Focus
Summary
Climate change is the great societal challenge of our time. Emissions of CO₂ and other greenhouse gases are one of the main factors behind global warming and reduction is necessary. The built environment plays an important role due to its large share of CO₂ emissions. Pricing CO₂ is a tool to achieve reduction. The role of CO₂ pricing will increase. Property owners, such as institutional investors, should take this into account in their policies.
CO₂ pricing increases need for sustainability
The built environment causes a large share of the Netherlands' greenhouse gas emissions. Because CO₂ emissions play an important role in climate change, reducing emissions is necessary. By putting a price on CO₂, governments, companies and consumers are stimulated to reduce emissions. Pricing ensures that emissions are considered in decision-making, it encourages energy efficiency and use of renewable energy, and it drives innovation.
CO₂ pricing already exists in several countries and regions and takes different forms. The two main ways are emissions trading schemes and carbon taxes. The basic principle here is that the polluter pays. In addition, one can talk about a social CO₂ price.
The price of CO₂
The best-known form of CO₂ pricing is the EU Emissions Trading Scheme ("EU ETS"). One emission allowance allows a company to emit 1 tonne of carbon dioxide (CO₂) with the allowances being tradable. Around ten thousand companies in Europe, four hundred of which are in the Netherlands, are covered by the EU ETS. Together, these companies are responsible for 40% of the EU's CO₂ emissions. These are companies in energy-intensive sectors of which power plants and producers of building materials such as cement and steel are most relevant to real estate. The EU ETS is volatile and dependent on the demand for allowances, which is strongly linked to the business cycle and related (expected) industrial activity and European Commission policies. The price level has increased in recent years from €20 at the end of 2020 to levels between €80 and €105 in 2023. Other ways of CO₂ pricing include a direct tax on CO2 emissions or using a social or policy price in policy. An example of a social CO₂ price is the Province of Utrecht, which charges a social CO₂ price of 875 euros per tonne in its policy.
EU-ETS PRICE (IN € PER TON CO₂)
Source: ICAP (2023)
Impact real estate
CO₂ pricing is not yet directly applied in the construction and real estate world for individual buildings or projects. However, it comes back indirectly through material and energy consumption. For new buildings, fifty to eighty per cent of the total CO₂ emissions during the 75-year life cycle consist of material-related emissions. Most emissions are generated in the first year of the production phase, while during the operation phase, energy consumption is the main cause of emissions. Building with locally produced bio-based or circular building materials results in significantly lower emissions.
A rise in the CO₂ price will have a major impact on real estate both in the construction and operating phases. If the CO₂ price will double compared to now, the cost price of building a house will increase by 5,300 euros, while in the scenario with a social CO₂ price (tenfold) the price difference rises to 47,700 euros. With an average new construction price of 466,000 euros in 2021, this would mean a ten per cent increase in the price of a new home. Building houses with the current building materials thus leads to cost increases. So using building materials without carbon emissions becomes more attractive.
In the operation phase, CO₂ emissions are determined by energy consumption. Electricity is already covered by the ETS if it comes from fossil fuels. For gas, there is currently no CO₂ pricing, but this is part of the European plans for the EU ETS2 to be introduced in 2027. When the CO₂ price will rise, this will have a substantial effect on households' energy costs. A doubling of the current CO₂ price involves about 500 euros more per year per household, a tenfold increase 2,500 euros.
Conclusion
To combat climate change, reduction of CO₂ is necessary. Pricing CO₂ emissions is an important tool for this. Given the ambitious climate goals, we take into account a rising price of CO₂. CO₂ pricing affects construction costs through higher material prices, but also the operating phase. Building materials and energy facilities that produce relatively high CO₂ emissions will become more expensive over time due to the pricing mechanisms. Building with low CO₂ emissions with locally produced biobased or circular materials will become more financially attractive and eventually the only affordable option. In recent years, sustainability has become increasingly important for institutional investors, mainly because of social responsibility and regulation. With increasing carbon pricing, it will also become increasingly important financially.
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