Carbon pricing could drive decarbonisation in real estate, but current application and rates render it ineffective, a new report says.

Emerging Trends in Real Estate® Global Outlook 2023, an annual survey by the Urban Land Institute and PwC says carbon pricing is gaining ‘much needed’ traction in real estate, but  wider adoption by companies and governments and more realistic pricing levels, are required to drive decarbonisation.

“Translating carbon emissions into a monetary amount is seen to put them into a language that most real estate professionals can understand and change the way companies think and act,” said Lisette van Doorn, CEO, ULI Europe.

“To better build the business case for decarbonisation it is important to incorporate all transition risks into property valuations, including the costs of decarbonisation, tenant voids as well as carbon emissions that have a price. Therefore, it is important for the industry to get on top of carbon pricing and collaborate closely on what this should look like to help accelerate the decarbonisation process.”

Of 68 countries which have a carbon tax or trading scheme, only a handful apply it to real estate and the ULI/PwC report argues carbon taxes applied by governments are generally too low to force change, given the capital intensity of the sector. 

Carbon prices companies set for themselves are usually higher, clustering around the €90 a tonne mark in Europe. Exceptions closer to academic recommendations are New York’s $268 a tonne and the Dutch city of Utrecht’s €875 a tonne.

If real estate companies adequately price carbon emissions, the cost of less carbon intensive materials and processes compare more favourably with “cheaper” alternatives. However, a 2019 study by McKinsey of voluntary carbon pricing found only 4% of real estate firms used internal carbon pricing, compared with 40% in the energy industry and 29% in financial services.

The report identifies embodied carbon as another gap, as current carbon taxes only apply a price to carbon from building operations. However some firms which use voluntary carbon pricing apply it to embodied carbon as well.

Gareth Lewis, director at PwC, said: “We are seeing carbon pricing in every region – from New York’s Local Law 97 and Canada’s various regional policies to the Singapore carbon tax – and it will only become more prevalent. 

“Some firms feel voluntary carbon pricing would price them out of the market, but there is arguably a commercial advantage in getting ahead of these regulations. And the carbon price is especially relevant in the case of real estate, where the cost of the technology or retrofit required to reduce a tonne of emissions is higher than in almost any other sector. This is a complex area. Changing behaviour in an equitable way and without reducing economic growth is quite a challenge for governments and regulators.”