Note that today’s commentary comes from a fellow FactSet energy market expert. The commentary may not directly align with the models, assumptions, and forecasts published in BTU Analytics’ reports.
About 38% of global energy-related CO2 emissions arise from the building sector according to the IEA. Yet retrofitting the massive existing global stock of residential and commercial buildings, moving many areas of the world away from in-building particulate and CO2 generating biomass and coal, and motivating efficiency and potentially more expensive building approaches makes the building sector one of the harder to decarbonize. The IEA currently sees the sector as ‘off-track’ to reach carbon neutrality by 2050 and calls for “all new buildings and 20% of existing buildings to be zero-carbon” by 2030. The UN’s IPCC sees building sector carbon emissions continuing to grow albeit at a slowing rate to 2050.
Key Emission Terms for the Building Sector
Of the 38% of global energy-related emissions from the building sector, about 9% arise directly from fossil fuel use in buildings (3% non-residential, 6% residential), 19% comes indirectly from heat and electricity generation used in buildings (8% non-residential, 11% residential), and an additional 10% is related to materials and the construction industry. CO2 emissions during the construction of the building are considered “embodied” CO2 emissions can equal 20-30% of the total emissions of a building during its lifetime. Embodied emissions are carbon emissions emitted from non-renewable electricity consumed during construction, carbon associated with all the construction materials (from extraction to processing and delivery), and carbon from fuels used by machinery and equipment.
“Operating” emissions are the emissions associated with running the building, including fossil-fuel electricity or heat generation or cooking, and can be from a variety of fuels. A near-zero energy building would be one that gets most of its operating energy needs from renewables. A net-zero energy building would be one that gets all of its operating energy needs from renewables. A net-zero carbon building (ZCB) is one that has a negative ongoing carbon footprint such that it offsets during the life of the building the carbon emitted during construction.
Recent Energy & Emissions Trends for the Building Sector
A key driver for buildings’ energy and emissions growth has been the growth in floor space. Fortunately, advances in energy efficiency have helped to partially offset floor space growth. Final energy use in buildings according to the IEA, for example, increased from 2010 to 2019 at an average annual rate of 1%, behind the average annual expansion in floor area of 2%. The IEA indicates that the fastest energy growth in the building sector is in space cooling, appliances, and miscellaneous electric plug-loads (others have linked this to technology and telecom). Space cooling growth is a trend widely expected to continue based on global living standards and, ironically, from global warming itself. The share of global households with air conditioning, for example, grew from 27% in 2010 to 35% in 2020 according to the IEA.
Globally, electricity is about one-third of building energy use, but fossil fuels – and their emissions – are a large part of remaining energy consumption and have experienced similar average annual growth of 0.7%. One global energy-use area frequently highlighted that could help overall would be finding a way to replace traditional biomass use in some regions with cleaner biomass, biogas, lower-carbon electricity, and even LPG.
The overall decline in global building energy intensity (energy use per square foot) is also attributed to building efficiency codes in many countries; additional and more stringent minimum energy performance standards (MEPS) for appliances; and shifts to higher-efficiency heating technologies such as heat pumps. One hundred countries have MEPS in place for at least one of these end uses, and another 20 are developing policies. Final energy use covered by MEPS globally is now above 80% for residential refrigerators and air conditioners, up from two-thirds in 2010, and just over 75% for lamps, an improvement of more than 30 percentage points in the same period.
The IEA states, however, that the buildings sector is ‘off-track’ to achieve carbon neutrality by 2050. To meet the UN’s Net Zero Emissions by 2050 target, the IEA believes that all new buildings and 20% of existing buildings would need to be zero-carbon by 2030 and that average building sector energy intensity must decline nearly 5X faster over the next ten years compared to the past five. This means the energy consumed per square foot in 2030 must be a remarkable 45% less than in 2020!
While still in the early innings, datacenters (often cloud storage hubs) are often a point of conversation when talking about decarbonizing new buildings. Datacenters are large consumers of energy for both their data operations and for the cooling requirements of their equipment. Crypto mining, with its high demand for electricity for processing power and cooling, shares some of the same issues as datacenters. The IEA estimated in 2020 that datacenters consumed 1-1.5% of the world’s energy, an amount generally expected to grow. Drivers for this growth and likely adding to ongoing grid considerations should be a doubling of internet traffic in coming years plus continued moves to cloud storage, crypto growth, and growth in both residential and commercial use of technology.
Efficiencies on the margin could help data center operators focus to control their carbon footprint. A close second is probably the hunt for more renewable energy sources including solar panels and batteries on-site.
Options for Decarbonizing Buildings Sector
The number one decarbonization option for the buildings sector is greater efficiency. The second is, as we see in other sectors, electrification with renewable power. Efficiency can include passive design, efficient HVAC equipment, on-site renewables where the building type and mechanicals allow, off-site renewables including hydrogen, and carbon offsets via investments elsewhere including carbon capture at the utility level. Passive design elements include design and orientation, insulation, roof color, window sizes, glass choices, and shading. Operating steps could include LED lighting; digital monitoring and control; more efficient power, heating, and HVAC equipment; solar water heating; and electricity storage.
The publicly traded REIT industry is said to represent ~510K buildings of a very wide variety and, because of their public ownership, does talk more about their climate mitigation strategies and is likely leading the overall buildings sector in the US. About two-thirds of the largest REITs – in-line with the market – are reporting their carbon emissions with many giving future targets as well.
Key Considerations for New Buildings
To reduce embodied carbon, contractors and the building products industries are working on lower-carbon materials. While announcements are gaining pace and are all incrementally positive, the tons and linear feet of lower-carbon materials over the next several years remain a very small part of overall materials used and can also be less economic for return-focused builders.
Cement and steel are two industries in the industrial sector whose efforts to create lower-carbon products are sometimes in the news. Lower carbon cement will use renewable energy, preheating with waste gas, CCS (Carbon Capture and Sequestration), recycling some concrete as an aggregates supplement, or to some degree, adding carbon into various types of cement for different performance characteristics including added strength. For global steel, there’s a slow shift to more EAF (electric arc furnace) steel, which has fewer emissions than traditional integrated steel, and, as recycling networks improve, the use of scrap steel inputs. The US is much further along in the percentage of EAF steel and developed scrap networks. That said, many EAFs globally have an interest in adding renewable electricity sources. In traditional blast furnace steel, some mills are adding CCS capabilities to coke ovens and furnaces to reduce net carbon footprints. For both cement and steel, introducing some level of hydrogen fuel to the ‘cooking’ process has also begun to gain wider interest.
Other efforts in new buildings is the use of a broad array of digital technologies to monitor, meter, and control building operations with an eye toward efficiency. Engineers can increasingly use software to calculate a building projects’ embodied carbon before construction and during operation to optimize the functional parts of their designs. Other efforts which are constructive and interesting, albeit currently small in the context of the sector, are considerations of carbon-negative materials. These include things like flooring and ceiling tiles with captured mineral fibers; more wood products that act as carbon sinks; materials with recycled content; and a variety of lower carbon roofing materials.
Key Considerations for Existing Buildings
There is no magic bullet or universally adaptable solution for all types of structures. Each building has its own unique characteristics of geographic location, use, size, age, lease, utility, footprint, roof size, heating/cooling needs, space, etc. And to the physical variables, we can add the financial ones including capital requirements, ownership, lease structures, and local installation and energy costs. Each variable contributes to a need for a complex, building-by-building approach.
Key metrics that some companies are starting to consider or report include carbon intensity (e.g. net CO2 per ton of cement used), clean energy in the electricity mix, and average power utilization efficiency (PUE) improvements. There are many ways to attack these goals. Many buildings pursue efficiency standards (with LEEDS and Energy Star ratings being two leading ones) which are useful to establish some comparability and appeal to stakeholders. Some of the more common modifications to existing buildings can include rooftop solar (applicable in some building types more than others), painting roofs a reflective color, adding vegetation where possible, coating or replacing windows, and adding passive cooling. In the residential space, newer energy-efficient appliances, heat pumps, solar panels, and other passive heating /cooling technologies (e.g. geothermal) are modifications that can be added, albeit often come with challenged economics. Many steps are not big in and of themselves in either the commercial or residential building markets but hopefully, in a cumulative sense, they will add up. The chart below from the EIA indicates that onsite generation, while definitely progressive, will remain a small part of overall building energy consumption.
As with new buildings, adding an enhanced digital suite of sensors, meters, and control equipment can essentially add room-by-room zones of control, akin to lights that turn on when they sense when someone is in the room. More monitoring and control electronics can manage heating and cooling and detect anomalies even if management is located elsewhere.
In some cases, the timing, space requirements, or economics of an existing building modification are not tenable in which case owners can take ‘offsite’ steps to reduce carbon footprints. Some firms are buying renewable energy credits and carbon offsets while others may make direct investments in reforestation or global renewable projects even if they aren’t physically connected to these activities.
Additionally, some firms have also taken credit for reduced square footage (and associated emissions) and the reduction in employee commuting emissions. Critics find fault with these claims, however, as they are likely just pushing the heating and cooling issue elsewhere rather than having a system-wide net impact. The charts below indicate where the EIA anticipates efficiency gains by 2050.
Challenges and Opportunities to Modifying Existing Buildings
The graphics below are from the EIA show areas of electricity consumption in US buildings which could also be looked at for where efficiencies might be considered.
Fully electrifying a home can improve carbon emissions, however, can also be significantly more costly to install or operate. New Jersey, for example, recently proposed that buildings with fossil fuel-fired boilers should have to install electric ones while also indicating that there’d be capital costs involved as well as operational costs 4.2-4.9X higher. In addition, while some national agencies believe solar panels on a home improve its value, this is not true in all locations and can partly depend on the remaining financing structure of the solar panels when a house changes hands.
There is also the issue of ‘split incentives’. Many tenants with net leases pay their own utility bills. If a building owner wishes to spend money to green a building, the tenant benefits with lower electric bills or carbon credits rather than the owner thru higher rent receipts, at least not immediately. Similarly, modifying a building’s controls, ductwork, piping, windows, or insulation while a tenant occupies the building can be very disruptive and landlords may not be able to make the desired changes. Many changes are then left until tenant turnover and equipment replacement cycles though even then may prove to be impossible (e.g. space constraints, existing HVAC systems, utility connections) or uneconomic (e.g. costs are at a significant premium while rents may have no pricing power).
Potential Opportunity for Policy to Help Drive Transition
Specific policy initiatives could include subsidies, rebates, financing structures, education on available technologies, construction company training, collectivized procurement schemes, and R&D support. In what could be a precedent-setting move, the U.S. Federal government recently established new efficiency standards for its many buildings.
Meanwhile, aligning building trade practices, supply lines, local considerations, economics, and, of course, politics has made the development of new codes and standards slower than many climate hawks would like. Tradeoffs between cost and rent potential – and chosen policy solutions – will vary across locations. An example of some different paths might be whether policymakers focus on new building codes or on motivating retrofits. Or alternatively, a policymaker may emphasize regional low carbon electricity and utility-scale batteries to help all building carbon footprints rather than focus on one market or another.
Some cities are moving to end the use of natural gas in new homes and buildings such as Berkeley, CA, San Francisco, Seattle, Denver, and New York City. Here the hope is that the electricity replacing the natural gas is increasingly low-carbon and, less explicit, reduces the growing demands for a constrained supply of natural gas otherwise needed for gas-fired generation. Clearly, rules and policies are slowly evolving around the world and are forcing change even if modestly. All in then, the hope is for continued improvement in the pace of efficiency gains as new buildings enter the national stock of about 110 million residential homes and over 10 million commercial buildings and existing buildings are modified.
Environmental Considerations Beyond Emissions
While carbon emissions are the focus of this article, many buildings are also working to reduce their water footprint, provide safe operations, and build resilience to climate change. As noted, some invest in offsite domestic and international reforestation and biodiversity support. Investments in resilience – to winds, rain, rising water levels, seasonal electricity demand, and regional water shortages and surpluses (floods) – have all been announced in recent quarters by the buildings sector. As with overall energy efficiency, there are various building health standards, ratings, and certifications that can help building owners demonstrate quality health and comfort.
Some Potential Risks Facing the Building Sector
Under various climate change scenarios, individual buildings, company portfolios, and entire areas can be exposed to environmental change. While some may benefit from changes due to climate, others could experience significant drops in value. Exposures could include: decarbonization capital requirements both voluntary and mandated; loss of value due to flooding or fire; risks to commuting ‘lanes’ even if the building is unaffected; regional volatility in water-stressed or energy-intensive industries; and the knock-on impacts on the ability to service financing.