, rather than a scatter-gun approach. May be more suited to office sector rather than, say multi-let industrial estates. Also we don’t get our hands on buildings that often, so the chance of influencing change is limited – although lease lengths are reducing.

Paul Edwards, Legal & General

What would be included?

The Display Energy Certificate (DEC) and Energy Performance Certificate (EPC) assessment methods could be used to decide which buildings or services qualify. A side benefit of this would be that the scheme would encourage owners to have DECs and EPCs carried out where it is currently optional.

Alternatively, the Government’s Energy Technology Product List could be used, although at present this covers only plant and machinery (not insulation). It would be important that components qualifying under the scheme should be from an approved list to help ensure emissions reductions are achieved.

What are the challenges?

• The impact on construction output and emissions reductions will be limited unless significant funding is provided by government.

• There would be a risk of unnecessary destruction of existing building components leading to a loss of architectural heritage and embodied energy.

• The landlord and tenant relationship could be problematic. What incentive

is there for the landlord to pay for improvements if they already have a secure tenant on a long lease?

• There is a risk that the scheme would simply bring forward refurbishments that would have been made anyway.

The focus should be on big energy users, such as retail shopping centres, warehousing and so on. But also the smaller business sector may be influenced more significantly by this measure. But you have to recognise that in the commercial sector, you can only intervene at certain points in the property cycle, such as break clauses. So you may need to focus on existing measures, such as capital allowances.

Nigel Lax, Industrial Securities

Environmental impacts and embodied energy preservation

The accelerated replacement of building components will have both positive and negative environmental impacts. For example, the benefit of lower carbon emissions from upgraded components vs loss of embodied energy from scrapped components and the production of the new components. The size of these impacts will depend upon the scale of the scheme i.e. how much money is made available. Using a methodology employed by the Institute for Fiscal Studies to examine the vehicle scrappage scheme, we have estimated the size of CO2 savings a scrappage scheme for buildings could yield, which are significant (see page 10).

The preservation of embodied energy should be a high priority in any refurbishment decision making. To avoid unnecessary waste, lifecycle costing could be used to assess whether or not renewal would be more energy efficient than preservation. The use of lifecycle costing could be made a requirement of a pre-qualification assessment for rebates. Any building materials that are replaced should be recycled if possible. In


addition, strict criteria for qualification for the scheme should be included to avoid the unnecessary destruction of historically significant features, such as protected windows.

Could work very well for homeowners. ‘Scrappage’ is a strong and recognised brand, just needs a public awareness campaign to focus it.

Geoff Harris, Henderson Global

With the removal of empty business rates relief leading to the demolition of vacant buildings, wouldn’t a scrappage scheme create further unnecessary demolition?

To avoid this problem, rebates under a scrappage scheme could be restricted to cases of replacement rather than straightforward demolition. However, there ought to be flexibility to apply the scrappage scheme to redevelopments in which the benefits of such an approach could be shown to outweigh operational and embedded carbon impacts. This may be in situations where site characteristics, for example, prevent functional operations without redevelopment.

In any case, the contribution from government would only be a small proportion of the cost of a complete redevelopment, and therefore unlikely to encourage redevelopment purely for the purposes of avoiding business rate liabilities.

However, the issue of empty business rates relief is a more extensive issue than this, particularly for the industrial sector. The removal of empty rates relief was introduced by the previousgovernment in order to encourage more effective use of space by penalising properties not in productive use. While there may be some merits in this in a buoyant market, in current market conditions there are concerns that it may be having the opposite effect, especially for the industrial sector. Potentially valuable property is therefore being demolished, which has a significant element of

embodied energy invested in it, and which would require new energy to replace such space.

As such, this provides some support for the reintroduction of empty rates relief to help address this issue. Without it, the applicability of a scrappage scheme in the industrial sector may have only limited benefit. Another option would be to link rates liabilities with EPC or DEC levels, such that lower energy consumption results in lower rates. This could provide an incentive to invest in refurbishment or redevelopment via a scrappage scheme.

The empty rates system is applied so inconsistently across the country. Some authorities apply it rigorously, whilst others don’t. It is simply a tax rather than a stimulant to development.


How successful was the vehicle scrappage scheme?

In February 2010, the Institute for Fiscal Studies published an analysis of the Government’s short term fiscal stimulus measures including the vehicle scrappage scheme. The vehicle scrappage scheme allowed for up to 400,000 old vehicles to be scrapped and replaced by new vehicles, with a £2,000 incentive split between government and manufacturers. Launched in spring 2009, initially £300m was allocated to the scheme but it proved so popular that it was extended to £400m by the autumn. By the close of the scheme in February 2010 some 400,000 old vehicles had been scrapped and replaced.

According to the IFS analysis the scrappage scheme did have a noticeable effect on car registrations with a strong rebound occurring immediately subsequent to its commencement, although from a low base. But the


largest impact may well have been to encourage people to replace old cars with new rather than second-hand vehicles. The report, however, found that the benefits of the vehicle scheme were that it was highly targeted on a certain industry and had a substantial effect on new car sales.

How much and who pays? As with the vehicle scrappage scheme, central government would need to provide funds on the condition that it is match funded by product manufacturers. As discussed, the size of the impact of the scheme would mainly depend upon the amount of money allocated to it by government. If funding of the order of £500 million per annum were dedicated to the scheme, then very significant CO2 emission reductions could be achieved. By comparison, the proposed HomeStar scheme in the US will make $6bn in rebates available to the residential sector.

Some of the costs of the scheme would be offset by higher VAT receipts from the increase in construction activity that it creates. The National Audit Office estimated that, although the car scrappage scheme cost the government £400m, it raised £116m in immediate tax benefits through enhanced VAT receipts. However, as the IFS points out in relation to the vehicle scrappage scheme: ‘The only new revenues are those coming from expenditures that would not have happened anyway (now or in the future) and that are not the result of substitution across VAT spending groups’. Even so, the stimulant impact of a building scrappage scheme over the next few difficult years may be reason enough to consider this concept.

Funding could be channelled from existing schemes such as the CRC Energy Efficiency Scheme (which, following October’s Comprehensive Spending Review is now effectively a tax rather than a cap and trade scheme). The CRC

scheme is expected to raise some £1bn per year by 2014/15. Using money from the CRC scheme would not only encourage businesses to reduce energy use but also help them to improve the efficiency of their buildings. Alternatively, funds could come from widening other existing related measures, such as the forthcoming Energy Company Obligation, which will require energy companies to provide funding for customer insulation and energy efficiency measures for those who need additional support.

Stimulating sustainable construction in the UK – Do we need a scrappage scheme for buildings?Stimulating sustainable construction in the UK – Do we need a scrappage scheme for buildings?

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How much carbon would be saved?

An analysis by the Institute for Fiscal Studies estimated the amount of CO2 emissions saved by the vehicle scheme of 2009 using the following formula: Change in CO2 emissions = [(E old x VKM old) – (E new x VKM new)] x L

Where E = emissions per km driven, VKM = annual distance driven, and L = remaining lifetime on the road of scrapped vehicle. The result of this is then multiplied by the number of vehicles scrapped to derive and estimate the total amount of CO2 emissions saved by the scheme’s existence.

An equation needs to be derived on whole building refurbishment vs demolition as part of the total carbon event. Effectively, the real value of carbon over time needs to be determined, so we can marry stimulant on construction and stimulant on sustainability.


This equation can be adapted to buildings by estimating the difference in emissions between the existing and

upgraded buildings then multiplying this by the remaining lifetime of the existing building (i.e. the time until it would have been upgraded anyway). Again, the total saved is multiplied by the number of refurbishments carried out.

For the upgrading of hypothetical standard air-conditioned offices we estimate that a scrappage scheme, costing an eighth of the 2009 vehicle scheme (£50m), could result in total emissions savings of 1.9 million tonnes of CO2 over a seven year period. This relates to only this element of the commercial property market, but greater benefits would be achieved the wider the scheme.

Stimulating sustainable construction in the UK – Do we need a scrappage scheme for buildings?Stimulating sustainable construction in the UK – Do we need a scrappage scheme for buildings? 10 Stratton Street London W1J 8JR GVA I 11

The way forward?

Despite a surprising rebound in 2010, the construction industry faces a potentially lengthy period of stagnation if the private sector is not able to fill the void left behind by the Government’s austerity measures.At the same time, the industry is struggling to make the improvements to our building stock fast enough to hit legally binding carbon reduction targets.

The need to stimulate sustainable construction is recognised by the government and steps are being made to address the problem, most notably the Green Deal. The Green Deal has the potential to reshape the path of sustainable construction but it must overcome several barriers. In particular, it

is not clear if take up of the scheme will be sufficient or that it will achieve efficiency improvements on the scale required.

A range of alternative options has been proposed but a potential novel solution could be to explore the use of a subsidy in the form of a scrappage scheme for buildings. Subsidies will always arouse controversy, especially at time of fiscal austerity. But the externalities of undertaking such a measure, supporting an industry vital to the UK economy while helping to improve energy efficiency, are positive ones.

The incentive schemes in place have their relative merits and could simply be extended to boost demand. For example, further reductions in VAT on sustainable building products. Linking up EPCs and DECs with the tax system is also attractive. But further incentives may be needed, including some powerful subsidies, especially if the construction industry enters a prolonged period of stagnation. Taking a different path may give

renewed impetus to the rate of building improvements during a time of austerity.

While the use of subsidies in the Green Deal has been ruled out, the scrappage approach is being considered in the United States. As such, it is worth considering whether a scrappage scheme for buildings is preferable to the current mix of incentives and the Green Deal. It should, at least, be considered as part of a ‘plan B’ should the government’s current ‘plan A’ fail.

Appendix - Current government sustainable construction incentive schemes

Scheme/Incentive Description/notesApproximate annual cost to government 09/10

Building Regulations Energy efficiency requirements (including progressive tightening of Part L) of Building Regulations.

n/a

Carbon Emissions Reduction Target (CERT) Energy suppliers must make reductions in emissions from low income and vulnerable households. Expires 2012 to be replaced by Energy Company Obligation.

n/a

Carbon Trust Loans Scheme Interest free loans for SMEs up to 400k. £71m lent at 0% interest

Climate Change Levy Tax on the use of energy in industry, commerce and the public sector. n/a

Community Energy Saving Programme (CESP) Energy companies required to make energy efficiency improvements to homes in low income areas. Expires 2012 to be replaced by Energy Company Obligation.

n/a

CRC Energy Efficiency Scheme Mandatory emissions payment scheme for large non-energy intensive business and public sector organisations.

n/a

Energy Performance of Buildings Directive Requirement for EU countries to set energy performance standards for major refurbishments, and introduce energy certification schemes for buildings (EPCs & DECs in UK).

n/a

Enhanced Capital Allowances Tax relief for investments in energy saving equipment. £100m

EU Emission Trading Scheme An overall cap on the total emissions allowed from all energy companies and some industry. n/a

Feed-in-Tariffs Support for small-scale renewable electricity via a requirement on electricity suppliers to pay a tariff to small-scale low-carbon generators.

n/a

Green Deal Loans for energy saving improvements. Question marks over take-up and mechanism. Will replace Warm Front, CERT and CESP (via ECO).

Not known. Due to be introduced in 2012.

Landlord’s Energy Saving Allowance Only residential. £10m

Product Policy Minimum energy efficiency standards for energy using products, e.g. Energy Using Products Directive.

n/a

Reduced VAT for certain residential conversions and renovations

Only residential. £150m

Reduced VAT on energy saving materials Only residential. £50m

Renewable Heat Incentive Financial support for those who install renewable heating systems. £850m over CSR period (to 2015)

Warm Front Scheme Support to vulnerable groups in, or at risk of, fuel poverty. Being phased out post CSR. £325m

Zero Carbon for New Non-Domestic All new non-domestic buildings to be zero carbon standard from 2019. n/a

Zero Carbon Homes Relief Stamp Duty Land Tax relief on zero carbon homes. Negligible

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