How can we collectively address real estate’s impact on the environment to achieve a carbon neutral, or even positive, built environment?
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The climate crisis is one of our most urgent social, environmental, and economic challenges. Society is making too little progress towards the 1.5-degree Paris agreement target, yet real estate has an important role to play in accelerating progress.

In the power sector, the EU Emissions Trading System has facilitated 43% reductions since its 2005 inception, yet, overall, carbon pricing remains a ‘niche tool’ with the World Bank estimating only 23 percent of global emissions are subject to carbon pricing.

As the world shifts to low carbon economies, forms of carbon pricing will be important for investment decisions as countries tackle climate change and decarbonisation targets.

Carbon pricing is more prevalent in energy-intensive sectors like oil, mining, and aviation, with limited familiarity and relatively slow progress across the built environment, despite it being a significant contributor of emissions.

As a relatively ‘new’ concept there are undoubtedly misconceptions, but carbon pricing must become a vital element to decarbonise the built environment. To make that case it’s important we eliminate any misunderstandings.

The concept is simple: polluter pays the cost of managing and/or reducing emissions, and it’s not simply to penalise but to set the carbon price at such a level to incentivise changes in behaviour and speed emissions reductions.

This is done in two ways.

External carbon pricing is levied on emissions by an outside body such as a local authority or national government. This regulatory approach could be a straightforward tax on emissions, or the approach that governments including the EU takes: an Emissions Trading System. With an ETS, companies are allocated annual emissions allowance quotas. Companies with spare allowances may trade with others expecting to exceed their quota. The EU also auctions further allowances, with the capital raised going to member states or an innovation fund.

Internal carbon pricing is where a company imposes a cost on the carbon it emits, with capital raised retained and often allocated internally to other decarbonisation activities. A recent survey for ULI C Change shows that around 8% of companies are implementing a full fee-paying carbon price, with another 4% modelling the impact with shadow carbon pricing.

This concurs with global research undertaken this year by ULI with PwC for the Emerging Trends in Real Estate Global Outlook which indicated that the potential for carbon pricing to drive decarbonisation is at risk as it’s limited by voluntary application of internal pricing which is set too low to influence behaviour given the capital intensity of the sector.

Frequently, we hear the response ‘why should we take the initiative to address this and not simply wait for regulation?’ However, it’s not just regulation pressuring industries to decarbonise. Increasingly it’s coming from other directions, from states to citizen groups.

European and US oil and gas companies have recently been subject to high profile legal action from environmental groups and even States concerning insufficient measures taken to mitigate the impacts of Co2 emissions or fossil fuel risks.

Meanwhile, six young people from areas ravaged by wildfires and heatwaves in Portugal have just gone head-to-head with 32 European governments, alleging in court that their failure to act quickly on climate change violates their human rights.

Could the built environment face similar consequences? It is one of the largest contributors to global emissions, but currently its impact is much lower profile than, for example, oil and gas.

Real estate still has the chance to collaboratively address the direct and indirect consequences of the climate crisis, embrace its responsibilities, and coordinate action, rather than risk having action imposed. Internal price setting can help us achieve this.

The good news is we’re starting to see progress. From the work we’ve undertaken with our members and the wider industry, there’s clearly an evolution of views, and increasing numbers are looking at carbon pricing and the important role it can plays in decarbonisation.

One key challenges concerns lack of knowledge and how pricing relates to other decarbonisation risks and the ‘tools’ used such as the cost of decarbonisation and offsets.

Based on workshops and interviews with industry professionals and associations, we’ve developed initial ideas on how the industry might standardise approach to pricing, recognising the barriers and support needed to build the business case.

One main learning concerns the complexity of real estate, which is an ecosystem of different industries, and responsibility for different operational and embodied emissions lies with specific parts of the industry, with other parts also contributing. This must be factored in when developing a solution.

An internal carbon pricing system set by the industry, which distributes responsibility across different stakeholders, and incentivises others to act, may provide a sophisticated solution ahead of imposed regulation such as ETS, while retaining the funds within the industry to support innovation.

The industry taking ownership of carbon emissions by collaborating at scale to co-create a solution for carbon pricing is our best opportunity to make the greatest impact on carbon emissions.