The new CRREM tool reduces the risk of properties being ‘stranded’ by non-compliance with changing regulations

Climate change represents an enormous challenge for real estate, requiring adjustments at numerous levels. The property industry is affected not only directly, by changing environmental conditions, but also – as one of the largest carbon emitters – indirectly, by a variety of regulatory measures. Under the Paris Agreement, almost all nations committed to limit global warming to below 2°C. Current voluntary commitments (so-called nationally determined contributions) would result in global warming of about 3°C. Tightened legislation seems inevitable against this background.

Decarbonisation – the profound transformation of our economy from a fossil fuel basis to a sustainable, renewable energy basis – involves considerable transition risks. In the oil industry, the term ‘stranding risks’ was established for assets facing significant write-downs and premature obsolescence due to the ongoing shift to renewables. Changing market demand and regulatory requirements on energy efficiency now also affect the building sector. Properties that no longer meet the higher requirements face substantial discounts on rents and selling prices. At worst, buildings that do not comply with certain minimum energy standards cannot be leased at all. Overcoming this state of ‘stranding’ by applying retrofitting measures requires substantial capital investment.

Stranding risks can be minimised through clear decarbonisation targets. But while long-term oriented investors intend to align with the Paris Agreement, how are they to recognise which properties fulfil the necessary criteria? Existing approaches lack a property-specific focus or concrete targets. European research consortium CREMM (Carbon Risk Real Estate Monitor) has created a new tool to close this gap, enabling the property industry to assess and minimise the risks associated with poor energy efficiency and high emissions at the individual property level, and making it possible to develop strategies for portfolio decarbonisation. 

The new CRREM tool captures stranding risks through precise decarbonisation targets. Its reduction pathways are aligned with international climate targets and are derived according to a reasonable methodology that takes into account inherent differences between building types as well as the different baseline situations in individual EU member states. 

CRREM’s decarbonisation pathways are based on global targets to limit warming to 1.5° or 2°C, as well as a compatible emissions curve for the next decades. The downscaling of this global emissions pathway to targets that are country and building-type specific relies on numerous studies, models and official statistics, and takes into account scenarios of future economic and technical development. Assuming a global convergence of per-capita emissions until 2050, the target pathway for the EU was derived and further broken down into different property sectors and individual member states. In a final step, the inherently different energy requirements and emission characteristics of various building types were taken into account.

The example here (figure 1) shows how the fundamental principle of CRREM’s stranding risk analysis works for individual properties. The y-axis quantifies greenhouse gas emission intensity as the pivotal target figure for measuring climate compatibility. Besides the emissions generated directly on site by the combustion of fossil fuels, the induced indirect emissions (through district heating and electricity consumption) are considered as well. The green line represents the target path valid for the given property according to its building type, which must not be exceeded.

The black line represents the examined building’s current greenhouse gas emissions intensity. In the given example, the property meets the requirements only at the beginning, and stranding then occurs well before the end of the observation period. Only appropriate measures to reduce emissions can ensure the building will meet future requirements.

CRREM takes into account that a building’s future carbon performance will be affected by the impact of climate change itself on heating and cooling demand, as well as by the decreasing amounts of emissions per unit of produced and consumed electricity as a result of a wider shift away from fossil fuels towards renewables in electricity production. While the latter effect may help in achieving individual emissions targets, the vast majority of emissions in the property sector emerge not from electricity consumption but from burning fuel for heating.

The CRREM tool enables its users to assess for the first time the performance of individual properties in relation to the Paris Agreement targets. Based on the current greenhouse gas emissions intensity of a building and the additional effects described above, the building’s future emissions can be estimated and compared against a building-specific decarbonisation pathway. After entering the required property data, the user receives a comprehensive analysis of stranding risk. In particular, it is determined whether and when the property will fail to meet the allowed emissions ceiling under the chosen climate target (1.5°C or 2°C) and appropriate mitigation measures become necessary. Based on scenarios for the future development of energy prices, potential carbon taxation and other parameters, the user also receives information on the cost-benefit structure of retrofitting measures.

In calculating the annual emission savings of retrofitting measures, the CRREM tool factors in the specific amount of ‘embodied carbon’ in such measures: comprising emissions from production, transport and disposal of retrofitting materials. It thereby considers the entire ecological balance to support well-informed decision-making.

Further information about the CRREM project as well as numerous details, in particular on the methodology used for the determination of decarbonisation targets, can be found online and in the comprehensive study Stranding Risk and Carbon – Science-based Decarbonisation of the EU Commercial Real Estate Sector accessible at www.crrem.eu.