Stranding Risk and Carbon CRREM report: More grist to the zero carbon mill, but is it sorting the wheat from the chaff?

Through our ‘Aim for Zero’ (A4Z) work, Verco has been working with clients in the commercial real estate sector to define pathways to zero carbon. We have developed a modelling tool to outline the steps and costs in taking a diverse range of assets to, or close to, net zero carbon by 2050. This allows asset managers to protect long-term value, assess climate-related risks and inform Paris-proof acquisition, disposal and investment strategies.

We were therefore interested in the publication of a substantial (143 page) report from the EU’s Horizon 2020-funded ‘Carbon Risk Real Estate Monitor’ (CRREM) project entitled ‘Stranding Risk & Carbon: Science-based decarbonising of the EU commercial real estate sector’. Robert Cohen, Technical Director and Adam Smith, Senior Consultant, offer their reflections.

The need for an ambitious strategy for existing buildings

Buildings represent the largest portion of final energy consumption in the EU – about 40% of the total in 2015 (1). At least two-thirds of the 2050 building stock is already in place today (2). The European Commission’s vision of decarbonising buildings by 2050 will therefore not be achieved without an ambitious strategy of retrofit of the existing property stock.

A major challenge here is the poor energy efficiency of existing buildings and low refurbishment rates in almost every Member State. At the current rate of emissions the 1.5°C carbon budget for 2050 for buildings in the EU will be consumed 14 years ahead of schedule in 2036. This threatens EU Member States’ abilities to meet commitments under the Paris Agreement and avoid the worst impacts of climate change.

Investments in building retrofit are expected to deliver significant commercial benefits – estimated to be up to 175bn euro per year (3). This is principally driven by the mitigation of climate-related risks associated with asset obsolescence and depreciation motivated by a changing policy landscape and, importantly, market expectations around building energy performance.

About the CRREM project: decarbonisation targets and pathways

The CRREM project aims to help industry plan against risks and move investment towards energy efficiency to ensure that as many commercial buildings as possible comply with future energy efficiency standards. In short, CRREM aims to quantify and communicate the financial implications of poor energy performance in EU commercial buildings. At the end of March 2019, CRREM published their report – ‘Science-based decarbonising of the EU commercial real estate sector’ - providing a roadmap for how the EU commercial real estate sector must decarbonise in line with the science underpinning the Paris Agreement.

The report is the outcome of a fairly ambitious attempt to generate top-down Paris-proof targets for various commercial building types in the EU. CRREM provides decarbonisation targets and pathways, disaggregated by country and building use type, in both the 1.5°C and 2°C scenarios.

The process to allocate carbon reduction targets involves three stages. The first involves calculating the EU economy’s carbon budget using data from the International Energy Agency and various climate models. The second uses data from the EU Reference Scenario 2016 to work out the proportion of this budget allocated to each Member State’s commercial real estate sector. The third stage provides carbon reduction targets for specific commercial real estate subsectors. This stage draws heavily on the Verco-led Building Energy Efficiency Survey (2013-16) – a UK Government project to quantify the energy use and energy efficiency potential in all types of non-domestic buildings in England and Wales. Overall, CRREM reports that the commercial building stock in the EU will need to reduce carbon intensity by 91% by 2050 to comply with the Paris aspiration of a 1.5°C warming scenario, and 78% to meet with the Paris binding commitment of 2°C. Looking at the methodology and findings of this project, we have a number of observations.

Verco observations

An area of weakness that we see is the EU’s definition of ‘High energy efficiency’ as a ‘reduction of energy demand up to 41% by 2050’ as compared to the demand peaks in 2005-06, which underlies this report (4). We see the potential for energy efficiency being much higher than this – perhaps in the region of 60% - to be in line with a ‘zero carbon by 2050’ Paris-proof concept (5). A strategy based on this level of energy efficiency would reduce the burden required to develop sufficient renewable energy capacity and ensure that we do not ‘bake in’ unnecessary usage of energy into the system.

Another interesting area of the report discusses embodied versus operational emissions:

“The proportion between embodied and operational carbon in the life cycle of building components is often underestimated. Even without considering any future grid decarbonisation, embodied carbon from newly constructed buildings from today until 2050 equals their cumulative operational GHG emissions in the same period”.

While the evidence base for this statement is hard to validate, it underplays the differences between scope 1 and 2 emissions and scope 3 emissions. The former are relatively easily quantified on an annual basis, whilst the latter can be made uncertain by the complexities of procurement and supply chains, with scope for the actuality to be different from specification. Nevertheless, we agree with the general objective that designers should be cognisant of the scope 3 emission implications of their design, and supply chains should be striving to make their products ‘zero embodied carbon’ and to create a competitive market in low embodied carbon building materials and components.

The weakness of Energy Performance Certificates (EPCs) as indicators of in-use energy performance is highlighted in the report - CRREM refer to EPCs as ‘only a starting point for carbon strategies’. The simplified calculation methodologies of EPCs, leading to large differences between predicted and actual performance (the performance gap) are referenced. A welcome comment in the report here is that “CRREM recommends investors gather data and estimate energy demand and carbon emissions using metered data”. However, there is no mention of delineation between base building and tenant energy use, despite some warm words about encouraging energy efficiency actions by tenants. We see this as a major missed opportunity.

It is disappointing to see that the National Australian Built Environment Rating System (NABERS) – which has delivered a transformation of energy performance (an almost halving of stock energy intensity) with associated rental premiums in commercial property in Australia - is cited only to mention some technicalities. At Verco we are working through the Design for Performance project (see here) to import learnings and best practise from NABERS to the UK. By contrast there is praise in the report for Energy Star, a scheme with a number of weaknesses, not least the failure to delineate between the separate landlord and tenant responsibilities for the total energy used by a commercial office building. Energy Star also rates buildings by reference to their position in the overall distribution for the stock, on a like-for-like basis through statistical manipulation. This approach lacks transparency on their absolute performance which is explicitly delivered by the NABERS 6 star scale.

Conclusion

The report is a methodical attempt to tackle a complex and challenging area. It provides a useful reference document of the policy context and various initiatives active across Europe, albeit with some oversights as detailed above.

For more information please contact Paul Stepan, Head of Policy, Strategy and Compliance (paul.stepan@vercoglobal.com, 07919 287 533).