How the building sector can tackle climate change

With the passing of the historic climate change agreement in Paris, the buildings sector, which accounts for 32 percent of total energy use and 19 percent of GHG emissions, has been highlighted as a key industry to transform in order to achieve global climate mitigation goals. The private sector has responded with ambitious pledges for action, and must now turn to practical solutions to put the building sector on a low-carbon path.

The good news is that the level of aspiration is very high. I participated in the first-ever Buildings Day at COP21, witnessing ambitious commitments from both the public and the private sector. Over 90 countries have included attention to buildings in their Nationally Determined Contributions (NDCs), with greater than 1,300 commitments from companies and industry and professional organizations.

Under the leadership of the World Green Building Council, several of its member organizations pledged that more than 1.25 billion square meters of buildings will be registered, renovated, or certified as green building space over the next five years. A Global Alliance for Buildings and Construction was also launched and publicly committed to helping countries meet their Nationally Determined Contributions (NDCs) through green building. The Global Environment Facility, a key funding entity, announced $23 million in funding for the Building Energy Accelerator and the District Energy Accelerator.

While progress is in the air, the bad news is that the world needs immediate action. The level of emissions from buildings could double or even triple by mid-century, due – in large part to the construction boom in the developing world, where population growth, migration to cities, and lifestyle changes will contribute to building energy usage. To avoid locking in resource intensive buildings, aspiration for change must quickly translate into action.

What will it take to move the construction industry toward the goal of decarbonizing the built environment? At the World Bank Group, we saw that technologies and know-how are not generally the problem. The economic benefits of building green are documented. Yet, we see economic value being left on the table. According to the International Energy Agency, the building sector is the least exploited source of energy efficiency, with only 20 percent of the potential captured. The tools are there but the confidence and the evidence for the building sector to take the leap to build green is not there.

Why is this happening? Why are we not making more progress in building green in the developing world where the built environment is growing fastest? The building sector is complex. There are many players whose interests diverge. Asymmetry of information and value creation between builders and buyers is key. We call this ‘the cycle of blame’ between homeowners, builders, developers, and investors.

For example, each player in the building ecosystem blames the other for not being willing to pay the additional costs for building green. There are real additional costs, but studies show that the perception of costs is usually higher than the reality. For example, a World Green Building Council study showed that developers perceive the costs to build green are as much as 30 percent higher than reality. Our experience shows and is now documented in pilot projects in South Africa and around the world, that the costs for moderate-income housing are only about 3 percent higher. In addition, other financial benefits often mitigate higher costs, such as lower utility bills, faster sales to owners, better resale value, lower default rates, etc.

The key is to address each party’s concerns and break the cycle of blame. This can be done through four steps:

1) A clear definition of a green building standard which focuses on energy, water, and materials savings for the end user that can be verified, and which leads to demonstrated reductions in utility costs. This is an important driver especially in the developing world where utility costs can consume up to 20 percent of a moderate-income family’s disposable income, as we have seen in Nigeria.

2) An easy-to-use tool that allows building designers to choose the lowest cost options that will help them reach a green building standard, combined with a fast, inexpensive certification system to verify that the buildings meet that standard.

3) An enabling environment of supportive government policies which raises the bar through increasingly greener building codes and provides the right incentives (which are not always financial) for building green.

4) Collection of evidence that building green has positive financial returns to all parties in the building ecosystem. This is especially important for bankers who can finance a pipeline of green building projects at acceptable rates by monetizing the economic benefits of green buildings. As long as we can prove that everyone wins financially by building green, we have a chance at collective action IFC, the private-sector arm of the World Bank Group, launched the EDGE Green Building Market Transformation Program to answer these needs in the market.

EDGE (which stands for Excellence in Design for Greater Efficiencies), is a comprehensive, four-pronged program which addresses all the players in the buildings ecosystem: developers and manufacturers; financial institutions; policymakers; and end buyers. At the heart of the Program is an easy-to-use, free software which helps building developers learn early in the project what efficiency measures make the most business sense.

Our EDGE tool is currently available to use online to design projects in over 100 countries. We have strong local partnerships in five countries, with the aim of expanding to 20 countries over the next few years, and we have global partners who cover the rest of the globe.

IFC’s EDGE and similar certifications in the market address the issues outlined above by providing a common standard that brings builders, buyers, and bankers onto the same page. EDGE can also capture data needed to analyze operational savings. And through our partnerships with certification providers, we can show client interest and demand so that more investors support the trend. Finance into buildings is already happening – what we must do is to transform existing flows toward greener alternatives. We believe that buildings can contribute significantly to climate action. With cooperative action, a fundamental market transformation is achievable.