Having participated in the “The District” event this past September in Barcelona, we had the opportunity to talk about the “greening” of real estate by meeting the challenge of ESG and sustainable finance and, more specifically, about the importance of carbon pricing in achieving sustainability goals, which is an emerging topic with many uncertainties.
Can carbon pricing catalyze a real change in the real estate sector? What are the key considerations for its implementation? Are we there yet?
Understanding carbon pricing
Carbon pricing is a market-based approach that reduces greenhouse gas emissions by placing a financial cost on carbon emissions. There are two main forms of carbon pricing, both of which have the potential to have an impact when it comes to real estate decarbonization.
On the one hand, we can find internal carbon pricing, which involves a company establishing a price on the CO2 it emits. This has two main forms, either a shadow carbon price, which is when a company puts a price on each ton of CO2 emitted, or a full fee-paying internal carbon price, when a company puts a price on the carbon emitted and pays the money into an internal fund. The first case would be purely theoretical, which means that the company does not really pay that money to anyone or set it aside, and in the second case, the company could make use of this fund to invest it in reducing their portfolio emissions or for offsetting.
On the other hand, we can find external carbon pricing, where a price is levied from an outside body on carbon emitted by a company. Again, it can be implemented in two different ways, the first one through carbon taxes, which are levied by a local authority or national government on the CO2 emitted by a company, and the other one through Emissions Trading Schemes (ETS), which are usually imposed by a government or regional body, such as the European Union (EU). In this particular case, companies might have a certain allocation of carbon they can emit, and they might then have to buy permits for each ton of carbon emitted above this level. Companies could trade the permits by putting a market price on carbon. As time passes, the allocation of “free” carbon emissions reduces, making the permits more valuable, raising the price, and encouraging companies to reduce emissions.
Carbon Pricing in the Real Estate Sector
Unlike the carbon-intensive sectors (electricity, foundry, etc.), which are already paying a carbon tax, a common official carbon tax has not yet been imposed in the real estate sector, but it is not discarded that it will begin to be implemented soon given the numerous initiatives to put a price on carbon in the sector. The adoption of carbon pricing is gaining momentum globally, with many countries committing to carbon pricing initiatives, like South Korea, China, and Brazil, actively pursuing carbon pricing to combat climate change. Additionally, efforts are underway to link carbon markets internationally, enabling cross-border collaboration and the exchange of emission reduction credits. This interconnected approach fosters cost-effective emissions reduction and encourages global cooperation in addressing climate challenges.
Some cities and countries are more advanced than others (New York, Canada, or Singapore, to name a few ), but it is clear that the real estate sector needs to be prepared for a price to be put on its emissions.
As sustainability professionals, we have no doubt that implementing a carbon pricing system could offer several compelling benefits for the real estate sector as it has the power to influence consumer behavior, driving demand for energy-efficient and environmentally friendly buildings and offering unique opportunities to drive sustainable development. Internal carbon pricing mechanisms enable organizations to incentivize emission reductions and align investment decisions with sustainability goals. By incorporating carbon pricing in underwriting and risk assessment processes, real estate owners and managers can better evaluate the financial risks associated with carbon-intensive assets and drive sustainable investments.
Overcoming Challenges
While carbon pricing is a promising solution, challenges need to be addressed for its effective implementation. Carbon leakage, where industries relocate to jurisdictions with lower carbon pricing, can undermine emission reduction efforts. To mitigate this, targeted policies such as tax credits and support services can discourage carbon leakage, just as we are seeing with the EU Carbon Border Adjustment Mechanism (CBAM) in other types of industries.
To ensure the successful adoption of carbon pricing in the real estate sector, collaboration and standardization are essential. Organizations like Arcadis are working towards standardizing internal carbon pricing practices, facilitating widespread adoption across the industry. Knowledge-sharing platforms, including collaborations among major standard-setting organizations, provide valuable insights and drive best practices. Reports from reputable institutions, such as the Urban Land Institute and PwC, offer guidance on implementing carbon pricing in real estate and showcase successful case studies. Hence, these foundations are already being laid.
Policy and Regulatory Support
Last but not least, government policies and regulations play a crucial role in supporting the implementation of carbon pricing in the real estate sector. Governments can provide incentives such as tax breaks or grants to encourage the adoption of low-carbon practices. Additionally, supportive regulations can promote transparency and disclosure of carbon emissions, enabling stakeholders to make informed decisions. Policymakers should also ensure that carbon pricing initiatives are designed in a way that is fair, aligned with broader policy goals, stable, transparent, efficient, and environmentally sound.
Carbon pricing is gaining traction in Real Estate, driving sustainability goals. Understanding its nuances is crucial. Collaborative efforts led by organizations like Arcadis are laying the foundation for successful adoption. Government support and clear policies are essential for accelerating this transition. Our recommendation: Stay informed and consider engaging with industry organizations for a greener future. Your engagement can make a meaningful contribution to a greener future.
