It's the money that matters in embodied carbon

The AEC industry can only do so much to reduce embodied carbon in our buildings. Real change requires turning our attention towards the real estate finance industry.

Follow the money. A popular saying when it comes to crime and corruption but also very relevant to climate change. Whoever controls the capital in a given sector ultimately chooses whether or not climate positive solutions are pursued. This isn’t a profound thing to point out but it can easily get lost in the focus on the solutions themselves. The recent push in the construction industry to lower the embodied carbon of buildings is a good example. Embodied carbon is the amount of greenhouse gasses emitted in order to produce a given quantity of a construction material (like a single brick). Sum up the embodied carbon for every material used in construction and that’s the total embodied carbon for a building. Reducing this to zero is just as important as reducing the emissions from operating a building to zero and arguably a much tougher problem. What I've come to believe is that there's too much focus on the architecture, engineering, and construction (AEC) industry when it comes to embodied carbon and not enough on the real estate finance industry.

Consider how a building gets built. At the center of the process is the real estate developer. This company or individual takes on most of the risk and gets most of the rewards. A real estate developer acquires the land; hires a firm to design and construct the building; files for permits; and most importantly secures financing for the project. Sometimes the developer is financing the building themselves but other times they are taking out a loan or raising funds through investors. For a developer the goal is simple: Sell or lease the finished building for a price that is higher than the cost to build it. Whether it's their own money or outside funding from a bank, the developer is beholden to providing a positive return on those dollars. As for the construction process, the new model is to hire a firm that does both design and construction under the same entity. Known as design-build, this aligns incentives since the architects work on the same "team" as the general contractor when they engage with the developer. But even still, projects typically take 20% longer than scheduled and go up to 80% over budget. Financing a building is risky business and developers want to reduce that risk every step of the way. The primary concern most always comes down to cost. If costs go too far over then either the shareholders will put their money elsewhere or the bank will foreclose on the building. Given this context the hierarchy becomes clear: AEC firms serve the developers and the developers serve the financiers (investors or lenders). Embodied carbon needs to matter to each level of this hierarchy.

Today embodied carbon is mostly the concern of the AEC industry. The focus is on getting better at measuring embodied carbon and choosing materials with lower embodied carbon values. The former is accomplished through tools like Tally, Athena Impact Estimator, or OneClickLCA and the latter is accomplished by comparing environmental product declarations (EPDs) for building materials before making a selection. Much of this emphasis is a result of organizations like Architecture 2030 and the Carbon Leadership Forum (CLF) raising awareness about this issue amongst AEC professionals. Understanding the baseline level of embodied carbon in buildings today is another active effort. The CLF has released this benchmark report that's now used to set targets for reductions in embodied carbon when possible. While the increased awareness is much needed, AEC professionals ultimately can only suggest actions such as conducting whole building life cycle assessments (WBLCAs) or choosing more sustainable materials. It's the developer who must be willing to pay for these efforts and it will have to come out of the total project budget. Without buy-in from developers there's not much AEC firms can do other than point out the problem. For the most determined AEC firms the best they can do is work towards lowering the costs of conducting these studies or making it cheaper to fabricate more environmentally friendly materials. Unless the financial backers of a project are required or incentivized to take embodied carbon into account, it's hard to envision a pathway for significant change.

There don't seem to be many developers, banks, or Real Estate Investment Trusts (REITs) that are publicly setting targets for lowering the embodied carbon content of their portfolios. The GRESB assessment and the LEED building certification system are popular amongst these groups but neither is very strict about lowering embodied carbon. And both are completely voluntary. The money for building projects has no strings attached when it comes to embodied carbon. There aren't any banks adding embodied carbon targets to the construction loans that they underwrite. Investors and self-funded developers aren't much better either. While some decisions such as choosing carpeting based on embodied carbon content might be easy to do, substantial reductions in embodied carbon today are most likely to be more expensive or at least create more uncertainty. The best example as I’ve covered in a previous post is mass timber. Swapping steel or concrete for mass timber is the biggest lever to reduce embodied carbon available in new construction and it is typically a bit more expensive. Even though it’s not prohibitively more expensive it’s also new in North America which adds some risk (real or perceived). Higher cost and more risk are not easy to justify when there are lenders to pay back or shareholders expecting a certain rate of return. It’s not surprising that the financiers of real estate aren’t taking a bolder stance on embodied carbon. What is surprising is that as far as I can tell there isn’t as much public pressure on these groups to reduce embodied carbon. Outside of the voluntary certification schemes mentioned above the financing side of the building sector seems unbothered by embodied carbon.

Regulation, in the form of incentives to reduce embodied carbon or penalties for not meeting certain embodied carbon targets, is the most effective means to get investors, banks, and developers to take this issue seriously. And there is some progress in North America. The Buy Clean Act in California sets thresholds for embodied carbon in steel construction materials, a few other states have similar bills that are pending, and the city of Vancouver has mandated a 40% reduction in embodied carbon by 2030 for new construction. There’s nothing new about this approach, it’s very similar to zero emission vehicle standards that states are implementing in the auto sector. So far no incentive based scheme has been implemented but that could work as well. A tax credit for reducing embodied carbon by say 10% compared to the regional benchmark would provide the financial headroom for developers to trial new methods. AEC firms are making progress in what could be considered a bottoms up approach, but top down reform can only come from government intervention in the real estate finance sector. And that's no small task in the United States where the finance industry is notorious for finding creative loopholes. The externalities of high embodied carbon must be internalized into the accounting of firms who fund new buildings. It's the only way to make meaningful progress.

That’s not to say the work of those within the AEC industry isn’t needed. Pushing for multiple life cycle assessments throughout the design process, using the Carbon Leadership Forum's EC3 tool to compare EPDs for materials, and raising awareness at every opportunity is critical. It’s just not enough. EPDs are often described as nutrition labels for construction materials. And this metaphor can be expanded to illustrate the bigger picture. Most of the work being done today in embodied carbon is akin to food journaling (measuring embodied carbon) and tracking body weight (conducting life cycle assessments). But without a robust accountability system that provides clear steps towards losing weight there’s not much of a chance for success. While the government can’t regulate anyone’s fast food consumption, it can regulate the embodied carbon diet of our buildings. Without government intervention we can only hope for incremental improvements that come from making it easier to measure embodied carbon and cheaper to create lower carbon materials. To really accelerate those solutions and go further there need to be new rules. The AEC industry should continue to do its best to lower embodied carbon on any given project but the attention must turn to those financing the projects themselves. The money is what matters, it's always what matters. Everything else is necessary but not sufficient.