Split Incentive Solutions

Although solving the split incentive issue has no one-size-fits-all approach, several examples provide common ways to address it. One such approach is a “green lease,” which can take a number of forms. For example, an agreement may be made between the building owner and tenant stating that the owner would make energy improvements (upgrading HVAC equipment) and the tenant would agree to operate the equipment within certain restrictions (maintaining minimum and maximum thermostat settings). For situations in which the tenant pays the utility bills, another possibility might be to permit an increase in rent based on anticipated energy savings. The owner would recoup some of his investment through higher rent, but the tenant would realize a net savings because of lower monthly bills. The increased rent is typically no more than 80 percent of the predicted savings to protect against underperformance. See http://daily.sightline.org/2009/04/27/split-incentive-stalls-energy-efficiency-in-rental-housing/.

Another option might be for the owner/landlord to pay up to a certain amount for utility expenses. If a tenant exceeded that amount, they would either make up the difference or incur a penalty. Neither one of these options comes without some issues to overcome. In the case of an existing building, determining some type of initial energy use benchmark is required to determine the savings achieved. It would likely be necessary to continue to monitor energy consumption, preferably on a unit-by-unit basis.

Although these agreements are all possible ways of helping to solve the problem of split-incentives, a critical component to all of this discussion is tenant education. Tenants need to be informed on certain operational guidelines, such as setting desired maximum and minimum thermostat settings, turning out lights in unoccupied rooms, and operating windows properly. Energy monitors may be an option, but tenants will have to be shown how to use them and what the readout means. Again, some form of energy monitoring is recommended to be able to verify energy use on a per unit basis. It is also likely that building staff will need to perform periodic checks to ensure tenants are following the recommendations and to reinforce conservation measures.