An environmentally friendly “green” house costs about 20% more to construct than
ID: 802431 • Letter: A
Question
An environmentally friendly “green” house costs about 20% more to construct than a conventional home. The green home is assumed to save 50% per year on energy expenses to heat and cool the dwelling. Assume the following:
- It is an all-electric home needing 8 MWh/yr for heating and cooling and 6 MWh/yr for equipment in the house (ordinary home)
- The conventional home costs $250,000 and its life span is 30 years.
- The cost of electricity is $15 cents assumed constant.
- The “green” home has the same life and no additional value at the end of 30 years.
- The discount rate is 4% per year
(a) Is the “green” home a worthwhile investment purely from an economic point of view?
(b) If the government imposes a carbon tax of $50/ton of carbon, how would you go about reevaluating the added benefit of the “green” home. Assume 170 lb of carbon are released per MWh of electricity generation (corresponds to California).
Explanation / Answer
a) From a pure economic perspective,
Cost of building:
Cost of a conventional house = $ 250,000
Cost of a green house = 20% extra = $ 300,000
Power consumption: Green house saves 50% on heating and cooling.
Power consumed by green house = 8 MWh/yr (heating - cooling) + 6 MWh/yr (appliances) = 14 MWh/year
Power consumed by conventional house = 16 MWh/yr (heating - cooling) + 6 MWh/yr (appliances) = 22 MWh/year
Cost of power consumption per year :
Cost per year for conventional house = (22,000 KWh/yr) * ($ 0.15) = $ 3,300/yr
Cost per year for green house = (14,000 KWh/yr)* ($ 0.15) = $ 2,100/yr
Life span of both the buildings would be 30 years.
Total amount spent on Power bills:
Total power bill spent on conventional house in 30 years = $ 3,300 * 30 = $ 99,000
Total power bill spent on a green house in 30 years = $ 2,100 * 30 = $ 63,000
Total investment on the house:
Total investment on a conventional house = $ 250,000 + $ 99,000 = $ 349,000
Total investment on a green house = $ 300,000 + $ 63,000 = $ 363,000
Hence from purely economic point of view, the green houses are not worth investing in.
b)
Carbon emissions:
Amount of carbon emission from conventional houses per year = 22 MWh * 170 lbs = 3,740 lbs = 1.87 tons
Amount of carbon emission from green houses per year = 14 MWh * 170 lbs = 2,380 lbs = 1.19 tons
Total amount paid as carbon tax over 30 years:
Total carbon tax for 30 years from conventional house = 1.87 ton * 30 years * $ 50 = $ 2,850
Total carbon tax for 30 years from a green house = 1.19 ton * 30 years * $ 50 = $ 1,785
Revaluated value of houses:
Total investment value of a conventional house = $ 250,000 + $ 99,000 + $ 2,850 = $ 351,850
Total investment value of a green house = $ 300,000 + $ 63,000 + $ 1,785 = $ 364,785
Therefore, even after the government has alloted a carbon tax, the green house would not be a good investment for its life of 30 years.
All the best :) Hope it helps.