• Carbon pricing can make less carbon intensive materials stack up against “cheaper” alternatives and decarbonisation funds generated by carbon pricing calculations can make retrofits cost-effective.
• Of 68 countries that have a carbon tax or trading scheme, only a handful apply it to real estate.

Global real estate leaders surveyed by the Urban Land Institute (ULI) and PwC believe that the potential of carbon pricing to drive decarbonisation in real estate is at risk of being limited by voluntary application and rates that are not high enough to influence behaviour.

Emerging Trends in Real Estate^® Global Outlook 2023, an annual survey by ULI and PwC, of real estate sector leaders’ expectations for the year ahead, takes one of the first deep dives into how carbon pricing can impact the industry’s decarbonisation.

Against a backdrop of continued high inflation and rising interest rates, the real estate industry tries to find ways to continue the green transformation of real estate and make the required investments.

The report finds a growing interest in carbon pricing as a driver of decarbonisation. “Translating carbon emissions into a monetary amount is seen to put them into a language that most real estate professionals can understand andchange the way companies think and act,” comments Lisette van Doorn, CEO, ULI Europe.

The key variable in carbon pricing identified by the report is price. Carbon taxes applied by governments are generally too low to force change, given the capital intensity of the sector. Carbon prices that companies are setting for themselves are usually higher, clustering around the €90 a tonne mark in Europe. Exceptions closer to academic recommendations are New York’s $268 a tonne and the Dutch city of Utrecht’s €875 a tonne.

Embodied carbon is identified as another gap. So far carbon taxes that exist only apply a price to carbon from building operations. Several of the firms that use voluntary carbon pricing apply it to embodied carbon as well, despite the measurement issues, and this is an area where external carbon pricing instruments need to catch up.

A study by McKinsey of voluntary carbon pricing by companies in 2019 found that just 4 percent of real estate firms were using internal carbon pricing, compared to 40 percent in the energy industry and 29 percent in financial services, showing that the real estate industry is lagging.

Van Doorn adds: “To better build the business case for decarbonisation it is important to incorporate all transition risks into property valuations, including the costs of decarbonisation, tenant voids as well as carbon emissions that have a price. Therefore, it is important for the industry to get on top of carbon pricing and collaborate closely on what this should look like to help accelerate the decarbonisation process.”

Gareth Lewis, ETRE Leader, Director at PwC, said: “We are seeing carbon pricing in every region – from New York’s Local Law 97 and Canada’s various regional policies to the Singapore carbon tax – and it will only become more prevalent. For example, the EU’s Emissions Trading System is being extended to building heating, whilst the bloc’s world-first Carbon Border Adjustment Mechanism (CBAM) is expected to put additional pressure on costs of cement and steel used in construction.”

 Lewis adds: “Some firms feel voluntary carbon pricing would price them out of the market, but there is arguably a commercial advantage in getting ahead of these regulations. And the carbon price is especially relevant in the case of real estate, where the cost of the technology or retrofit required to reduce a tonne of emissions is higher than in almost any other sector. This is a complex area. Changing behaviour in an equitable way and without reducing economic growth is quite a challenge for governments and regulators.”