Financial stimulus packages for the building sector with green conditionalities attached are the ideal tool for a Green Recovery. They promote jobs and stimulate local economic activity, and provide a chance to make the paradigm shift towards green construction and zero-carbon buildings.
The construction sector is essential for an economic recovery after the COVID-19 crisis. It can rapidly create large amounts of jobs and involves far-reaching value chains of small and large businesses. In 2015, the sector accounted for 11-13% of global GDP. It is indeed a major employer: 7% of total global employment or 220 million jobs depend on it. Globally, USD 4.5 trillion were spent on construction and renovation of buildings in 2018.
At the same time, the building sector presents a massive – and largely unused – opportunity to respond to the climate crisis. The construction and operation of buildings is responsible for 40% of all energy-related carbon dioxide emissions, even more than transport or industry. This trend is accelerating, as the building floor area is set to double by 2060, and energy demand is growing fast.
Green buildings are not rocket science
Buildings cause greenhouse gas emissions both when they are built, and over their long lifetime of 30 to 80 years. Our modern way of constructing is mostly based on standard designs with energy and resource-intensive materials, regardless of the climate. This leads to high energy bills for those who can afford it, and economic and health risks for those who cannot.
Energy-efficient buildings are not rocket science. Improvements in the building envelope and appliances can achieve substantial energy savings compared to standard buildings. Measures to future-proof buildings can range from “low-tech,” such as painting roofs in light colors and ensuring external shading, to digital solutions for building design and management.
Additional macro-economic benefits include energy security, job creation and health. From a business perspective, future-proofed buildings have a lower lifetime cost and higher asset values. Nevertheless, the real estate business is slow to change its way of doing things and mobilize these small extra investments without external nudges in the form of legal obligations or incentives.
The response to the COVID-19 crisis as an investment into the future
The building sector holds the potential for a double win: providing a powerful tool to stimulate the economy, while moving the whole sector to a new and greener state. For small extra investments, green buildings can achieve massive long-term savings of cost and greenhouse gas emissions. The International Energy Agency (IEA) estimates that realizing the potential of sustainable buildings will save USD 1.1 trillion by 2050.
Therefore, we have at this moment of global crisis a unique opportunity to shift the course of the building sector and earmark investments for green construction. If we aim for “business-as-usual” in the stimulus packages that are prepared, we will repeat or even aggravate the mistakes of the past. Instead, we need to urgently change the path of the building sector to move towards green buildings, or even zero carbon buildings.
Successful blueprints for green building programmes exist
Stimulus policies targeting the buildings and construction sector often have the greatest macroeconomic impacts compared to other stimulus measures. Green building programmes are a proven tool to stimulate economic activity and create jobs. Many countries have successfully used green building programmes to fight the 2008 economic crisis. Green building programmes stimulate investments into green buildings, through incentives that compensate for the slightly higher investment cost for green renovation or construction projects.
The Programme for Energy Efficiency in Buildings (PEEB), together with the Global Alliance for Buildings and Construction and its Finance Work Area has collected examples of green building programmes that can serve as inspiration for green recovery programmes. A GlobalABC webinar discussed how to finance and scale up these green building stimulus programmes.
These green building programmes use a variety of instruments, for example green mortgages for households, bridging loans for developers, grants and concessional loans for homeowners, developers or housing associations. In Peru, the Fondo MiVivienda uses green mortgages to promote sustainable housing for low- and middle-income urban households. In addition, the programme targets water savings, electricity, education and a solid waste management plan during the construction phase. After 5 years, it its estimated that the programme triggered 8.000 jobs and saves 3.144 tons of carbon dioxide per year.
Incentive programmes can also use financial incentives without engaging additional budget, for example by using the allocation of free land. The government of Kenya provides developers that win public bids with free land to build affordable housing projects that fulfil the certification. Estonia used a grant and loan programme for deep energy retrofits of apartment buildings constructed before 1993. The amount of the subsidy is linked to energy performance – the higher the energy performance, the higher the grant. The first phase of the programme achieved a leverage factor of 3.8 for grants (€36 million attracting investment of €135 million). 17 jobs are created per €1 million used: 10 jobs directly on the construction site, one in consultancies and six in manufacturing.
In addition to these existing programmes, new initiatives are under development. The French-German PEEB programme is currently working with its partner countries in Morocco and Vietnam on such stimulus programmes for energy-efficient buildings.
“Strings attached” – green conditionality for stimulus packages for the building sector
Green stimulus packages for the construction industry need to have “strings attached”. A green conditionality is needed to set the bar higher for buildings that receive support, through simple principles such as:
- Rewarding performance: higher energy or sustainability performance should be rewarded with higher financial incentives.
- Building certification and labeling as a basis for financial support, based on energy efficiency and environmental specifications.
- Preferential treatment: for example through including green criteria for public procurement or “fast track” processing of building permits for energy efficient buildings.
- Accelerate national climate policies: short-term economic stimulus programmes should be geared towards a country’s climate and sustainable development goals.
By setting smart and effective criteria for green buildings, short-term stimulus packages can become a double tool for economic recovery and environmental sustainability, to work towards the goals of the Global Alliance for Buildings and Construction (GlobalABC) of a zero-emission, efficient, and resilient buildings and construction sector.
An shorter version of this article was published in April 2020 on IISD’s Knowledge Hub.
The opinions expressed on this blog are those of the authors and do not necessarily reflect the official position of their institutions or of AFD.