The Key to a Net-Zero Future is Lower Carbon Buildings Today

Above: Euclid Office Building, Euclid, OH

You might be surprised to learn that the buildings where we live, work, and play are some of the biggest sources of carbon emissions. Worldwide, the built environment generates roughly 42 percent of annual C02 emissions, with building operations accounting for 27 percent of the total and embodied carbon from four main building materials – cement, iron, steel and aluminum – accounting for the other 15 percent.¹ 

Rapid growth in the building sector is expected to continue. According to the International Energy Agency, the global building stock is expected to grow by the “equivalent of adding an entire New York City to the world, every month, for 40 years.”²

While these statistics might seem overwhelming, there’s good news as well. The technology to create greener buildings doesn’t need to be invented; lower-carbon solutions for buildings already exist. Now, we just need to put them to work, and quickly.

By greening buildings now, we could drastically cut the cost of transitioning to a clean energy future and make it happen much faster. A recent report from the Department of Energy’s Lawrence Berkeley National Laboratory and energy consulting firm Brattle Group³, shows that increasing building efficiency could reduce the total cost of decarbonizing the country’s power supply as much as $107 billion per year, or one-third of the total energy transition cost. Building decarbonization is needed for carbon reduction today, for the grid to be able to handle the increase in renewable electrification of tomorrow, and to bring a clean energy future years earlier.

It is clear that addressing our climate challenge will require the real estate sector to be significantly engaged, an imperative recognized by lawmakers in more than 30 U.S. states that have implemented commercial property assessed clean energy (C-PACE) programs. C-PACE programs provide incentivized financing for green upgrades to existing buildings and new construction that meet environmental standards. C-PACE is a financing structure enabled by state legislation in which building owners borrow low-cost, long-term funding for energy efficiency and renewable energy projects and make repayments via an assessment on their property tax bill. 

C-PACE is a powerful tool, albeit one that few outside of the real estate sector have heard of. PACE Equity and Calvert Impact are trying to change that. Earlier this year we launched the Cut Carbon Note, which allows individual and institutional investors the opportunity to directly invest in C-PACE projects that are decarbonizing buildings. The Cut Carbon Note is an investment grade retail-accessible fixed-income product that aims to transform the way we build and reduce carbon emissions. The Note finances energy efficiency and renewable upgrades in commercial, industrial, and multi-family buildings and aims to drive meaningful reductions in energy, water, and carbon intensity. This funding supports the installation of efficient lighting, roofing, windows, HVAC, water heating, and insulation, on-site solar power generation and storage, and low-flow plumbing and other water conservation measures.

Moreover, we’re trying to go beyond standard C-PACE requirements and conform to the rigorous CIRRUS™ Low Carbon Standard developed by PACE Equity and verified by the New Buildings Institute, which raises the bar for commercial energy efficiency. It is used as the basis for specialty financing that rewards projects for pursuing a lower carbon design in their energy and water-consuming products and systems. After its launch in 2021, the CIRRUS program continues to be refined and expanded with newer options developing for net zero and passive building standards.

To encourage adoption of the CIRRUS Low Carbon standard, building owners receive a free comprehensive business analysis, which summarizes (i) the utility savings from adopting more efficient systems, (ii) the financial benefits of using Cut Carbon financing, (iii) the marginal cost of making the upgrades, and (iv) the impact to property value from the expected lower net operating income of the building.

The purpose of the program is to incentivize building owners to implement more efficient designs and understand where they can get the most “carbon bang for their buck.” With motivation for developers who are only focused on the financial bottom line, and for those who are passionate about building green, the program outlines practical ways to heighten efficiency and pay for them with C-PACE financing. The Cut Carbon program aims to be a one-stop shop for all types of building owners to go green.

Without financing from the Cut Carbon Note program, these efficiency and clean energy upgrades would not be made. As such, the program provides investors a high level of additionality, something not always found in green bonds. As all buildings will be enrolled in ongoing utility monitoring, this will allow impact reporting twice a year on the buildings’ actual reduction in carbon emissions and utility consumption, compared to engineering expectations.

While creating new renewable energy is important and has grabbed investors’ attention, we must also reduce our carbon and energy demands in order to meet our climate goals. Decarbonizing the buildings where we live, work and play is a critical piece. We hope that this and aligned programs can motivate building owners, investors, and policy makers to help transform the way we build and speed our transition to a clean energy future.

Article by Beau Engman of PACE Equity and Lucas Pappas of Calvert Impact

Beau Engman is Founder and President of PACE Equity and a leader in the drive for sustainability in the built environment. Through top level executive roles with the nation’s largest energy service company, non-profits, and prominent private equity firms, Beau has consistently led efforts to break down barriers to energy efficiency in the private sector. Beau serves on the board of PACENow, a non-profit focused on promoting and implementing Property Assessed Clean Energy (PACE) around the country.  

Lucas Pappas is Director of Strategy at Calvert Impact, and has led the organization’s C-PACE financing and the development of the Cut Carbon Note program. He has been with Calvert Impact since 2010 and managed a diverse portfolio of investments in affordable housing, community real estate developers, and small and micro business lenders.