On 11th January 2023, CRREM released their updated Decarbonisation Pathways for the Real Estate Sector, aligned with the Science Based Targets initiative (SBTi). The updates took into consideration feedback received from their consultation that concluded in November 2022.
CRREM, or the Climate Risk Real Estate Monitor, is a EU funded tool developed as part of a research project by a consortium of real estate organisations and academic institutions. The tool allows the user to model science-based carbon pathways for individual properties and portfolios and identify the ‘stranding risk’ of properties. Stranded assets, according to CRREM, are those properties which undergo premature obsolescence, due to the inability to meet the market’s demands and legal requirements for decarbonisation. The purpose of the tool is to drive increased energy efficiency and promote a net zero culture by demonstrating the financial implications that poor energy performance can have on the value of an asset.
CRREM tool’s analysis is based on the 1.5⁰C and 2⁰C scenarios set during COP21, with a focus on the 1.5⁰C limit. In order to ensure that these thresholds are not exceeded, the carbon budgets, or the amount of greenhouse gases than can be emitted, are derived from the IPCC’s emissions pathways and are aligned with the International Energy Agency’s (IEA) 1.5°C Net-Zero by 2050 roadmap[1]. A portion of these budgets is allocated to the real estate sector, providing national building sector pathways for different property types. CRREM uses the Sectoral Decarbonisation Approach convergence methodology[2] to calculate the national limits. The pathways can be used to establish the threshold of carbon emissions for a building or a portfolio.
Properties being assessed are required to stay within these limits to avoid the risk of stranding. These yearly limits are also called the CRREM carbon and energy pathways. The recently released update is aligned to 1.5⁰C and impacts the underlying data of the tool in three key areas- carbon limits, energy limits and SBTi-alignment[3]. The baseline year for the v2 update is 2020, as opposed to 2018 in v1.
- Carbon limits: Since the v1 pathways were released in 2018, the real estate industry has shown higher consumption than projected. This has resulted in a revision of the remaining carbon budgets. The carbon pathways have thus become stricter (or steeper), illustrating that accelerated carbon reduction initiatives are needed and delayed action will result in even tighter budgets in the future. As a result, the update has placed an increased focus on short-term action, illustrated in the steeper reduction profiles for the carbon limits. The 2050 limits on the other hand remain similar to the previous version. This serves as a reminder to the decision makers that waiting till the stranding year to act is not enough to limit climate change to 1.5⁰C.
Figure 0.1 Comparison of GHG emissions limits for offices in UK
- Energy limits: Energy limits now take into consideration the decarbonisation of the UK’s National Grid as per the HM Treasury Green Book supplementary guidance: valuation of energy use and greenhouse gas emissions for appraisal[4]. This means that the renewable capacity of the grid is also taken into account, leading to lower emissions factors. By mid 2030s, the emissions from the grid are reduced to nearly zero, such that it is projected that further reductions in EUI would not be needed to stay within the budgets. Therefore, the energy use intensity (EUI) values in the v2 of CRREM energy pathways plateau after 2030.
Figure 0.1 Comparison of energy limits for offices in UK
- Calculation of EUI: The calculation of the EUI limits has changed. They are now based on gross energy demand of the building, i.e., the total energy demand of the building irrespective of the energy generated and consumed on-site. This aligns with LETI’s[5] definition of EUI limits and while it is being criticised for disincentivising on-site renewables, it will promote the reduction of energy demand, which is key to achieving net zero. Moreover, on-site generation is accounted for in the carbon pathways alongside retrofit measures and grid decarbonisation, to ensure that both energy generation and energy efficiency are prioritised.
- New building typology: Separate pathways have been introduced for warm and cold distribution warehouses to account for the high energy demand associated with cooling and refrigeration. This will result in a realistic operational carbon emissions limit for both typologies.
- SBTi alignment: To align with SBTi’s target setting guidance for the building sector, due to be released in Q3 2023, some changes have been made to the methodology of the CRREM tool. The emissions factor for electricity now excludes transmission and distribution losses. In addition to that, to demonstrate the impact of F-gas emissions, GHG pathways have been included (CO2e), along with carbon limits (CO2), without F-gas emissions, for companies that are unable to collect the necessary data at this stage.
What’s next for CRREM and upcoming updates?
The CRREM update contains clarifications and additions based on the consultation conducted in 2022. However, it is also vital to regularly update the pathways to ensure that the latest carbon budgets continue to be used to determine the investment strategies. Further property types can be included in the tool to provide specific pathways, along with regional pathways for countries, where there might be significant fluctuations in emissions factors.
Our thoughts
While the new pathways are likely to drive climate action, the 2⁰C pathways, which are under development and will be released in the coming months, may provide an excuse to avoid investment into retrofitting and may provide an opportunity to delay necessary action. It is widely acknowledged that the 2⁰ C pathways are not adequate to limit global warming and the industry must move away from using these.
The stricter carbon budgets and steeper target pathways will remind the real estate industry about the need for immediate and effective action against climate change and the financial implications of delayed action. The use of gross energy limits will now encourage reduction in energy consumption by making buildings more efficient, due to the exclusion of on-site renewable energy from the EUI limits.
It is extremely important to understand that to truly achieve Net Zero buildings must be optimised and their emissions should be limited below Net Zero Target levels for a decarbonised grid to be able to meet the residual demand. In this context it is felt that the current CRREM limits may be too lenient to drive the necessary action for certain sectors.
The incorporation of the UK’s National Decarbonisation Pathways in CRREM’s carbon trajectory has been welcomed. Taking the national renewable capacity into account has resulted in achievable EUI limits which plateau after 2030. This encourages short-term action and may lead to a wider use of the tool. However, in some cases the limits may not be ambitious enough, for e.g., the EUI limits for offices in the UK is over 50% higher than the UKGBC and LETI limits.
What does this mean for the industry?
CRREM has been widely used by real estate organisations to inform their investment and retrofitting strategies. Due to the recent update to the pathways, such companies are advised to reassess their properties and portfolios and against the new pathways to make sure that they are aligning to the latest update. In doing so, the most significant change is likely to be the focus on short-term action, which would require organisations to rethink their retrofitting timeline and capital mobilisation plan. The inclusion of grid decarbonisation and more realistic EUI limits will prompt wider adoption. The organisations that are undergoing validation of limits under SBTi will also be impacted when the new Building Sector Guidance is released later this year.
Written by Akshita Gupta
