As carbon emissions and climate change are negatively impacting the world environment, a study by the International Finance Corporation (IFC) warns that global climate targets cannot be achieved without a substantial reduction in emissions from the housing-related manufacturing and construction sector.
IFC, a subsidiary of the World Bank, published the report titled ‘Building Green: Sustainable Construction in Emerging Markets’ in October 2023, to advocate for international cooperation and collaboration to decarbonise the housing construction value chains.
The report provides a comprehensive analysis of obstacles to reducing carbon emissions from construction value chains in developing countries. It also highlights the enormous opportunities available from mobilising an estimated US$1.5trillion investment required for transition in the construction sector. The report calls for decisive action by policymakers, developers, construction material producers, financiers and international development institutions to reduce construction-related carbon emissions.
According to the report, construction value chains – including the construction and operation of buildings, as well as production of materials such as steel and cement – account for approximately 40 percent of energy and industrial-related CO2 emissions globally. It notes that two-thirds of the emissions from construction can be attributed to emerging markets and developing countries alike. Also, it forecasts that emissions through construction will increase substantially as expanding populations, rapid urbanisation and rising incomes boost demand for better housing and commercial buildings.
In that regard, the report forecasts how developing countries meet their rising building needs will be pivotal to the world’s climate future. The World Bank estimates that emerging economies and developing countries already generate about two-thirds of global construction-related emissions. Unfortunately, the correlation between carbon emissions and construction poses a serious challenge to emerging markets, because their economic progress depends largely on construction activity as demand for buildings continues to increase.
Around the world, climate change-induced disasters are already causing significant damage to people and assets. Between 2008 and 2018, on average 24 million people per year were internally displaced because of climate disasters – of which 85 percent involved storms and floods. Currently, Ghana and other west African countries are experiencing unexplained rains, which are causing flooding in low-lying regions. Heavy rains have compelled the Volta River Authority to spill the Akosombo Dam, which generates the bulk of Ghana’s electricity capacity. The spilled water has submerged human settlements in the Eastern and Volta Regions of Ghana, which nearly pushed the country into a complex emergency.
The good news is that the projected emissions in construction value chains can be reduced significantly, with the application of existing technologies, new financing instruments and implementation of appropriate policies. Even as emerging economies meet the rising demand for residential and commercial buildings, it is possible to reduce total emissions from the sector below the current level by 2035.
Moreover, the report examines two possible pathways for reducing carbon emissions in construction value chains over the next decade in emerging markets. One pathway involves accelerating attainment of the net zero emissions target set in the Paris Agreement by 2050. This can be done by boosting investments in green buildings and materials through widespread carbon pricing and fiscal support measures.
The report estimates that this pathway would more than double investments in green construction by 2035 globally. Achieving this pathway will entail significant short-to-mid-term output losses due to early retirement of productive assets and other transition-related costs. The second pathway could achieve a similar reduction in construction emissions by supporting the adoption of technologies like electrification of buildings with cleaner energy mixes and energy-efficient buildings and materials.
Overall, the decline in global construction emissions would entail a drop in total global emissions of about 20 percent in comparison to a scenario without any mitigation investments and measures. These results emphasise the importance of starting to decarbonise building operations and materials to meet climate goals set in the Paris Agreement.
Based on these estimates, the report stresses the need for a flexible strategy in decarbonising construction value chains over the long-term. Therefore, efforts should be geared toward minimising economic costs for emerging markets – by deploying the most efficient sequencing of adaptation and mitigation policies and technologies related to each country’s conditions over the long-term.
According to the report, switching to greener technologies in construction and operation of buildings and materials – combined with more climate-friendly capital markets – could reduce the construction industry’s carbon footprint by 23 percent in 2035. Construction value chains, which comprise the construction and operation of buildings and production of materials such as cement and steel, are a major contributor to global warming; accounting for about 40 percent of global energy and industrial-related CO2 emissions.
IFC estimates that heating, cooling and powering buildings represents around half the construction sector’s 40 percent share of global emissions. This can be abated through energy-efficient designs for new structures, orienting them toward the sun, incorporating more external shading and installing smaller windows. Existing buildings can also be improved by re-designing them with more efficient cooling and heating systems, smart meters. Applying reflective paint to external surfaces and rooftops could also enhance sustainable practices and technologies. In addition to addressing climate change, this would generate savings for building owners.
Measures to reduce carbon
The other major contributor to emissions from the construction sector (about half its CO2 output) is the production of building materials, principally cement and steel. Cement production is the most carbon-intensive activity in the world. It is estimated that using alternative fuel sources such as biomass, waste and industrial residues, combined with wind and solar renewable energies rather than coal, can reduce emissions from cement production by 20 percent. In the steelmaking industry, injecting pure oxygen into blast furnaces uses less coal and can lower emissions by 15 to 20 percent.
Current predictions put emissions from construction on a path to rise by 13 percent globally by 2035 without additional mitigation and adaptation efforts. In addition, energy-saving building designs, sound construction practices and access to climate-friendly capital markets could curb emissions by 12.8 percent by 2035 from 2022 levels. This would mark a significant breakthrough in the fight against climate change, reducing the likelihood of extreme weather events that exact an ever-higher economic and human cost on the world’s poorest populations. Companies that reap cost-saving or new business opportunities will also find benefits to their bottom line.
In the longer term, green hydrogen technology – which generates energy by splitting water into hydrogen and oxygen using renewable electricity – offers a promising solution for decarbonisation in the cement industry. Meanwhile, carbon capture – which involves taking the CO2 from emissions and either storing or recycling it for further industrial use – could potentially halve carbon emissions by 2050 and beyond, the research finds.
Furthermore, the report offers significant recommendations on financial instruments, technical assistance, standards, technologies and capacity-building to channel more financing into green buildings and materials. Funding for green construction is a challenge because sustainable finance markets are less developed in emerging markets than advanced economies. Of the US$230billion of green private debt finance available in 2021 for construction value chains, just 10 percent went to emerging markets – with most of that going to China.
Currently, most of the green private debt financing has been directed toward the construction and operation of buildings. Just nine percent of financing has gone into greening the manufacturing of construction materials – the activity responsible for almost half the value chain’s carbon footprint. The research indicates that the total cost of greening construction value chains would amount to just 0.03 percentage points of global GDP per year between 2022 and 2035. This requires a global investment estimated at US$3.5trillion, of which US$1.5trillion is for emerging markets.
Consequently, many financing tools have been developed to increase emerging markets’ share of global financing for green buildings. One of them is the blended finance model, which combines public and private funding. Other instruments include sustainability-linked debt, green mortgages and venture capital funds. Blended Finance utilises limited pools of concessional funds to mobilise larger sums of private sector financing toward development goals, often with climate-related objectives. It can thereby provide more impact per dollar than pure grants, while reducing potential misallocation of capital.
Similarly, sustainability-linked debt can mobilise private investment for decarbonising construction materials by aligning financial incentives between investors and material producers to reduce emissions. Another financing stream is sustainability bonds, which raises funds to finance specific green projects and can also be allocated toward social objectives. Since 2017, development finance institutions have raised about US$16billion for green buildings in emerging markets through sustainability bonds.
Also, Real Estate Investment Trusts, also known as REITs, can inject equity finance in new or retrofitted green buildings and materials. They have the potential to scale financing of green building construction and operations. In 2021 Green REITs raised about US$28billion globally through bonds and loan issuance, up from $0.7billion in 2017.
Finally, Carbon Transition Bonds and Carbon Retirement Portfolios are designed to contribute in decarbonising or decommissioning brown construction assets. These bonds do not require borrowers to be completely green but to become ‘greener’ over time, thereby reducing negative screening by investors of carbon-intensive steel, cement and glass companies.