Real Estate’s Decarbonization Code: The Importance of Enforcing Building Standards

Real Estate’s Decarbonization Code: The Importance of Enforcing Building Standards

Building codes are crucial for reducing energy intensity and emissions in the construction sector, helping meet climate goals. However, inconsistent adoption, especially in developing regions, slows decarbonization efforts. In this article, Linde Kattenberg,  a PhD Candidate in Finance at the School of Business and Economics, Maastricht University, discusses global building code implementation practices and highlights the challenges in unifying enforcement.

Real estate off track for net zero: Rising emissions, lagging renewables, though energy intensity declines

The Global Status Report for Buildings and Construction, published annually by the United Nations, assesses the sector’s progress toward meeting the goals of the Paris Agreement. The 2022 report reviews policies, financing, technologies, and solutions within the sector and concludes that it is not currently on track to achieve net-zero targets. Key findings include a 1% increase in the sector’s emissions. Only 6% of the energy consumed in buildings comes from renewable sources, compared to the 2022 target of 11% and the 2030 target of 18%.

On a brighter note, energy intensity—measured as energy consumption per square meter—has decreased by 3.5%, signaling some progress in efficiency.

Building codes are vital, but future plans fall short

A key factor in reducing energy intensity is the implementation of building codes, now in place in 81 countries. Clearly defined, ambitious, and enforced regulations on building quality can have long-term impacts on energy efficiency. However, the report raises a significant concern: 80% of projected building stock growth by 2030 is expected to occur in countries lacking stringent building codes. This gap presents a critical barrier to achieving decarbonization targets in the sector.

Additionally, even in regions with energy-efficient building codes, such as the European Union, current regulations remain too lenient. While the EU requires buildings to meet nearly zero energy standards, it won’t mandate zero-emission buildings until 2030. In the United States, the adoption of all-electric building codes faces delays due to legal challenges from the fossil fuel industry, as seen in Washington State, Sonoma County, and Denver. This highlights a broader issue: a lack of rigor in enforcing current building codes to support Net-zero goals. In countries pushing for stricter codes, implementation is often slow or disrupted by legal opposition.

Assessing building code impact: Insights from california

Research has long examined the role of strict building codes in advancing decarbonization. A notable example is Levinson’s (2014) analysis of California’s energy building codes, introduced in 1978, which evaluated whether homes built under these regulations achieved lower energy consumption.

California’s codes, the first of their kind in the U.S., are among the nation’s strictest. Levinson’s study compared three factors: energy use across homes built under different code stringencies, at varying outdoor temperatures, and in homes of similar ages in other states. His findings suggest that the new codes resulted in little to no significant reductions in energy consumption, potentially due to factors like poor compliance by builders, shifts in residents’ energy habits, or inadequate maintenance of insulation and appliances.

Similarly, Bruegge et al. (2019) examined homes on either side of California’s climate zone boundaries, where energy codes differ. Their findings indicated that stricter codes led to energy savings in newly-built homes primarily through smaller property sizes, often with fewer bedrooms. The study also noted that lower-income households were more likely to occupy these smaller, energy-efficient homes, suggesting that code compliance may vary based on market demographics.

Risks and opportunities in implementing building codes

Building codes are essential for reducing energy intensity and emissions in the building and construction sector—an essential step toward meeting global climate goals. However, inconsistent adoption of strict codes, particularly in rapidly developing regions, hinders progress toward unified decarbonization. Energy-efficient buildings not only reduce operating costs and enhance resilience to future regulations but also offer long-term value as demand for sustainable properties grows. Nonetheless, as the California example shows, compliance with energy codes doesn’t always guarantee reduced energy use.

For investors, stricter building energy codes present both risks and opportunities. As governments tighten regulations, staying ahead of these changes is critical to protecting portfolio values. Simultaneously, with 80% of future building growth projected in regions without strong codes, investors have a chance to drive sustainable practices in these markets. By engaging with emerging markets, they can support the global shift to a low-carbon economy while seizing new investment opportunities in high-growth regions.

Call upon other investors to collaborate to achieve real-world impact

GREEN is a not-for-profit collaborative engagement initiative for institutional investors, focusing on reducing climate risk in the real estate industry. GREEN members acknowledge the importance of collaboration to initiate change and maximize impact. We, therefore, call upon other institutional investors to join GREEN and work together towards a Paris-aligned real estate sector. Check the investor statement for more information.