Authors: Valerio Micale, John Michael LaSalle, Paul Rosane, Matthew Solomon, Chavi Meattle, Jessie Press-Williams, Priscilla Negreiros

Buildings are central to an effective, resilient, and just net zero transition for cities. They are responsible for 37% of global energy-related greenhouse gas (GHG) emissions globally, the third highest sector after electricity and heat, and transport (UNEP, 2021; Ritchie et al., 2020). Buildings are also a critical component of cities’ resilience against the impacts of climate change, both in shared and private spaces, as a place of shelter and protection from extreme weather (C40 & McKinsey, 2021).

With nearly 70% of the world’s population expected to live in urban areas by 2050, city governments must anchor the building sector transition. Cities are interested in decarbonizing buildings because of their importance to local welfare and development priorities such as health and job creation. The centrality of housing to quality of life paired with growing urbanization rates, particularly in developing countries, makes the building sector critical for a just transition. Improving building energy efficiency provides cross-cutting benefits such as reduced local air and noise pollution, increased economic opportunities in construction, and lower living costs through energy savings (C40 et al., 2019b).

Many city authorities engage in policy experimentation, technical innovation, and demonstration projects for green buildings, both with publicly owned buildings and in collaboration with the private sector (WRI 2016, C40, and Arup 2021; OECD 2022). However, cities have vast untapped potential to better focus their policy and financing responses for achieving the net zero transition.

We believe city government actors and municipal authorities can and must respond to the opportunities to decarbonize the buildings sector. Our analysis explores how best they can consider their options in sequence across a range of responses, which we have framed as policy and finance instruments. While there is a robust literature on policy options for decarbonizing buildings, the complex interdependencies between supporting instruments and implementation barriers remain unexplored. Understanding these relationships can enable city governments to select the most appropriate policy and financial tools to decarbonize their building sectors.

This report applies network analysis to examine the interdependencies between 75 policy and finance instruments, as well as 22 barriers, to support the transition to net zero carbon buildings. Such a network analysis approach allows us to move beyond case studies to explore potential high-impact pathways for cities to support a low-carbon transition for the building sector effectively.

Developing a systemic representation of the building sector allows us to answer the following questions:

1. Which barriers should we prioritize to ensure systemic transformation of the building sector?
2. Which instruments should we roll out, and in what sequence?
3. What pathways can cities follow to transition to a fully decarbonized building sector?

This report offers initial findings on the general challenges and mechanisms behind the transition towards a net zero carbon buildings sector, helping shed light on concrete pathways cities can implement to decarbonize the building sector.

KEY FINDINGS

A NEW PERSPECTIVE ON BARRIERS

We identified 22 key barriers to achieving net zero carbon buildings in cities, grouped into four categories.

Table ES1: Barrier types and their perceived priority and influence

Financial barriers are perceived to be the most critical, especially in relation to residential buildings, which make up 80% of the total global building stock floor area (IEA, 2019). The simplest way to finance net zero buildings is via long-term cost savings achieved through energy efficiency improvement, which makes upfront investments worthwhile. However, low-income building users face constraints in sourcing capital for such projects, and landlord/tenant dynamics may complicate incentives for improvement.

Investment risk/opportunity barriers can also severely reduce financing for low-carbon building technologies, which are considered more expensive than alternatives. Investors may be unaware of or misunderstand the potential long-term economic benefits of such investment (e.g., cost savings from energy efficiency vs. conventional revenues).

While financial barriers are viewed as a high priority from a demand-side perspective, they can be significantly reduced by mitigating regulatory and market readiness barriers. For example, the absence of dedicated financial instruments specialized in funding net zero building technologies (a financial barrier) can result from concerns over technical performance or limited experience with these technologies (market readiness barriers) or from a lack of information and technology standards (regulatory barriers).

Local market readiness and expertise are also preconditions to regulation and effective policy instruments for net zero buildings. For example, a lack of local technical expertise can lead to ineffective building regulations and longer permitting processes.

A NEW PERSPECTIVE ON INSTRUMENTS

In order to understand the tools available for policymakers, local governments, and financiers to drive investment in low-carbon buildings, we mapped and analyzed 31 policy instruments and 44 financial instruments that have been proposed, piloted, or implemented globally. See Annex 2 for the full list of instruments.

The instruments have varied – and often complementary – roles in the net zero building transition. Some relate only to specific technologies, barriers, or actors. For example, there are more mapped instruments that support low-carbon, efficient heating, ventilation, and air conditioning (HVAC) systems than support embodied carbon reduction measures (Figure ES1).

Figure ES1: Overview of mapped instruments

Note: Instruments were mapped to the four high-impact outcome areas detailed in LaSalle et al., 2022.  

Achieving the net zero transition requires governments and policymakers to identify and prioritize barriers and implement the right instruments to address them. Policymakers must also understand how instruments relate to each other, as some will only be effective in combination with others. The network analysis used in this study can helpdetermine which instruments depend on or enable others and how they address barriers directly and indirectly.

Figure ES2: Network analysis of net zero carbon buildings instruments

Note: The above figure was adapted from a mapping of the system generated using yED flowchart algorithm software (yWorks, 2022a). Fundamental inputs are policy and financing instruments that systemically enable other instruments; these should be in place before dependent inputs to make dependent inputs more effective in achieving outcomes. We grouped the 75 policy and financing instruments into 11 categories for simplification.

We categorized the policy and financing instruments based on implementing actors and mechanisms, as well as mapped fundamental and dependent inputs (Figure ES2). The three policy instrument categories are 1) capacity development, 2) mandates, and 3) incentives. The eight financing instrument categories are: 1) grants, 2) fiscal instruments, 3) equity instruments, 4) risk mitigation instruments, 5) business models and contracts, 6) debt instruments, 7) asset finance models, and 8) structured finance strategies.

Capacity development and fiscal instruments are systemic enablers that help support mandates and incentives. For example, capacity development can improve skills in the local workforce, such as by developing the sustainability expertise of public engineers, architects, and building code officials (UNDESA, 2012).

Mandates (e.g., for building owners to disclose data and standard-setting on buildings, processes, and equipment) are central to successfully transitioning to a net zero building sector, with the most interdependencies among all our instrument categories. While they rely on capacity development and fiscal instruments to be effective, they are fundamental in supporting the development of new financial mechanisms.

Debt instruments, business models and contracts, structured finance strategies, and asset finance models strongly depend on fundamental instruments, including mandates.

CITIES CAN MAKE A DIFFERENCE.

While cities cannot achieve a shift to net zero carbon buildings alone, they can use high-potential pathways and instruments to support the decarbonization of the sector.

Mandate instruments that set requirements, such as building codes, performance standards, and bans, can deliver multiple goals. In particular, phasing out fossil-fuel-based appliances and equipment such as gas and oil-based heating systems reduces emissions intensity and increases the energy efficiency of buildings. City governments should also support the adoption of energy-efficiency building codes by mandating tracking and disclosure of energy use. This data can help to develop energy efficiency benchmarks and labels for buildings and, in turn, inform the establishment of energy intensity limits under building energy performance standards.

We dive into the role of cities in supporting four high-impact thematic areas – cooling, embodied carbon, adaptation, and just transition – identified as priority action areas because of their high CO2 emissions mitigation potential, particularly in emerging economies (LaSalle, 2022).[2] We summarize the instrument pathways that cities could use to target these areas in Table ES2.

Table ES2: High-impact thematic areas

Future work could build on this network analysis approach to provide resources useful for city-level policymakers. First, a web portal tailored for cities to understand the instruments available and how they link together could help cities understand options for addressing their barriers. Second, increased national coordination between public and private stakeholders can help exchange knowledge on the barriers to financing net zero carbon buildings. Third, more research is needed to understand the just transition in the building sector.

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[2] See Box 1 for more details on the rationale of this choice.