The buildings sector is one of the most complex to decarbonize because it is right at the intersection of energy and climate policy, environmental policy, and financial policy. This requires an approach which balances each pillar while delivering a cohesive whole, a true test of the EU Green Deal. With the revision of the Energy Performance of Buildings Directive around the corner, are all the EU’s horses pulling in the same direction?
Before we can discuss solutions, we first need to illustrate the magnitude of the problem. Following the latest number crunching by the EU Commission, 85-95% of the buildings in EU countries will still be around in 2050 and 75% of those are not energy efficient. EU Member States have started to renovate public buildings and to incentivize commercial and residential building renovation, but annual renovation rates are still averaging around 1%. Private citizens often shy away from the high upfront costs and companies struggle to access sufficient financing or are bogged down by lengthy permit procedures for installing solutions like solar roofs. At this pace, we will never achieve net zero emissions in the building sector by 2050, but the EU is diving headfirst into speeding this up.
Setting the right framework conditions
Within the EU Green Deal, there are two overall framework policies that aim to deliver the decarbonization of the building sector: The Effort Sharing Regulation (ESR) and Renovation Wave. The proposed revision of the ESR would oblige EU member states to reduce their emissions in the buildings, transport, agriculture, and waste sectors by 40% by 2030, and is complemented by an extended Emissions Trading System. This framework ambition has been supplemented by the Renovation Wave, an initiative which aims to double the annual renovation rates of buildings in the EU to ensure Europe’s building stock is climate neutral by 2050. If we dive in a little deeper, we find this mammoth undertaking requires renewable energy, energy efficiency, significant levels of investment and a circular style of construction.
The heating and cooling challenge
To solve the energy equation, the EU has proposed in July to revise the Renewable Energy Directive and the Energy Efficiency Directive, which require member states to increase their levels of available green energy, decrease their energy consumption and decarbonize heating and cooling. Additionally, the Commission proposed to set up an Emissions Trading System for buildings, thereby incentivizing the phase-out of fossil fuel boilers. In December, we can expect the next wave of energy policies, among which will be the revision of the Energy Performance of Buildings Directive (EPBD). In this new version, we expect a policy shift from a focus on new buildings to minimum energy performance standards for existing buildings, the so-called MEPS. This would be a game-changer for the building sector and will require a massive effort by both homeowners as well as governments to finance these renovations.
Finding the financing
This is one of the largest challenges for buildings: how can we provide homeowners with value for money when they renovate their home and how can we incentivize them to do so in the first place? The EU is trying to tackle this in a myriad of ways. The most visible is the Next Generation EU package, the 800-billion-euro investment instrument to recover from COVID-19, which requires EU countries to spend at least 37% on greening their economy. Another example is the public sector loan facility under the Just Transition Mechanism, leveraged by the EU Investment Bank. Through these funds the EU acts as a guarantor for these investments but the largest burden continues to fall on the private sector, therefore clear market signals are crucial. This is where the EU Taxonomy of sustainable activities comes in, which indicates to investors which type of real estate investment is sustainable, giving clear signals to investors on which kind of investments are future proof.
As a last angle, we cannot forget that new buildings need to be constructed sustainably meaning the emissions during construction are minimal and building materials are recycled and reused. In 2022, the Commission will propose to revise the Construction Products Regulation, which sets common sustainability and performance standards for construction products. This will directly target the construction sector and incentivize them to ensure new buildings are circular and carbon neutral.
If we keep going at our current pace of building decarbonization, we will not be ready for a post-2050 world. If we go about speeding up renovations and net zero builds in the wrong way, we will cause further energy poverty and saddle up millions with considerable debt. The key to this dilemma is cooperation across all policy fields, the FleishmanHillard team is already doing it, are you?
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March 9, 2022