Green coalitions’ contradictions – why we need innovative policies for building stock decarbonization

Prominent policy initiatives all over the globe are polarizing society for how to govern an increasingly unaffordable building stock in the era of sustainability – even in the quaint city of Basel in traditionally neutral Switzerland. While our readership is primarily concerned with energy and CO₂, here I present an emerging conflict between social and environmental policies in the building sector – primarily due to the silo mentality of (green-leaning) politicians and policymakers. I argue why we need to break down these silos by innovating our current arsenal of policy tools to achieve the broader set of goals.

Referencing recently published work: I. Petkov, C. Knoeri, V.H. Hoffmann, The interplay of policy and energy retrofit decision-making for real estate decarbonization, Environmental Research: Infrastructure and Sustainability, 1 (2021) 035006 https://doi.org/10.1088/2634-4505/ac3321

Reducing the energy and CO₂ footprint of the existing building sector is critical for meeting climate goals (accounting for around 30% for both metrics globally). Standards for the energy use of new buildings are already reaching technical saturation in progressive countries — there is not much farther they can go. Generally, we know which technologies work and what needs to be done in new buildings relating to their efficient design and energy footprint. The next frontier is tackling embodied emissions of materials such as concrete and steel.

Over 90% of existing buildings in Europe will still be standing in 2050 (Sandberg et al. 2016). Therefore, without significant modernization of existing buildings — that is, improving energy efficiency and installing renewable energy systems — due to their long-lifetimes, Europe will not meet climate goals (Luderer et al. 2018). We need to speed up renovations while assuring that they are ‘deep’ and ‘green’ enough.

‘Deep’ renovations often refer to significant reductions in energy demand (>60%) through improved insulation along with renewable-powered heating & cooling systems (EU Renovation Wave), like heat pumps coupled with solar PV panels, while the ‘green’ aspect refers to using low-embodied CO₂ materials such as mineral-based insulations and wooden window frames (KBOB – Swiss construction life cycle assessment).

As is the case with many cutting-edge clean energy technologies, the high capital expenditure for renovations is a huge barrier for owners — whether they are professionalized institutional investors (banks, pensions, insurances) or private homeowners —  and is one of the main reasons why the renovation rate is too slow (Egli et al. 2018). The split-incentive problem also plays a role in that tenants benefit from decreased energy costs after renovations (Nie et al. 2020).

Green colations’ contradictions

Policies play an important role to standardize and (dis)incentivize renovation projects. In November 2021, a left-leaning coalition of SP (Social Democrats), the Greens and BastA! (Basel’s starke alternative (Basel’s strong alternative) – self-described as (eco)socialists who promote Net-Zero emissions by 2030) succeeded in passing the initiative “Yes to real housing protection” with 53% of the Basel city population in favor. 

Supported by the Tenants’ Association, the initiative protects tenants from being evicted, especially “many poorer and older people” who are experiencing “mass layoffs”. Further, a rent cap was introduced for renovations, conversions, and new buildings when there is a low vacancy in the city, along with additional requirements for densification. 

What could be the problem with such a seemingly social policy? Put bluntly, this policy directly contradicts arguably the most central political target of green-leaning parties — Net-Zero emissions goals.

Paradoxes in sustainable building policy

My team and I recently interviewed real estate investment teams from four of the largest building owners in Europe — pension funds, insurance firms, and banks all based in Switzerland — to understand how they make renovation decisions and how different policies impact those decisions (Petkov et al. 2021). We learned that, paradoxically, energy and climate policies are not very impactful to drive decarbonized existing building renovations. Energy policies such as building energy codes are not decisive for renovation options and financial incentives are just ‘nice to have’. However, climate policies such as lower interest rates offered for deep renovations (EU Sustainability Taxonomy) have been shown to make an impact. 

Naturally, policymakers primarily rely on energy or CO₂ focused policies to decarbonize, but this silo mentality largely overlooks the market dynamics in the building sector. Surprisingly, we found that policies focused on other social and financial objectives have a far greater impact on building owners’ decisions to invest in deeper & greener renovations at a faster rate. Specifically, these more-influential policies focus on affordability, densification, and financial security. 

Policies in these categories directly affect owners’ financial bottom-lines as they address how much the owner can increase the rents to amortize onto tenants the large capital expenditure of renovations. These are the same arguments used by the opposing coalition of the Basel initiative made up of a diverse coalition — FDP (Liberals), SVP (Swiss People’s Party), and the Green Liberals — along with the Homeowners’ Association. In Berlin, a similar coalition banded together against a similar initiative in April 2021, and won.

“Cheaper housing is being sacrificed for the sake of the environment”

So what’s happening? There is a direct conflict of policies between the tenant security & affordability and the energy & climate domains. We spoke to a portfolio manager who wants to renovate towards greener buildings, stating that “cheaper housing is being sacrificed for the sake of the environment”. The high costs of renovations coupled with the tight regulations on passing those costs onto tenants (restricted rates for what is being renovated) could actually be preventing real estate owners from meeting internal corporate CO₂ goals. Nevertheless, this implies the status quo of relatively high returns in real estate and kicks the ‘stranded assets’ can down the road.

What happens when similar highly regulated real estate market policy regimes stay in place for a while? We see it in places like Geneva – where buildings literally ‘rot’ because renovations are delayed much longer than they should according to the component lifetimes. A Geneva initiative in 1996 paved the way for the recent Basel initiative to assure higher tenant security and rent caps upon renovation. As a result, the renovation rate in Geneva is half of the national average, rents remain high due to low market supply, and the quality of flats is quite low due to the lack of modernizing renovations. Recent and novel evidence for rent control initiatives in San Francisco have also back-fired.

As with most well-crafted academic arguments, there is some truth on both ends of the political spectrum. Based on our research to understand the interplay of owners’ renovation strategies with policy — the Basel initiative could lock in emissions for the sake of tenant security and affordability. This is exactly due to the reduction of renovation-based evictions and a less attractive market for increasing rents after renovations.

It is interesting that the green-leaning coalition argues solely for the negative sides of evictions without thinking of more innovative ways to get their positive effects. It is important to note that evictions are necessary to deeply renovate a building due to the significant amount of construction work. Further, the Basel initiative primarily affects private owners, as public owners such as the city’s social housing already have well instituted tenant relocation mechanisms in case they need to deeply renovate a building. Here, I highlight the importance of housing diversity — in a largely privatized real estate market it is vital to have sufficient public housing to protect the “many poor and old people” who are being evicted in Basel.

Thinking holistically about affordable, livable, and sustainable buildings

In my view, the coalition around the SVP is making, ironically, the smarter vote in terms of the climate. But, in this article I want to address policymakers and parties who actually care about climate (sorry SVP) and who voted YES to the Basel initiative. I urge you to free from the silo mentality of focusing on just one policy objective, in this case assuring tenant security and affordability, to understand the interactions and implications of such policies.

Beyond a strict mandate on deep renovations, which is arguably rigid and would not necessarily solve social aspects of the problem, my recommendation would be to move towards a more balanced mix of policies which could meet multiple objectives at once. These policies would need to better support each other to assure tenant security, affordability, and environmental sustainability of the building stock. Such approaches are already used in ‘density bonus schemes’ – when renovating a building to a green building standard, the owner gets to build an extra floor thereby acting as a market incentive to deeply renovate and densify. 

One innovative policy idea is for the city to subsidize some of the rents in privately owned residential buildings (with a controlled rate of return for the owner) when the owner makes a deep & green renovation. Here, a percentage of the flats in the building would be secured as ‘affordable housing’ while owners can still charge the market rate for the rest of the flats. Regarding evictions, a better mix of private and public housing (social-focused housing below market rates) would need to be instituted. Further, initiatives like mandating cooperative ownership (Genossenshaft) in cities, e.g. 30% in Zurich, provide housing diversity. Other ideas could relate to changing the financial regulations of large scale owners, e.g. pensions, such as the required interest rate distributions or reinvestment requirements.

To pay for this program, why not distribute CO₂ tax revenue progressively to people who actually need it (the poor and old tenants) instead of regressively to everyone’s health insurance? Progressive use of CO₂ taxes have been shown to better alleviate income inequality. 

Of course, there is no perfect policy regime. In the future, I hope (green-focused) policymakers think more holistically about which policies they support in an effort to meet holistic social and environmental objectives.