ICE on the intersection of real estate carbon emissions and housing affordability

This article is sponsored by ICE.

Andrew Teras, client strategy lead for sustainable finance at ICE, John Sheffield, senior director and product architect, and Lauren Patterson, lead climate and ESG policy scientist, discuss how better data is needed to help homeowners understand the financial costs of real estate emissions.

The skyrocketing cost of housing affects people across the United States, particularly lower to middle income residents. Many households also struggle to pay their energy bills, adding to their cost burden. Could better energy efficiency provide housing cost relief while also cutting emissions? In this article, we explore the contribution of real estate to global carbon emissions, and tools that may lead to a better understanding of the intersection between the two.

Several factors contribute to soaring housing costs, including rising interest rates, higher inflation and a growing imbalance between housing supply and demand. Increasingly, policymakers appreciate the role that energy consumption plays in driving up housing costs. The Federal Inflation Reduction Act of 2022 and Bipartisan Infrastructure Law of 2021 include billions in loans and grants to promote energy efficiency and help reduce residential heating and electricity bills.

This focus on energy efficiency is logical from both an environmental and cost perspective. Residential homes account for over 20 percent of direct carbon emissions in the United States, and most of these emissions come from energy consumption. Accordingly, over 25 percent of all US households reported energy cost concerns or have difficulty paying energy bills in 2020. Therefore, improving energy efficiency and decarbonising electricity and home heating can yield dual benefits: reducing emissions and providing housing cost relief.

Despite this, policymakers and the public have limited visibility into the carbon footprint of residential properties and limiting understanding of how energy inefficient homes results in increased costs for homeowners and renters. But real estate lenders and investors are paying attention. Higher energy bills affect the likelihood of mortgage delinquencies, while more and more lenders are also interested in the environmental and social benefits derived from decarbonising real estate.

Better data

ICE Sustainable Finance is seeking to improve public understanding into how carbon emissions affect real estate costs. Our initial approach for carbon footprinting in US real estate covers residential properties and mortgages (whole loans and serviced loans) as well as residential mortgage-backed securities (RMBS).

For mortgages and RMBS, we can estimate emissions for residential portfolios and loan pools comprised of properties within the continental United States, in alignment with the Financed Emissions Standard developed by the Partnership for Carbon Accounting Financials. Importantly, our methodology allows us to estimate residential carbon footprints without compromising borrower privacy at the property level.

Our estimates of carbon emissions are derived from our proprietary geospatial dataset, which comprises most residential properties in the continental United States. We then incorporate building energy models (BEMs) to inform property-level energy demand. BEMs are detailed physics-based models of the factors that influence energy demand, from weather response (home insulation characteristics, heating fuels, HVAC efficiencies) to behavioural factors (cooking fuels, common washer/dryer efficiencies, electric vehicle uptake rates).

We also incorporate hourly electricity grid emissions data to model energy demand under a set of actual meteorological conditions and expected usage patterns. All these components contribute to an estimate of Scope 1 and 2 emissions for residential properties.

In the coming months, we’re planning additional enhancements to our emissions footprinting capabilities in the real estate sector. Firstly, we intend to estimate the carbon footprints for most commercial properties, which may, in aggregate, account for approximately 15-20 percent of US carbon emissions. We also plan to incorporate certain land use and transportation considerations into our footprinting modelling. We believe this will provide insight into additional indirect emissions attributable to spatial location and distance travelled to and from the property.

Furthermore, for residential real estate, we plan to incorporate more granular information on the specific operating inputs that drive housing costs higher, including insurance, property taxes and utilities. This will enable us to deliver detailed cost of living analysis for a pool of loans or mortgage portfolio.

And we plan to expand our granular, geospatial approach to real estate emissions footprinting to properties worldwide. Globally, close to 30 percent of greenhouse gas emissions are generated by the building and construction sectors. Inventorying carbon footprints for real estate assets outside the United States presents additional complications, where building standards and construction materials can vary greatly by region and country. Furthermore, access to reliable and granular asset-level data can be very difficult to obtain in many parts of the world.

Nonetheless, visibility into the carbon intensity of global real estate is crucial given that decarbonisation of these assets is key to limiting global temperature rise to the 1.5C degree pathway to 2050 as stipulated in the Paris Agreement of 2015. With about 80 percent of the building stock that will exist in 2050 having already been built, improving the climate efficiency of existing buildings is perhaps more important than focusing on new construction. As such, having an inventory of operational emissions of existing real estate and prioritising the retrofitting of these assets go hand in hand.