The buildings sector holds huge decarbonisation potential. Heating and cooling accounts for 51% of energy use, but only 11.2% is met by RE.[i] Buildings also account for a large proportion of labelled and unlabelled capital markets, accounting for 29% of green bonds, USD146.9bn, issued in 2021.[ii] Elevated gas prices and heating costs mean that rates of energy poverty are likely to substantially increase globally. Governments have an opportunity to both meet the transition and alleviate energy poverty, by investing in energy efficiency and RE heating and cooling solutions.
To ensure adequate ambition from investments in green buildings, standards are needed – for energy efficiency interventions, and for green new buildings. Governments can require a certain reduction in energy use or set a threshold for energy efficiency measures to qualify for support programmes or green mortgages. Accompanying standards with clear energy efficiency labelling can ensure visibility of green investments and ease decision-making. [iii] Easing planning permission for zero carbon buildings or energy efficiency measures provides further incentives. This is a low-cost and easily-enacted policy.
New buildings provide an opportunity for greater ambition. Governments can set Energy Performance Certificate (EPC) and renewable energy use requirements for new buildings. The recast of the Energy Performance of Buildings Directive (EPBD) requires new residential buildings to be net-zero from 2030 and new public buildings by 2028.[iv] In addition, all new buildings and those undergoing deep renovation, over a certain size, will be required to install solar generation.[v] This can be strengthened by immediately prohibiting the supply of fossil fuels to new buildings. The longer phase-in time could be used for full lifecycle emissions, given the difficulties in decarbonising building materials. Fossil fuel phaseout schemes also send a clear market signal. Denmark has banned the installation of fossil gas or oil boilers in 2013, while in the Netherlands, new buildings have been banned from accessing the gas grid since 2018.[vi]These will need to be phased in for existing buildings, accompanied by financial support such as boiler scrappage schemes.
Complex contracting for energy efficiency projects can create mistrust among end users and discourage bank lending for these projects. Clear and standardised energy performance contracts can streamline the investment process and encourage bank lending and create opportunities for scaling.[vii]
Governments can provide direct incentives for energy efficiency interventions through tax relief schemes or providing discounted loans for energy efficiency measures. For example, Italy’s 2019 Ecobonus and 2021 Superbonus tax relief scheme. This triggered a 500% increase in home renovations 2020-2021.[viii] However it is only available for privately-owned houses, with public administrations having to access the Conto Termico instead and neither scheme available for commercial property. It is also available for any energy efficiency measure, regardless of efficiency gains made, whereas the EU Taxonomy requires building retrofits to make a significant contribution to energy savings to qualify as green.
To leverage private capital for retrofitting and simplify retrofit adoption, property assessed clean energy (PACE) programmes can be established. The PACE provider issues ABS to fund retrofitting, with loan repayments attached to the property tax bill. The US PACE programme funds both commercial and residential retrofitting, removing upfront financing costs. [ix]
Governments can also encourage district heating, which can be more energy efficient than individual home heating. Germany is planning a subsidy scheme for efficient heating grids to incentivise the switch to district heating, support the switch to renewable energy carriers and improve the use of waste heat.[x] Such schemes can also be linked to community DRE development, see Green energy production.
Costs of energy efficiency measures or RE installation can also be reduced if they are implemented neighbourhood-wide. This also reduces the administrative burden on property owners and increases uptake. Making incentive schemes available to group applications or councils can enable this.
The Energy Efficiency Mortgages Initiative is a global initiative which aims to stimulate a greater flow of private capital to fund energy efficiency measures. Energy Efficient Mortgages can reduce the credit risk associated with the borrower, increase the value of the property underlying the contract and therefore reduce the risk associated with the credit exposure of banks and financial institutions. This therefore represents a lower risk for lenders, which in turn helps them qualify for better capital treatment for their loan book. This lower risk could be rewarded with lower interest rate to the mortgagee. This shared incentive on the lender and mortgagees helps create a more robust loan book. [xi] Policymakers can support banks in offering this by providing open source EPC data and by setting up a state-backed guarantee scheme for credit insurance providers for EEMs.
Building decarbonisation can also be enabled by encouraging lenders to provide green mortgages. Green mortgage schemes offer more favourable lending conditions against houses with a certain level of energy efficiency or for green energy interventions. Central banks can encourage banks to offer green mortgages, see central banks above.[xii] Regulations requiring lenders to disclose the energy efficiency of their mortgage books could also incentivize them to offer green mortgages to improve this metric.
Energy efficiency gains and RE uptake will also require demand changes. Green regulatory nudges are low-cost policies, using behavioural insights to gently encourage environmentally friendly choices and behaviours.[xiii] They have the capacity to change behaviour without imposing mandates or significantly altering economic incentives
A green default policy pre-selects renewable rather than fossil fuel electricity, while the non-renewable option can still be chosen by opting out. This may lead to a 20% increase in green electricity consumption.[xiv] Careful design of the context in which people make energy decisions (opt-in design, order or options) can improve the availability and accessibility of greener options. Such green nudges are generally easy to implement and cost-efficient, even larger than economic incentives.
[i] REN21, 2022. Renewables 2022: Global Status Report, https://www.ren21.net/reports/global-status-report/
[iii] Climate Finance Leadership Initiative, 2022. Unlocking Private Climate Finance in Emerging Markets, https://www.gihub.org/resources/publications/unlocking-private-climate-finance-in-emerging-markets/
[iv] European Commission. 2021m Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the energy performance of buildings, https://ec.europa.eu/energy/sites/default/files/proposal-recast-energy-performance-buildings-directive.pdf
[vii] Climate Finance Leadership Initiative, 2022. Unlocking Private Climate Finance in Emerging Markets, https://www.gihub.org/resources/publications/unlocking-private-climate-finance-in-emerging-markets/
[xii] Magyar Nemzeti Bank. 2020, Facilitation, deadline-extension in the green capital requirement programme https://www.mnb.hu/en/pressroom/press-releases/press-releases-2020/facilitation-deadline-extension-in-the-green-preferential-capital-requirement-programme
[xiii] OECD, 2017. Behavioural Insights and Public Policy: Lessons from Around the World, OECD Publishing, Paris.
[xiv] Kaiser M. et al., 2020. The power of green defaults: the impact of regional variation of opt-out tariffs on green energy demand in Germany, Ecological Economics, 174