W i l l G r e e n B u i l d i n g s b e A p p r o p r i a t e l y V a l u e d b y t h e M a r k e t ?
121
WILL GREEN BUILDINGS BE APPROPRIATELY
VALUED BY THE MARKET?
Chihiro Shimizu
1
1
Department of Economics, Reitaku University (Japan) & University of British Columbia (Canada)
Abstract
As interest grows in environmentally friendly buildings, or “green buildings,” the real
estate industry is expected to play an increasingly active role in the realization of a low-
carbon society. Various efforts toward such society are now being promoted vigorously
within an international framework.
To supply a socially desirable level of green building
via the market mechanism, the economic value of green buildings (as measured by the
marketplace) must be commensurate with the required investment. Many remain
skeptical, however, about the true economic value of green buildings. A thorough
analysis has yet to be conducted to evaluate whether green buildings realize income
increases commensurate with the enormous initial investments required, although it is
clear that cost savings do result from lower energy consumption. This paper shows,
through a series of analyses, that in order for green buildings to produce economic value.
Based on a demonstration analysis of the housing market, the author shows that new
condominiums with “green” labels command a premium of approximately 5 percent.
Keywords:
Green building; green label; hedonic approach
1. Introduction
As scientists elucidate in increasing detail the mechanism of global warming, or how
carbon compounds produced from economic activities produce climate change, global
warming has become recognized not just as an economic issue, but also as a
comprehensive global issue vital to ecological protection. Accordingly, the realization of
a low-carbon society has become one of today’s highest international priorities.
Some are still skeptical of the causal linkage between carbon compounds and
global warming. It is unimaginable, however, that efforts toward the realization of a low-
carbon society will be reduced because of these doubts; rather, it seems that if anything
they will increase.3)
How, then, will the real estate market be affected as environmental policy
progresses? And what economic value will be produced by the environmentally friendly
buildings, or green buildings, which these environmental efforts have given birth to?
This paper intends to provide a normative presentation of the economic value of green
buildings.
There has been a large accumulation of analytic studies on the relationship between
environmental and real estate value. Almost all of previous studies were intended to
evaluate how real estate prices are affected by the surrounding environment. Their main
purpose was, in other words, to measure through the real estate market the economic
value of certain environmental qualities that were not explicitly traded in the market.
Economically, they were designed to measure the economic value of external or highly
public goods.
When it comes to the economic value of green buildings, however, the analysis
must take on a very different structure. Green buildings are environmentally friendly
themselves and do not depend on the externality of their surroundings. The economic
