Report Building Green Sustainable Construction in Emerging Markets OCTOBER 2023 About IFC IFC—a member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work in more than 100 countries, using our capital, expertise, and influence to create markets and opportunities in developing countries. In fiscal year 2023, IFC committed a record $43.7 billion to private companies and financial institutions in developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity as economies grapple with the impacts of global compounding crises. For more information, visit www.ifc.org. Building Green Sustainable Construction in Emerging Markets BUILDING GREEN Page 2 ACKNOWLEDGEMENTS This report was prepared under the guidance of Susan Kruskaia Sierra-Escalante (Senior Manager, CBFNP, IFC) Lund, Vice President of Economics at IFC. Denis Medvedev and Elizabeth T. Burden (Operations Officer, CBFNP, IFC) (Director, CERDR, IFC), Roumeen Islam (Senior Economic for their invaluable help with the concessional and blended Advisor to the CEO, IFCMD, IFC), Vivek Pathak (Director, finance data, and Diep Nguyen-Van Houtte (Senior Manager, CBDDR, IFC), and Jamie Fergusson (Director, CBDDR, CBDSB) for her comments on the report. Peter Gumbel IFC) provided research leadership. Lucio Castro (Senior and William Shaw were the editors and Irina Sarchenko Economist, CERER, IFC) was the lead author managing (Communications Officer, CCOCO, IFC) served as the the team. Working team members include Imtiaz Ul Haq graphics editor. Brian Beary (Communications Officer, (Economist, CERER, IFC), Juliana Somerville (Consultant, CCOCO, IFC) and Chris Vellacott (Senior Communications CERER, IFC), Gabriel Michelena (Consultant, CERER, IFC), Officer, CCOCO, IFC) played an invaluable role in editorial Samuel Asuquo Edet (Economist, CERER, IFC), Edgar Salgado production. Nadya Saber (Senior Communications Officer, (Economist, CERER, IFC), Maty Konte (Senior Economist, CCOIC, IFC), Monica de Leon (Communications Officer, CERER, IFC), and Ariana Tamara Volk (Associate Economist, CCOIC, IFC), and Nicolas Douillet (Senior Communications CERER, IFC). Li Tu (Senior Investment Officer, CMGMF, Officer, CCOIC, IFC) led the dissemination efforts. Adama IFC), John Anagnostou (Senior Industry Specialist, CMGMF, Badji (Executive Assistant, CERDR, IFC), Irina Tolstaia IFC), Marek Stec (Senior Industry Specialist, CMGMF, IFC), (Program Assistant, CERDR, IFC), and Gleice Zanettin and Jinhuan (Ursula) Sun, (Associate Investment Officer, (Program Assistant, CERDR, IFC) provided administrative CMGMF, IFC) co-authored Chapter 3, while Imtiaz Ul Haq support. and Juliana Somerville co-authored Chapter 4. Dominique We thank the peer reviewers Tom Farole (Lead Economist, van der Mensbrugghe (Director and Research Professor, SCADR, IBRD), Stephan Hallegatte (Senior Climate Change Purdue University) and Maksym Chepeliev (Senior Research Adviser, GGSVP, IBRD), Seema Jayachandran (Professor of Economist, Purdue University) developed the model and Economics and Public Affairs, Princeton University) and produced the projections presented in this report, jointly Juan Pablo Rud (Professor of Economics, Royal Holloway, with Lucio Castro and Gabriel Michelena. R. Balaji (Chief University of London) for their insightful comments. Industry Specialist, CMGMF, IFC), John Anagnostou and We especially thank the Facility for Investment Climate Marek Stec provided invaluable expertise and support Advisory Services (FIAS) for the financial support provided on construction materials, and Hania Dawood (Practice for the report. FIAS supports World Bank Group projects Manager, SCCFE, World Bank), Corinne Figueredo (Senior that foster open, productive, and competitive markets Operations Officer, CBDSB, IFC), Prashant Kapoor (Chief and unlock sustainable private investment in business Industry Specialist, CBDSB, IFC), Ommid Saberi (Senior sectors that contribute to growth and poverty reduction. Industry Specialist, CBDSB, IFC), Sandeep Singh (Operations Supported by nearly 20 development partner countries and Officer, CBDSB, IFC), Naz Beykan (Consultant, CBDGB, IFC), donor institutions, co-financed by the World Bank Group, and Smita Chandra Thomas (Consultant, CBDGB, IFC) on and managed and implemented by IFC, FIAS is one of the green buildings. Jean Pierre Lacombe (Director, CGRDR, oldest and largest multi-donor trust funds in the World IFC), Veronica Navas (Senior Economist, CGRDR, IFC), Bank Group. For more information, see the FIAS website at and Julio Flores Salvatierra (Senior Economist, CGRDR, www.thefias.info. IFC) provided detailed comments on the prospects for steel decarbonization in emerging markets. We also thank Page 3  CONTENTS Foreword������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 6 Main Findings������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 8 Executive Summary��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������10 CHAPTER 1: Prospects for Reducing Carbon Emissions from Construction �����������������������������������������������������������������������������������������27 1.1. Summary���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 28 1.2. Construction value chains are a major contributor to global CO2 emissions, particularly from emerging markets.����������������������������������������������� 28 1.3. Emissions from construction are set to rise and are off track to meet construction climate commitments.������������������������������������������������������������ 36 1.4. A combination of available and emerging technologies and policy actions can reverse the growth in construction value chain emissions. 42 1.5. $1.5 trillion in investment in emerging markets is needed to achieve the emissions-reduction goal in construction.�������������������������������������������� 47 1.6. Decarbonizing construction value chains entails short-term trade-offs for long-term benefits.����������������������������������������������������������������������������������50 CHAPTER 2: Building Green in Emerging Markets ��������������������������������������������������������������������������������������������������������������������������������55 2.1. Summary���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 56 2.2. The environmental and financial advantages of green buildings.���������������������������������������������������������������������������������������������������������������������������������������������� 56 2.3. Decarbonizing buildings in the next decade.������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 60 CHAPTER 3: Technological Solutions for Decarbonizing Construction Materials �������������������������������������������������������������������������������� 71 3.1. Summary�����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������72 3.2. Reducing emissions from the production of construction materials is challenging.������������������������������������������������������������������������������������������������������������72 3.3. The construction materials industry is well-positioned to decarbonize.����������������������������������������������������������������������������������������������������������������������������������72 3.4. More needs to be done to decarbonize construction materials.������������������������������������������������������������������������������������������������������������������������������������������������ 76 3.5. Opportunities and challenges for investments in green cement and steel.��������������������������������������������������������������������������������������������������������������������������� 85 CHAPTER 4: Financing the Green Construction Transition in Emerging Markets������������������������������������������������������������������������������� 87 4.1. Summary���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������88 4.2. Emerging markets are not mobilizing enough green private finance to decarbonize their construction value chains.���������������������������������������88 4.3. Market failures largely explain the paucity of green finance for construction in emerging markets.��������������������������������������������������������������������������89 4.4. Concerted action by private investors and policymakers will be required to overcome market failures and reduce emissions from construction value chains.�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 93 CHAPTER 5: Ways Forward������������������������������������������������������������������������������������������������������������������������������������������������������������������� 111 Annexes�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������117 Annex 1: The General Equilibrium—Circular Economy (CGE-CE) Model���������������������������������������������������������������������������������������������������������������������������������������� 118 Annex 2: Supplementary Tables and Figures�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 122 Annex 3: Methodology for Green Building Finance and Policy Tools ��������������������������������������������������������������������������������������������������������������������������������������������� 130 References�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 137 BUILDING GREEN Page 4 EXHIBITS EXHIBIT 1������������������������������������������������������������������������������������29 EXHIBIT 16����������������������������������������������������������������������������������65 Construction Generates About 40 Percent of Global Carbon Expected Costs and Abatement Potential of Decarbonization Emissions Options in Construction EXHIBIT 2������������������������������������������������������������������������������������30 EXHIBIT 17����������������������������������������������������������������������������������67 Cement and Steel Account for About 50 Percent of Carbon District Cooling Systems Can Reduce Energy Consumption up to 40 Emissions from Construction Materials Percent EXHIBIT 3������������������������������������������������������������������������������������ 32 EXHIBIT 18���������������������������������������������������������������������������������� 77 Cement Is the Most Carbon-Intensive Activity Globally Abatement Potential and Economic Costs of Technological Solutions EXHIBIT 4����������������������������������������������������������������������������������� 33 EXHIBIT 19����������������������������������������������������������������������������������82 Construction-Related Emissions in Emerging Markets, 2022 Use of Alternative Fuels for Cement Production is Limited in Low- Income Regions EXHIBIT 5������������������������������������������������������������������������������������34 Emerging Markets Account for About 90 and 70 Percent of Global EXHIBIT 20���������������������������������������������������������������������������������� 91 Cement and Steel Production Global Private Green Debt Finance to Build Green Increased Twentyfold, and About 70 Percent Flowed into Green Bonds EXHIBIT 6����������������������������������������������������������������������������������� 35 Construction Materials Production Is More Carbon Intensive in EXHIBIT 21����������������������������������������������������������������������������������92 Emerging Markets Than in High-Income Countries Emerging Markets Issued Only 10 Percent of Global Domestic and Foreign Private Green Debt Finance for Construction EXHIBIT 7������������������������������������������������������������������������������������ 37 Decarbonization Dissemination of Green Building Measures by the Private Sector Has Been Limited Outside High-Income Countries and Large Emerging EXHIBIT 22����������������������������������������������������������������������������������93 Markets Latin America and the Caribbean Accounts for More Than 50 Percent of Private Green Debt Issuance for Construction EXHIBIT 8�����������������������������������������������������������������������������������39 Decarbonization in Emerging Markets Outside China Global Construction Emissions Are Projected to Grow EXHIBIT 23��������������������������������������������������������������������������������� 94 EXHIBIT 9���������������������������������������������������������������������������������� 40 Emerging Markets Are Increasingly Using Sustainability-Linked South Asia Will Be Driving the Increase in Construction Emissions in Instruments for Green Construction Financing Emerging Markets EXHIBIT 24����������������������������������������������������������������������������������97 EXHIBIT 10����������������������������������������������������������������������������������43 Sustainability-Linked Finance Can Help Decarbonize Hard-to-Abate Global Construction Emissions Could Decline by 13 Percent Below Construction Materials the 2022 Level by 2035 with Decisive Action in Construction Value Chains EXHIBIT 25�������������������������������������������������������������������������������� 100 Fundraising by Green REITs Increased More Than Fortyfold in the EXHIBIT 11���������������������������������������������������������������������������������� 46 Last Four Years Emerging Markets Will Account for Most of the Expected Reduction in Construction-Related Emissions EXHIBIT 26�������������������������������������������������������������������������������� 104 Carbon Taxes Have Been Introduced in Only a Few Emerging EXHIBIT 12��������������������������������������������������������������������������������� 48 Markets Investment Needs for Building Green Will Amount to $1.5 Trillion in Emerging Markets in the Next Decade EXHIBIT 27�������������������������������������������������������������������������������� 105 Regional, National, and Subnational Emissions Trading System (ETS) EXHIBIT 13��������������������������������������������������������������������������������� 49 Initiatives Implemented Investment in Building Green Would Be Largest in Residential Housing EXHIBIT 28�������������������������������������������������������������������������������� 109 Latin America and the Caribbean and Sub-Saharan Africa Receive EXHIBIT 14����������������������������������������������������������������������������������59 About Half of Concessional and Blended Finance Upfront Capital Costs and Payback Periods of Green Buildings Vary Widely EXHIBIT 29���������������������������������������������������������������������������������110 Multilateral Development Banks Raised About $16 Billion in Bonds EXHIBIT 15��������������������������������������������������������������������������������� 60 Supporting Building Green in Emerging Markets in 2017–2022 Green Buildings Can Have Lower Operating Costs and Higher Asset Value Page 5  ABBREVIATIONS AND ACRONYMS BF-BO Blast Furnace – Basic Oxygen Furnace CCUS Carbon Capture, Utilization, and Storage CDM Clean Development Mechanism CER Certified Emission Reduction CGE-CE Computable General Equilibrium – Circular Economy model CO2 kg eq. Kilograms of carbon dioxide equivalent DFIs Development Finance Institutions EAF Electric Arc Furnace EBRD European Bank for Reconstruction and Development EDGE Excellence in Design for Greater Efficiencies EF Environmental Finance EFTA European Free Trade Association ENVISAGE Environmental Impact and Sustainable Applied General Equilibrium model ESG Environmental, Social, and Governance ETS Emissions Trading System EU European Union GCCA Global Cement and Concrete Association GDP Gross Domestic Product GHG Greenhouse Gas GTAP Global Trade Analysis Project IBRD International Bank for Reconstruction and Development IDA International Development Association IEA International Energy Agency IEA PAMS IEA Policy and Measures database IFC International Finance Corporation IMF International Monetary Fund IMF WEO IMF World Economic Outlook KPIs Key Performance Indicators MAGC Market Accelerator for Green Construction MDBs Multilateral Development Banks MtCO2 eq. Metric tons of carbon dioxide equivalent NDCs Nationally Determined Contributions OECD Organization for Economic Co-operation and Development PM2.5 Particulate Matter Pollution R&D Research and Development REITs Real Estate Investment Trusts UNFCCC United Nations Framework Convention on Climate Change BUILDING GREEN Page 6 Foreword C onstruction 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. Two-thirds of this can be attributed to emerging markets, and this contribution will grow substantially as growing populations, urbanization, and rising incomes drive demand for better housing and commercial buildings. How developing countries meet their rising building needs will be pivotal to the world’s climate future. The good news is that the projected emissions growth in construction value chains can be reduced significantly with the application of existing technologies, new financing instruments, and the 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 today’s level by 2035. To avoid perpetuating the status quo, decisive action is needed by policymakers, developers, construction material producers, financiers, and international development institutions. IFC is launching this report to guide international efforts to decarbonize construction value chains. Building Green: Sustainable Construction in Emerging Markets was prepared through close collaboration between IFC economists, investment officers, and building and construction sector specialists. The report provides a comprehensive analysis of the challenges of reducing carbon emissions from construction value chains in developing countries, but also the considerable opportunities that will come from mobilizing the estimated $1.5 trillion of investment required for this transition. Page 7 Foreword The report also offers important recommendations on financial instruments, technical assistance, standards, technologies, and capacity building to channel more financing into green buildings and materials and address the market failures hampering further progress on building green. IFC's own green buildings program and sustainability-linked finance facilities offer proven models on how such initiatives can be accomplished at scale. Realizing the potential outlined in this report will require coordinated efforts by stakeholders across regions and industries. IFC is committed to working with policymakers, businesses, and investors on seizing the climate opportunity in building green and turning today’s challenges into opportunities for a greener, more resilient world. Susan M. Lund Vice President, Economics and Private Sector Development, IFC BUILDING GREEN Page 8 Main Findings G lobal climate goals will not be Technologies that already exist can significantly reduce achieved without a substantial reduction construction’s environmental footprint with moderate economic costs. For buildings operation, these technologies in emissions from the construction sector. include electrification of buildings with non-fossil fuels, and This poses a particular challenge to emerging use of specific materials to reduce energy consumption, markets: their economic development depends like reflective painting for rooftops and film coating for significantly on construction activity, but they windows, among others. For new buildings, energy-efficient already generate about two-thirds of global and resilient designs and systems, renewable energies, construction-related emissions. and district cooling and heating systems, are some of the possible mitigation and adaptation options. For construction This report analyzes the investments and policy actions materials, especially cement and steel, improving energy- needed—and the economic trade-offs they imply—to efficiency, and switching to low-emission processes, raw reduce carbon emissions in construction value chains materials, and fuels, can also reduce emissions now. In the in emerging markets, including the construction and future, potentially deploying nascent technologies such as operation of buildings and the production of construction carbon capture and storage and green hydrogen, among materials such as cement and steel. It explores the costs others, can all serve to reduce emissions, but these levers are and availability of technological solutions that could help only expected to become commercially available without reduce emissions, and it considers potential sources for fiscal support by 2035 and beyond. financing these solutions as well as the policy interventions needed to channel private investment into mitigation For all emerging markets, incorporating resilience into and adaptation efforts in emerging markets. The report new green buildings will be paramount in the next decade, examines the alternative policy options and available and especially in countries affected by frequent hazardous novel technologies for building green in emerging markets, climate events. Climate change-induced disasters are considering each region’s income level, technological and already causing significant damage to people and assets policy readiness, and dependence on fossil fuels. Key findings around the world. Between 2008 and 2018, on average 24 and messages include: million people per year were internally displaced because of climate disasters, of which 85 percent involved storms and Construction value chains today account for about floods. 40 percent of energy and industrial-related CO2 emissions globally, according to this report’s estimates. Without Investments in electrification of brown buildings with additional mitigation and adaptation efforts, emissions are cleaner energy, energy-efficient new buildings, and low- likely to increase by about 13 percent by 2035, this report emission materials, and the adoption of adequate policy estimates, which would equal the total construction- frameworks could reduce global construction value chain related emissions of the United States in 2022. The share of emissions by 2035 to about 23 percent below the level they construction-related emissions generated in emerging and are projected to reach without any mitigation efforts—and developing economies, currently two-thirds of the global 13 percent below today’s levels—this report estimates. total, is also likely to rise by 2035. This is because these Emerging markets would account for about 55 percent markets have the largest stock of brown buildings (not of this projected reduction in construction emissions. The adapted for energy or emissions reduction), use relatively decline in global construction emissions would also entail more carbon-intensive construction methods and materials, a drop in total global emissions—including construction and their investment in construction is likely to grow faster and other economic activities—of about 20 percent than in high-income economies. in comparison to a scenario without any mitigation Page 9 Main Findings investments and measures. These results emphasize the Policymakers can support the green construction transition importance of starting to decarbonize hard-to-abate and crowd in private financing by creating activities now, such as building operations and materials, to an adequate business and regulatory environment. It is meet the climate goals set in the Paris Agreement. critical to address the market failures which limit green construction in emerging markets through green building With proper policies and regulations in place, adopting codes and standards, greening government buildings and these commercially available technologies in construction public procurement, and in the mid-term, wider adoption of value chains would generate new private investments carbon pricing and fiscal support measures. of $1.5 trillion in greener buildings and materials in emerging markets over the next decade, according to The pace of adoption of these technologies and measures this report’s estimates. Private investors have yet to will depend on each country’s income level, access to take advantage of this opportunity. Global private debt finance, technological and policy readiness, and dependence financing for decarbonizing construction using ‘green’ on fossil fuels. Countries with sufficient fiscal space may be financial instruments reached a record high in 2021 of able to move faster in deploying relatively costly policies, about $230 billion, but emerging markets only issued about like carbon pricing, stricter environmental regulations, 10 percent of that total, this report estimates. retrofitting brown plants and buildings, and providing fiscal incentives to novel green technologies non-economically This report examines two possible pathways for reducing viable today. In other countries, early action could be carbon emissions in construction value chains in the taken by seizing ‘low hanging fruit’, including the adoption next decade in emerging markets. One pathway involves of commercially available technologies for electrification accelerating the attainment of the net zero emissions target of buildings with cleaner energies and energy-efficient set by the Paris Agreement by 2050 by boosting investments buildings and materials. Low-income economies can begin in green buildings and materials through widespread carbon their journey in the green construction transition with pricing and fiscal support measures. This pathway would technical and financial support from the international more than double investments in green construction by community. 2035 globally but would entail significant short-to-mid-term output losses due to early retirement of productive assets Decarbonizing construction value chains in emerging and other transition-related costs. Another pathway would markets will entail relatively small short-term negative costs achieve a similar reduction in construction emissions but at for long-term benefits. Construction-specific measures lower costs by supporting the adoption of ‘low-hanging fruit’ and the cost of incentives to adopt commercially available technologies, like the electrification of buildings with cleaner technologies geared towards fostering energy-efficient energy mixes and energy-efficient buildings and materials, buildings and materials powered with cleaner energies among others. would reduce global GDP growth by 0.03 percentage points per year between 2022 and 2035, this report estimates. Most Based on these estimates, the report stresses the need for a of this output loss will occur in countries with the largest flexible strategy for decarbonizing construction value chains construction sectors today, mostly high-income and some geared toward minimizing economic costs for emerging upper-middle economies. The majority of middle-income markets by deploying the most efficient sequencing of countries would be able to meet their rapidly growing adaptation and mitigation policies and technologies, construction needs with lower economic costs. Output adapted to each country’s conditions, and from a long-term losses among low-income countries would be smaller still. perspective. These reductions pale in comparison with the loss in human welfare over the next decades if insufficient efforts are made to address climate change. BUILDING GREEN Page 10 Executive Summary Construction value chains in emerging Emerging markets generate two-thirds of markets are a major contributor to global construction-related global emissions, with about CO2 emissions, and the problem is set to three-fifths of these emissions from China, because get worse by 2035. of their dominant share both of “brown” buildings and the global production of materials, their use of more Construction value chains account for about carbon-intensive construction methods and materials 40 percent of energy and industrial-related CO2 than in high-income countries, and their rapid growth emissions globally.1,2 These value chains comprise in income per capita, which increases construction the construction and operation of buildings and the demand.4 production of materials. This report estimates that operation of buildings explains about 20 percent Without additional mitigation efforts, global of global carbon emissions, followed by the supply construction-related emissions would increase by of materials (19 percent), and construction services about 13 percent between 2022 and 2035, according to (0.3 percent) (Exhibit A). About 85 percent of total this report’s estimates. This 13 percent increase relative construction emissions globally come from the use of to today’s levels, driven by increasing emissions from fossil fuels in buildings and materials plants while the emerging markets would be equivalent to the total remaining 15 percent comes from process or industrial emissions from the construction value chain in the emissions related to the production of construction United States in 2022. Global climate goals are unlikely materials.3 to be achieved without a reduction in emissions from the construction and operation of buildings. Thus, an important challenge facing the global community is how to ensure the integration into construction value 1 This report includes only scope 1, 2, and 3 CO2 emissions resulting from energy combustion and economic activity in agriculture, manufacturing, and services. Emissions of other greenhouse gases (e.g., methane) and other CO2 emissions (e.g., from changes in land use) are not considered due to data limitations. Emissions are calculated based on the location where they were produced, not where they are consumed. Industrial or process emissions are the by-product of processes that convert raw materials to chemical, mineral or metal products such as cement and steel, among others. 2 This estimate roughly aligns with recent calculations from IEA (2021) and UNEP (2021) in which construction accounts for 36 percent of global final energy consumption and 37 percent of energy related CO2 emissions. 3 IFC calculations based on Global Trade Analysis Project data. 4 “Brown” refers to conventional buildings and materials in which no energy or emission-reduction measures or technologies have been adopted. Page 11 Executive Summary chains of commercially available green technologies will therefore be a priority in emerging markets in the that could substantially reduce carbon emissions in the next decade. next decade. Some promising technologies with high The level of economic and policy effort required to abatement potential, like green hydrogen and carbon reduce emissions from construction value chains will storage, among others, are likely to only become necessarily vary across regions in the next decade. commercially available without fiscal support by 2035 Countries with greater fiscal and financial resources and beyond. Deploying already available technologies EXHIBIT A Construction Generates About 40 Percent of Global Carbon Emissions Global CO2 emissions by category Total: 38 billion CO2 tons Rest of global CO2 emissions 60.6% Global construction value chain emissions by region Total: 15 billion CO2 tons Building Production of China High Other operations construction 40% income emerging 20.4% materials 31% markets 18.7% 29% Building construction 0.3% Notes: This report includes only scope 1, 2 and 3 CO2 emissions coming from energy combustion and economic activity in agriculture, manufacturing, and services. Emissions from other greenhouse gases (e.g. methane) and other CO2 emissions (e.g., from changes in land use) are not considered due to data limitations. Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the firm. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the firm’s value chain. Other emerging markets category includes Sub-Saharan Africa. Figures in the text might not be identical due to rounding. Source: IFC calculations based on data from the Global Trade Analysis Project (2022). BUILDING GREEN Page 12 may be better positioned to deploy more rapidly relatively costly policies—carbon pricing, tighter BOX A environmental regulations, and fiscal support— and new technologies with significant abatement Some Examples of the Climate and potential but high economic costs today. Middle- Business Benefits of Green Buildings income countries, in turn, can accelerate the pace of Energy savings. The Menarco Tower office in adoption of green construction codes, standards, and Manila, the Philippines, achieved 41 percent energy readily available technologies and practices. Low- savings through variable speed drives in the air income economies can begin their green construction handling units, a higher-efficiency cooling system and appliances, energy-saving lighting in corridors, transition with financial and technical support from common and external areas, and occupancy sensors the international community. in bathrooms along with other passive measures. This summary of the report provides, first, an overview Lower carbon emissions. In Gujarat, India, a district of technologies that are either being deployed or are cooling system has been installed in the Gujarat anticipated in the near future. Increased resources Finance Tec-City, a joint-venture financial center. will be needed to support the green construction The system distributes thermal energy in the form transition, and the report provides rough estimates of chilled water from a central source to multiple buildings through a network of underground pipes of the magnitude of the private investment required. for use in space cooling. The system aims to reduce Governments will also be required to mitigate the power demand and make air conditioning more market failures prevailing in construction value energy efficient, reducing CO2 emissions. chains and green financial markets by establishing an Financial benefits. Residential green developers like appropriate policy framework, under which companies Signature Global (India) and Capital House (Vietnam), in construction value chains can adopt emerging have reported faster sales resulting in stronger cash and commercially available technologies. The final flows for them. In South Africa, International Housing section of this summary discusses policies that could Solutions reports that its low-income renters save an encourage companies to undertake more green entire month’s rent each year from lower utility bills, construction and private investors to commit more and its green homes’ occupancy rates are higher than resources to these activities. for similar conventional homes that it owns. Lower operating costs and higher occupancy thus make Construction and operations of green buildings a more profitable asset. buildings and other structures. The menu of available options to decarbonize buildings ranges from measures with high abatement and adaptation potential but prohibitive economic costs today to measures with more moderate emission- reduction potential but lower costs. Emerging Page 13 Executive Summary countries will have to choose among these alternatives Green buildings, buildings with energy-efficient depending on country conditions, available financing designs, cleaner energy-mixes, and low-emission and policy and regulatory frameworks in place in the materials, offer multiple opportunities to significantly next decade. reduce carbon emissions in construction value chains while offering a business opportunity for private Deep retrofitting "brown" buildings and materials investors. Passive measures related to the design of plants through replacing inefficient energy and green buildings achieve energy savings through the thermal electrical and mechanical systems or building’s orientation to the sun, external shading, and reconstructing building envelopes, among other reduced window size. Such measures are particularly measures, can significantly reduce buildings’ emissions. effective in managing heat gain or loss during the Due to its high costs today, however, this option is day as well as reducing construction costs. Active likely to be affordable only for few countries with measures in green buildings related to more efficient the fiscal and policy space required to start deep electrical and mechanical systems also lower energy retrofitting or implementing early retirement of consumption. For instance, ceiling fans, thermostatic stranded brown buildings and plants now. valves, and heat valves can achieve high levels of Electrification, or replacing fossil fuels for cooking, energy efficiency. The use of eco-friendly refrigerants water heating and cooling with electric systems also enables emissions savings. Incremental costs, powered with renewable energies, is an attractive payback periods and emission reduction potential of complement to deep retrofitting because of its green buildings relative to conventional alternatives relatively low costs and the expected greening of are contingent on climate zones, country conditions electricity generation over the coming decade. and types of buildings. Box A provides some examples However, electrification alone cannot achieve the of the climate and financial benefits of green buildings needed reductions in emissions given the economic and systems. unfeasibility of completely removing fossil fuels from One important aspect of green building measures, the energy mix in most countries in the next decade. like renewable energy technologies, passive cooling Economies for which complete retrofitting is likely and heating systems, water recycling, or rainwater to remain out of reach in the near future, including collection solutions, is that they improve resilience of middle-income countries undergoing rapid population buildings to hazardous events. Resilience needs to be and economic growth, can invest in electrification integrated into construction of new green buildings as well as construction of new green buildings to ensure longer life cycles and avoid unnecessary and material plants to respond to their swelling land carbon emissions related to the reconstruction housing needs in the years to come. And for all process. Countries with sufficient fiscal space can also emerging markets, incorporating resilience into employ fiscal incentives to integrate resilience into green construction will be critical in the next decade, retrofitted buildings. especially in countries affected by catastrophic climate events. BUILDING GREEN Page 14 With supportive policies, the use of specific materials, construction-related CO2 emissions. Deep retrofitting such as reflective painting for rooftops and film old buildings to be more carbon efficient can achieve coating for windows, can enhance thermal efficiency similar or higher energy savings than construction of in existing as well as new buildings with relatively new green buildings, but its high cost makes it unlikely moderate costs. In specific large projects, like to be a priority in most emerging countries in the next renovation of urban areas or construction of university decade. or medical campuses, district cooling technologies can Many other approaches exist to reduce the carbon reduce energy consumption by setting a centralized footprint of building construction and operation. cooling system for an interconnected group of new or For example, increasing reliance on renewable completely renovated buildings and structures. energies and district systems for heating and cooling Greater reliance on digital technology could also could significantly reduce emissions from buildings contribute to reducing construction emissions. Using operation. Local emissions from construction sites "smart" internet-connected devices to enhance could be addressed using electric vehicles and the energy efficiency of large appliances, like air biomass-powered machinery. Some of these options conditioners, refrigerators, washing machines, and may only be feasible in middle- or high-income cookstoves, can significantly reduce emissions from countries, but the international community can buildings operations. Increasing the use of this contribute to gradually disseminating and supporting technology may require regulatory measures, and in them in low-income economies. some cases, depending on country conditions, policy incentives. 3D-printed construction can reduce waste Construction Materials (and thus lessen embodied carbon) and construction Cement and steel are the two major materials used in time, improve energy efficiency, and lower labor construction, and for both, technological solutions to costs but can only be applied today in relatively reduce their emissions intensity are already available small housing and commercial projects. Across all or being developed. By 2035 and beyond, novel project stages, digitalization could increase materials' technologies with high abatement potential but non- efficiency by integrating life-cycle emissions in the commercially available today, such as carbon capture construction process, using, for instance, 3D building and storage and green hydrogen, are likely to still need information modeling, enhancing collaboration significant fiscal support, even in advanced economies. through management apps on mobile devices, and Deep retrofitting or early retirement of existing brown monitoring sites with drones for scanning. plants will also remain out of reach for most emerging Improving the use of space and infrastructure through economies in the next decade. flexible design and undertaking climate-smart Over the next 10 years, the priority should therefore building that emphasizes the importance of resilience be promoting commercially available abatement and would extend lifetimes of new buildings. This would adaptation levers, particularly in emerging markets reduce the demand for cement and steel, as well as undergoing rapid economic and population growth. Page 15 Executive Summary Piloting some of these technologies and measures, with the support BOX B of the international community, could also contribute to reducing Some examples of the use of already available and emissions in cement and steel novel decarbonization technologies in cement and production. steel plants Biomass and recycled materials. Green hydrogen. In 2021, For example, replacing carbon- Sococim, a subsidiary of French Compañía Siderúrgica Huachipato intensive clinker, cement’s cement maker Vicat S.A, will launched in Chile a pilot of a green main input, with alternative replace part of its clinker lines in hydrogen mill that is expected to natural materials and industrial its Senegal plant with more fuel- be completed by 2023. CEMEX is by-products can significantly efficient facilities, utilizing up to 70 already implementing hydrogen reduce process emissions. Using percent alternative fuels (biomass technology at its San Pedro de alternative fuel sources such as and recycled tires). The project will Macoris cement plant in the reduce greenhouse emissions by Dominican Republic. biomass, waste, and industrial 312,000 tons of CO2 equivalent residues, combined with wind Carbon capture and storage. per year by 2030, enabling it to and solar renewable energies, Anhui Conch Cement developed in produce one of the lowest-emission among others, rather than coal can 2017 a cement with carbon capture cements in the world. IFC is plant in Wuhu, China. In India, reduce emissions from production supporting the project with its first Dalmia Cement Limited and Carbon of cement by 20 percent. Taking green loan for materials in Africa. Clean Solutions are developing the energy and resource efficiency Recycled scrap. Rider Steel, a largest cement plant with carbon measures can save up to 30 rolling mill operator, is investing capture in the global cement percent in electricity plant needs. in a greenfield manufacturing industry. The plant is expected to Adaptive and self-learning plant in the Kumasi area in Ghana. capture 500,000 tons of CO2 per technologies can also optimize The new plant will save 332,000 year. tons of carbon dioxide annually fuel management and material by entirely using steel scrap as blending. These options can have input (283,200 tons per year). The relatively short payback periods plant also operates an energy- with adequate financing and efficient induction furnace with a regulatory frameworks. significantly lower carbon intensity than existing blast furnaces. IFC By 2035 and beyond, green supported the project through a $12 hydrogen is expected to offer million loan in 2020. a promising (but not now commercially viable) solution for decarbonization in the cement BUILDING GREEN Page 16 industry.5 Carbon capture, utilization, and storage— Deploying these technologies could which captures CO2 from industrial emissions and reverse projected emissions growth from either recycles it for further industrial use or stores construction value chains, requiring $3.5 it safely underground—is another technological trillion in global investment between innovation that could potentially almost halve CO2 2022 and 2035. emissions but also will also require subsidies and tax Integrating readily available technologies, like incentives, at least before 2035, and possibly beyond. electrification of brown buildings with cleaner energies In the steel industry, injecting pure oxygen into blast and energy-efficient buildings and materials, among furnaces can lower emissions by 15–20 percent, by other technologies, into construction value chains reducing the use of coal as a reductant agent for combined with compliance with the NDC targets iron oxide. When sourced from renewable resources, could reduce construction-related emissions to well biomass can also substitute for coal, while increasing below today’s levels. Results from the computable the share of high-quality scrap in electric arc furnace general equilibrium–circular economy dynamic model6 steelmaking can lower the use of carbon-intensive employed in the report suggest that, taken together, iron. Green hydrogen could improve the performance these measures (the “energy efficiency scenario” in of conventional blast furnaces and produce direct Exhibit B) would reduce global construction-related reduced iron to be further processed into steel. As emissions in 2035 to about 13 percent below the level with cement, green hydrogen and carbon capture in 2022, or about 23 percent below the level that technologies, among others, combined with renewable would be reached in 2035 in the absence of additional electricity generation, hold the promise of carbon- mitigation efforts (the “no mitigation” scenario in neutral steelmaking in the longer term but they will Exhibit B). The 13 percent reduction relative to today’s not be economically viable without fiscal support by levels is equivalent to the total emissions from the 2035 and beyond. construction sector in the United States in 2022. Emerging markets would account for more than half Box B summarizes the experiences of companies of this reduction in emissions. which are implementing some of these existing and novel decarbonization technologies in cement and On average, global construction-related emissions steel plants in emerging markets. decline by about 2 percentage points per year in the energy efficiency scenario relative to the no mitigation scenario. Of this, 1.4 percentage points 5 Green hydrogen is hydrogen produced by splitting water into hydrogen and oxygen using renewable electricity. Hydrogen gas is extracted from water by a technique known as electrolysis, which involves running a high electric current through water to separate hydrogen and oxygen atoms. The electrolysis process is expensive because it involves high energy expenditure. 6 Global dynamic computable general equilibrium models provide an indication of some plausible paths of economic growth and carbon emissions under alternative policy scenarios rather than precise numerical estimates. These models, however, allow us to examine the effects of these policies on the global economy taking into the account the interactions between countries, economic sectors and economic agents based on a consistent and analytical robust theoretical framework and detailed input-output, balance of payments and fiscal accounts data. See Box 2 and Annex 1 for a detailed explanation of model and simulations presented in this report. Page 17 Executive Summary EXHIBIT B Global Construction Emissions Could Decline by 13 Percent Below the 2022 Level by 2035 with Decisive Action in Construction Value Chains 18,000 17,000 No mitigation +12.8% 16,000 Millions of CO2 equivalent tons 15,000 Nationally -3.6% Determined Contributions 14,000 (NDCs) -12.8% 13,000 Energy E ciency (including NDCs) 12,000 2022 2025 2028 2031 2034 Notes: The exhibit shows the results of the simulations for the no mitigation, Nationally Determined Contributions (NDCs), energy-efficiency and net zero-aligned scenarios described in Box 2 and Annex 1. Castro et. al mimeo simulates alternative scenarios. The NDC scenario simulates the effects of complying with the NDCs emission-reduction targets set in the Paris Agreement. The energy-efficiency scenario simulates the effects of sector- specific measures geared towards cleaning the energy mix and improving the energy efficiency of buildings and materials plus compliance with the NDCs. The net zero-aligned scenario simulates the impacts of widespread carbon pricing on brown buildings and materials and subsidies to green alternatives plus compliance with the NDCs. The drop in emissions in the net zero-aligned scenario is similar to the decline in emissions in the energy efficiency scenario and it is therefore not shown here. Figures in the text might not be identical due to rounding. Source: IFC calculations based on data from the Global Trade Analysis Project (2022) and Global Climate Change Alliance (2021). BUILDING GREEN Page 18 EXHIBIT C Investment Needs for Building Green Will Amount to $1.5 Trillion in Emerging Markets in the Next Decade High Income Total $2.01 trillion $3.50 trillion China $1.33 trillion Other Emerging Markets $0.16 trillion Notes: Investment needs are calculated as the difference between investments in electrification of brown buildings with renewable energies and new buildings and materials powered with low-emission energies in the no mitigation scenario and the energy efficiency scenario. See Box 2 for an explanation of the model and scenarios. Figures in the text might not be identical due to rounding. Source: IFC calculations based on data from Global Trade Analysis Project, Global Climate Change Alliance, International Energy Agency and other sources. come from reductions in energy intensity of buildings energies and energy efficient buildings and materials and materials, while 0.6 percentage points come (the energy efficiency scenario in Exhibit B) would from a decline in carbon intensity. Construction result in a decline in total global emissions, including demand would only experience a minor drop of construction and all other sectors, of about 0.04 percentage points per year.7 19.8 percent by 2035, compared with the no mitigation scenario.8 These results emphasize the need to The simulations also suggest that the drop in pave the way now for decarbonizing hard-to-abate construction emissions achieved through the activities, such as construction and operation of electrification of brown buildings with renewable buildings and materials, in the next decades to meet 7 IFC calculations based on Global Trade Analysis Project (2022). Energy intensity refers to the unit of energy used per unit of construction output and carbon intensity refers to the unit of CO2 metric ton per unit of energy consumed in construction. Castro et. al, mimeo present a detailed decomposition of these carbon and energy intensity and total demand effects. The 2 percent average yearly drop in emissions refers to the 23 percent decline in construction-related emissions in the energy-efficiency scenario relative to the no mitigation scenario between 2022 and 2035. IFC calculations based on Global Trade Analysis Project (2022). 8  Page 19 Executive Summary EXHIBIT D A Third of the Investment Needs in Emerging Economies Outside China Would Be in Latin America and the Caribbean and South Asia Latin America & the Caribbean Total $76.7 billion $160 billion South Asia $25.4 billion Europe & Central Asia Middle East & $17.6 billion North Africa $14.9 billion East Asia Pacific $12.9 billion Sub-Saharan Africa $12.4 billion Notes: The exhibit shows the results of the simulations of the cumulative investment needs for the energy efficiency scenario described in Box 2 and Annex 1 relative to the no mitigation scenario. Figures in the text might not be identical due to rounding. Source: IFC calculations based on Global Trade Analysis Project (2022). the climate goals set in the Paris Agreement. markets would be channeled to electrification of brown buildings, new energy efficient buildings, and The results of the model also suggest that the global materials powered with cleaner energies. Around cumulative investment needed from 2022 to 2035 75 percent of investment would be funneled into to achieve this reduction in construction emissions cleaning the energy mix and improving the energy- in the energy efficiency scenario could amount to efficiency of buildings. Increased supply of less carbon- $3.5 trillion.9 The investment needs in emerging intensive cement, steel, and other materials would markets would amount to almost $1.5 trillion, of which absorb about 20 percent of the required investment. $1.3 trillion would be from China. (Exhibit C). The remaining 5 percent would finance built Most of the $1.5 trillion investment needs in emerging environment-related services on and off construction 9 Investment refers to gross fixed capital investment in the Global Trade Analysis Project database. See Annex 1. BUILDING GREEN Page 20 sites.10 These financing needs would require a marked cost in foregone output as the construction value rise in domestic and international green private debt chain undergoes a more rapid transition to net zero finance for decarbonizing the construction value emissions. chain in emerging markets, which amounted to about $23 billion in 2021. Decarbonizing construction value chains Of the additional $160 billion in green construction entails short-term trade-offs for long-term investment in emerging markets other than China benefits. between 2022 and 2035, Latin America and the Combining compliance with NDCs with construction Caribbean, South Asia and Europe and Central Asia value chain-specific mitigation and adaptation would account for about $77 billion, $25 billion, and measures and readily available technologies geared $18 billion. In the Middle East and North Africa and East towards cleaning the energy mix and improving the Asia and the Pacific, the investment would amount energy efficiency of buildings and materials would to about $15 billion and $13 billion. Green building likely have only a limited impact on economic growth investment would amount to $12 billion in Sub- rates by 2035. The model employed in this report Saharan Africa (Exhibit D). About 86 percent of the suggests that compliance with the NDCs (without investment would be directed to residential buildings measures specific to the construction sector) would (a half of that in Latin America and the Caribbean), reduce global construction emissions by 3.6 percent especially in single-family detached housing. and total global emissions, including construction and the rest of the economic activities, by 13.04 percent The results of the model employed in this report also for a decline in yearly global GDP growth of suggest that an alternative scenario geared towards 0.02 percentage points by 2035. accelerating the pace to achieve net zero-construction by 2050 by boosting the stock of green buildings Pursuing construction-specific mitigation policies to and materials through widespread carbon pricing promote cleaning the energy mix and improving the and fiscal support measures (the net zero-aligned energy-efficiency of buildings and materials in addition scenario described in the notes of Exhibit B) would to compliance with NDCs (the energy efficiency attain a similar drop in construction emissions by 2035 scenario in Exhibit B) would reduce global construction as the energy-efficiency scenario but with markedly emissions by 13 percent and total global emissions, higher investment needs. Bringing down construction including construction and all other economic emissions by about 23 percent with this policy mix activities, by 19.8 percent relative to the no mitigation would require investments in new green buildings scenario for a decline in yearly global GDP growth of and materials amounting to $6 trillion globally, almost 0.03 percentage points. However, this short-term twice the investments needed in the energy efficiency loss would be more than compensated by long-term scenario, but also would come at a much higher gains in reduced damages from climate change to infrastructure, growth, and human welfare. IFC calculations based on Global Trade Analysis Project (2021); and GCCA (2021). 10  Page 21 Executive Summary An alternative policy mix of applying carbon taxes These results suggest that relatively few countries to brown buildings and materials, subsidizing green with available fiscal space may be in a position to alternatives, and complying with NDC targets (the “net offset the decline in private investment in conventional zero-aligned” scenario described in Exhibit B) would construction due to carbon taxes on brown buildings achieve a similar reduction in global emissions as the and materials through increased public investment energy efficiency scenario. It would also contribute and fiscal support measures. For other emerging to putting construction more rapidly on the path to markets, promoting the adoption of ‘low hanging net zero by 2050 by boosting the stock of greener fruit’ technologies, like the electrification of buildings buildings and materials in construction value chains. with cleaner energies and energy-efficiency, would be a more pragmatic and feasible pathway to reducing The net zero-aligned scenario would bring down emissions in construction value chains in the next global carbon emissions, however, at significantly decade, until horizon technologies, like carbon capture higher costs than the energy efficiency scenario. and storage and green hydrogen, become widely The 19.8 percent reduction in global total emissions, available at scale. including construction and the rest of the economic activities, in this scenario would entail a drop of By 2050, the cost in terms of foregone output 0.4 percentage points in average yearly growth stemming from the emissions reduction scenarios in globally by 2035, more than 10 times the output losses this report is likely to be more than offset by reduced of the energy efficiency scenario. damages to infrastructure, productivity, and growth from global temperature increases. Recent simulations This larger output loss in the net zero-aligned using similar models to the model employed in this scenario relative to the energy efficiency scenario is report, for instance, suggest that the economic explained by the crucial importance of construction benefits of reducing the growth in global temperatures value chains in global investment.11 As most buildings by 2050, particularly related to lower mortality and and materials are brown today,12 imposing taxes on morbidity rates, would exceed by 1.4 to 2.5 times the conventional construction would cause a marked drop output costs of reducing carbon emissions in this in total construction investment that is unlikely to be decade.13 offset in the next decade by the expansion of green alternatives, even with fiscal support measures, at Emerging markets receive only a small least until technologies with the highest abatement potential become commercially available by 2035 share of domestic and foreign green and beyond. finance for decarbonizing construction. Several financial tools are, or can be, used to channel Construction accounts for about half of total fixed capital investment globally (IFC calculations based on Global Trade Analysis Project, 2022). 11  Only about 7 percent of the stock of buildings is green today globally, according to IFC calculations based on the Global Trade Analysis Project. 12  See, for instance, Markandya et al. (2018). 13  BUILDING GREEN Page 22 EXHIBIT E Global Domestic and Foreign Private Green Debt Finance for Construction Decarbonization Increased Twentyfold in the Last Five Years Compound Annual Growth Rate 250 Sustainability- Other linked bonds 221% Sustainability 200 bonds 192% 150 $ billions 100 Green bonds 93% 50 Sustainability- linked loans 313% Green loans 70% 0 2017 2018 2019 2020 2021 Notes: Calculations only consider green, sustainability, sustainability-linked, and transition bonds and loans with "green buildings" in the use of proceeds or issued by construction material sectors and used for decarbonization. ‘Other’ includes transition bonds and sustainability loans. See Annex 3 for more details on the methodology. Figures in the text might not be identical due to rounding. Source: IFC calculations based on data from Environmental Finance and Bloomberg (2022). domestic and foreign private funds to greening investment for decarbonizing hard-to-abate construction value chains. These include: construction materials by aligning financial incentives between investors and material • Sustainability-linked debt can mobilize private producers to reduce emissions;14 Sustainability-linked finance includes loans and bonds in which compliance with a set of pre-determined sustainability targets triggers reductions in financing costs. 14  Page 23 Executive Summary EXHIBIT F Only 10 Percent of Global Domestic and Foreign Private Green Debt Finance for Construction Decarbonization Was Issued in Emerging Markets Compound Annual Growth 250 Rate Other emerging markets 146% Sub-Saharan Africa 138% China 86% 200 150 $ billions 100 High income 109% 50 0 2017 2018 2019 2020 2021 Notes: Calculations only consider green, sustainability, sustainability-linked, and transition bonds and loans with “green buildings” in the use of proceeds or issued by construction material sectors and used for decarbonization. Volumes shown by income and region are based on the location of headquarters and/or country of risk (determined by the firm’s geographical exposure to operations) of the issuing entity. Compound annual growth rates are calculated using the first year of issuance as base year: 2018 for Sub-Saharan Africa and other emerging markets, and 2017 for high income countries. See Annex 3 for more details on the methodology. Figures in the text might not be identical due to rounding. Source: IFC calculations based on data from Environmental Finance and Bloomberg (2022). • Green mortgages can drive consumer demand for energy savings over time; investments in net-zero buildings; • Green funds and real estate investment trusts can • Performance contracts and leasing can offer inject equity finance in new or retrofitted green off-balance sheet financing from local energy buildings and materials; providers for energy-efficiency investments in • Venture capital funds can finance or co-finance buildings and materials that can be repaid through game-changing decarbonization construction BUILDING GREEN Page 24 technologies; and, The low level of investment for green construction largely stems from market failures that make green • Carbon transition bonds and carbon retirement buildings more expensive than they should be, since portfolios can contribute to decarbonizing or in the absence of carbon pricing the social benefit decommissioning brown construction assets. from building green is not reflected in their market Of these green financial instruments, green bonds price. Other market failures, such as the limited have attracted most of the domestic and foreign information on default rates and monetary benefits private financing for green construction between of green building investments, coupled with high 2017 and 2021, although sustainability-linked debt screening and monitoring costs of emission-reduction instruments experienced the highest growth rates targets, further restrict finance for green construction. (Exhibit E).15,16 Equity instruments are less commonly These failures compound with other market failures, used for such financing, though Real Estate the decentralized structure of construction value Investment Trusts have the potential to scale financing chains, and fragmented regulations and policies at of green building construction and operations. The the national and sub-national level. Depending on volume of other innovative green finance tools, such country conditions and fiscal and policy resources, as transition bonds or carbon retirement portfolios, policymakers can take action to mitigate the market is quite small and almost non-existent in emerging failures in construction value chains and remove the markets. bottlenecks to private investment. Measures can include the following: Emerging markets issued only 10 percent of total domestic and foreign private green debt finance for • Improving the efficiency, transparency, and depth construction decarbonization in 2021 (Exhibit F). Of of local financial markets through improved that share, China accounts for 6 percent of the global macroeconomic management and prudential total and the rest of the emerging economies for the regulations is paramount to expanding funding for remaining 4 percent. Private green debt financing building green; for construction is also heavily skewed toward green • Electrification, or replacing fossil fuels for cooling, buildings, with decarbonization of construction heating and cooking with cleaner energies, can materials attracting only 9 percent of the issuance contribute to reducing emissions from building globally. operations; Concerted action by private investors and • Green building codes and standards and other policymakers will be required to reduce regulations can contribute to enticing private emissions from construction value chains. finance into green construction; 15 IFC (2020) provides a broader analysis of the green bond market. 16 Calculations only consider green, sustainability, sustainability-linked, and transition bonds and loans with “green buildings” in the use of proceeds or issued by construction material companies and used for decarbonization. See Annex 3 for more details on the methodology. Page 25 Executive Summary • Governments should take the lead on construction Development finance institutions have decarbonization through greening public buildings critical roles to play in construction value and public procurement, as well as encouraging chain decarbonization. the adoption of carbon transition bonds and Development finance institutions can play an carbon retirement portfolios for decarbonizing and important role in promoting financing toward decommissioning brown plants; construction value chains decarbonization in emerging • Carbon pricing can help internalize emissions markets. They can help to mobilize significant volumes externalities by providing an economic incentive of domestic and international private and public to emitters to either green their production and funds through investing in green bonds and loans lower their emissions or continue emitting and pay and other financial instruments, support innovative the price for their emissions. It can also encourage green financial instruments for decarbonizing brown consumers to switch from brown to green buildings, provide technical assistance for the adoption construction products; of green codes, regulations, and standards, serve as an anchor investor, provide concessional and blended • Compulsory or voluntary carbon markets can financing, and operationalize various supranational unlock domestic and foreign private sector climate funds. investment in construction decarbonization; Concessional finance deployed by development • Green banks can play a role in mobilizing finance finance institutions can provide financial products to for small-scale green building projects that may de-risk private investments through subordinated not otherwise be widely available in the market; loans, equity, and guarantees. Blended finance utilizes and, limited pools of concessional funds to mobilize larger • Subsidies (e.g., grants, below-market-rate loans, sums of private sector financing toward development and direct transfers) and tax incentives (e.g., tax goals, often with climate-related objectives; thereby it breaks) can contribute to financing technologies can provide more impact per dollar than pure grants for construction decarbonization and incentivize while reducing potential misallocation of capital.17 the decarbonization or decommissioning of Concessional and blended finance for building green brown materials’ plants. However, more empirical will need to be scaled up in the poorest countries. evidence is needed on the effectiveness and efficiency of such tools. Many emerging markets How this report is structured also lack the fiscal resources and policy readiness Emerging markets encompass a heterogeneous to manage efficiently these measures, in particular group of countries. Their capabilities for adopting and in low-income countries. implementing mitigation and abatement policies in 17 IFC (2021). BUILDING GREEN Page 26 construction, therefore, vary widely. These countries value chains. The last chapter summarizes the main also differ in their reliance on fossil fuels for driving recommendations for policymakers, private investors, economic growth and diverge in the carbon intensity and other stakeholders for making a reality of the of the production of materials and the construction opportunity for building green in emerging markets in and operation of buildings. the next decade. The report focuses on the prospects for reducing emissions in construction in emerging markets in the next decade, a period where some of the technologies with the largest abatement potential are unlikely to become commercially available without supportive policies. This approach also emphasizes the most plausible path for adopting carbon pricing programs in emerging markets over the next 10 years based on the existing NDCs, rather than simulating the hypothetical carbon prices required to limit emissions below the levels established in the Paris Agreement by 2050. Other recent reports analyze the impacts of global warming and abatement policies on economic growth in the next decades by 2050 and beyond.18 This report is organized as follows. The first chapter details the size, source, and prospects for reducing carbon emissions from construction value chains. The second chapter considers technological improvements that would reduce carbon emissions from the construction and operation of buildings, while the third chapter addresses technologies to reduce emissions from the production of building materials. The fourth chapter outlines the finance now available for green construction, the measures required to improve incentives for green construction, and measures to channel the increased domestic and foreign private financing to emerging markets to achieve a significant reduction in carbon emissions from construction 18 See, for instance, IMF (2022), Chapter 3; and Acemoglu et. al. (2012). IEA (2020) explores the effects of investments and policies promoting energy efficiency on global warming by 2050. CHAPTER 1: Prospects for Reducing Carbon Emissions from Construction BUILDING GREEN Page 28 1.1. Summary report. The operation of buildings is highly energy- and resource-intensive, generating about 20 percent of Emerging markets generate about 70 percent of global emissions. The supply of materials accounts for construction-related emissions globally and that share about 19 percent of global emissions, mainly from the is projected to increase by 2035. Technologies are fossil fuel-powered and energy-intensive processes available or emerging that can reduce emissions across used to produce these materials. The construction construction value chains, both from the operation process itself accounts for only 0.3 percent of global of buildings and from the production of construction emissions, as it relies heavily on relatively less carbon- materials. The speed of the green construction and resource-intensive activities like off-site and on- transition will depend on each country’s income level, site construction services. About 85 percent of total technological and policy readiness, available fiscal and construction emissions globally come from the use of financial resources, and dependance on fossil fuels. fossil fuels in buildings and materials plants while the This chapter examines scenarios for construction- remaining 15 percent comes from process or industrial related emissions reduction in emerging markets and emissions related to the production of cement, steel, the amount of investment that these efforts would and other construction materials.21 require. It also estimates the implications for economic growth in emerging markets over the next decade and The contribution of the operation of buildings to beyond. global emissions accrues over the buildings’ lifetime from the use of energy-intensive and fossil fuel- 1.2. Construction value chains are powered systems, like cooling, heating, and lighting, a major contributor to global CO2 and large appliances, like refrigerators and cookstoves. emissions, particularly from emerging Inefficient envelope insulation and design features markets. (e.g., building placement and exposure to sunlight, window size and rooftops’ heat absorption, and air Construction value chains—that comprise construction circulation) in conventional buildings further increases and operation of buildings and production of heating, cooling, and lighting systems’ energy loads.22 construction materials—account for about 40 percent Retrofitting is extremely expensive today; brown of CO2 emissions globally (Exhibit 1).19,20 Box 1 describes buildings23 account for most of the stock of buildings what is meant by a construction value chain in this 19 This report includes only scope 1, 2 and 3 CO2 emissions coming from energy combustion and economic activity in agriculture, manufacturing, and services. Emissions from other greenhouse gases (e.g. methane) and other CO2 emissions (e.g., from changes in land use) are not considered due to data limitations. Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the firm. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the firm’s value chain. 20 This estimate roughly aligns with recent calculations from IEA (2021) and UN (2021) in which construction accounts for 36 percent of global final energy consumption and 37 percent of energy-related CO2 emissions. 21 IFC staff calculations based on Global Trade Analysis Project data. 22 IEA (2021). 23 Brown buildings refer to buildings not designed or adapted for energy or emissions reduction. Page 29 Chapter 1: Prospects for Reducing Carbon Emissions from Construction EXHIBIT 1 Construction Generates About 40 Percent of Global Carbon Emissions Global CO2 emissions by category Total: 38 billion CO2 tons Rest of global CO2 emissions 60.6% Global construction value chain emissions by region Total: 15 billion CO2 tons Building Production of China High Other operations construction 40% income emerging 20.4% materials 31% markets 18.7% 29% Building construction 0.3% Notes: This report includes only scope 1, 2 and 3 CO2 emissions coming from energy combustion and economic activity in agriculture, manufacturing, and services. Emissions from other greenhouse gases (e.g. methane) and other CO2 emissions (e.g., from changes in land use) are not considered due to data limitations. Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the firm. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the firm’s value chain. Other emerging markets category includes Sub-Saharan Africa. Figures in the text might not be identical due to rounding. Source: IFC calculations based on data from the Global Trade Analysis Project (2022). BUILDING GREEN Page 30 EXHIBIT 2 Cement and Steel Account for About 50 Percent of Carbon Emissions from Construction Materials 41% 7% 43% 10% Other Other Cement Metals services mater- and products ials Total: 6.7 billion CO2 tons Notes: About 50 percent of demand for steel comes from construction (World Steel Association, 2020). About 99 percent of cement production goes to construction (GCCA, 2020). Figures in the text might not be identical due to rounding. Source: IFC staff calculations based on Global Trade Analysis Project and GCCA. globally, even in high-income economies.24 Given the accounts for about 45 percent of those emissions, average lifetime of a building is about 50 years, the while other emerging countries, particularly in Europe stock of brown buildings will keep the contribution of and Central Asia, Middle East and North Africa, and building operations to global carbon emissions high South Asia, explain the rest with about 55 percent of and it will increase as new brown buildings are built in global buildings’ operation-related emissions.26 the absence of additional mitigation and adaptation Materials and construction today generate only efforts.25 22 percent of the emissions of a typical building during About 56 percent of the global emissions from its average 50-year lifespan.27 Most of these embodied buildings’ operation originates in emerging markets. carbon emissions are associated with production This sizable contribution is explained by the prevalence materials, with around half of these emissions of brown buildings and appliances in emerging generated by cement and steel.28 Embodied carbon markets relative to high-income countries. China refers to the carbon emissions associated with the 24 See Sections 2.2. and 3.3 on the current landscape and prospects for retrofitting buildings. 25 IEA (2020). 26 IFC staff calculations based on Global Trade Analysis Project. 27 WBCSD/ARUP (2021) Exhibit 1 measures emissions from manufacturing construction materials in the base year 2022 rather than emissions resulting from the materials’ production over the building’s lifespan. 28 Material Economics (2018). Page 31 Chapter 1: Prospects for Reducing Carbon Emissions from Construction BOX 1 What Is a Construction Value Chain? Schematic Representation of the Construction Value Chain The construction value chain is a complex network with multiple stages and stakeholders. The diagram shows that the value chain of Material and Operations End of Life construction and operation of buildings and Construction Phase Phase Demolition ~3-5 years ~50 years other infrastructures comprises three main stages with varying duration: (a) materials and construction (3–5 years); (b) operations (up to 50 years); and (c) end of life (demolition). Three main decision makers intervene over the life cycle of buildings and other constructions: (a) material manufacturers; (b) developers; and (c) users. Government regulations play a key role in shaping the availability and emission-intensity of materials and the design and specifications of Government construction. Users determine emission intensity regulations and waste generation in the operation phase. Financial institutions and investors influence Architects, engineers, the supply of materials and construction, while consultants Decision influencers architects, engineers and other specialists can affect design and construction specifications. Banks, investors The construction value chain plays a crucial role in the global economy. Investment in construction accounts for 15 percent of global GDP and about 10 percent of the GDP in Buyers emerging markets.* Construction is the main component of investment in most economies. Therefore, it is a key driver for aggregate Occupiers demand and economic growth. Construction is also a labor-intensive activity, generating millions of low-skilled jobs in emerging markets. Materials The value chain also encompasses some of the Manufacturers Decision makers main industrial activities, like cement and steel, along with an extended network of downstream on-site and off-site services like logistics and Developers transportation, among others. * IFC calculations based on Global Trade Analysis Project and WEO. Owners BUILDING GREEN Page 32 EXHIBIT 3 Cement Is the Most Carbon-Intensive Activity Globally Cement 6.9 kg CO2 per $1 of output Electricity 4.6 Coal 2.4 Iron and steel 1.9 Non-ferrous metals 1.5 Other non-metallic minerals 1.3 Transport 1.2 Gas 0.9 Notes: Output is calculated as the sum of value added and intermediate consumption by activity. Only the top 10 most carbon intensive activities Metals casting 0.9 globally are included. Carbon intensity is estimated as the ratio between total carbon emissions and output by sector. Emissions only include process and industrial emissions; those generated by methane are not Chemical products 0.8 included. Figures in the text might not be identical due to rounding. Source: IFC staff calculations based on Global Trade Analysis Project and GCCA. materials and construction processes throughout The contribution of construction materials to global the whole life cycle of a building or infrastructure. emissions is, in turn, mostly due to the production of It includes material extraction, transport to the cement and steel. The construction industry consumes manufacturer, manufacturing, transport to site, almost all the world’s cement and nearly half the steel construction, use phase (e.g., concrete carbonation produced.30 Cement and concrete production generate but excluding operational carbon from, for example, about 43 percent of the emissions from materials, energy use of the building or infrastructure), steelmaking about 10 percent, and other materials maintenance, repair, replacement, refurbishment, about 7 percent.31 Construction materials are also deconstruction, transport to end-of-life facilities, heavy users of other highly carbon-intensive activities, processing, and disposal.29 mainly electricity, transportation, and other services, 29 Material Economics (2018). 30 Karlson et. al (2020). 31 About 50 percent demand for steel comes from construction (World Steel Association, 2021). About 99 percent of cement production goes to construction (GCCA, 2021). Page 33 Chapter 1: Prospects for Reducing Carbon Emissions from Construction which account for the remaining approximately 40 percent of EXHIBIT 4 emissions (Exhibit 2). Construction-Related Emissions According to this report’s in Emerging Markets, 2022 calculations, cement is the most carbon-intensive activity globally Percent of total, excluding China (about 7 CO2 kg eq per $1 of sia A output), and steelmaking (iron Central and steel) is the fourth most intensive (about 2 CO2 kg eq per pe and $1 of output). Other materials s ica and activities heavily used in 7.2 Euro er m construction, such as electricity, eA ia th a Ind carbon, non-ferrous metals, other ric d Af an rth 6.3 sia non-metallic minerals, transport, No eA nd m a metal casting and chemical st co a eE -in products, are also among the dl ow id c M acifi eP 8L 8 top 10 most carbon intensive 5. and th 0. a Asi (Exhibit 3). The carbon intensity he ast out of S of cement and steel derives in est 2 .7 R part from the massive amounts of energy needed to generate the high esia 1.5 Indon temperatures required to produce these materials. This energy is still 2.4 Rest o f Latin Am mainly dependent on fossil fuels, erica and the Carib bean especially in emerging markets. 0.8 Bra zil The chemical processes involved in 0. producing these materials are also 8R es to a large source of emissions.32 fS 0. ub 5S -S 0.1 a ou ha 0.1 Ethio ra th Against this backdrop, emerging Nig n Af Af ric eria ric markets generate more than a a pia 70 percent of total construction- Notes: Only the largest countries measured by population are reported due to data limitations. Color of categories corresponds to the official World Bank Group regions. Figures in the text might not be identical due to rounding. Source: IFC staff calculations based on Global Trade Analysis Project and GCCA. Hasanbeigi (2021). See Box 4 in Chapter 3 for an 32  explanation of how cement and steel are produced. BUILDING GREEN Page 34 EXHIBIT 5 Emerging Markets Account for About 90 and 70 Percent of Global Cement and Steel Production Cement 11% 61% 26% 2% Steel 33% 54% 12% 1% High income China Other emerging markets Sub-Saharan Africa Notes: Figures in the text might not be identical due to rounding Source: IFC staff calculations based on Global Trade Analysis Project and GCCA. related emissions globally today. China is the largest construction-related emissions), followed by Ethiopia contributor, accounting for about 40 percent of and Nigeria (both with 0.1 percent). In Southeast Asia the world’s construction-related emissions. Other and the Pacific, Indonesia contributes the largest emerging markets contribute about 30 percent share of global construction emissions (1.5 percent). (Exhibit 1).33 Brazil is the largest emitter in Latin America and the Caribbean, with about 0.8 percent of global In other emerging markets excluding China, Central construction emissions (Exhibit 4). Table 2.3 in Annex Asia and Europe accounts for about 7 percent of global 2 shows the projected contribution of each country to construction emissions, and India and the Middle East construction-related emissions by country grouping, and North Africa follow with about 6.3 percent and region and globally between 2022 and 2035. 5.8 percent, respectively. In Sub-Saharan Africa, South Africa is the largest emitter (0.5 percent of global 33 Other emerging markets includes Sub-Saharan Africa unless stated otherwise. Page 35 Chapter 1: Prospects for Reducing Carbon Emissions from Construction Within construction value chains, emerging markets account EXHIBIT 6 for about 83 percent of global carbon emissions generated by Construction Materials Production Is More the production of construction Carbon Intensive in Emerging Markets materials. For instance, China Than in High-Income Countries generates about 68 percent of Average CO2 kg eq. emissions per unit of output cement emissions and about 62 percent of steel emissions globally. Cement Other middle-income emerging markets account for 26 percent of China 8.4 global emissions from construction materials.34 The contribution of Sub-Saharan Africa 7.0 low-income countries is marginal. This disproportionate contribution Other emerging markets 6.9 of middle-income emerging countries in part reflects their High income 4.4 decisive role in the supply of these materials globally. They account for about 90 percent of the world’s Iron and steel cement production and about 67 percent of steel. China explains Other emerging markets 1.9 about half of that, but other large emerging markets such as India, China 1.5 Indonesia, Brazil and other South Asian and East Asian countries have been rapidly expanding production, Sub-Saharan Africa 1.6 driven by their rising per capita incomes, growing urbanization, and High income 0.6 increased investments in buildings and infrastructure. Emerging 0 2 4 6 8 10 Average CO2 kg eq. emissions per unit of output markets excluding China produce about 26 percent of cement Notes: Output is calculated as the sum of value added and intermediate consumption by sector. Figures in the text might not be identical due to rounding. Source: IFC staff calculations based on Global Trade Analysis Project and GCCA. 34 IFC staff calculations based on Global Trade Analysis Project. BUILDING GREEN Page 36 and about 12 percent of steel globally. Sub-Saharan about 30 percent in 2000. By contrast, the share of Africa has a minor participation in the supply of both high-income countries in construction investment materials. High-income countries only account for declined from more than 70 percent to less than about 11 percent of the global supply of cement and 50 percent over the same period. Overall, investment about 33 percent of steel (Exhibit 5). Table 2.1 and 2.2 in construction and materials accounts for about in Annex 2 shows the contribution of each country by 20 percent of the combined GDP of emerging region to the production of cement and steel in these markets.37 country groupings and globally. The significant contribution of large emerging markets 1.3. Emissions from construction are to the emissions from construction materials also set to rise and are off track to meet reflects reliance on relatively more carbon-intensive construction climate commitments. production methods. For instance, emerging markets The Paris Agreement calls for every building to be produce steel with almost three times more emissions net-zero carbon (highly efficient and powered from per unit of output than developed economies (Exhibit renewable energy sources, with any emissions offset) 6). Similarly, cement production in emerging markets by 2050. Only 5 percent of new buildings, however, are is much more carbon-intensive than in high income net-zero and less than 1 percent of these buildings are countries. Use of more polluting energy sources, built with zero-carbon specifications today.38 like heavy fuel oils and coal, and more energy- and As the expected life span of buildings constructed resource-intensive equipment mainly account for today is about 50 years, the construction methods of these large differences in carbon-intensity of cement today determine emissions and energy consumption and steel production between developing and of buildings for the foreseeable future. Non-carbon- developed economies.35  neutral buildings will also need to be retrofitted in the Finally, high levels of construction emissions by next 30 years.39 Retrofit rates are insufficient, however, emerging markets also reflect the rapid growth of as average annual retrofit rates in buildings amount investment in new buildings and materials in these to less than 1 percent of the buildings stock per year in countries, particularly in middle-income economies.36 most major markets, even in high income countries. Today, emerging markets account for about half of Because of its high costs, moving aggressively in deep the global investment in construction (China alone retrofitting or decommissioning brown buildings, has about a quarter of the global total), up from however, will be challenging for most economies and it 35 World Bank, mimeo. 36 Investment in this report refers to gross fixed capital investment in the construction sector in the Global Trade Analysis Project database. See Annex 1. 37 IFC staff calculations based on Global Trade Analysis Project. 38 A zero carbon ready building is highly energy efficient and either uses renewable energy directly or uses an energy supply (e.g., electricity or district heating) that will be fully decarbonized by 2050. IEA (2020). 39 IEA (2020). Page 37 Chapter 1: Prospects for Reducing Carbon Emissions from Construction EXHIBIT 7 Dissemination of Green Building Measures by the Private Sector Has Been Limited Outside High-Income Countries and Large Emerging Markets 2015: Positive sentiments share related to 'Green Building Certification' share of positive documents by country 61%-100% 46%-60% 31%-45% 16%-30% 0%-15% No data 2021: Positive sentiments share related to 'Green Building Certification' share of positive documents by country 61%-100% 46%-60% 31%-45% 16%-30% 0%-15% No data Notes: Analysis based on identifying selected keywords on green building certifications and construction methods in company’s documents using artificial intelligence text-recognition methods, natural language processing, and machine learning. Algorithms assess the tone of a transcript on a spectrum of positive to negative. The scale measures the share of company’s documents registering positive “sentiment” by country. The data only includes company’s documents in English. Source: IFC and IBRD DEC based on Facset https://www.factset.com/solutions/data-solutions. BUILDING GREEN Page 38 will therefore most likely not be a priority for middle- potential investment opportunities. The summary of and low-income countries in the years to come. results of the simulations of the model employed in this report are presented in the following paragraphs. More than 110 countries lacked mandatory building energy codes or standards in 2021, meaning that more In the absence of additional efforts to reduce than 2.4 billion square meters of floor space were emissions (the no mitigation scenario described in built last year without meeting any energy-related Box 2), the results of the model suggest that total performance requirements—the equivalent of Spain’s construction-related emissions would increase by entire building stock.40 about 13 percent between 2022 and 2035 globally. About 45 percent of this increase reflects the rapid Lack of adequate building codes, insufficient green investment in conventional carbon-intensive buildings financing, and the dearth of technical and enforcement and construction materials in emerging markets other capabilities explain the sparsity of low-emission than China, driven by fast urbanization and economic buildings and materials in least developed economies, growth in India, East Asia and the Pacific, the Middle and some middle-income economies. The highly local East and North Africa and Sub-Saharan Africa. China’s and decentralized organization of the construction contribution to the increase in emissions will be industry also makes designing and enforcing consistent moderate due to the existing excess supply of cement, green building regulations and standards challenging steel, and other materials as well as the already in many emerging markets, especially in some Latin massive stock of buildings (Exhibit 8). Low-income American and Southeast Asian economies.41 economies would make only a marginal contribution. This report employs a computable general equilibrium Table 2.3 in Annex 2 provides the projected trajectory dynamic-circular economy model to analyze of construction-related emissions by country and alternative scenarios for construction value chains region. Only the major countries measured by decarbonization in emerging markets by 2035 (See purchasing power parity-adjusted GDP are displayed Box 2 and Annex 1 for a detailed description of the there due to data limitations. model and the scenarios). Computable general The operation of buildings will account for most of the equilibrium models provide an indication of plausible projected rise in construction-related emissions. Its paths of construction carbon emissions and the contribution will increase from about 50 percent of economic effects of alternative policy options rather construction emissions in 2022 to about 60 percent by than precise numerical estimates. These models 2035. In the absence of vigorous mitigation efforts (the offer valuable guidance to policymakers and private no mitigation scenario in Box 2), this will be mainly investors for the design and deployment of mitigation propelled by the construction of new brown buildings, and adaptation measures and the identification of and therefore, by the expansion of the stock of 40 IEA (2021). 41 World Bank (mimeo); and IEA (2020). Page 39 Chapter 1: Prospects for Reducing Carbon Emissions from Construction EXHIBIT 8 Global Construction Emissions Are Projected to Grow +13% 16,943 16,464 15,804 15,019 Millions of CO2 equivalent tons 6,735 China 6,775 6,524 6,069 5,184 Other emerging markets 4,699 4,869 4,662 4,820 5,023 High-income countries 4,289 4,580 2022 2026 2030 2035 Notes: See Box 2 and Annex 1 for a description of the model used for the projections. Other emerging markets include Sub-Saharan Africa. Figures in the text might not be identical due to rounding. Source: IFC staff calculations based on Global Trade Analysis Project. carbon- and energy-intensive buildings.42 Retrofitting and promoting novel mitigation and adaptation is costly, and the construction of new energy-efficient technologies not commercially viable today through buildings, and the expected progressive greening of the fiscal incentives. Most middle- and low-income energy grid, is unlikely to offset the emissions coming economies are likely to focus more on seizing ‘low- from conventional brown buildings without decisive hanging-fruit’ measures with moderate costs like additional mitigation efforts in the next decade.43 green codes, regulations and standards and already commercially available technologies. With financial Against this backdrop, in the next decade, advanced and technical support from development finance economies will most likely concentrate their policy institutions, some upper-middle income countries efforts on scaling up carbon pricing programs, could also accelerate the piloting of promising adopting stricter green codes and standards, 42 IFC staff calculations based on Global Trade Analysis Project. 43 IEA (2020). See Chapters 2 and 4. BUILDING GREEN Page 40 EXHIBIT 9 South Asia Will Be Driving the Increase in Construction Emissions in Emerging Markets 1,268 South Asia Millions of CO2 equivalent tons 1,167 1,058 1,150 Europe and Central Asia 1,083 1,043 1,039 Middle East and North Africa 920 861 726 East Asia and the Pacific (excl. China) 622 674 604 Latin America and the Caribbean 460 518 294 396 Sub-Saharan Africa 2022 2027 2035 Notes: See Box 2 and Annex 1 for a description of the model used for the projections. Only the major countries measured by GDP adjusted by purchasing power parity are displayed here due to data limitations. Figures in the text might not be identical due to rounding. Source: IFC staff calculations based on Global Trade Analysis Project. technologies with high abatement potential like green due to the presence of economies with abundant and hydrogen.44 intensive use of fossil fuels in the operation of buildings and production of materials. Latin America and the Looking at the regional distribution in the simulations, Caribbean, and especially Sub-Saharan Africa, would the model’s results suggest that, in the absence only make a minor contribution (Exhibit 9). of additional mitigation efforts (the no mitigation scenario in Box 2), rapid population and economic The growth in construction activity will be mainly growth in South Asia and East Asia and the Pacific, propelled by expansion in building floorspace in especially in India and Indonesia, and to a lesser emerging markets, especially in high growth South extent, in Europe and Central Asia, would drive the Asian and East Asian countries, like India, Indonesia, increase in global construction emissions. The Middle and Malaysia. Building floorspace is expected to East and North Africa would follow in importance increase by a factor of two to three in developing 44 See Chapter 4. Page 41 Chapter 1: Prospects for Reducing Carbon Emissions from Construction BOX 2 Modeling Alternative Scenarios for Construction Investment and Emissions by 2035 Given the complexity of construction effects cause, in turn, changes in total taxes on all sectors to achieve NDC value chains in their interactions emissions. targets. Scenario c) is simulated by with the broader economy and the applying carbon taxes on electricity environment, IFC has partnered with The model represents the economy as generation for buildings operations and the Global Trade Analysis Project (GTAP) a circular flow in which firms acquire construction materials, and assuming at Purdue University, which developed factors (e.g., labor, capital, materials, improvements in the use of energy. for this report a computable general energy, etc.) to produce goods and Scenario d) is simulated by applying equilibrium–circular economy (CGE- services. Households, in turn, receive taxes directly on the stock and flow CE) model. The model aggregates income from firms (e.g., wages, capital of brown buildings and materials information on national accounts, gains, etc.), and demand goods and and direct subsidies to low-emission balance of payments, and input-output services produced by firms. Equality alternatives (Annex 1). matrices in a consistent representation of supply and demand determines of the dynamic inter-dependencies equilibrium prices for factors, goods, The simulations focus on a time span across sectors, agents, and markets. and services. Using the economic (the next decade, 2022-2035) when and environmental data described most of the technologies with the To analyze the effects of economic above, the model is calibrated to largest abatement potential, like green and population growth and alternative this theoretical representation of hydrogen and carbon storage, are mitigation policies on emissions the economy for the baseline year unlikely to become widely adopted and other environmental indicators, of 2022 and solved as a sequence of without supportive policies (IEA, 2023). the CGE-CE model incorporates an comparative static equilibria where This approach also emphasizes the explicit representation of production inputs are linked over time. most plausible path for adopting carbon technologies (e.g., primary, secondary, pricing in emerging markets based on and recycling activities) and materials For this report, the model simulates the existing NDCs, instead of simulating (e.g. steel, cement, glass, fossil fuels, four scenarios: a) no mitigation, which the hypothetical carbon prices required minerals, among others). By capturing assumes continuation of the current to limit emissions below the levels changes in both supply and demand, climate policies without additional established in the Paris Agreement. the model simulates adjustments in the mitigation measures; b) NDC, which Annex 1 provides the carbon prices economy following the implementation assumes countries comply with their by country and region used in the of a policy shock. Nationally Determined Contributions simulations, considering the expected (NDCs); c) energy efficiency, that differences in the level and velocity of For instance, if carbon pricing is includes compliance with the NDCs, and adoption of carbon pricing programs adopted, this leads in the model to electrification of brown buildings with between high-income economies and higher prices in brown primary and cleaner energies and decarbonization emerging markets. It also provides secondary activities, reduced demand of construction materials and new further details about the model for brown goods, as well as shifts in buildings with non-fossil fuels and employed in the report. the supply mix by increasing the share improved energy efficiency; and d) net- of low-carbon activities in output zero-aligned that includes compliance and employment. Carbon prices also with NDCs, and direct taxation of induce changes in carbon and energy brown buildings and materials and intensity of total output. These demand subsidies to green alternatives. Scenario and energy- and carbon-intensity b) is simulated by applying carbon BUILDING GREEN Page 42 countries by 2060.45 According to this report’s to well below today’s levels. Chapters 2 and 3 calculations using the model described in Box 2 and discuss these existing and emerging technologies Annex 1, emerging markets could account for about and Chapter 4 examines the policies and financing half of global construction investment by 2035 in the required to achieve the projected reduction in global no mitigation scenario. construction emissions. Despite the expected deceleration of its economy,46 The model employed in this report focuses on two China is still likely to account for a quarter of the alternative, but not necessarily exclusive, pathways world’s construction investment because of the or scenarios for reducing carbon emissions in combination of new investments and the need to construction value chains by 2035 (See Box 2 and maintain the existing stock of buildings and other Annex 1). One pathway involves accelerating the structures. The contribution of other emerging attainment of the net zero emissions target set by markets is expected to rise to about 25 percent, with the Paris Agreement by 2050 by boosting the stock most of the construction occurring in India and other of green buildings and materials through widespread Asian economies. carbon pricing and fiscal support measures (the net zero-aligned scenario in Box 2). Another pathway The share attributable to Sub-Saharan Africa and involves fostering the adoption of ‘low-hanging low-income economies in other regions would be fruit’ technologies, such as electrification of brown relatively small, at 3 percent, despite the region more buildings, energy-efficient buildings and materials, and than doubling its construction investment in absolute cleaner energies through measures with moderate terms. In contrast, the construction investment share economic costs (the energy efficiency scenario in of high-income economies is likely to decline from Box 2). 50 percent in 2022 to 48 percent by 2035 due to decelerating population and economic growth.47 These scenarios entail tradeoffs between accelerating now the decarbonization of hard-to-abate sectors 1.4. A combination of available and and the potential costs in terms of foregone output emerging technologies and policy actions and investment required by 2035. When and how can reverse the growth in construction emerging markets start down these pathways value chain emissions. towards construction decarbonization would depend on country conditions, available financing, Compliance with the NDCs and construction- technological and policy readiness, and dependence specific mitigation policies and novel and available on fossil fuels. The simulations of the model described technologies could bring down construction emissions 45 UN Environment and IEA (2017). 46 China’s GDP growth is expected to decelerate from an average 6 per cent per year in 2014–2022 to 4 percent in 2022–2035 (Global Trade Analysis Project model calculations based on near-term outlook in WEO (2022). 47 IFC staff calculations based on Global Trade Analysis Project (2022). Page 43 Chapter 1: Prospects for Reducing Carbon Emissions from Construction EXHIBIT 10 Global Construction Emissions Could Decline by 13 Percent Below the 2022 Level by 2035 with Decisive Action in Construction Value Chains 18,000 17,000 No mitigation +12.8% 16,000 Millions of CO2 equivalent tons 15,000 Nationally -3.6% Determined Contributions 14,000 (NDCs) -12.8% 13,000 Energy E ciency (including NDCs) 12,000 2022 2025 2028 2031 2034 Notes: The exhibit shows the results of the simulations for the no mitigation, Nationally Determined Contributions (NDCs), energy-efficiency and net zero-aligned scenarios described in Box 2 and Annex 1. Castro et. al mimeo simulates alternative scenarios. The NDC scenario simulates the effects of complying with the NDCs emission-reduction targets set in the Paris Agreement. The energy-efficiency scenario simulates the effects of sector- specific measures geared towards cleaning the energy mix and improving the energy efficiency of buildings and materials plus compliance with the NDCs. The net zero-aligned scenario simulates the impacts of widespread carbon pricing on brown buildings and materials and subsidies to green alternatives plus compliance with the NDCs. The drop in emissions in the net zero-aligned scenario is similar to the decline in emissions in the energy efficiency scenario and it is therefore not shown here. Figures in the text might not be identical due to rounding. Source: IFC calculations based on data from the Global Trade Analysis Project (2022) and Global Climate Change Alliance (2021). BUILDING GREEN Page 44 in Box 2 and Annex 1 explore these potential tradeoffs. abate activities, such as construction and operation of Section 1.4 presents the results of the model for the buildings and materials, to meet the climate goals set investment needed to reduce construction emissions in the Paris Agreement. in the next decade, while Section 1.5 presents the These results also suggest that buildings and results pertaining to foregone output under the two construction materials will not decarbonize in the scenarios. years to come without decisive policy action, private Exhibit 10 shows the simulated trajectories of total sector investment, and widespread adoption of construction-related emissions globally under the existing abatement technologies and practices.50 no mitigation scenario and the energy efficiency Novel technologies hold the promise of net zero scenario, using the model depicted in Box 2 and Annex buildings and materials, but they are expected to 1. According to the simulations, construction emissions remain non-economically viable without fiscal support would not only decline in the energy efficiency by 2035 and beyond.51 scenario by about 13 percent globally with respect The speed and depth of the policies required to to 2022—equal to about 1.9 billion CO2 equivalent promote the adoption of these existing and novel tons —but they would also fall by about 23 percent, technologies will vary across countries in the next about 3.8 billion CO2 equivalent tons, relative to the decade. Countries that have already made significant no mitigation scenario (Exhibit 10). The 13 percent progress in decarbonizing activities with lower reduction relative to today’s levels is equivalent to the marginal abatement costs, such as energy supply total emissions from the construction value chain in and transportation, and that possess adequate fiscal the United States in 2022; when compared with the space may be able to move faster in deploying carbon decline relative to the no mitigation scenario in 2035, it pricing and promoting technologies that are non- would be equivalent to the combined emissions of the commercially available today. With adequate policy United States, the European Union, and the rest of the and regulatory frameworks and international financial OECD countries.48 and technical support, middle-income economies The simulations also suggest that by 2035 global total could be able to reap the benefits of already carbon emissions, including construction and the rest commercially available technologies, and the piloting of the economic activities, would decline by about 19.8 of novel mitigation and adaptation technologies. Low- percent in the energy efficiency scenario compared income countries will need assistance to start walking with the no mitigation scenario due to the drop in the path towards building green in the years to come construction emissions.49 These results emphasize the (See Chapter 4). need to pave the way now for decarbonizing hard-to- 48 IFC staff calculations based on Global Trade Analysis Project (2022). 49 IFC calculations based on Global Trade Analysis Project (2022). 50 Castro et. al, mimeo. 51 IEA (2023). Page 45 Chapter 1: Prospects for Reducing Carbon Emissions from Construction The results of the simulations suggest that the the road towards building green in emerging markets operations of buildings would account for about three would require sequencing the decarbonization of quarters of the 23 percent projected decline in global construction value chains by 2035. Reducing the construction emissions by 2035 in the energy efficiency energy and carbon intensity of new buildings and scenario compared to the no mitigation scenario materials or electrifying the stock of brown buildings (Box 2). This would occur through the electrification with cleaner energies, for instance, could contribute to of brown buildings with renewable energies, the reducing emissions with moderate economic costs in construction of new net-zero carbon and resilient the next decade (See Section 1.6). buildings, and other mitigation and adaptation Commercially available measures and technologies, alternatives. The increased supply of cleaner cement such as improving thermal and energy efficiency and and steel, spurred by the increased use of renewable switching to less carbon intensive inputs and non- energy, low-emission raw materials, and improved fossil fuels, can also contribute to reducing emissions energy and thermal efficiency, would account, in from construction materials now. Retrofitting brown turn, for about 25 percent of the projected drop in plants or buildings could potentially yield sizeable emissions. Greening the construction activity itself reductions in global emissions, but the high costs would only have a marginal contribution as it relies on are likely to limit substantial progress in this area relatively less carbon- and energy-intensive activities in the next decade in most emerging markets (See like off-site and on-site construction services.52 Chapter 3). In the longer term, widespread adoption of On average, global construction-related emissions carbon pricing and technologies with high abatement decline by about 2 percentage points per year in potential, but not commercially available now, the energy efficiency scenario relative to the no could further decrease construction emissions (See mitigation scenario. Of this, 1.4 percentage points Chapter 4). come from reductions in energy intensity of buildings Against this backdrop, emerging markets would and materials, while 0.6 percentage points come from account for more than half of the approximately a decline in carbon intensity. Construction output 23 percent decline in global construction-related would experience only a minor deceleration (a drop of emissions in the energy efficiency scenario relative 0.04 percentage points per year).53 to the no mitigation scenario (Box 2). According to Depending on the expected abatement costs the projections, China’s contribution to the drop in and emission-reduction potential of alternative emissions would be 10.3 percentage points, while other technologies,54 the results of the model suggest that emerging markets and Sub-Saharan Africa would 52 IFC staff calculations based on Global Trade Analysis Project. 53 Energy intensity refers to the unit of energy used per unit of construction output, while carbon intensity refers to the unit of CO2 metric ton per unit of energy consumed in construction. Castro et. al, mimeo present a detailed decomposition of these carbon and energy intensity and total demand effects The 2 percent average yearly drop in emissions refers to the decline in emissions of about 23 percent in the energy-efficiency scenario compared to the no mitigation scenario between 2022 and 2035. 54 Chapters 2 and 3 analyze the economic costs and abatement potential of alternative technologies and measures for buildings and materials, respectively. BUILDING GREEN Page 46 EXHIBIT 11 Emerging Markets Will Account for Most of the Expected Reduction in Construction-Related Emissions Sub-Saharan Africa -0.1% Other Emerging Markets -2.4% High Income -9.9% China Total -10.3% -22.7% Notes: The exhibit depicts the contribution of each region to the change in construction-related emissions in the policy scenario relative to the no mitigation scenario (See Box 2 and Annex 1). The contribution is calculated by multiplying the share in global emissions in the base year by the percentage change in emissions for each region. Castro et. al, Forthcoming explore alternative scenarios and assumptions for the simulations. Figures in the text might not be identical due to rounding. Source: IFC based on Global Trade Analysis Project and GCCA. contribute 2.4 and 0.1 percentage points, respectively, The results of the model also suggest that the net to the decline (Exhibit 11). zero-aligned scenario (Box 2) would achieve a similar 13 percent reduction in global construction emissions Emissions from middle- and low-income economies as the energy efficiency scenario and also place are set to experience a more moderate decline in construction value chains closer to the goal of net construction emissions because of their expected zero emissions set by the Paris Agreement by 2050 by higher growth rates, less developed carbon pricing increasing the relative importance of green buildings and regulations,55 and more carbon and energy- and materials in total construction investment. This intensive construction and operation of buildings and alternative would, however, entail significantly higher construction materials, even in the energy efficiency investment needs and economic costs by 2035 scenario. 55 See Section 4.4 for an analysis of carbon pricing programs in emerging markets. Annex 2 provides the assumed carbon prices used in the simulations employing the model described in Box 2. Construction value chains emissions reductions by country/region in the “energy efficiency” and “net-zero-aligned” scenarios are roughly proportional to the reductions in the NDC scenario. Page 47 Chapter 1: Prospects for Reducing Carbon Emissions from Construction than the energy efficiency scenario, particularly for energies than developed economies. According to emerging markets, as shown in the next two sections. the model described in Box 2, in emerging markets excluding China, investments in cleaner brown 1.5. $1.5 trillion in investment in buildings and new green buildings would amount to emerging markets is needed to achieve the $160 billion in the next decade, compared to $2 trillion emissions-reduction goal in construction. in high-income economies in the energy efficiency scenario in comparison with the no mitigation According to the model described in Box 2 and Annex 1, scenario. Investment in China would amount to reducing construction-related emissions by 13 percent $1.3 trillion (Exhibit 12). between 2022 and 2035 would require cumulative investments in electrifying brown buildings with Construction practices and technologies in cleaner energies and energy efficient new buildings emerging markets are more carbon intensive than and materials of about $3.5 trillion globally (Exhibit 12), in high-income countries, especially in fast-growing 56 supported by complementary policy reforms.57 economies with higher shares of fossil fuels in the energy mix.59 More importantly, the expected faster The simulations also suggest that the alternative pace of both population and economic growth in path to reduce construction emissions by shifting emerging markets over the next decade could allow construction investment towards greener alternatives for available energy-efficient technologies to be through widespread carbon pricing and fiscal embedded in existing and new buildings rather than incentives (the net zero-aligned scenario in Box 2 and deeply retrofitting or retiring existing brown assets.60 Annex 1) would be a much costlier solution. This path would require cumulative investments of about $6 The results of the simulations of the energy trillion globally by 2035, about twice the investment efficiency scenario using the model depicted in Box 2, required for electrifying conventional buildings and suggest that most of the $1.5 trillion investment new energy-efficient buildings and materials powered needs in emerging markets would be channeled to by cleaner energies (the energy efficiency scenario in electrification of brown buildings and new, more Box 2).58 energy efficient buildings and materials, powered with cleaner energies. Around 75 percent of investment Emerging markets offer more cost-effective would be funneled into cleaning the energy mix opportunities to reduce carbon emissions in of brown buildings and new green buildings with construction value chains through investments in lower energy and water consumption, less polluting electrification, energy efficiency and renewable waste management systems, low-carbon embodied 56 Investment refers to gross fixed capital investment in the construction sector in the Global Trade Analysis Project database. See Annex 3. 57 Chapter 4 examines in detail the policies and financing required for incentivizing investment in green construction in emerging markets. 58 IFC calculations based on Global Trade Analysis Project (2022). 59 IEA (2020). 60 IEA (2021). BUILDING GREEN Page 48 EXHIBIT 12 Investment Needs for Building Green Will Amount to $1.5 Trillion in Emerging Markets in the Next Decade High Income Total $2.01 trillion $3.50 trillion China $1.33 trillion Other Emerging Markets $0.16 trillion Notes: Investment needs are calculated as the difference between investments in electrification of brown buildings with renewable energies and new buildings and materials powered with low-emission energies in the no mitigation scenario and the energy efficiency scenario. See Box 2 for an explanation of the model and scenarios. Figures in the text might not be identical due to rounding. Source: IFC calculations based on data from Global Trade Analysis Project, Global Climate Change Alliance, International Energy Agency and other sources. materials, carbon offsets and use of renewable electrified brown buildings and green buildings with energies. Increased supply of less carbon-intensive renewable energies and improved energy efficiency cement, steel, and other materials would absorb for emerging markets by region, assuming that about 20 percent of the required investment for the construction materials and services are already decarbonizing construction value chains in emerging embedded in the buildings. Section 3.5 analyzes some markets by 2035.61 The remaining 5 percent would specific investment opportunities in green cement finance built environment-related services on and off and steel. construction sites.62 Of the additional $160 billion in green construction Employing the model described in Box 2, Exhibit 13 investment in emerging markets other than China further disaggregates the projected investment in between 2022 and 2035, Latin America and the 61 IFC calculations based on Global Trade Analysis Project (2021); and GCCA (2021). 62 IFC calculations based on Global Trade Analysis Project (2021); and GCCA (2021). Page 49 Chapter 1: Prospects for Reducing Carbon Emissions from Construction EXHIBIT 13 Investment in Building Green Would Be Largest in Residential Housing Investment needs by region and building type, 2022–2035, $ billion Europe & Sub-Saharan Middle East Latin East Asia South Asia Total Central Asia Africa & North America & Pacific Africa the Carribean O ce 0.4 0.5 0.5 1.1 0.4 0.7 3.6 Retail 0.8 0.4 0.4 1.2 0.4 1.0 4.3 Education 1.0 1.1 0.8 3.4 0.4 0.6 7.3 Healthcare 0.4 0.4 0.5 0.8 0.1 0.2 2.4 Hotels & Restaurants 0.3 0.1 0.2 0.7 0.2 0.4 1.8 Institutional/Assembly 0.3 0.3 0.4 0.3 0.1 0.2 1.5 Warehouse 0.2 0.3 0.2 0.5 0.1 0.2 1.5 Total Commercial 3.4 3.0 3.0 8.1 1.7 3.2 22.4 Single-Family Detached 10.4 8.1 8.9 47.9 5.8 12.8 94.0 Multi-Unit Residential 3.9 1.3 3.0 20.7 5.4 9.4 43.6 Total Residential 14.3 9.4 12.0 68.6 11.2 22.2 138 Grand Total 17.6 12.4 14.9 76.7 12.9 25.4 160 Notes: Investment in materials and construction services are already embedded in the investment by type of building and structure. The coloring is comparing building types within a region. Within a region, the building type with the highest value has the brightest blue color. These forecasts differ from the estimates presented in IFC, 2019 because the model used in this report considers the dynamic effects of investments in green buildings on investment in conventional alternatives as well as the effects of the latter on other markets and sectors and the entire global economy between 2022 and 2035. See Box 2 and Annex 1 for an explanation of the model and scenarios. Figures in the text might not be identical due to rounding. Source: IFC staff calculations based on Global Trade Analysis Project and IFC (2019). Caribbean, South Asia and Europe and Central Asia This amount of investment implies a major scale- would account for about $77 billion, $25 billion, and up in funding for investment in building green in $18 billion. In the Middle East and North Africa and East emerging markets. According to IFC calculations, local Asia and the Pacific, the investment would amount and foreign private green debt finance—bonds and to about $15 billion and $13 billion. Green building loans—for decarbonizing the construction value chains investment would amount to $12 billion in Sub- amounted globally to $230 billion in 2021, with only Saharan Africa. About 86 percent of the investment $23 billion issued in emerging markets. Less than half of would be directed to residential buildings (a half of this amount was issued in emerging markets outside that in Latin America), especially in single-family China (See Chapter 4). detached housing. BUILDING GREEN Page 50 In the next decade, new buildings and plants will Existing evidence indicates that without reductions still have to be built, and therefore, investment will in high-emission activities, climate change is have to be financed in emerging markets. Financial expected to have an increasingly negative impact markets offer an opportunity to channel domestic on the global economy, particularly in the period and international capital to investments in green after 2050. Rising temperatures caused by increasing construction in emerging markets with the adequate emissions dampen agricultural productivity, workers’ policy and regulatory framework in place (See health, land availability, hydropower capacity, and Chapter 4). Concessional and blended finance will labor productivity, and increase the frequency and also have to be stepped up for building green in magnitude of adverse climatic events, hampering the poorest countries in the next decade. In 2022, economic growth. Besides its effects on human multilateral climate funds issued $1.79 billion in grants systems, climate change hinders biodiversity, water and $1.39 billion in concessional and blended climate quality, and natural habitats.65 finance. Development finance institutions provided Against this background, the most cost-efficient $3.06 billion in grants and $16.81 billion in concessional solution to start decarbonizing construction value and blended climate finance.63 chains in emerging markets now will be to foster the adoption of ‘low-hanging fruit’ technologies, 1.6. Decarbonizing construction value particularly switching the energy mix towards non- chains entails short-term trade-offs for fossil fuels and improving the energy efficiency of new long-term benefits. and existing buildings and the supply of materials (the Climate change action entails facing the trade-offs energy efficiency scenario in Box 2), through policies between short-term adverse effects on economic with relatively moderate economic costs, like green growth and long-term positive impacts on construction codes, energy efficiency regulations and productivity and human welfare. Recent publications green building standards (See Chapter 4), at least until suggest that adoption of ambitious mitigation targets high-abatement technologies, like green hydrogen and now could have relatively small economic costs in the carbon storage, become commercially available (IEA, next decade that would be more than compensated 2023, and Chapters 2 and 3). by the benefits of taming global warming by 2050 and The alternative pathway to reduce construction beyond. 64 Against this backdrop, this section examines emissions in the next decade through widespread these trade-offs using the model described in Box 2 taxation of brown buildings and materials and to simulate the economic and environmental effects subsidies to green alternatives (the net zero-aligned of alternative adaptation and mitigation policies in scenario in Box 2) would come with greater costs to construction value chains. 63 There is no disaggregated data by use of proceeds for concessional and blended finance. See Chapter 4. 64 See, for instance, IMF (2022). 65 IMF (2022) and Chepeliev et.al (2022). Page 51 Chapter 1: Prospects for Reducing Carbon Emissions from Construction short-to-medium term economic growth than the without significant concessional support or direct energy efficiency scenario. The carbon intensity of transfers from high-income countries. construction value chains would require imposing These output losses are not likely to be offset fully by significantly higher carbon taxes on buildings and the expansion of low-emission construction activities materials than in relatively easier to decarbonize over the next decade. Workers’ reallocation from high- sectors, like electricity generation, at least until to low-emission activities could involve significant technologies with high abatement potential become costs due to inter-sectoral skills mismatches and commercially available by 2035 and beyond. Given other frictions in labor markets.67 Shifting capital the importance of construction in total global to low-emission activities can also face substantial investment,66 deploying carbon taxes directly on obstacles due to financial market imperfections.68 predominantly brown buildings and materials would As the result of these frictions in capital and labor therefore entail a larger decline in economic growth markets, contraction of high-emission sectors caused rates compared to measures geared towards cleaning by carbon taxes could result in lower economic growth the energy mix and improving the energy efficiency of rates than in a counterfactual scenario in which no construction value chains. additional mitigation measures are undertaken— The results of the simulations of the model described until the damages from rising temperatures start to in Box 2 suggest that direct taxation of brown increase rapidly in the second half of the century. buildings and materials (the net zero-aligned scenario) Against this background, the results of the model would result in a 0.4 percentage points deceleration described in Box 2 and Annex 1 suggest that the in global yearly growth through 2035 with about a alternative pathway of promoting the adoption of ‘low 20 percent drop in global total emissions, including hanging fruit’ technologies -electrification of buildings, construction and other activities, in comparison to cleaner energy supply and energy-efficiency- (the the no mitigation scenario. Emerging markets would energy efficiency scenario) would achieve a similar experience relatively larger output losses than high drop in global carbon emissions than the ‘net zero- income economies because their construction value aligned’ scenario but with much more moderate chains are more carbon intensive. Novel technologies output losses. with high abatement potential are also extremely expensive today and would therefore require massive The total cost of reducing global total emissions subsidies which are unlikely to be attainable for most —including construction—by about 13.04 percent emerging economies, at least through compliance with the NDCs (with no construction-specific mitigation measures) would 66 Construction accounts for about half of total fixed capital investment globally (IFC calculations based on Global Trade Policy Project, 2022). 67 Policies required to facilitate the reallocation of workers from high to low-emission activities (e.g., reskilling, labor support programs, among others) are out of the scope of this report, and not analyzed here. 68 See Chapter 4. BUILDING GREEN Page 52 amount to 0.02 percentage points in annual GDP improved energy-efficiency and cleaner energy supply growth by 2035 in comparison with the no mitigation through adequate policy and regulatory frameworks, scenario. Promoting energy-efficient buildings and international technical and financial support.70 and materials powered with cleaner energies (the These results also suggest that decarbonizing energy efficiency scenario) would reduce total global construction value chains in emerging markets is likely emissions, including construction and other sectors, by to require a sequential strategy in the years to come. about 20 percent, like the net zero-aligned scenario, Early action could be taken on electrifying buildings but with output losses amounting to 0.03 percentage with renewable energies, and on switching the energy points in yearly global growth relative to the no mix and processes of material plants to less carbon- mitigation scenario. The results of the simulations intensive fuels and raw materials. Improved energy under this scenario align with the Climate Action and thermal efficiency and resilience of new and Tracker (CAT) pathways, the main reference for existing buildings and plants, and adoption of other climate-related simulations using similar computable readily available technologies, should also be priorities general equilibrium models to the model employed in for emerging markets. In the longer term, retrofitting this report (Annex 1). brown buildings and plants, accelerating the pace According to the simulations of the model described of greening materials and the readiness of novel in Box 2, upper-middle income countries would technologies with high abatement potential but non- experience the largest output losses in the energy commercially viable today without fiscal incentives efficiency scenario amounting to minus 0.06 percent through widespread carbon pricing programs and in yearly growth by 2035, in comparison with the no fiscal support measures, will also be required to reach mitigation scenario. Lower-middle income countries the net zero carbon targets set in the Paris Agreement would experience the lowest output losses amounting by 2050. to about minus 0.01 percentage points in yearly The modalities and pace of this integral and sequential growth. Low-income economies in Sub-Saharan Africa approach will depend on each economy’s conditions: would experience a similar decline.69 available fiscal and financial resources, technological These results suggest that emerging markets facing and policy readiness, and dependence on fossil rising housing demands in the next decade, driven fuels. Countries with sufficient financial and policy by high economic and population growth, have an capabilities, such as high-income economies and opportunity to build green with moderate economic perhaps some upper-middle income countries, could costs by promoting ‘low-hanging fruit’ mitigation and begin now the deep decarbonization of buildings and adaptation technologies for buildings electrification, materials through carbon pricing and fiscal support 69 IFC calculations based on Global Trade Analysis Project (2022). 70 IFC calculations based on Global Trade Analysis Project. See more details on the model in Box 2 and Annex 1. Chapters 2 and 3 detail the available mitigation and adaption technologies and measures. Chapter 4 discusses alternative policy options for fostering building green in emerging markets. Page 53 Chapter 1: Prospects for Reducing Carbon Emissions from Construction measures at the expense of assuming higher output in construction value chains, emissions could fall loses. Most middle-income economies should prioritize substantially. the adoption of some readily available technologies The technology required to achieve a significant and regulations with moderate economic costs. Low- reduction in construction-generated emissions income economies can begin their journey in the green is available now but technologies with highest construction transition with technical and financial abatement potential would only become commercially support from the international community and available by 2035 and beyond. Investment development finance institutions.71 opportunities for building green are significant In the longer term, the results of similar computable but require decisive public and private action to general equilibrium-circular economy dynamic materialize. Decarbonizing construction value chains models to the model employed in this report (See will demand an integral strategy that includes Box 2 and Annex 1) show that these costs in terms of the most efficient sequencing of measures and foregone output will be more than offset by reduced technologies. The specific modalities of this strategy damages from global temperature increases by 2050 would vary across emerging markets depending on with the adequate policy framework in place. Recent their income level, carbon intensity of construction simulations, for instance, show that the economic value chains, and policy and technological readiness. co-benefits of lower global temperatures by 2050, Potential technological improvements to reduce particularly related to lower mortality and morbidity emissions are outlined in the next two chapters. At rates, would exceed by 1.4 to 2.5 times the output costs the same time, sufficient domestic and international of reducing carbon emissions this decade.72 financial resources must be mobilized to achieve the transition to lower emissions in emerging markets, Conclusions and policymakers need to support net-zero carbon construction through finance and changes in As we have seen, the construction sector is a major incentives. These efforts are described in Chapter 4. source of global emissions, with developing countries contributing the largest share. And the world is far off track from achieving the Paris Agreement target that every building on the planet should be net-zero carbon by 2050. Indeed, in the absence of additional mitigation efforts, emissions from the construction sector are expected to grow significantly over the next decade. However, by meeting the NDCs, combined with strong efforts to reduce carbon emissions 71 Chapter 4 analyses these policy options and the role of development finance institutions. 72 Markandya et al. (2018). CHAPTER 2: Building Green in Emerging Markets BUILDING GREEN Page 56 2.1. Summary These buildings minimize negative impacts on the environment and climate. Green buildings that Green buildings, which feature energy efficient designs, incorporate recycling can reduce waste output by low-emission materials, and use renewable energy, 90 percent and use 30 percent less energy. In financial could make a significant contribution to reducing terms, this equates to a 5 percent increase in net carbon emissions from construction value chains and operating income compared to traditional buildings. constitute a business opportunity for private investors. Green buildings use technologies with a longer The technology to achieve new zero-carbon buildings anticipated lifespan and/or more durable components or to electrify brown buildings with cleaner energies (such as LED lights), reducing maintenance costs.73 already exists. Emerging markets, particularly middle- income countries, can build green now to respond to Key considerations for building green include the rapid population and economic growth in the next physical features and operating systems of buildings, decade. In low-income countries, adequate financial the embodied carbon of buildings which is determined and technical support could contribute to paving the through the choice of materials, and the energy way for greening buildings. Retrofitting of brown efficiency and waste levels of design and construction buildings is unlikely to become a priority because of practices. For instance, natural cross ventilation can its high costs, but some relatively simple steps can reduce the need for air conditioning and supplies fresh be taken to reduce energy consumption in existing air during the seasons when external temperatures are buildings. This chapter examines both passive and comfortable. active measures relating to the design, construction More efficient mechanical and electric systems can and operation of buildings that can reduce emissions also reduce energy consumption in green buildings. by, among others, energy-efficient designs and For instance, the Menarco Tower office in Manila, electrical and mechanical systems, electrification with the Philippines, achieved 41 percent energy savings renewable energies, improving building resilience, through variable speed drives in the air handling units, enhancing the efficiency of materials used, modifying higher-efficiency cooling systems and appliances, building practices, exploiting digital technologies and energy-saving lighting in common and external areas, smart devices and appliances, and extending the life of and occupancy sensors in bathrooms along with other buildings. passive measures.74 Embedding resilience into the design of buildings can also limit emissions by reducing 2.2. The environmental and financial the need for new buildings (Box 4). advantages of green buildings. Green buildings feature energy-efficient designs, low-emission materials, and renewable energy. 73 IFC (2021). 74 IFC staff analysis. Page 57 Chapter 2: Building Green in Emerging Markets Some evidence suggests that green buildings can and resource and energy efficiency. According to offer discernable financial advantages in addition a sample of IFC EDGE’s project data, for instance, to creating social value. Depending on the type of the ratio of incremental cost to conventional cost is building, the passive and active measures undertaken, largest, at 5 percent, for retail buildings and smallest and country conditions, green buildings can have, for for hospitals (with hospitality, home, and offices instance, relatively low incremental upfront costs and falling somewhere in between). Hospitals also had the short payback periods. Data from IFC EDGE-certified shortest payback period (at almost two-and-a-half projects suggest that the average incremental capital years), while homes had the longest payback period at expenditure for some green buildings can range from up to five years (Exhibit 14). 1 to 10 percent. Savings in utility costs relative to a Payback periods and incremental costs also vary traditional building can also result in short payback substantially by country. Projects in Kenya and periods of two to three years in some residential Vietnam had the longest payback periods, each projects. Costs can be low enough for green measures over six years, while projects in Indonesia, Jordan, to be attractive even for some low-income housing and Peru were among the lowest periods (all under projects in certain country conditions, climate zones, two years). On the other hand, Malaysia and Peru had and types of buildings. the highest incremental costs (both over 10 percent), India’s Tata Realty & Infrastructure Ltd, for instance, while projects in the Philippines and Vietnam had reported incremental costs of 2 percent for its green some of the lowest.76 These variations are explained residential projects. Joyville Shapoorji Housing Pvt. Ltd., by differences in design, building codes and other an Indian affordable housing developer, has managed regulations, costs of labor and other services, the to keep these incremental costs to under 1 percent by availability of technology and materials, and climate.77 focusing primarily on passive design features which Green buildings can have lower operating costs and create energy savings of up to 45 percent. According to can also have higher asset values than traditional Aavas Financiers Limited, an Indian housing financing buildings. A recent survey,78 for instance, suggests company, construction costs for green homes are that green buildings can have an average of 10 to about 2 percent more than for a traditional home, 17 percent lower operating costs and asset values that while the savings for homeowners are very tangible can be more than 9 percent higher than comparable with payback periods of just two to three years.75 conventional buildings (Exhibit 15). Incremental upfront costs and payback periods can vary across type of building, countries, climate zones, 75 For more details on Aavas Financiers Limited’s experience, with direct testimonies from Indian homeowners, see: https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_ external_corporate_site/news+and+events/news/green-buildings-in-india-are-reducing-emissions?deliveryName=DM170723 76 IFC based on EDGE internal project data. 77 UN Environment Program (2021). 78 Dodge Data and Analysis (2022). BUILDING GREEN Page 58 BOX 3 What Is a Green Building? Green buildings produce significantly to reduce reliance on fossil fuels. In the future, adoption of net-zero lower carbon emissions than Passive measures - the orientation carbon building standards could conventional buildings. While of a building to the sun, natural create incentives for industrial some definitions include a variety ventilation, external shading, and producers of steel, cement, glass, of other requirements (including reduced window size are the most and other inputs to decarbonize preservation of biodiversity and the cost-effective and reliable means their production processes. These physical and psychological wellbeing to ensure higher energy efficiency. standards could also foster complete of occupants), most focus on These measures cost less than many electrification of green buildings energy, water, and waste treatment active measures to implement, and with renewable energies and efficiency, and use of renewable their efficacy does not depend on more ambitious energy reduction energies. IFC has established three how the building is managed. They targets than existing green building criteria for identifying a basic green are particularly effective to manage standards and regulations. building: heat gain or loss through the year. For instance, a smaller window area • Certification under a robust reduces the heating energy need governance system, such as IFC that is associated with heat losses Excellence in Design for Greater in cold climates and the cooling Efficiencies (EDGE). energy demand due to heat gains • Ambitious performance levels, in hot climates, and also reduces including at least 20 percent construction costs. lower energy use in operations Active measures involve mechanical than conventional buildings; or electrical systems. For example, and, ceiling fans are a more efficient • Ability to quantitatively report way to provide comfort than air- impact, such as energy and conditioning. Most commercial water savings, and reductions in buildings, from offices to greenhouse-gas emissions. warehouses, target improving the efficiency of their cooling and Green buildings can reduce lighting systems. In cold climates, emissions through passive and radiators’ thermostatic valves to active measures. Passive measures control heating in each room reduce relate to fixed physical features, and energy consumption. Both cooling active measures involve mechanical and heating can be addressed by or electrical systems and the use heat pumps. of renewable energy measures Page 59 Chapter 2: Building Green in Emerging Markets EXHIBIT 14 Upfront Capital Costs and Payback Periods of Green Buildings Vary Widely Incremental capital cost relative Payback of incremental to conventional buildings capital costs 5% Retail 2.9 4% O ces 3.4 1% Hospitals 2.3 2% Hospitality 3.6 2% Homes 4.9 6% 4% 2% 0% 0 2 4 6 Percentage Years Notes: Incremental capital costs are the ratio of incremental cost over typical construction costs. Source: IFC based on a sample of IFC EDGE internal project data. For instance, residential developers, like Signature a mandatory green building code, followed by policies Global (India) and Capital House (Vietnam), have to incentivize voluntary certification, which yielded reported faster sales resulting in better cash flows immediate results (Box 4). for them. In South Africa, International Housing Despite its financial and climate benefits and Solutions reports its low-income renters save a whole supportive regulations, however, the construction month’s rent each year from lower utility bills, and its of new green buildings faces stringent challenges. green homes occupancy rates are higher than similar Construction is a fragmented sector and highly conventional homes it owns. localized; customary building use and construction Several emerging market countries have begun practices vary widely. Most of the companies are implementing green building policies, or are planning small and medium-sized and therefore lack scale and on doing so, to encourage the private sector to access to financing to deploy new technologies with invest in green construction. Colombia in 2015, for uncertain returns.79 instance, as the first Latin American country to adopt 79 World Bank, mimeo. BUILDING GREEN Page 60 EXHIBIT 15 Green Buildings Can Have Lower Operating Costs and Higher Asset Value Average reduction in Average reduction in Average perceived increase operating costs in the next operating costs in the next in asset value 12 months 5 years New Green Buildings 10.5 percent 16.9 percent 9.2 percent Green Renovation/Retrofit 11.5 percent 17.0 percent 9.1 percent Notes: Survey of over 1,200 respondents from 79 countries. Source: Dodge, 2022. No single solution is appropriate for all contexts, and further reduce the carbon footprint of construction significant awareness-raising and capacity building and operation of buildings. A new generation of green are essential to foment change. Split incentives and buildings needs to be fostered in the next decade. The information asymmetries are among the industry embodied carbon of green buildings can be reduced challenges. While design decisions lie with developers through less use of high-emission cement and steel. and building sponsors, the benefits of lower utility This can be accomplished in several ways, including costs go to the end-users such as home buyers or technologically driven abatement practices that tenants. The lack of skilled construction workers improve energy efficiency in the production of these with adequate knowledge about how to build with materials (See Chapter 3), construction practices that lower emissions further limits the potential for green reduce the need for, and the waste of, these materials, construction. Moreover, while developers know what and substitution with other materials. Electrification— resource-efficiency measures lie behind the façade, substitution of fossil fuels for renewable energies in the buyer or investor may not have the expertise to cooking, cooling, and heating—can also be a cost- evaluate claims of higher efficiency or resilience (the effective measure to reduce emissions in buildings’ financial implications of these issues are explored in operation. Chapter 4). The further development of these technologies and their widespread adoption would require appropriate 2.3. Decarbonizing buildings in the next policies, including regulations, carbon pricing, and fiscal decade. incentives, to encourage green construction. How, In addition to the green building measures already in which and when these levers are adopted will depend use, other practices and emerging technologies can on income level, policy and technological readiness and Page 61 Chapter 2: Building Green in Emerging Markets BOX 4 In Colombia, Public Policy and Private-Sector Investment Have Made the Country a Leader in Green Construction In 2015, the Colombian government green projects. This enabling In 2021, about 20 percent of enacted the first mandatory green environment gave banks confidence Colombian new construction building code in Latin America. This to launch green construction finance was certified as green, from includes minimum requirements for and green mortgages. virtually no green buildings in the construction of new residential 2017. CAMACOL is now pushing In 2016, Bancolombia became the and commercial buildings aimed at members toward zero-carbon first bank in Latin America to finance ensuring lower energy and resource construction. Banks meanwhile green buildings by raising $400 consumption than conventional are increasing their product million in three bond issuances. In buildings. By establishing clear offerings for green construction: 2017 the Colombian Chamber of direction for public policy, the BBVA, for instance, plans to launch Construction (CAMACOL) started government raised awareness in the preferential financing for EDGE an aggressive educational program industry and successfully unleashed Advanced buildings (higher resource with its members to promote EDGE a wave of private-sector investment efficiency). certification. By 2021, five banks in green buildings totaling $9 billion were offering green building finance to date, according to IFC estimates. products—mainly green mortgages: Policies included tax incentives for Bancolombia, Davivienda, BBVA, green technologies and certified Banco Bogotá, and Caja Social. the support of the international community, especially energy or carbon offsets.80 In 2017, there were 2,500 in low-income countries (See Chapter 4). Here, we net-zero buildings worldwide that were recognized explore in detail these decarbonization levers. through a green building certification or adhered to an official standard. Some of these achieved self- Fostering a new generation of zero carbon sufficiency in operational energy by generating as buildings. much renewable energy as they consume annually.81 The technology to achieve zero-carbon buildings In addition, some low-carbon materials are already already exists. The next frontier for green buildings is available to address embodied emissions to reduce to have net-zero emissions. Net-zero buildings are the emissions from construction. A push by the public highly efficient buildings that use only renewable sector could mainstream the adoption of approaches 80 IFC (2021). 81 IFC staff estimates. BUILDING GREEN Page 62 already tried and tested by industry leaders, especially be needed, especially in low-income economies (See in middle-income economies (See Chapter 3). Chapter 4). Some buildings in developing countries are already Integrating resilience into new net-zero zero carbon. Francis Kere, the first African to receive buildings and existing brown buildings. architecture’s coveted Pritzker award, is well known for his mastery of passive design. Within the cadre Resilience needs to be integrated into construction of EDGE Zero Carbon certified buildings, offices of both new green buildings and existing buildings to dominate, for instance, the Ufficio BJX office in Mexico, ensure longer life cycles and avoid unnecessary carbon and the Arthaland Century Pacific Tower in Philippines. emissions related to the reconstruction process, A wide range of highly efficient buildings are being especially in regions affected by increasingly frequent constructed in various markets using commercially catastrophic climate events, like South Asia and available technology. As of June 30th, 2022, over 9.7 some Caribbean economies. Green building measures million square meters of floor space had been EDGE like renewable energy technologies, passive cooling Advanced certified in 55 countries.82 systems, water recycling, or rainwater collection solutions can improve resilience to these hazardous Improving energy efficiency primarily through passive events.84 measures and decarbonizing energy demand should be the key priority for the next generation of green Climate change-induced disasters are already causing buildings. The former is the cheapest way to reduce significant damage to assets and people around the emissions, resulting in less energy demand and less world. Any new building or retrofit must consider the need for heating, ventilation, and air conditioning and potential impacts from extreme weather events. When renewable energy generation systems, all of which structural integrity and climate resilience are not have their own carbon footprint as well as cost.83 More considered, damaged or entirely lost properties need financial and technical support will be needed from to be rebuilt, especially as the frequency and intensity development finance institutions in the next decade of climatic disasters increase. On average, 24 million to encourage and support the construction of net zero people per year were internally displaced between buildings. In some specific construction projects, like 2008 and 2018 because of climate disasters, of which housing for lower income households, blended finance 85 percent involved storms and floods.85,86 and other concessional finance, or fiscal incentives will 82 IFC staff estimates based on EDGE project data. 83 IFC (2019). 84 IDMC (2019). 85 IDMC (2019). 86 IDMC (2019). Page 63 Chapter 2: Building Green in Emerging Markets A striking example is the 2017 Hurricane Maria’s electricity demand and annual emissions equivalent to impact on Dominica in the Caribbean. About 38 the current level of emissions from the United States.91 percent of the hurricane’s damages was in the housing Commercially available electric technologies for sector; 15 percent of the country’s housing stock was heating and cooking, such as electric hot water destroyed and 75 percent partially damaged.87 The heaters, electric heat pumps, and electric stoves disaster’s damage to properties and infrastructure powered with cleaner energies, can help to reduce alone was estimated to be around 200 percent of emissions from buildings operation. Stimulating the Dominica’s GDP.88 demand for electric, renewable and energy efficient Electrifying buildings with cleaner heating, cooling, and cooking systems through energies. developing, supporting, and enforcing minimum energy requirement standards, energy labels, fiscal Electrification, or replacing fossil fuels for cooling, support programs, and energy efficient public cooking, and heating with technologies that draw procurement systems will therefore be essential to electricity from renewable energies, is a low-hanging reduce emissions from the operation of buildings in fruit for decarbonizing building operations. Natural the next decade. gas, for instance, accounts for around 44 percent of the energy mix used in cooking, cooling, and heating Technologies and practices to further globally. In emerging countries, about 60 percent reduce emissions from the construction of the energy employed in cooking comes from and operation of buildings. traditional biomass. Other fossil fuels, such as natural Exhibit 16 summarizes the expected costs and gas, LPG, and kerosene, are also widely used, especially abatement potential of some of these measures in in low-income economies.89 the next three decades. Material efficiency offers Large appliances, like air conditioners, refrigerators, the largest abatement potential with more than washing machines, cookstoves, among others, are 1,000 tons of carbon dioxide equivalent, followed one of the fastest growing sources of energy demand, by switching to low-emission materials with driven by emerging markets with growing populations 500–1,000 tons of carbon dioxide equivalent. The rest and economies, and high temperatures.90 Together, of these technologies offer similar abatement potential these appliances account for 40 percent of global with less than 500 tons of carbon dioxide equivalent. 87 GFDRR (2017). 88 GFDRR (2017). 89 BP (2023). 90 IEA (2018). 91 IEA (2021). BUILDING GREEN Page 64 The potential costs of these technologies are rather specific location in the building, moving away from low, but widespread adoption in emerging markets uniform steel beams. Computer-driven designs could has been so far limited mainly due to lack of regulatory handle the increased complexity of design and prevent and technological readiness, especially in low-income construction errors. countries but also in some middle-income economies, Replacing carbon-intensive refrigerants and heating combined with the fragmented market structure materials can also significantly contribute to reducing and highly localized regulations of construction value emissions from the operation of buildings. For chains and split incentives between developers, instance, in Eastern Europe, older supermarkets that financiers and owners (See Chapter 4). Here, we have high leakage rates in fridges and freezers can analyze these technologies in detail. save the same level of carbon emissions as from Improvements in material efficiency. reducing electricity by using eco-friendly refrigerants. World Bank estimates show that improving material Another option would be to substitute cement and efficiency in the construction of new buildings steel for less carbon-intensive materials. For instance, and other structures alone could cut embodied timber can be used as an alternative to steel in construction emissions by 2050 in half, while not buildings under 12–18 stories in both residential and significantly affecting the cost of construction.92 commercial settings. The use of timber has been This would be achieved by reducing the amount of deemed one of the most greenhouse gas-abating uses cement and steel used in construction that exceeds of biomass when used instead of steel and cement.94 the amount needed to meet standards, among other However, the cost of timber is highly dependent on measures. Achieving this depends on how much steel local availability and can be 10–20 percent above the and concrete demand can be reasonably reduced. To price of a comparable concrete frame. The increased illustrate, estimates of excess structural steel range use of timber in construction also raises issues from 20–46 percent.93 around sustainable sourcing and deforestation and will require changes in the design and construction Substitution of high-emission with phases. The use of other materials, such as engineered low-emission materials. wood products and rammed earth, to reduce carbon emissions also should be explored.95 Replacing concrete and steel with low CO2 primary materials can reduce embodied construction Building techniques to enhance thermal emissions. In the case of steel, optimized design would efficiency. customize the size of each structural beam to its 92 World Bank (Mimeo). 93 C40 Cities (2019). 94 World Bank (2022). 95 World Bank (2022). Page 65 Chapter 2: Building Green in Emerging Markets EXHIBIT 16 Expected Costs and Abatement Potential of Decarbonization Options in Construction Measures and Technologies Abatement Potential Cost Tons of CO2 equivalent in 2050 Material efficiency >1,000 Material substitution 500–1,000 Low Enhanced building utilization <500 <$50/Tons of CO2 equivalent Digital construction <500 Modular construction <500 Source: World Bank (forthcoming). According to the International Energy Agency (IEA), three-floor retail buildings in Jakarta, Indonesia.98 energy use for space cooling has doubled since 2000— from 1,000 terawatt-hours to 1,945 terawatt-hours— Centralized cooling systems. due to hotter weather, rapid urbanization, increased For large projects, such as renovated or new urban ownership of air conditioners, and use of inefficient areas, industrial parks, and health and university air conditioners.96 Space cooling is responsible for campuses, among others, using a “district” centralized significant energy use and emissions, contributing cooling system for an interconnected group of new or around 1 gigaton of CO2 and nearly 5 percent of total renovated buildings can reduce energy consumption energy consumption worldwide in 2020.97 dramatically (See Exhibit 17 for a diagrammatic representation). For example, Keppel Industries Against this background, reflective painting and film develops and operates district cooling systems for coating can enhance thermal efficiency in existing as industrial and commercial parks in Singapore and well as in new buildings. For instance, reflective roofs China, enabling energy savings of up to 40 percent could save more than $20,000 per year in electricity through use of solar panels, innovative thermal bills relative to a conventional building in one-floor energy storage technologies, and smart optimization warehouses in Bogota, Colombia. Utility savings from systems.99 tinted windows could reach up to $2,000 per year in 96 IEA (2021). 97 IEA (2021). 98 IFC (2022) based on EDGE simulations. 99 “Introduction to Keppel”. Presentation prepared for IFC. October, 2022. BUILDING GREEN Page 66 In Gujarat, India, a district cooling system has been Improving building design and installed in the Gujarat International Finance Tec-City, construction practices. a joint-venture financial center. The system distributes thermal energy in the form of chilled water from a Thoughtful design can reduce the amount of concrete, central source to multiple buildings through a network metal, or glass in a building, for example, by reducing of underground pipes for use in space cooling. The glazing, using hollow concrete blocks and ‘filler’ in floor system aims to reduce power demand and make air slabs. Design for disassembly is another example of conditioning more energy efficient, reducing CO2 life-cycle design thinking. Improvement in the design emissions.100 and construction process can include prefabricating components and structures at centralized facilities, The Energy Center for the Olympic Park in London, and reducing vehicle emissions at sites, for example United Kingdom, reduced emissions by more than through using electric vehicles and biomass-powered 20 percent and enabled energy savings in energy machinery.103 Zero-emission construction sites consumption, compared to conventional facilities, by (which also have spillover benefits relating to noise adopting district cooling systems.101 District Clima, and pollution reduction) are also within reach. For located in a renovated urban area in Barcelona, Spain, instance, around 14.5 percent of fine particulate matter has achieved reductions in fossil fuel consumption by pollution (PM2.5) in London is estimated to be due to 63 percent through district cooling systems.102 construction sites.104 IFC has partnered with UAE-based cooling system Having systems in place to measure and track company Tabreed to set up Asia’s first greenfield embodied carbon will be key, and cradle-to-cradle platform to invest in sustainable district cooling analysis must be mainstreamed to meet net-zero solutions for commercial and retail developments. Its carbon goals. Many material manufacturers now primary focus is on India, followed by other Southeast declare their carbon footprint through Environmental Asian countries. India has a growing demand for Product Declarations. Products undergo a Life Cycle cooling infrastructure, and the use of district cooling Analysis which may report carbon emissions from technology is at an early stage. The project will assist cradle-to-gate (from primary material extraction to market creation by establishing proof of concept for the factory gate), cradle to grave (material extraction district cooling technology, economic and commercial to end-of-product life), or cradle-to-cradle (material viability, and sustainable energy efficiency. extraction to recycling of product components into more products). 100 Patel (2017). 101 See: https://www.power-technology.com/projects/olympic-park-energy-centre/ 102 IFC staff calculations. 103 Oslo Kommune (2020). 104 Oslo Kommune (2020). Page 67 Chapter 2: Building Green in Emerging Markets EXHIBIT 17 District Cooling Systems Can Reduce Energy Consumption up to 40 Percent Customer’s building Customer’s building Customer’s building Customer’s building AHU AHU Chilled water storage system AHU (in discharge mode) District cooling plant Chiller Customer station Thermal storage tank Heat exchanger Chilled water return Meter Chilled water supply Source: Keppel (2022). Cradle-to-cradle analysis105 is key to promoting the typically provide cradle-to-gate data. Nevertheless, regenerative loops necessary for a circular economy, cradle-to-cradle analysis, which recognizes the value however it is difficult to execute.106 Manufacturers of long product life, recyclability, reusability, and the 105 Cradle to cradle can be defined as the design and production of products of all types in such a way that at the end of their life, they can be truly recycled (upcycled), imitating nature’s cycle (Sherrat, 2013). 106 EU (2021). BUILDING GREEN Page 68 minimization of waste, must increase to meet the of space and infrastructure through flexible design Paris Agreement goals. Of course, the biggest impact could extend building lifetimes. Possible reductions comes from repurposing a whole building rather than in the demand for new buildings in the future range demolishing it. from 10 to 20 percent.108 This measure can also reduce the demand for steel and cement for new buildings, Recycling. reducing embodied construction emissions. Extending Embodied carbon of green buildings can also be a building’s lifespan could reduce CO2 construction- reduced via ‘secondary substitution’, i.e., recycling related emissions by 50 percent in countries like China, building components (for example, using old steel where the average residential lifespan is about 25 beams in a new building). In the city of Medellin, years, compared to 100 years in the European Union Colombia, for instance, construction companies, and the United States.109 producers of cements and concrete mixtures, firms Efficient use of space can be particularly important producing pavements, and quarries are recycling for developing countries, where most investment in and reusing construction waste in their construction new buildings and construction is expected to happen materials and works.107 in the next decade (See Chapter 1). Efficient use of Elongating the life of steel and cement components space can also generate savings in construction, via recycling requires ‘construction for deconstruction’, depending on the type of building (e.g., commercial, or or thoughtful design around how input materials can residential), building design, and local regulations and eventually be reused. These emerging solutions must materials availability.110 be implemented at scale. Low- and middle-income Retrofitting existing buildings. countries are, however, unlikely to identify material efficiency and recycling as a policy priority due to Green retrofit practices to reduce energy consumption the need for encouraging building and infrastructure include thermal insulation of the building envelope, construction for development purposes. increased natural or mechanical ventilation when outdoor temperatures are at comfortable level, Helping buildings live longer. replacement of windows and doors, improved lighting Design for refurbishment over new construction systems, water-saving faucets, ultraviolet-disinfected can be another route to reduce emissions from or filtered air circulation systems, and the installation constructing new buildings. Encouraging efficient use of energy-efficient heating and air conditioning 107 UN Environment Program (2021). 108 C40 Cities (2019). 109 Hertwich et al. (2019) 110 C40 Cities, (2019). Page 69 Chapter 2: Building Green in Emerging Markets systems.111 Given the long operational life of a typical especially in lower-middle- and low-income countries. building, retrofitting can achieve similar or higher Limited fiscal resources further restrict the use of tax energy savings than construction of new green incentives and subsidies to promote retrofitting of buildings.112 Typical building retrofits reduce energy use commercial and residential buildings. by up to 25 percent while deep retrofits can sometimes save more than 50 percent.113 Innovative construction technologies. Buildings can already be 3D printed. This is an The retrofit market is estimated to have grown at a automated process that can produce complex wall compound annual growth rate of 8 percent from 2018 structures using fast-curing viscous material layer-by- to 2023, mainly driven by demand from high income layer. It minimizes construction waste and achieves economies.114 Energy efficiency retrofits have shown higher energy efficiency due to seamless construction, attractive returns on investment, even for short-term while decreasing labor costs. The process is fast and investors. This is because, in addition to generating has the potential to use local low-carbon inputs, such direct cost savings, these measures positively affect as soil. the overall value of buildings.115 ABN AMRO and ING have financed retrofits as a way of accessing the For instance, the developer 14Trees in Kenya built an green bond market, complying with stricter emission IFC EDGE Advanced 3D printed sustainable home, the regulations, and reducing their exposure to carbon- first of its kind in Africa. The 3D printing process uses intensive assets in their portfolios. In some European minimal materials, only printing exactly what is needed countries, like Germany, governments are providing for the structure of the house. 14Trees hoped to not tax breaks for improving the energy efficiency of only save energy and water during the construction existing buildings through replacing the heating process, but also during the operational phases, which system, fitting new windows, or insulating roofs and led the company to certify the houses with EDGE. external walls.116 Prefabricated wall panels can be manufactured in a In emerging countries, however, the dissemination factory to precise dimensions and assembled on site. and adoption of retrofitting practices, especially deep Advantages are like those of 3D printing: reduced retrofitting, remains limited because of the high waste; better energy efficiency; faster construction; costs of replacing energy inefficient mechanical and and decreased labor costs. Prefabricated panels have electrical systems, and modifying building envelopes, less embodied carbon and yet have tested as more 111 IFC (2019). 112 Hills et al (2016). 113 IFC (2021). 114 IFC staff estimates. 115 IFC (2021). 116  See: https://www.bmwk.de/Redaktion/EN/Pressemitteilungen/2019/20191016-altmaier-tax-breaks-for-retrofitting-buildings-benefit-both-climate-change-mitigation-and-local- craft-workers-and-jobs.html BUILDING GREEN Page 70 typhoon resistant than traditional hollow concrete developing countries, especially in low-income and blocks.117 This technology can be cost competitive fragile countries and middle-income economies with existing construction processes, but this is highly with construction sectors characterized by the dependent on transport costs.118 large presence of informal and small construction companies.120 Climate-smart building strategies. Internet-connected appliances can help reduce A climate-smart building strategy should also energy consumption by enabling the use of dynamic recognize the importance of building both green electric pricing and time-of-use tariffs. These smart and resilient. The resource efficiency and resilience appliances, along with energy efficient management of a building is largely locked in at the design stage. retrofit systems, can reduce energy consumption by Retrofitting is financially far less attractive than 20 to 30 percent.121 The Super-Efficient Equipment constructing a new building with optimal efficiency and Appliance Deployment Initiative, led by the because it usually involves demolition and replacement International Energy Agency, for instance, provides of existing features. Moreover, effective passive support to more than 20 governments to implement measures are best incorporated at the design stage. energy efficient policies for appliances and equipment Nevertheless, retrofitting is essential given the long and identify and promote the adoption of innovative operational life of a typical building, as most buildings smart devices and systems.122 built today are expected to be in use for the next 50 years or more.119 At the same time, extreme weather events are becoming more severe and frequent. Digital technology and smart appliances. Across all project stages, digitalization could increase materials’ efficiency by integrating life-cycle emissions, using 3D building information modeling, enhancing collaboration in the construction process through management apps on mobile devices, and monitoring sites with drones for scanning. Paper-based work practices, cost increases, and technological illiteracy are, however, likely to represent key barriers in 117 See: https://www.connovate.com/technology 118 McKinsey & Company (2017). 119 UNEP (2021). 120 World Bank (Mimeo). 121 IEA (2021). 122 IEA (2021). CHAPTER 3: Technological Solutions for Decarbonizing Construction Materials BUILDING GREEN Page 72 3.1. Summary existing technologies or production processes and underlining the risk of stranded polluting assets. In the Construction materials include some of the most absence of carbon price programs124 or regulations carbon-intensive and hard-to-abate industrial that internalize the social costs of carbon emissions, activities globally. This chapter focuses on the two producers often do not have an incentive to invest key materials for the industry, cement and steel, and in expensive and still uncertain decarbonization explores a range of technologies and other options for technologies, particularly as demand is sensitive both that could sharply reduce their carbon intensity to both price and quality, or to offload plants and emissions. These include commercially available in operation.125 Demand from environmentally- alternatives such as improving energy and resource responsible developers and owners is also limited by efficiency, switching to alternative, lower-carbon the lack of widely accepted standards and regulations feeder materials and using alternative non-fossil fuels. that determine what low-emission materials are, and Nascent technologies, including green hydrogen and regulate how they should be employed in construction. carbon capture, utilization, and storage, hold the promise of net zero cement and steel but they are 3.3. The construction materials industry likely to remain non-economically viable without is well-positioned to decarbonize. substantive fiscal support by 2035 and beyond. The construction materials industry has made 3.2. Reducing emissions from the significant progress and important commitments to production of construction materials is decarbonize. For instance, resource recycling and more challenging. energy-efficient production processes have reduced carbon emissions in the supply of steel and cement. Cement and steel are considered some of the hardest Both private-sector companies and governments industrial sectors to abate. Production is extremely are moving to put in place measures to further energy intensive (Box 5): process-related emissions decarbonize construction materials. generate about 60 percent of total carbon emissions in the global cement industry, and about 86 percent This section focuses on the cement and steel of carbon emissions from steelmaking.123 Cement and industries’ current decarbonization efforts. These steel are highly capital- and scale-intensive activities, two materials are responsible for about 80 percent and changing production processes entails massive of the embodied emissions in buildings and other investments. Plants have an average operational life structures.126 Critically, there are no cost-effective of over 50 years, making it even harder to replace and scalable alternatives today for these materials in 123 World Bank, mimeo. 124 Chapter 4 analyzes alternative carbon price programs, like taxes, markets, and regulations, in emerging markets. Castro et al, mimeo explore the impacts of carbon tariffs in high income countries on the steel industry in developing countries. 125 Envirotech Online, 2019. 126 See Chapter 1. Page 73 Chapter 3: Technological Solutions for Decarbonizing Construction Materials construction value chains. Cement is also the most concrete has very low embodied carbon compared to consumed good in construction in the world, while alternatives. steel can be found not only in buildings and other Major cement industry associations have announced structures but also in other crucial activities such as plans to meet the carbon neutrality ambition. The aviation or automobiles. Even technologies that are World Cement Association recently issued a statement driving decarbonization, like wind turbines and solar supporting accelerating changes to achieve full panels, require cement and steel.127 decarbonization. The Global Cement and Concrete Decarbonizing cement and steel can, therefore, have Association has also issued a set of sustainability a decisive impact on reducing carbon emissions in guidelines and an ambitious roadmap to cut CO2 the entire global economy beyond construction value emissions by a quarter by 2030, and to achieve net- chains. Box 6 provides some examples of IFC recent zero CO2 emissions by 2050.128 CEMBUREAU, which experience in supporting private manufacturers of represents the European cement industry, has set a cement and steel in emerging markets on their path to goal of reducing gross CO2 emissions by 30 percent decarbonization. for cement and by 40 percent for the clinker-cement- concrete-construction-carbonation value chain by Existing technologies are already helping 2030 and achieving carbon neutrality by 2050.129 to decarbonize cement. In the European and North American markets, Between 1990 and 2020, global emissions per investor scrutiny and regulatory pressure to reduce ton produced of cement fell by about one fifth. carbon emissions are likely to intensify. The European Manufacturers achieved these savings mainly by Union’s ambitious Green Deal and its package of improving production energy efficiency, utilizing measures, including the introduction of a carbon waste as a fuel, and substituting clinker with industrial border adjustment mechanism for cement, could byproducts, such as fly ash from power generation reduce carbon emissions across the entire region.130 In plants and blast furnace slag from steel plants. North America, decarbonization efforts are promoted Concrete is well-positioned to become carbon neutral. through state- and country-wide initiatives, such as This material is durable, can be 100 percent recycled Canada’s 2019 implementation of the Carbon Pricing and uses other industry wastes directly (through Backstop program. 131 recycled aggregates) or indirectly (through cement). Steel is one of the most recycled materials. Except for the embodied carbon of cement, Steel is among the most highly recycled materials in use today, and about 30 percent is produced with 127 UNIDO (2022). 128 GCCA (2020). 129 European Cement Association (2022). 130 EU (2022). 131 IEA (2020). BUILDING GREEN Page 74 recycled scrap. Steel recovery rates are estimated at 90 percent for BOX 5 automotive and machinery, 85 percent for construction, and 50 How Are Cement and Steel Produced? percent for electrical and domestic Cement and concrete are essential material for virtually all aspects appliances. A total of 1,085 million construction materials. As the of our built environment. Steel is tons of steel is recycled per principal ingredient of concrete, produced via two main routes: cement acts as the binder between the blast furnace-basic oxygen year.132 Recycled steel saves raw aggregates (fine and coarse rocks) furnace (BF-BOF), and electric materials, energy consumption, in the formation of concrete. In the arc furnace (EAF). The BF-BOF and emissions: recycling one ton of cement-manufacturing process, route predominantly uses iron ore, steel scrap saves 1.5 tons of CO2, 1.4 raw materials—limestone and coal, limestone, as raw materials, tons of iron ore, 740kg of coal, and a few other natural materials, while the EAF route uses mainly 120kg of limestone.133 including clay or shale—are heated recycled steel and electricity. In to a temperature of up to 1450°C the production process, these In the future, recycled steel in a kiln in a fuel-intensive process. ingredients turn into liquid steel production could rise as more This process and the resulting through a series of chemical steel-made products reach the chemical reactions lead to the reactions at a temperature of up end of their life cycle in emerging formation of the material that in to 1700°C. The heat is generated the industry is referred to as clinker. by coking coal, which is made from markets. However, scrap-based Once cooled, the small round coal in furnaces. steel is unlikely to satisfy the clinker nodules are ground to a fine industry’s need for raw materials The addition of elements such as powder and combined with other because of the growth in demand chromium or titanium can produce ingredients like gypsum to produce alloys that are more able to absorb and the lack of availability of cement. energy (toughness), easier to quality scrap metal and developed Cement production is a local cast, scratch resistant (hardness), recycling value chains, especially in industry with plants usually located or rust-resistant (corrosion- low-income countries. Steelmakers near limestone deposits. Given its resistance, such as in stainless are adopting similar technologies performance characteristics and steel). Huge rollers and molds and measures as cement producers the plentiful supply of limestone, help to shape the metal while it for decarbonization. cement (and therefore concrete) is still hot, with further processing is likely to remain the construction potentially incorporating protective Some major steel producers and material of choice globally and is coats, color, or other additions. business associations have made part of the future of development Steelmaking is a truly global important commitments to and urbanization. industry, and raw materials (such as iron ore and scrap) and steel decarbonize the industry. China Steel offers the most economical products are traded globally. and the highest strength-to- weight ratio of any building 132 The World Counts (2022). material and serves as an integral 133 World Steel Association (2022). Page 75 Chapter 3: Technological Solutions for Decarbonizing Construction Materials BOX 6 IFC Experience Supporting Cement and Steel Decarbonization IFC has been a long-time investor in the cement and NCCL. Kenya's largest domestic cement producer steel industries in emerging markets. IFC is supporting invested in 2019 in reducing fuel consumption, achieving the adoption of the best available technologies and energy savings, and reduced carbon emissions through international environmental and social standards in order lower clinker-to-cement production, use of reactive to strengthen sustainability. IFC has enabled its clients to pozzolana, and a waste heat recovery unit, which will improve energy efficiency (via measures such as waste be the first of its kind for cement in East Africa. IFC heat recovery), resource efficiency (via measures such as supported NCCL in two rounds: $55m loan and $7.5m waste recycling), and value chain integration. Here, we equity investment in 2014, and in 2019 with $25m IFC include some recent examples of IFC projects supporting loan, and $103m in syndications between 2019 and 2020. decarbonization in cement and steel in emerging Rider Steel. The company, a rolling mill operator, is markets. investing in a greenfield manufacturing plant with best CIMAF. Ciments de l'Afrique, a subsidiary of Omnium des available technologies in the Kumasi area in Ghana, with Industries et de la Promotion Group, a leading cement a total production capacity of 240,000 tons per year. producer in Morocco and West Africa, is investing in The new plant will save 332,000 tons of carbon dioxide the best available technologies in cement production annually by entirely using steel scrap as input (283,200 in Ghana, Mali, and Senegal. The project will reduce tons per year). The plant also operates an energy annually up to 332,000 tons of carbon dioxide by entirely efficient induction furnace that achieves much less using steel scrap as input. IFC provided €165 million debt carbon intensity compared to existing blast furnaces. financing for the project since 2021. The IDA19 Private IFC supported the project through a $12 million loan Sector Window Blended Finance Facility also provides up in 2020. to €7.5 million to support the project in Mali. Baowu Group and Luxembourg-based ArcelorMittal, by 2050 relative to 2019, and the emissions intensity two of the world’s largest steelmakers,134 for instance, of crude steel production would need to decline by have committed to becoming carbon neutral by 58 percent, to be in line with the goals of the Paris 2050.135 The World Steel Association published a recent Agreement.136 report indicating that total direct emissions from iron and steel would need to fall by more than 50 percent 134 World Steel Association, (2022). 135 ArcelorMittal (2020); China Baowu Group (2021). 136 World Steel Association (2021). BUILDING GREEN Page 76 3.4. More needs to be done to process is expensive because it involves high energy decarbonize construction materials. expenditure.138 There are three principal approaches to deeply Technological readiness, abatement potential, decarbonize the cement and steel industries, including and economic costs vary significantly across these operational advances, alternative construction inputs decarbonization levers. Novel technologies, like and fuels, and technological innovations. Adoption carbon capture and green hydrogen, for instance, of best-available-technologies can already reduce offer the highest abatement potential (500 to energy and resource intensity and consumption. 1,000 tons of carbon dioxide equivalent by 2050) Replacing carbon-intensive materials, like iron in in most applications, but their costs today are still steelmaking and clinker in cement, for readily available extremely high (ranging from $50 to more than $100/ greener organic or recyclable alternatives can also cut ton of CO2) for both cement and steel production. process-emissions today. Switching from fossil fuels These technologies are expected to remain non- to biomass, waste, or recycled alternatives is already economically viable without fiscal support in the next technologically feasible for cement and steel plants, decade, and potentially beyond.139 In contrast, biomass enabling the reduction of emissions relating to energy and waste fuels are already economically feasible, but consumption. their abatement potential is relatively more limited (Exhibit 18). In the future, new technologies, like carbon capture, utilization, and storage and green hydrogen, could This chapter focuses separately on these technologies contribute to making cement and steel production for the cement and steel industries in detail, given their carbon neutral but it is not economically viable and specific technical, regulatory, and economic challenges. will most likely remain so until 2035 and beyond.137 We examine their abatement potential, economic Carbon capture, storage, and utilization is a process costs, and technological and process applications. The through which carbon dioxide is captured and then further development of these technologies and their transported to storage or for further industrial use. widespread adoption by private companies would Green hydrogen is hydrogen produced by splitting require establishing an appropriate policy framework water into hydrogen and oxygen using renewable to encourage green construction and mitigating electricity. Hydrogen gas is extracted from water by market failures in construction value chains and green a technique known as electrolysis, which involves finance (See Chapter 4). running a high electric current through water to separate hydrogen and oxygen atoms. The electrolysis 137 IEA (2023). 138 IRENA (2020). While there are other types of hydrogen like blue and grey hydrogen, this report focuses on green hydrogen given the potential of this lever for the cement and steel industry. IFC (2023) provides an in depth-analysis of these alternative types of hydrogen and how green hydrogen is produced. 139 IEA-IFC (2023). Page 77 Chapter 3: Technological Solutions for Decarbonizing Construction Materials EXHIBIT 18 Abatement Potential and Economic Costs of Technological Solutions Expected Technology Costs (current $/ton of CO2) Abatement potential High Medium Low (tCO2 in 2050) (>$100/tCO2) ($50–100/tCO2) (<$50/tCO2) High Top-gas recycling in steel Cement-specific CCUS Alternative non-clinkered >1,000 tCO2 blast furnace with CCUS options cements Medium Hydrogen and Smelting reduction for Alternative clinkered 500–1,000 tCO2 electrification in cement steel production with cements CCUS Low Hydrogen in steel blast Hydrogen direct reduction Biomass and waste fuels <500 tCO2 furnace in steel for cement Iron ore electrolysis for steel production Notes: CCUS—carbon capture, utilization, and storage. Source: World Bank (forthcoming). Cement. technologies with the highest abatement potential in the cement industry but that are not expected to be The cement industry has several options to reduce commercially available until 2035 and beyond: the use emissions in the next decade. Some of them are of green hydrogen fuel and adopting carbon capture, already available, while others are still in the pilot utilization, and storage; and recycling construction and phase with high economic and financial costs. Here, demolition waste for concrete production.140 we analyze three commercially available options for cement decarbonization: improving energy and Improving energy and resource efficiency. resource efficiency; reducing and replacing clinker, Further energy efficiency measures are possible, cement’s main input, for less-polluting alternatives; including integrating waste heat recovery systems, and increasing the use of alternative fuels to fossil which can generate up to 30 percent of overall plant energies. We also examine the prospects of the 140 Lorea et al (2022) provides a list of green cement projects announced worldwide. BUILDING GREEN Page 78 electricity needs,141 and investing in state-of-the-art investment in buildings and infrastructure. In those equipment, such as multistage preheaters and pre- countries, there is therefore an opportunity to adopt calciners and high-efficiency coolers that can reduce state of the art or best available low-emission energy kiln heat requirements. Multistage preheaters and and resource efficient equipment in new cement pre-calciners make use of the waste heat from the plants. In contrast, the future for decarbonization kiln and clinker cooler to pre-heat and pre-process the in countries with substantial installed capacity will kiln feed, and thereby allow for considerable energy mainly lie in either engaging in expensive retrofitting savings.142 or offloading existing plants. Installation of long kilns that recover heat from Substitution of clinker with alternative the clinker heating unit can reduce emissions by 7 materials. percent.143 Energy intensity can be reduced through better plant utilization and increasing equipment CO2 emissions are directly proportionate to the effectiveness. Advanced analytics can create adaptive, amount of clinker used in cement production. Clinker self-learning models to enable higher levels of can be substituted by alternative materials, such automation and optimization of kilns and mills fuel as limestone, natural and calcined pozzolans,146 management and material blending.144 Future cement and industrial by-products, such as fly ash147 and plants could further reduce carbon emissions by blast furnace slag,148 for producing blended cement. combining digital technology and more sustainable Limestone calcined clay cement, for instance, a new operations.145 type of cement that is based on a blend of limestone and calcined clay, can help reduce CO2 emissions in the This is particularly important for emerging markets production process by up to 40 percent.149 Alternative where most of the global demand for new cement natural or recycled non-clinkered cements can achieve plants will originate in the next decade, driven zero or negative cost abatement, with a significant by increased economic growth, population, and emissions reduction potential of nearly 2,000 tons 141 IFC (2014). 142 Institute for Industrial Productivity (2022). 143 Schorcht et al. (2013). 144 For instance, advanced analytics can be used for controlling and monitoring rates of fuels to ensure consistent burning; optimizing the grinding circuit to increase throughput and secure consistent output quality, while also lowering energy consumption; and ensure cement is blended in the right proportions, which is essential to ensuring specifications and quality of products. 145 World Bank (mimeo). 146 A natural pozzolan is a raw or calcined pozzolan that is found in natural deposits. A material is referred to as “calcined” when it has been heated below the temperature of fusion to alter its composition or physical state. ACI (2022). 147 Fly ash is the fine ash produced at coal-fired power plants that develops cementitious properties when mixed with cement and water. 148 Slag cement is a hydraulic cement formed when granulated blast furnace slag is ground to suitable fineness and is used to replace a portion of Portland cement. It is a recovered industrial by-product of an iron blast furnace. 149 Construction World (2021). Page 79 Chapter 3: Technological Solutions for Decarbonizing Construction Materials of carbon dioxide equivalent by 2050. This could Increasing use of alternative non-fossil represent a reduction of nearly 90 percent in carbon fuels. emissions generated by cement production in non- OECD countries.150 Alternative fuels only supply about 8 percent of total thermal energy used in heating cement kilns One challenge to switching to non-clinkered globally, and this technology is little used in emerging alternatives is the lack of availability of these materials. markets.153 Alternative fuels refer to fuels that can For instance, the quantity of blast-furnace slag be used instead of conventional fossil fuels such and fly ash is expected to decline as the industries as coal, oil, and natural gas. Some alternative fuels decarbonize in high-income countries but also in commonly used in the cement industry are residue oil upper middle-income emerging markets. Natural and solvents, contaminated wood and process waste reserves of pozzolans are limited to specific regions from wood, used tires and rubber waste, plastic waste, close to volcanic regions, such as northeast Argentina, thermal fraction of domestic waste, sewage sludge, Chile, China, Germany, Greece, Italy, and Peru, among and animal meal, among others.154 others, and have not yet been assessed at scale. Stringent local cement regulations also hamper A shift to less carbon-intensive alternative fuels for piloting and adopting natural and industrial clinker heating cement kilns could reduce CO2 emissions by substitutes.151 around 12 percent by 2050.155 Producers today face no technical limitations on increasing the share of Despite these challenges, some global companies are alternative fuels. However, the feasibility of this shift already substituting clinker with natural and recycled depends on the availability of alternative fuels. The materials, given the high abatement potential and development of local supply chains and domestic relatively moderate costs of this solution. For instance, regulations also plays a critical role in enabling firms the Mexican-based building-material company CEMEX to switch to alternative fuels. For instance, regulation has developed a clinker-free cement that enables of the waste management value chain can induce carbon emission reductions of 40 percent relative to the use of waste as an energy source.156 Adoption conventional concrete.152 of this alternative fuel also requires investments in technology and equipment to turn waste into fuel and incorporate it into the cement manufacturing process. 150 World Bank (mimeo). 151 World Bank (mimeo). 152 CEMEX (2021). Energy Transition Commission (2022). 153  154 Chinyama (2011). 155 IEA (2018). 156 World Bank (Mimeo). BUILDING GREEN Page 80 IFC estimates that using biomass and natural and to remain non-commercially viable without fiscal industrial waste in cement plants with capacities support in the next ten years and possibly beyond.158 of more than 5 tons per hour involves a capital This technology can eliminate direct emissions from expenditure investment of between $5 million and heating the cement kiln, which account for around $18 million and results in an operating expenditure of 35 percent of total emissions in cement production. between $5 and $25 per ton of cement, representing Adoption is contingent on availability and costs, which a relatively small additional cost.157 As a result, currently are high at more than $100 per ton of CO2. recycled and biomass fuels have increased in cement Some companies in developed countries, with support production in developed countries and some of the from government agencies and business associations, main producing countries in Latin America, but are are already piloting this technology. In 2021, a cement lagging in Sub-Saharan Africa and other low-income kiln was successfully operated in the United Kingdom regions. (Exhibit 19). using hydrogen technology for the first time.159 High Some companies are already investing in the costs and implementation challenges have so far production of low-carbon cement with biomass and impeded efforts to pilot the use of green hydrogen for reused materials in emerging markets. For instance, heating cement kilns in emerging markets. Sococim, a subsidiary of French cement maker Vicat Some companies in emerging markets are nonetheless S.A, will replace part of its clinker lines in its Senegal already piloting this technology, while others have plant with more fuel-efficient facilities, utilizing up announced plans to deploy it soon. In 2021, Compañía to 70 percent alternative fuels (biomass and recycled Siderúrgica Huachipato, for instance, launched in Chile tires). The project will reduce greenhouse emissions a pilot of a green hydrogen mill that is expected to be by 312,000 tons of CO2 equivalent per year by 2030, completed by 2023.160 Chile’s solar and wind resources enabling it to produce one of the lowest-emission can produce green hydrogen with the lowest costs in cements in the world. IFC is supporting the project the world.161 with its first green loan for materials in Africa. CEMEX announced in 2021 that it will extend the Green hydrogen for heating cement kilns. use of green hydrogen from its plants in Europe In the mid-to-long term, green hydrogen offers a to its operations in Africa, Asia, the Caribbean, promising abatement solution (500–1,000 tons of Central America, Mexico, South America, and the carbon dioxide equivalent by 2050) but it is expected United States. For instance, the company is already 157 IFC (2017). 158 IEA (2023). 159 MPA (2021). 160 See CAP S.A.: https://www.capacero.cl/cap_acero/noticias/ejecutivos-de-cap-presentan-a-ministerio-de-energia-proyecto-de/2021-11-03/115628.html 161 See World Bank: https://worldbankgroup.sharepoint.com/sites/news/pages/Betting-on-Green-Hydrogen-for-Sustainable-Growth--17072023-120542.aspx Page 81 Chapter 3: Technological Solutions for Decarbonizing Construction Materials implementing hydrogen technology at its San Pedro de traded. These conditions are not prevalent in many Macoris cement plant in the Dominican Republic.162 emerging markets, which also lack the regulatory and implementation capacity and the green finance Carbon capture, utilization, and storage needed to pilot this high-risk technology with still technologies. uncertain benefits. On the horizon by 2050 are carbon capture, utilization, Recycling construction and demolition and storage technologies, which capture CO2 from waste. industrial emissions and either recycle it for further industrial use or store it safely underground. Once One way to introduce circularity into the cement captured, a wide variety of potential uses for CO2 value chain is by recycling construction and demolition could be possible, such as in the production of plastics, waste to produce concrete. In the United Kingdom, minerals, or synthetic fuels. Carbon capture is still for instance, recycled material from construction expensive at $50–$100/ton of CO2 and it is expected to and demolition waste is increasingly being used to remain so by 2035 and beyond, but it offers the largest replace aggregates in concrete. Some companies are abatement potential among the decarbonization also engaging in the production of recycled concrete. levers for cement production (Exhibit 18). For instance, Holcim operates the Geocycle Recycling Center in Retznei, Austria, which processes 130,000 There are several carbon-capture pilots underway by tons of construction and demolition waste per year. large cement players, although still with high costs About 35 percent of this waste is co-processed in the and often ample government assistance. For instance, company’s cement, while 35 percent is used as recycled Anhui Conch Cement developed in 2017 a cement aggregates by construction companies. The remaining with carbon capture plant in Wuhu, China. In India, unrecyclable 30 percent is used as backfilling material Dalmia Cement Limited and Carbon Clean Solutions for the cement plant quarry.164 are developing the largest cement plant with carbon capture in the cement global industry. The plant is Other solutions include introducing new materials expected to capture 500,000 tons of CO2 per year.163 that can be easily deconstructed and reused in other buildings once the original building is torn down and The progress of extensive decarbonization will expanding the use of carbon calculators such as EC3 depend on the economic viability of this carbon or third-party auditors or environmental, social, and capture technology, as well as the availability of CO2 governance (ESG) rating agencies to give visibility marketplaces through which the captured CO2 can be to the embodied carbon emissions in a construction 162 See CEMEX: https://www.cemex.com/-/cemex-successfully-deploys-hydrogen-based-ground-breaking-technology 163 Global CCS Institute (2019). 164 See Holcim: https://www.holcim.com/who-we-are/our-stories/building-again-construction-and-demolition-waste BUILDING GREEN Page 82 EXHIBIT 19 Use of Alternative Fuels for Cement Production is Limited in Low-Income Regions Biomass utilization in cement fuel consumption as percentage of total consumption 0 25 50 Alternative fuels utilization in cement fuel consumption as percentage of total consumption 0 2 4 6 8 Source: IFC staff calculations based on GCCA (2022). Page 83 Chapter 3: Technological Solutions for Decarbonizing Construction Materials project at the design and procurement phases.165 quality scrap, making the use of other abatement This would allow building owners, green building technologies a must. Increasing demand for high- certification programs, and policymakers to assess quality scrap will also lead to extra cost for the electric supply chain data to establish requirements and set arc furnace-based steel production. embodied carbon limits at the project stage. Improving furnace efficiency. Steel. Furnaces that use this technology produce iron In steelmaking, the decarbonization options that are from iron ore, and then a basic oxygen converter already commercially available include enhancing turns iron, with some additions of scrap, into steel energy and thermal efficiency, increasing the use (Box 5). Production relies on a chemical process called of scrap to substitute iron, steel’s main input, and reduction to separate iron from oxygen. Carbon in substituting coal and heavy fuel oils with biomass the form of coal is needed, as a reducing agent. In the fuels. Like in the cement industry, adoption of process, the carbon combines with the oxygen and innovative technologies such as carbon capture and forms carbon dioxide. This use of carbon makes CO2 green hydrogen, among others, hold the promise of emissions unavoidable in this process. net zero steelmaking but these levers are expected to Decarbonization options include optimizing the blast remain non-economically viable by 2035 and beyond. furnace burden mix by maximizing the iron content As with cement, we analyze the specific application of in raw materials to decrease the usage of coal as a some of these technologies for the steel industry.166,167 reductant, using coke oven gas in the furnace as an Increasing the share of scrap-based energy source, and increasing the use of fuel injection electric arc furnace steelmaking. through, for example, pulverized coal injection, natural gas, plastics, or biomass. Pulverized coal injection The main feedstock for electric arc furnace is a process that involves blowing large volumes steelmaking is steel scrap, but it can also smelt of fine coal granules into the blast furnace. This solidified iron or sponge iron. The heat necessary provides a supplemental carbon source to speed up for melting the metal comes from an electric arc the production of metallic iron, reducing the need for that arises when the electrodes contact the metal coke production. These options help decrease CO2 (Box 5). This technological option seeks to maximize emissions, yet do not offer fully carbon-neutral steel secondary flows and recycling by melting more scrap production. Near pure oxygen can also be injected in electric arc furnaces. However, this lever can be into existing blast furnaces to improve efficiency and limited in regions with an inadequate supply of high- 165 The Embodied Carbon in Construction Calculator (EC3) tool is a tool that allows benchmarking, assessment, and reductions in embodied carbon, focused on the upfront supply chain emissions of construction materials. See https://carbonleadershipforum.org/ec3-tool/ 166 IFC (2023) analyzes other emerging technologies for steel decarbonization and provides further detail on the economic costs and potential abatement potential of steel decarbonization levers. 167 Lorea et al (2023) provides a tentative mapping of green steel projects announced worldwide. BUILDING GREEN Page 84 lower overall emissions intensity by approximately eucalyptus charcoal, replacing traditional coking coal. 15-20 percent.168 The company has 50,000 hectares of eucalyptus planted for sustainable charcoal and captive pig iron Use of biomass in integrated steelmaking. production.171 Biomass can be used in integrated steelmaking as a Hydrogen-based steelmaking. source of fuel or reductant, substituting coal or other fuels in the sintering process, as a blend component There are generally two ways to use green hydrogen in the production of coke, as a direct replacement for in steelmaking: as alternative injection material coke or as an injectant to replace injected pulverized to pulverized coal to improve the performance of coal in the blast furnace, and as a source of carbon in conventional blast furnaces, which can reduce carbon the steelmaking process (Box 5). When sourced from emissions by up to 20 percent;172 and as an alternative renewable resources, biomass has the potential to reductant to produce direct reduced iron that can reduce emissions intensity by as much as 50 percent be further processed into steel using an electric arc across the integrated steelmaking process.169 However, furnace.173 Based on the use of green hydrogen as well biomass may not become a widespread abatement as renewable electricity from wind, solar, or water, lever due to a lack of availability of sustainable sources this technology can enable nearly carbon-neutral of biomass in some regions170 and competing demand steelmaking.174 from other industries. However, the main challenges and uncertainties for Despite these challenges, some producers are already the scalable commercial adoption of this technology conducting steelmaking trials using biomass in are related to the costs of hydrogen generation and emerging markets. Aço Verde do Brasil (Green Steel running the electric arc furnace on affordable sources of Brazil), for instance, is piloting the production of renewable energy. Today, the costs of green of 600,000 tons per year of low carbon steel in hydrogen are still high ($50–$100/ton of CO2), despite its mill in the northern Maranhão state of Brazil. its large abatement potential (Exhibit 18). The trial employs hot metal production based on Some global steelmakers are exploring this technology 168 BHP (2020). 169 BHP (2020). 170 See Exhibit 19 for data on biomass availability for the cement industry. 171 See AVB’s announcement: https://avb.com.br/en/brazils-avb-receives-carbon-neutral-steel-certificate/ 172 McKinsey & Company (2020). 173 Direct reduced iron is iron ore in the form of lumps, fines or pellets that have had the oxygen removed by using hydrogen and carbon monoxide. Typical sources of carbon monoxide are natural gas, coal gas, and coal. Other energy inputs into the production process often include oil and electricity. 174 McKinsey & Company (2020). Page 85 Chapter 3: Technological Solutions for Decarbonizing Construction Materials in emerging markets. In South Africa, for instance, Green hydrogen and carbon capture technologies Sasol and ArcerlorMittal in 2022 launched a joint in steelmaking are today up to 30 percent more venture that will assess the use of green hydrogen to expensive than their commercially available convert captured carbon from ArcelorMittal South counterparts in the absence of carbon pricing Africa’s Vanderbijlpark steel plant into sustainable fuels programs.178 Gas-based direct reduced iron with and chemicals.175 carbon capture and hydrogen-based direct reduced iron are highly sensitive to the cost of natural gas and Carbon capture, utilization, and storage. electricity and the policy environment.179 However, it is Carbon capture, utilization, and storage can be expected that carbon capture and green hydrogen will integrated in existing steelmaking plants but provide competitive options for steelmakers by 2040- requires carbon transport and storage infrastructure. 2050 globally.180 Depending on the configuration, carbon capture has the potential to reduce emissions intensity of the 3.5. Opportunities and challenges for integrated steelmaking process by up to 60 percent.176 investments in green cement and steel. The first commercial steel carbon capture project has The prospects for greening cement and steel been launched by Al Reyadah and Emirates Steel at production in emerging markets hinge on the a gas-based, direct reduced iron plant in Abu Dhabi, availability and carbon content of alternative fuels United Arab Emirates. and raw materials, the average capacity of plants, In India, Tata Steel has commissioned a 5 ton-per- and policy and regulatory readiness. Here, we briefly day carbon capture plant at its Jamshedpur Works. examine some of the regional and country investment The carbon capture technology extracts carbon opportunities and challenges, with a focus on dioxide directly from blast furnace gas for onsite commercially available technologies.181  reuse. The company plans to scale up this technology Within emerging markets, China and India offer in other facilities.177 As with cement, carbon capture the largest potential for cleaner cement and steel technologies for now are not economically viable production. In China, several factors could encourage (Exhibit 18). investment in low-emissions cement and steel over the next decade. These include the recent deployment 175 See Sasol’s announcement: https://www.sasol.com/media-centre/media-releases/sasol-arcelormittal-south-africa-partner-decarbonise-and-reindustrialise-vaal-saldanha-through 176 BHP (2020). 177 IFC (2023). 178 IFC (2023). 179 IEA (2020). 180 McKinsey & Company (2021). 181 Chapter 4 analyzes in detail the policy framework and financing required for decarbonizing construction, including cement and steel.  BUILDING GREEN Page 86 of carbon-trading programs at the provincial level, viability of one of the readiest decarbonization levers and their planned scale up nationwide, tighter in cement.186 environmental regulations, and the large scale of the Besides China and India, Brazil offers significant cement and steel plants, which can more easily bear investment opportunities in green steel in Latin the higher costs of green technologies relative to America and the Caribbean. It has the largest supply conventional alternatives.182 The Chinese government, of renewable energy in Latin America and ample iron for instance, has recently announced plans to put a ore reserves. It is the only country in South America price on cement emissions.183 with carbon storage facilities (two out of three are In India, recent policy measures, like the Performance in operation). There is also one green hydrogen plant Achieve and Trade Scheme, the Steel Scrap Recycling under construction and four others will be ready Policy, and Draft National Resource Policy, will by 2030.187 Half of the cement used in Brazil is still incentivize decarbonization in cement and steel.184 hand-mixed, pointing to the need for investments Blast furnace-basic oxygen furnaces, which could in speeding up the transition to bulk cement and potentially switch to low-carbon technologies, concrete-ready mixes.188 Substantial investment contribute 65 percent of India’s steel capacity. The opportunities for green cement and steel also exist country has available iron ore reserves and massive in Türkiye and South Africa.189 Other emerging potential for renewable energy sources. India’s markets, some in Sub-Saharan Africa, present the government, for instance, requires thermal power potential for investing in new zero-emissions steel and plants to be 5-10 percent co-firing with biomass. cement plants to respond to increasing construction India is also the second largest cement market in demand.190 the world, and its production is expected to more than double in the next decade.185 This offers an opportunity for investing in greening existing cement plants and investing in new net-zero facilities. Yet, restrictive regulations impede the use of low-carbon non-clinkered materials, hindering the commercial 182 IFC staff analysis, IFC (2023) and IEA (2022c). 183 IEA (2022c). 184 IFC (2023a) and IEA (2018). 185 IFC based on Global Trade Analysis Project and WEF (2022). 186 IFC (2023b). 187 IFC (2023a) and IEA (2018). 188 IFC (2017b).  189 IFC (2023a) and IFC staff analysis.  190 IFC staff analysis and McKinsey & Company (2022).  CHAPTER 4: Financing the Green Construction Transition in Emerging Markets BUILDING GREEN Page 88 4.1. Summary instruments, like green sustainability bonds and loans, have been growing at a faster pace (Exhibit 20).191 Emerging markets that put adequate policies in place Equity instruments are less commonly used for such could represent a major investment opportunity financing, though Real Estate Investment Trusts for building green. Emerging markets, however, (REITS) hold the potential to scale financing of green issued only 10 percent of the $230 billon in domestic building construction and operations. Other innovative and foreign green private debt finance for building green finance tools, such as transition bonds or carbon green in 2021. This chapter examines approaches retirement portfolios, are almost non-existent in to directing a greater volume of private finance to emerging markets.192 building green in emerging markets, including green codes, regulations and standards; mandatory and Emerging markets are mostly missing out on voluntary carbon markets; and financial tools including these increasing flows of private green finance for sustainability-linked finance and venture capital funds, decarbonizing construction. Since 2017, they have among others. Some of these instruments represent issued just 10 percent of total global green debt an investment opportunity for domestic and foreign financing, and China accounted for about 60 percent investors. The capability to foster and adopt these of that. Relative to total green debt private finance, for tools will vary across emerging markets depending on all purposes, debt finance for net-zero buildings and each economy’s income level, technological and policy materials amounted to only 20 percent in emerging readiness, and dependence on fossil fuels. markets, compared with about 30 percent in high- income countries.193 4.2. Emerging markets are not mobilizing Yet, there is some promise: private green debt finance enough green private finance to for building green has been growing faster in other decarbonize their construction value emerging markets, including Sub-Saharan Africa, chains. although such finance remains at extremely low Domestic and foreign private finance is increasingly levels (Exhibit 21). In addition, about 90 percent of flowing into greening construction globally. In the last this financing in 2021 globally went to green buildings four years, green debt financing increased twentyfold, rather than to hard-to-abate construction materials from about $10 billion in 2017 to a record high of about such as steel and cement, which account for about $230 billion in 2021. Green bonds accounted for about 19 percent of global carbon emissions.194 70 percent of that financing, but some emerging debt 191 Calculations only consider green, sustainability, sustainability-linked, and transition bonds and loans with green buildings in the use of proceeds or issued by construction material sectors and used for decarbonization. See Annex 3 for more details on the methodology. 192 Section 4.5 analyzes in detail each of these instruments, and their use in greening construction in emerging markets. 193 IFC staff calculations based on Environmental Finance and Bloomberg. Total green debt finance includes sustainability, sustainability-linked, and transition debt issued in 2021 for all purposes, including green buildings and materials. 194 IFC staff calculations based on Environmental Finance, Bloomberg and Global Trade Analysis Project. Page 89 Chapter 4: Financing the Green Construction Transition in Emerging Markets Of the total private green debt finance for building explained by market failures in green finance and green issued in emerging markets outside China, about construction value chains. These market failures are 54 percent of domestic and foreign debt was issued in often more pronounced and pervasive in emerging Latin America and the Caribbean, followed by East Asia economies, especially in low-income countries. and the Pacific (19 percent), and Europe and Central For instance, the fragmented structure of construction Asia (12 percent). The Middle East and North Africa, value chains, highly localized regulations, the presence South Asia, and Sub-Saharan Africa together issued of informational asymmetries between the segments about 15 percent of total green debt financing for of the value chains and policymakers, and the building green (Exhibit 22). Within Sub-Saharan Africa, prevalence of small and medium-sized construction South Africa accounts for most of the private green companies restricts finance for building green. debt financing issued for construction decarbonization Financial decisions often involve multiple stakeholders, (75 percent).195 including investors, developers and owners, architects Looking at the use of climate finance instruments and other professionals, and materials producers, by region, about 90 percent of green bonds and with split incentives (Box 1). Investors cannot loans for decarbonizing construction were issued also easily identify investment opportunities in by high-income countries and China between 2017 green construction in the absence of green codes, and 2021. Sustainability bonds were issued mainly in regulations, and standards. Small and medium-sized those economies, but Sub-Saharan Africa and other developers, especially in economies with high levels of emerging markets also use some of those financial informality, also face financial restrictions for building instruments, accounting for about 7 percent of the green. The lack of skilled workers in sustainable total (Exhibit 23). construction techniques further limits the potential of investments in green buildings or materials. Sustainability-linked green debt instruments exhibit the highest use by emerging markets of green Green construction alternatives also appear more construction financial instruments, with 20 percent expensive than they ought to be because today’s of the total bonds and 10 percent of the total loans market prices do not reflect the social costs imposed (Exhibit 23). by emissions from brown buildings and materials, reducing expected returns for green construction 4.3. Market failures largely explain the projects. Consumers and investors can be unwilling or paucity of green finance for construction unable to pay an up-front premium for green buildings in emerging markets. of about 1–5 percent relative to brown alternatives, especially in affordable housing targeted at lower- The low levels of domestic and foreign private capital income households. This is more challenging in low- for building green in emerging economies are partly income and fragile countries, where there are few 195 IFC staff calculations based on Environmental Finance and Bloomberg (2022). BUILDING GREEN Page 90 commercially viable green building investments. by the lack of legal frameworks and institutional capabilities. Carbon pricing can also increase consumer Limited information about default rates and the prices of brown construction materials and buildings, monetary benefits of green building investment limiting the appetite for these systems, especially in portfolios also reduces investment in green low-income countries.202 Restrictions on international construction. Climate risk, related to issues such as trading of carbon permits also limit channeling capital economic losses arising from climate hazards, tends to from carbon markets in developed countries to green be underpriced by financial markets.196 For example, construction projects in emerging markets.203 residential property values often do not fully reflect the risks of extreme climate events, even when such Private investors can face high costs for measuring information is public.197 This increases the capital costs and monitoring environmental performance in for green and resilient buildings relative to traditional green construction projects, especially in hard-to- alternatives. This problem can be more severe in abate materials like cement and steel. These costs emerging markets exposed to frequent catastrophic are especially high in emerging markets because of events and lacking well-developed financial and poor governance and disclosure standards, lower insurance markets.198 transparency, weaker regulations, and limited technical capabilities for issuing and regulating green Carbon markets can, in principle, mitigate some of financial instruments.204 these differences in market prices between green and brown buildings and materials. 199,200 However, Emerging markets may also face supply constraints. these markets remain underdeveloped, especially in There are often fewer commercially viable green emerging markets. For instance, only three emerging projects in construction value chains to finance in economies have launched carbon markets: China, these markets.205 This may be due to the absence Kazakhstan, and Mexico.201 This is partly explained of innovation, limited green technical capacity for 196 Hong et al. (2019); Hino & Burke (2021). 197  Ibid. 198 See Chapter 3 for a discussion on resilient green buildings in emerging markets. 199 Note that carbon taxes can achieve a similar effect by imposing a cost on carbon, forcing firms to internalize the social costs generated due to emissions. Taxes also face similar concerns of potentially higher consumer prices and erosion of competitiveness, though implementation capacity issues are less of a problem. The primary difference is in the setting of the carbon price: it is determined by market forces in carbon markets and by the government in the case of taxes. Hence for the former, there may be some uncertainty around costs for firms, and it is possible that the cost of abatement exceeds the estimated benefits (Frank, 2014). However, carbon taxes are subject to uncertainty around the impact on total level of emissions (relative to carbon markets where caps can be set). (Frank 2022). 200 IFC (2019b). 201 World Bank (2022). 202 IFC (2019b). 203 World Bank (2021a). 204 IFC and Amundi (2019). 205 World Economic Forum (2022a). Page 91 Chapter 4: Financing the Green Construction Transition in Emerging Markets EXHIBIT 20 Global Private Green Debt Finance to Build Green Increased Twentyfold, and About 70 Percent Flowed into Green Bonds Compound Annual Growth Rate 250 Sustainability- Other linked bonds 221% Sustainability 200 bonds 192% 150 $ billions 100 Green bonds 93% 50 Sustainability- linked loans 313% Green loans 70% 0 2017 2018 2019 2020 2021 Notes: Calculations only consider green, sustainability, sustainability-linked, and transition bonds and loans with "green buildings" in the use of proceeds or issued by construction material sectors and used for decarbonization. See Annex 3 for more details on the methodology. ‘Other’ includes transition bonds and sustainability loans. See Annex 3 for more details on the methodology. Figures in the text might not be identical due to rounding. Source: IFC based on Environmental Finance and Bloomberg (2022) BUILDING GREEN Page 92 EXHIBIT 21 Emerging Markets Issued Only 10 Percent of Global Domestic and Foreign Private Green Debt Finance for Construction Decarbonization Compound Annual Growth 250 Rate Other emerging markets 146% Sub-Saharan Africa 138% China 86% 200 150 $ billions 100 High income 109% 50 0 2017 2018 2019 2020 2021 Notes: Calculations only consider green, sustainability, sustainability-linked, and transition bonds and loans with “green buildings” in the use of proceeds or issued by construction material sectors and used for decarbonization. Income and region volumes are based on the location of headquarters and/or country of risk (determined by the firm’s geographical exposure to operations) of the issuing entity. Compound annual growth rates are calculated using the first year of issuance as base year: 2018 for Sub-Saharan Africa and other emerging markets, and 2017 for high income countries. See Annex 3 for more details on the methodology. Figures in the text might not be identical due to rounding. Source: IFC based on Environmental Finance and Bloomberg. Page 93 Chapter 4: Financing the Green Construction Transition in Emerging Markets implementation, lack of economies of scale, and limited concessional EXHIBIT 22 finance resources.206 Regulatory, macroeconomic, currency, and Latin America and the Caribbean Accounts for political risks and volatility can More Than 50 Percent of Private Green Debt also increase costs, making green Issuance for Construction Decarbonization construction investments less in Emerging Markets Outside China profitable. Percent of emerging markets excluding China by region, 2017–2021 4.4. Concerted action 1% Middle East & North Africa by private investors and 5% South Asia policymakers will be 9% Sub-Saharan Africa required to overcome market failures and 12% Europe & Central Asia reduce emissions from construction value chains. A range of solutions that already 19% East Asia & Pacific exist or are emerging can address some of these challenges for financing green construction in emerging markets in domestic and international capital markets. Some solutions are purely financial, 54% Latin America & Caribbean while others are based on carbon- trading and pricing systems, or government regulations. Some of these financial tools are already available, like sustainability-linked finance and equity funds; others Notes: Calculations only consider green, sustainability, sustainability-linked, and transition are still nascent and require further bonds and loans with "green buildings" in the use of proceeds or issued by construction material sectors and used for decarbonization. Income and region breakouts are based on support, like green mortgages, the location of headquarters and/or country of risk (determined by the firm’s geographical exposure to operations) of the issuing entity. South Asia comprises solely India (no other transition bonds, and carbon country recorded any issuances). Middle East & North Africa includes Egypt (63 percent) and Lebanon (38 percent). Latin America and the Caribbean comprises Mexico (66 percent), Brazil retirement portfolios. (8 percent), Costa Rica (7 percent) and Guatemala (7 percent), among others. Europe and Central Asia includes Türkiye (88 percent), Russia (10 percent) and Armenia (2 percent). East Asia and Pacific includes Philippines (41 percent), Malaysia (26 percent) and Indonesia (25 percent), among others. Figures in the text might not be identical due to rounding. Source: IFC staff calculations based on Environmental Finance and Bloomberg (2022). 206 Chatterton and De Vautibault (2021); Loukoianova et al. (2022). BUILDING GREEN Page 94 EXHIBIT 23 Emerging Markets Are Increasingly Using Sustainability-Linked Instruments for Green Construction Financing Accumulated sustainability finance by region. Percent of total, 2017–2021 Sustainability-Linked Bonds Sustainability-Linked Loans High Income China Sustainability Bonds Sub-Saharan Africa Other emerging markets Green Bonds Green Loans 0% 20% 40% 60% 80% 100% Percent of total, 2017-2021 Notes: Calculations only consider green, sustainability, sustainability-linked, and transition bonds and loans with "green buildings" in the use of proceeds or issued by construction material sectors and used for decarbonization. Income and regional breakouts are based on location of headquarters and/or country of risk (determined by the firm’s geographical exposure to operations) of the issuing entity. ‘Other emerging markets’ sustainability-linked bonds are composed solely of issuances from India. Figures in the text might not be identical due to rounding. Source: IFC based on Environmental Finance and Bloomberg These instruments would open a $1.5 trillion business The appropriate mix of financial and policy opportunity for both domestic and international instruments for building green will vary across investors in electrified brown buildings with cleaner emerging markets, depending on the country’s energies and lower-emission new buildings and income level, the size and depth of the domestic materials than conventional alternatives in emerging financial system, and the public sector’s regulatory and markets in the next decade (See Chapter 1). The enforcement capabilities. Reliance on fossil fuels in the sources of funding—domestic, foreign and/or local economy and carbon- and energy-intensity of multilateral—as well as the type of provider—private, the construction sector will also affect the prospects public, and/or multilateral—and the potential financial and the speed of adoption of some of these tools. instruments for financing these decarbonization levers, including off-balance sheet, debt, equity, and venture A range of private green financing capital, among others, along with some examples of instruments is available or emerging recent investments in emerging markets are discussed to support investments in greening here and detailed in Table 2.4 in Annex 2. construction value chains. Page 95 Chapter 4: Financing the Green Construction Transition in Emerging Markets Building green in emerging markets will require a In 2021, the company issued a sustainability-linked combination of existing and novel green financial bond that raised $400 million in domestic and instruments, depending on the type of investment and international capital markets. The bond’s rate is linked country conditions. Some of these tools will be mainly to compliance with the company’s self-determined provided by local financial institutions, especially in target of reducing its carbon emissions by 22 percent residential real estate. International and domestic by 2030. If the target is missed, the interest rate will investors can contribute with other debt and equity rise by 75 basis points.207 instruments, such as green bonds and loans or REITs. In 2021, sustainability-linked finance for greening Off-balance sheet financing can also be supplied construction registered a record high of about by local energy-service providers, via performance $27 billion globally, and about 70 percent of that contracts or leasing. Voluntary carbon markets can, went to decarbonization of construction materials. in turn, help to channel domestic and international Cement and steel each received about half of total capital into green construction. Here, we analyze some sustainability-linked finance for construction materials of these tools. globally, but the share of steel has been growing Using sustainability-linked debt for more rapidly since 2019. Loans are the most popular decarbonizing hard-to-abate construction linked instrument for financing the decarbonization of construction materials, accounting for about materials. 86 percent of total financing, but bond issuance By reducing screening and monitoring costs for increased seven-fold in 2019–2021.208 (Exhibit 24). lenders, sustainability-linked finance—that is, loans and bonds in which compliance with a set of pre- Driving demand for green construction determined sustainability targets triggers reductions with green mortgages. in financing costs—can, at least in principle, contribute As with traditional mortgages, domestic financial to aligning incentives of investors and brown institutions are the primary provider of green construction companies to reduce carbon emissions. mortgages in most countries. This type of debt To be effective in reducing emissions, sustainability- instrument demands long-term finance in local linked finance requires well-developed regulatory, currency not commonly offered directly to borrowers prudential, and sustainability frameworks, and by international banks or other investors.209 However, domestic financial markets. debt and equity issuances in global capital markets, The case of India’s largest cement producer, Ultra along with conventional and concessional finance Tech, illustrates the potential of this instrument. from development finance institutions, are becoming 207 See Ultra Tech Cement’s announcement: https://www.ultratechcement.com/about-us/media/features/ultratech-cement-raises-usdollar-400-million-through-india-s-first- sustainability-linked-bonds 208 IFC staff calculations based on Environmental Finance and Bloomberg. 209 IEA (2021). BUILDING GREEN Page 96 an important source of finance for this asset class for frameworks, deep local financial markets and thriving mortgage providers in middle-income economies. demand from sustainability-oriented owners and investors. With financial and technical support from Against this backdrop, green mortgages offer development finance institutions, these financial consumers preferential conditions, such as lower instruments are therefore more likely to blossom interest rates and/or longer duration, to purchase in middle-income economies than in low-income properties with lower energy consumption and carbon countries. emissions. Green mortgages may have lower down payments than conventional alternatives because Energy-performance contracts and leasing green buildings consume less energy, and thus have for building green. lower utility bills, which may count as borrower’s income. Off-balance sheet finance can be an effective tool to incentivize and fund investments in new and Outside the European Union and United States, use retrofitted net-zero buildings and materials. Through of green mortgages has been limited by high due performance contracts and leasing, energy-service diligence costs for green buildings and the lack of providers can offer financing for energy-efficiency information on default rates of these instruments investments that can be repaid through energy savings for local financial institutions.210 That is not the over time. Off-balance sheet energy-performance case everywhere, however. In 2016, Bancolombia, contracts can also be used to finance waste heat Colombia’s largest commercial bank, issued a $400 recovery in cement plants,213 and could be used to fund million green bond in three tranches. This financing energy-efficiency upgrades in steel plants. was used to build a pipeline of green construction projects and offer green mortgages in local currency According to the IEA, about 25 percent of global with a discount rate of 65 basis points.211 In Peru, IFC clean energy investments (e.g., energy- efficiency is supporting BBVA, one of the largest local financial improvements, carbon capture, and alternative low- institutions, to finance homebuyers’ green mortgages emission fuels) in the industrial sector, including also issued in domestic currency, and is providing cement and steel, is financed today through advisory and certification services through EDGE, IFC’s performance contracts or leasing. Combined with green building certification program.212 equity and debt financing, off-balance sheet finance might become an even more important source As in the case of sustainability-linked finance, of capital for construction decarbonization. It is green mortgages require demanding regulatory estimated, for instance, that about 20 percent of and prudential capabilities, adequate sustainability 210 IFC (2019a). 211 Ibid. 212 IFC (2022). 213 IFC (2014). Page 97 Chapter 4: Financing the Green Construction Transition in Emerging Markets EXHIBIT 24 Sustainability-Linked Finance Can Help Decarbonize Hard-to-Abate Construction Materials Compound Annual Percent of Total Growth Rate 2019–2021 20 Other 100% Other 5% 15 Steel 371% 80% Steel 47% Percent of total 60% $ billions 10 40% 5 Cement 368% Cement 48% 20% 0 0% 2019 2020 2021 2019-2021 Notes: ‘Other’ comprises sustainability-linked bond issuances from a provider of wood-based solutions for construction and sustainability-linked loan issuances from a provider of sustainable facades. Figures in the text might not be identical due to rounding. Source: IFC staff calculations based on Environmental Finance and Bloomberg. financing for green buildings will occur through Channeling equity finance into green energy-performance contracts or leasing in the next buildings in emerging markets with green decade.214 Given its relatively low regulatory demands funds and REITs. compared to sustainability-linked finance and green mortgages, off balance sheet contracts could become Green REITs inject equity finance into net-zero a powerful tool to promote building decarbonization construction through investments in green real not only in middle-income economies, but also estate and mortgages. This instrument raised about in some low- income countries with adequate $28 billion in 2021 globally through bonds and loan regulations in the energy sector and financial and issuance, up from $0.7 billion in 2017 (Exhibit 25). There technical support from the international community. is no detailed information on emerging markets, but green REITs show potential to finance building green 214 IEA (2021). BUILDING GREEN Page 98 by diversifying investors’ risk in a portfolio of brown emerging markets.219 Recent evidence suggests that and carbon-neutral properties. actively managed green equity funds can identify green firms with potentially high-risk adjusted results, For example, Kimco Realty, the largest operator of reducing screening and monitoring costs for investors open-air shopping centers in North America, used relative to green equity passive funds.220 $365 million from a green bond issued in 2020 to finance the acquisition of green residential and Green equity could become a powerful instrument commercial buildings and invest in energy-efficiency to foster construction decarbonization in emerging upgrades in 123 of its existing properties. This markets in the years to come. This asset class, transaction enabled 7,200 tons of carbon dioxide however, remains nascent even in most high-income equivalent savings in greenhouse gas emissions for the economies and requires relatively sophisticated policy company.215 and oversight capabilities in the public sector. Green construction equity funds are therefore more suitable Like green REITs, green equity funds can invest for middle-income economies with substantial policy in companies that design, build, manage, and capabilities. In low-income countries, development operate green buildings. Some funds also invest in finance institutions could support some equity- decarbonization of cement and steel companies.216 based construction-related investment, possibly with Green equity funds are among the prominent options blended finance, with the aim of sowing the seeds for for investors to invest in sustainable companies in green equity markets in the years to come. emerging markets,217 though they are mostly domiciled in advanced economies.218 Financing innovative technologies with Green funds are relatively new. For instance, the venture capital. first Exchange Traded Fund for green buildings was Venture capital markets can help finance game- launched in 2021. This passive fund tracks the MSCI changing technologies for construction material Global Green Building Index, which focuses on the decarbonization and energy, as well as resource- entire global construction value chain, including 215 Business Wire (2022). 216 Naqvi et al. (2021). 217 Naqvi et al. (2021). 218 IMF (2021). 219 Johnson (2021). 220 Revelli & Viviani (2014). Page 99 Chapter 4: Financing the Green Construction Transition in Emerging Markets efficient buildings and infrastructures. They can also These markets allow investors to trade carbon be critical in building a pipeline of commercially viable permits against investments in green projects without green construction technology investments. However, government oversight or regulation. For now, they since 2013, only 4 percent of $88 billion invested by have financed green construction projects in only 10 venture capital funds in green technologies globally emerging economies since 2006, and mainly in green went to green buildings and materials.221 Moreover, buildings rather than in hard-to-abate construction venture capital investing in emerging markets is materials. Low-income countries have received limited because of weak protections for intellectual investments in green buildings, while middle- and property rights, a lack of long-term investors, and high-income countries have invested in energy the dearth of exit options because of underdeveloped efficiency retrofits and waste heat recovery in cement capital markets.222 and steel plants.223 High-income economies could support construction decarbonization in emerging Venture capital holds promise for promoting economies by fostering the development of voluntary novel mitigation and adaptation technologies for carbon markets specialized in trading carbon permits construction decarbonization in countries with against green construction projects in those countries. relatively sophisticated domestic financial markets Development finance institutions could provide and venture capital investors operating in other financial and technical support and blended finance for sectors, like Brazil, India, or South Africa. Realizing such efforts in lower-middle income and low-income this potential will require, however, strengthening economies. financial regulations and support from development finance institutions. In low-income economies, the Carbon transition bonds and carbon international community can collaborate to lever retirement portfolios for decarbonizing or venture capital investments into small innovative retiring brown construction assets. green construction projects through blended finance and other concessional tools as well as technical These bonds do not require borrowers to be support. completely green but to become greener over time, thereby reducing negative screening by investors of Funding building green in emerging hard-to-abate and carbon-intensive steel, cement, markets through voluntary carbon and glass companies.224 This tool is relatively new, markets. with only about $4 billion issued to date for the 221 Johnson (2021). Groh et al. (2016). 222  IFC staff calculations based on Berkeley Voluntary Registry Offsets Database (July 2022). 223  Negative screening refers to the process of finding and excluding stocks of companies, whose operations are seen as “unsustainable” from an environmental, social or a governance 224  (ESG) standpoint. BUILDING GREEN Page 100 construction sector. Transition bonds have not yet been issued in emerging markets.225 EXHIBIT 25 The first transition bond issued by a steelmaker Fundraising by Green REITs globally illustrates the potential of this instrument. Increased More Than Fortyfold In 2022, JFE Holdings, Japan’s largest steelmaking in the Last Four Years company, issued a $230 million transition bond. Proceeds have been used for investments in research $ Billion and development (R&D) of innovative technologies, 30 28.3 including carbon recycling blast furnaces, hydrogen- based steelmaking, carbon capture, storage, and utilization technology, and electric arc furnaces. The 20 18.1 funds have also been used to increase the use of renewable energies and scrap metal in the steelmaking 14 $ billion process. In the future, carbon retirement portfolios could also 10 contribute to decarbonizing cement and steel. These 5.2 portfolios, which are not yet commercially viable, might enable investments to phase down outdated 0.7 0 plants and to decarbonize plants still in operation, 2017 2018 2019 2020 2021 diversifying and reducing investors’ risks.226 Development finance institutions could provide technical and financial support to the development of Notes: Fundraising refers to debt issuances only. Figures in the text might not be identical due to rounding. these novel financial instruments in emerging markets. Source: IFC staff calculations based on Environmental Finance Given the high cost of decommissioning or retrofitting brown steel and cement plants and buildings, and the need for fiscal support, these efforts should be focused Policymakers’ action is required to on countries with relatively large cement and steel support the growth of green construction sectors and developed domestic financial markets. financial markets. These efforts could be oriented towards some pilot projects to contribute to paving the way for further Policymakers can use a range of tools to mobilize decarbonization in the longer term. domestic and international green finance in emerging markets. These measures include strengthening local 225 IFC staff calculations based on Environmental Finance and Bloomberg. 226 World Economic Forum (2021). Page 101 Chapter 4: Financing the Green Construction Transition in Emerging Markets financial markets, carbon taxes and markets, fiscal previously came under no regulation.227 incentives, building codes and regulations, as well Governments can also increase investor appetite as concessional and blended finance, among others. and spur innovation by requiring all publicly-owned To date, the most popular tool used in emerging buildings to meet certain green standards. This countries has been regulation, especially minimum has a knock-on effect in terms of developing skills energy performance standards, compared with high among designers, engineers, and workers—ensuring income countries that mainly resort to fiscal tools a growing technical capacity which can spill over into such as carbon taxes and incentives (Annex 2). Here, the private sector.228 However, today only about 80 we analyze how these policy instruments can be countries have mandatory or voluntary building energy used to channel more investments in building green codes at the national or subnational level, of which just in emerging markets, considering differences in fiscal over half, 43 countries, have mandatory codes at the resources, government capabilities, reliance on fossil national level for both residential and non-residential fuels, and carbon intensity of materials, construction, buildings.229 and operation of buildings. Codes can incentivize private investment by increasing Green building codes and standards and the risk of stranded assets in portfolios that hold other regulations as a tool for enticing conventional buildings (making investments in green domestic and international private finance buildings more attractive by comparison).230 Large into green construction. fines for buildings that do not meet regulatory criteria can lessen underpricing of climate risk, reducing the Codes and energy-efficiency standards for materials risk-return portfolio of standard buildings. Other and buildings can be effective mechanisms for regulatory benefits for green building, like density attracting more green funding for construction value bonuses (additional height allowances for eligible chains. Building codes and standards force developers green buildings) and expedited permitting, can also and other participants to meet certain standards from make green building investments more attractive. the get-go, applying them to the design, construction, use, and maintenance of built structures. Minimum Against this backdrop, emerging markets tend to energy-efficiency standards include mandatory rely more on regulatory tools than fiscal tools to labeling and/or certification of energy performance foster decarbonization in construction. Due to limited for buildings and appliances. Universal green building fiscal space, regulation is a popular tool among codes can reduce the incremental costs of green these governments (See Table 2.4 in Annex 2 for building projects relative to standard buildings which more details). However, in emerging markets where 227 IFC (2019a). 228 Steuer and Troger (2022). 229 IEA (2021). 230 IFC (2019a). BUILDING GREEN Page 102 regulations such as building codes do exist, they Adopting policies geared toward improving the may not be comprehensive or fully enforced. Weak efficiency, transparency, and depth of local capital institutional and enforcement capabilities, combined markets, through improved macroeconomic with high risk of corruption, may limit the effectiveness conditions, prudential regulations, and other measures, of these tools and increase the risk of greenwashing. is thus necessary to unlock the capital required for building green, especially in the poorest and more Strengthening domestic capital and unstable developing countries. 235 financial markets for building green. Improving environmental, social, and All over the world, private investments in construction, governance (ESG) disclosure regulations. especially residential housing, are mainly funded by domestic financial institutions in local currency.231 In addition to strengthening local capital markets, Volatile macroeconomic and political conditions, governments can increase ESG reporting requirements, combined with weak regulatory and implementation which can facilitate financing green construction. capabilities, hamper the expansion and deepening of Regulations on environmental disclosure can financial markets in many emerging economies. improve transparency in the market for sustainable financing instruments, serving to reduce informational In low-income countries, for instance, domestic credit asymmetries. Currently, high screening costs due to to the private sector only amounts to about 13 percent greenwashing concerns can discourage investors and of GDP compared to about 160 percent in high-income lead to inefficient allocation of capital, especially for countries.232 Similarly, stock market capitalization carbon-intensive companies such as concrete and hovers around 80 percent of GDP in low- and middle- steel producers. income countries, while it is about 170 percent in high-income economies on average.233 Public financing More standardized and comparable disclosure or co-financing for construction also faces stiff regulation can serve to improve the quality of ESG restrictions in emerging markets. Government gross information that is reported and reduce screening debt to GDP, for instance, only amounts to about 64 costs for investors. This would allow financiers to percent of GDP in low-income countries compared to better navigate around firms with substantial climate more than 100 percent in advanced economies.234 risk (for both financial and non-financial reasons), and instead allocate more capital to greener firms that 231 IFC (2019). 232 Aggregate figures sourced from the World Bank Open Data portal. 233 Aggregate figures sourced from the World Bank Open Data portal. 234 Government gross debt figures sourced from World Economic Outlook data portal. 235 See World Bank (2020) for a detailed policy discussion on capital market development. Page 103 Chapter 4: Financing the Green Construction Transition in Emerging Markets will thrive in an increasingly sustainability-focused Most of the cement and steel decarbonization economic context.236 projects originated in China and India.238 Outside those countries, development finance institutions and Improving these regulations should become a government agencies from high-income countries priority in all emerging markets. To foster the use should contribute to broaden the use of carbon credits of novel and sophisticated financial instruments for for decarbonization projects in emerging markets construction decarbonization like sustainability-linked through fiscal support -tax incentives or subsidies-, finance, green equity funds, and more in the future, blended finance, and technical assistance, especially in carbon retirement portfolios and transition bonds, lower middle- and low-income economies. middle-income as well as low-income economies should strengthen and expand the reach of their ESG Emissions trading systems can generate government disclosure regulations. revenues that can co-finance piloting technologies for greening construction value chains that might be too Emissions Trading Systems (ETS). risky for private investors. For instance, ArcelorMittal, These systems can help mobilize domestic and the world’s largest steelmaker, is using a combination foreign private capital to invest in green buildings of carbon offsets, funding from the EU Green Deal, and and net-zero carbon materials in emerging countries. grants from the EU ETS Innovation Fund to finance Emissions trading systems provide incentives to invest investments in green technologies.239 Similar programs in green alternatives by pricing the social costs of could be used to foster piloting new technologies in emissions from brown construction activities.237 The emerging markets with support from development United Nations-run Clean Development Mechanism finance institutions, development government (CDM) is a system that certifies and regulates carbon agencies of high-income economies or the EU. credits generated in emerging countries. These credits The potential to implement emissions trading systems are then allowed to be sold to high-income countries in emerging markets remains constrained by weak and firms that are regulated by emissions caps. The legal frameworks and implementation capabilities. CDM has certified more than 12 million credits in Carbon pricing can increase consumer prices and green buildings, 23 million in net-zero carbon cement, impair the competitiveness of domestic producers, 54 million in steel and iron, and about 40,000 in glass. which further reduces the appetite for this tool in emerging economies.240 Some solutions for making 236 Steuer and Troger (2022). 237 McKinsey & Company (2022). 238 IFC staff calculations based on CDM data from 2006–2022. Figures include all projects in the respective ‘cement’, ‘steel & iron’, and ‘glass’ categories as classified by the CDM UNFCC database, not only those specific to buildings. See methodology for detailed explanation. 239 The EU Innovation Fund raises revenue through the EU ETS and has been commissioned to provide funding to highly innovative low-carbon technologies (Greenovate Europe, 2019). The EU Green Deal is an economic plan aimed to help the EU reach carbon neutrality by 2050 and will be financed via the EU’s seven-year budget and the Next Generation EU Recovery Plan (European Commission, 2019). 240 IFC (2019b). BUILDING GREEN Page 104 EXHIBIT 26 Carbon Taxes Have Been Introduced in Only a Few Emerging Markets National and regional carbon tax systems Subnational carbon tax systems under consideration under consideration implemented or scheduled for implementation implemented or scheduled for implementation Source: World Bank Group Carbon Pricing Dashboard. Accessed July 2022. carbon markets more attractive to policymakers have implemented emissions trading systems to date may include using revenues for pro-poor policies.241 (Exhibit 27). Development finance institutions should help to mitigate these potentially adverse distributional effects Using carbon taxes to promote green through provision of financial and technical support. construction.242 Because of these hurdles, only a few emerging markets Carbon taxes can contribute to internalizing the social 241 IFC (2019b). 242 The analysis of potential risk of leakages of carbon pricing programs in steel given its high international tradability is beyond the scope of this report. Yet, available evidence from the European Union Trading System suggests there are no significant leakages stemming from these programs (Branger, Quirion, and Chevallier 2017). Page 105 Chapter 4: Financing the Green Construction Transition in Emerging Markets EXHIBIT 27 Regional, National, and Subnational Emissions Trading System (ETS) Initiatives Implemented National and regional ETS initiatives Subnational ETS initiatives Size of the circle represents the carbon emissions covered. Source: World Bank Group Carbon Pricing Dashboard. Accessed July 2022. costs of brown construction in manufacturers and middle-income countries. However, setting the right developers’ prices, increasing the demand for greener price is critical to maximize effectiveness and may alternatives. One of the key benefits of carbon taxes require complex analysis. Another benefit of carbon is that they generate revenues that can be used to taxes is that they can be increased gradually over time, compensate for their potential distributional effects. allowing companies to adjust their cost structures Carbon taxes are easier to implement than market- gradually. based carbon pricing systems and provide a clearer Carbon taxes can also be applied to different segments price signal to consumers and producers. These of construction value chains, from fossil fuels providers characteristics may make them better suited for to builders and consumers, to encourage green BUILDING GREEN Page 106 BOX 7 What Is Concessional and Blended Finance? Concessional finance from development finance guarantor, with fees charged at below-market rates institutions can provide a range of below-market-rate (e.g., first-loss guarantees, partial credit guarantees). financial products to the green building and green While this tool does not solve the liquidity constraints of construction material sectors, correcting for some green building developers and commercial bank lenders, market failures. Concessional finance can include it can directly address the underlying portfolio risks and subsidized loans and grants, as well as guarantees and uncertainties around the future value of green projects, equity. While grants are usually one-time transfers of particularly innovative ones, and hence help to unlock money with no expectation of repayment, subsidized private capital. Additionally, it can also address the issue loans are loans offered to firms at below-market-rate of currency risk for local currency financing in emerging interest rates. markets. Concessional equity is an ownership stake in a company Blended finance utilizes limited pools of concessional with return expectations below the market rate. This funds to mobilize larger sums of private sector financing equity tool can be advantageous as it may provide toward development goals, often with climate-related credit-constrained buildings and building material firms objectives. The concessional component can be used with upfront funding and does not require recipients to increase the commercial viability of projects via risk to make loan payments. This may be helpful for cash- mitigation and improvement of the risk-return profile of strapped firms in low-profit margin, capital-intensive cutting-edge investments. The donor elements of these sectors like steel and cement, which require substantial transactions tend to be structured as co-investments capital upgrades to reduce emissions. This form of (primarily as debt, but also as equity, risk-sharing, or financing can also mitigate risk associated with senior guarantee products) with expectation of reflows for debt–borrowed money that a company must repay first future investments or other uses. Blended finance can if it goes out of business–by improving coverage ratios provide more impact per dollar than pure concessional and, unlike concessional senior debt, it does not crowd financing, as a relatively small amount of concessional out private bank participation. funds can unlock substantial amounts of private capital. This also means there is less risk of misallocation of Concessional guarantees and risk-sharing facilities capital compared to standard grants and subsidies. transfer all or part of the financial risk of a loan to the construction.243 In principle, carbon taxes should be building use-related activities in the next decades targeting those segments with the highest abatement as the power industry decarbonizes and buildings potential. For instance, taxing construction materials increasingly rely on electricity in their operations.244 could become relatively more important than taxing Taxing consumers or producers would depend, in 243 IFC (2019). 244 IFC (2019). Page 107 Chapter 4: Financing the Green Construction Transition in Emerging Markets turn, on the potential distributional implications and in which revenues from emissions trading systems political feasibility, especially in lower middle- and surpassed those from carbon taxes.245 low-income countries. Fiscal support for decarbonizing and Alternatively, carbon taxes could be applied to the decommissioning materials plants and entirety of construction projects to spread out their funding low-income green residential costs over the entire value chain instead of on a housing. particular set of stakeholders. Carbon taxes are mainly used today for the raw materials and manufacturing Subsidies (e.g., grants, below-market-rate loans, and of building products as well as the repair, replacement direct transfers) and tax incentives (e.g., tax breaks) and refurbishment of buildings, and operational stages. are commonly used policies to finance construction decarbonization, especially in developed economies The results of the simulations employing the model (Annex 3). Given the risks associated with such described in Box 2 presented in Section 1.3. suggest, measures, for example subsidies where the desired however, that direct taxation of brown buildings and result is not effectively monitored or would have materials now could have significant negative impacts occurred in the absence of support, there is a need on economic growth in the short-to-medium-term, for more empirical evidence on the effectiveness and especially in emerging markets, at least until the efficiency of such tools, particularly in comparison to technologies with the highest abatement potential regulatory approaches. become commercially available by 2035. Yet, following the example of the United States and As of 2022, there were 36 carbon pricing initiatives the European Union with carbon-powered facilities,246 implemented, covering 28 national jurisdictions, and fiscal support will likely be needed to decommission or regulating approximately 6 percent of total global decarbonize brown cement and steel plants. Given the greenhouse gas emissions. These include not only high costs of decommissioning or retrofitting stranded national programs, but also eight subnational systems material plants, this lever will most likely remain a (which are mostly located in North America). An longer-term priority for most emerging markets. additional eight carbon tax initiatives are underway, Fiscal incentives will also be required to incentivize in emerging markets such as Botswana, Indonesia, construction of green residential housing targeted to Morocco, and Senegal (Exhibit 26). While carbon tax low-income households that might not be available in programs appear to be extending to new regions, fiscally constrained economies without international they are becoming a relatively smaller piece of the support. equation as other carbon-pricing mechanisms gain in popularity. For example, 2021 was the first year 245 World Bank (2022). 246 See IEA (2021). BUILDING GREEN Page 108 Green Banks. BOX 8 Green banks can play a role in mobilizing domestic and international finance for small-scale green IFC Experience in Promoting Green building projects. These types of banks, often funded Buildings Using Concessional and by national or subnational governments, specialize in Blended Finance providing mission-driven green financial products that Since 2018, IFC has funded green construction may not otherwise be widely available on the market. projects in Latin America, Sub-Saharan Africa, Middle Products include green construction loans, mortgages, East and North Africa, South Asia, and East Asia and first loss guarantees. However, two-thirds of for $15.4 million using concessional and blended green banks are in high-income countries. Expansion finance through the Market Accelerator for Green of green banks in emerging markets is limited by the Construction (MAGC) program. Co-funded with the availability of finance, technical capacity, and political United Kingdom’s Department for Business, Energy & Industrial Strategy (BEIS), MAGC seeks to boost the and regulatory factors.41 Nonetheless, these entities uptake of greener practices and technologies focused are becoming more popular and currently exist in on developing countries’ construction markets India, Malaysia, and South Africa. through four main components: (a) firm-level technical assistance and blended finance to financial Development finance institutions. institutions; (b) country-level capacity building; (c) Development finance institutions can play a critical IFC’s EDGE certification platform, maintenance, operations and improvements; and (d) Green building role in mobilizing local and international private capital performance report and dissemination. toward green construction, serving as an anchor investor, providing market-rate and concessional About 60 percent of MAGC’s funds has gone financing, and operationalizing supranational to developers to afford the extra costs of green buildings, and the remaining financing to support climate funds. For green buildings specifically, IFC green mortgages through private financial invested and mobilized nearly $4.4 billion from 2014 institutions. For instance, IFC provided blended to 2019.247 According to IFC client survey data, loan finance and technical support to help open the green disbursements for green building projects have home market in South Africa in 2017. IFC invested grown from only $226,000 in 2015 to reach a high of $21 million in a $300 million fund managed by a large approximately $495 million in 2019.248 equity investor in South Africa’s affordable housing sector, called HIS. Of the total $21 million investment, Concessional and blended finance can be particularly $10 million was funneled to the HIS through a effective in channeling funding to financial concessional equity investment using donor funds from the Global Environmental Fund. 247 Figure is referenced from IFC EDGE ‘Creating Markets: IFC’s Green Buildings Market Transformation Program’. 248 IFC calculation based on IFC Climate Assessment for Financial Institutions Database. Coverage is limited as client survey response rate is approximately 70 percent. See Annex 3 for more details. Page 109 Chapter 4: Financing the Green Construction Transition in Emerging Markets institutions looking to expand their green building and construction materials’ portfolio, addressing liquidity EXHIBIT 28 constraints and funding bottlenecks. The concessional component of blended finance is often supported Latin America and the Caribbean by bilateral or multilateral climate funds. Similarly, and Sub-Saharan Africa Receive bilateral, and multilateral funds could support blended About Half of Concessional and and concessional finance to support construction Blended Finance decarbonization in low-income and fragile countries. Box 7 explains what concessional and blended finance is. 1% Other 4% Middle East and North Africa Concessional and blended funds have become an 11% Central Asia and Eastern Europe important source of climate finance for emerging markets. In 2020, multilateral climate funds issued 11% East Asia and the Pacific $1.79 billion in grants and $1.39 billion in low-cost project debt for climate finance, including green buildings. Development Finance Institutions provided 14% South Asia $3.06 billion in grants and $16.81 billion in low-cost project finance. Box 8 illustrates the recent experience of IFC in fostering green construction in emerging 23% Sub-Saharan Africa markets through concessional and blended finance. Bilateral and multilateral institutions are also key contributors of low-cost project debt, while governments provide substantial climate finance through grants. The bulk of low-cost funds issued by 35% Latin America and the Carribean development finance institutions using concessional and blended finance went to Latin America and the Caribbean, and Sub-Saharan Africa (Exhibit 28). More co-financing with the private sector will be needed from development finance institutions in Notes: ‘DFIs’ include multilateral, bilateral, and national DFIs. the next decade to reduce carbon emissions in ‘Other’ (1 percent) includes Transregional and Western Europe. Western Europe debt is composed solely of national DFI issuance. construction value chains, especially in hard-to-abate No detailed data on concessional and blended funds for green buildings is available. Figures in the text might not be identical due and carbon-intensive construction materials. Since to rounding. Source: Climate Policy Initiative, Global Landscape of Climate 2017, development finance institutions for instance, Finance 2021. have raised about $16 billion for green buildings in BUILDING GREEN Page 110 emerging markets through sustainability bonds EXHIBIT 29 (Exhibit 29). Multilateral Development Banks Blended finance will also be required to support Raised About $16 Billion in Bonds ongoing efforts for the development of novel technologies with high abatement potential like green Supporting Building Green hydrogen. The World Bank, for instance, recently in Emerging Markets in 2017–2022 approved a $150 million loan that establishes a 6 $ Billion blended finance fund and risk mitigation instruments to accelerate green hydrogen projects in Chile. 5.0 The project will also provide technical assistance, including capacity building—regulations, certification 4.0 4 processing and enabling environment—and boosting 3.2 local demand. IFC is also currently supporting the pre-investment stages of green hydrogen projects. IFC $ billion projects these could mobilize more than $2 billion in 2 1.7 1.7 private investments in Chile.249 0 2017 2018 2019 2020 2021 Notes: Includes all green, sustainability-linked, and sustainability bonds used for green building issued by the following multilateral development banks: ADB, EBRD, European Investment Bank, IADB, IBRD, IFC, Nordic Investment Bank, West African Development Bank. See Annex 3. Figures in the text might not be identical due to rounding. Source: IFC staff calculations based on Environmental Finance (2022). 249 See World Bank: https://worldbankgroup.sharepoint.com/sites/news/pages/Betting- on-Green-Hydrogen-for-Sustainable-Growth--17072023-120542.aspx CHAPTER 5: Ways Forward BUILDING GREEN Page 112 T he findings of this report indicate that informational asymmetries, lack of specialized skills, limiting the global rise in temperatures resources, and scale, and fragmented and rigid to well below 2 degrees Celsius, and thus regulations of construction value chains in emerging avoiding the worst effects of climate change, markets. Absent or weakly enforced green codes and as committed in the Paris Agreement, will not standards and insufficient public awareness efforts be possible without a substantial reduction in reduce the incentives of environmentally minded emissions from the construction sector in the households and companies for buying or renting next decade. green buildings. The lack of regulations and standards certifying the carbon content of construction materials Achieving that goal will require the integration of also hampers the use of net zero materials in new existing and novel abatement technologies into buildings by developers. Rigid construction regulations construction value chains. Some of the critical also limit the use of alternative materials and non- technologies for reducing construction emissions are fossil fuels to produce cement and steel with lower commercially feasible today, while others are likely emissions. Construction services are also often to come on stream over the next few years. But the dominated by small and medium-sized companies challenge of greening construction value chains goes with limited resources and adequately skilled workers well beyond the availability of technologies. to adopt environmentally friendly materials and In the long term, the major issue is that the financial sustainable construction techniques and practices, return on green activities is too low, because it does especially in low-income countries but also in some not reflect the benefits to society of providing a fast growth middle-income economies. product or service with lower emissions. As green Achieving the needed reduction in emissions from production technologies tend to be more expensive construction value chains will therefore require than brown alternatives (in the absence of carbon urgent efforts by policymakers to address these prices or their equivalents), companies wishing to market failures in construction value chains and green build green may find it difficult to compete with financial markets. At least in developing countries with companies that are less concerned with their carbon adequate capabilities, governments will also need to footprint. They may also face difficulties in attracting ensure that construction companies and materials investors. Given the higher market prices of green producers absorb the social cost of their operations goods and services, consumers also lack incentives and can earn an adequate return by choosing green, for substituting brown products with green products. and that consumers switch consumption from brown Other market failures related to the availability of to green construction products and services. information, as well as screening and monitoring costs, further restrict domestic and international private The findings of this report emphasize the need finance for green construction investments. for policymakers to take decisive steps toward establishing the appropriate business, policy, and These market failures compound the problems regulatory frameworks that will facilitate the stemming from the decentralized market structure, Page 113 Chapter 5: Ways Forward green construction transition. This framework will and time horizons. Electrification of brown buildings be pivotal to mobilize domestic and international with renewable energies will require investments in investments toward net-zero buildings and materials new transmission lines, energy storage, and energy in emerging markets in the next decade. The report efficient cooking, heating, and cooling appliances, also emphasizes the need to focus policy efforts and systems. New buildings with improved energy on promoting the adoption of readily available and thermal efficiency and powered with cleaner technologies with moderate economic costs until the energies, or net zero buildings, will also require technologies with the highest abatement potential, similar investments and the gradual decarbonization but prohibitive costs today, like green hydrogen and of materials and construction services. Deploying carbon storage, become available by 2035 and beyond. biomass-derived fuels measures will also interact with the deployment of non-commercially available The report also stresses the need for an integral technologies today, like carbon storage and capture. strategy to decarbonizing construction value chains that considers the interaction between the segments This report suggests a wide range of policies that of the value chain, other sectors, and technological governments in emerging markets can undertake changes, and that seeks to minimize costs to to encourage green construction. These include economic output. This strategy will also require careful regulatory policies, namely green codes and standards sequencing of mitigation and adaptation actions and that require companies to adopt practices that technologies, adapted to the specific conditions of limit their carbon emissions. They also include each country, and from a long-term perspective. measures to promote contributions to green construction activities from the financial markets, Under supportive policy frameworks, early action can reducing market failures that limit private domestic be taken at relatively low costs and with significant and international investment and establishing the reductions in construction emissions by deploying appropriate financing infrastructure to encourage readily available technologies for electrifying brown green financial instruments. Other policies outlined in buildings, improving the energy efficiency of new the report include promotion by governments of green and existing buildings and plants, and integrating construction through their own building operations cleaner energies and raw materials. Supporting the and fiscal support for the decommissioning of stranded development and piloting of new technologies with brown materials plants as well as the construction of high abatement potential, like green hydrogen and green residential housing for low-income households. carbon storage, is also feasible in the next decade but The report also highlights the establishment of with fiscal support that it is unlikely to be attainable frameworks that impose quantitative limits on, or for most emerging markets. The gradual deployment increase taxes on, firms' emissions. of carbon pricing programs should also pave the way for net zero construction by 2050. How and when policymakers deploy these measures will vary depending on country conditions, available This integral strategy should also contemplate the fiscal and financial resources, and technological and interaction between technologies with differing costs BUILDING GREEN Page 114 policy readiness. For most middle-income countries, moderate economic costs and policy efforts through the focus over the next decade is likely to be on these policy tools. actions with moderate economic costs and policy Governments can adopt green building codes that efforts, like green codes and standards, green public govern the design, construction, use, and maintenance buildings, and green construction procurement, and of built structures. Minimum energy-efficiency on mobilizing green private finance into net zero standards can be imposed, supported by mandatory buildings and materials. High-income economies labeling and/or certification of energy performance. and possibly some upper-middle-income countries Additional height allowances and expedited permitting with sufficient fiscal space and adequate regulatory for eligible green buildings can reduce incremental capacity may be able to move faster, deploying capital costs for private builders at minimal or zero relatively costlier policies like carbon pricing programs, fiscal costs. stringent environmental regulations, and providing fiscal support to technologies with high abatement Effective green building codes, enforced by potential but that are non-commercially available substantial fines for noncompliance, can improve the today, like green hydrogen and carbon storage. competitiveness of green construction. Regulations, Low-income countries could begin walking the path particularly minimum energy performance towards green construction now with international standards, are more commonly used in emerging financial and technical support. markets to support green construction than fiscal tools are. However, many emerging markets with Development finance institutions can play an such regulatory practices need to strengthen their important role by providing resources, particularly institutional and enforcement capabilities to ensure at concessional terms with focus on low-income the effectiveness of such standards. economies. They could also mobilize greater private sector investment by promoting the adoption Other regulations can be modified to increase the of innovative green financial tools and adequate feasibility of green construction. For example, easing regulations, especially in middle-income countries with stringent local cement regulations, while ensuring well-developed domestic financial markets. Here, we consumers’ safety, could encourage piloting and summarize the main recommendations of the report. adopting natural and industrial clinker substitutes, especially in middle-income countries. And regulation Regulation and Standards. of the waste management value chain can promote Supporting and strengthening green construction the use of waste as an energy source. These measures regulations and standards would be the option of have negligible fiscal costs and therefore could be choice for most emerging markets. With adequate widely adopted in many emerging markets with technical and financial support, middle-income and financial and technical support from development some low-income countries could accelerate the pace finance institutions. of green construction in the next decade with Page 115 Chapter 5: Ways Forward Financial Markets. publicly owned buildings meet certain green standards would directly reduce emissions; encourage innovation Financial innovation is important to channel the in green construction; increase the economy-wide financial resources needed for the massive investments supply of designers, engineers, and craftsmen with in green construction required over the next decades. knowledge of green building techniques; and (if done Particularly in the poorest countries, improving the well) provide examples that could encourage imitation efficiency, transparency, and complexity of local by private sector firms. Greening public procurement financial markets through improved macroeconomic in construction can also help foster the demand for conditions and prudential regulations is critical for green buildings and materials from private companies an expansion of finance for green construction. and consumers. Establishing more reliable and standardized environmental disclosure regulations could reduce the Carbon Taxes and Emissions Caps. high screening costs of green buildings and materials Taxing carbon emissions so that prices fully reflect projects, particularly in emerging markets, that make their environmental costs, or imposing limits on firms’ it difficult to attract investment in green construction. or regions’ carbon emissions (in conjunction with Thus, efforts to strengthen governance and regulatory programs to allow the trading of emissions rights) frameworks, particularly environmental, social, and provide an economic incentive to companies to green governance disclosure by private firms, and to improve their production and induce consumers to switch from technical capabilities for issuing and regulating green brown to green products. However, while the bulk financial instruments would help channel greater of emissions over the next decade are expected to financing to green construction. be generated by emerging markets, only seven have The financial industry can also play a role in implemented carbon pricing initiatives, with additional improving standards, for example through publishing carbon tax initiatives underway in eight emerging green finance guidelines, providing third-party markets. Only three emerging market governments environmental audits, suggesting harmonized have established mandatory emissions trading environmental frameworks, and promoting the use of systems. ESG rating providers. Such information can encourage The potential to implement emissions trading green construction and help mobilize finance by systems in emerging markets could be improved enhancing transparency, reporting, and monitoring by strengthening legal frameworks that are not of sustainability impacts in linked finance, transition adequate to establish reliable carbon markets, and bonds, and carbon retirement portfolios. by improving the implementation capabilities of Government Buildings and Procurement. the government agencies involved. There is also a concern that imposing higher energy prices would Governments have a large carbon footprint, and impair the competitiveness of domestic producers changes in their own operations can make a significant in industries exposed to international competition. contribution to green construction. Requiring that all This issue underlines the importance of international BUILDING GREEN Page 116 coordination of carbon pricing and emissions caps. example subsidies where the desired result is not effectively monitored or would have occurred in the Carbon taxes can be a useful alternative to emissions absence of support, there is a need for more empirical trading, particularly in low- and middle-income evidence on the effectiveness and efficiency of such countries, because they generate revenues that tools, particularly in comparison to regulatory or can be used to compensate for their potential carbon pricing approaches. distributional effects, are easier to implement than market-based carbon pricing, provide a clearer price Development Finance Institutions. signal to consumers and producers, and can be Development finance institutions can also make increased gradually over time to allow firms time to an important contribution to mobilizing local and adjust. However, setting the right tax rate is critical international private capital for green construction. to maximize effectiveness and may require complex Their potential roles include serving as an anchor analysis. Carbon taxes could be targeted to segments investor, providing market-rate and concessional of the value chain with the highest abatement financing, and operationalizing supranational climate potential (for example, increasing reliance on taxation funds. Concessional and blended finance can be used of construction materials as their importance in to increase funding for financial institutions looking to emissions increases relative to building operations over expand their green building and construction materials the next decade). portfolio, addressing liquidity constraints and funding Fiscal Support. bottlenecks. Subsidies (e.g., grants, below-market-rate loans, and Other areas where development finance institution direct transfers) and tax incentives are commonly support could be particularly useful include the used policies to finance construction decarbonization, construction of affordable green housing, the especially in developed countries, and some large retrofitting of buildings, new and retrofitted low- developing economies. Following the example of the emission cement and steel plants, and piloting United States and European countries with carbon- new decarbonization technologies. Increasing the powered facilities, fiscal support will be needed to availability of finance for these activities could encourage decommissioning of stranded brown encourage greater investments by venture capital plants, and construction of green residential housing funds in technological innovations for greening targeted to low-income households. Along with these construction value chains. Carbon retirement incentives, policymakers will also need to encourage portfolios may also require incentives to become the development and adoption of innovative financial operational. Finally, co-financing with private-sector instruments, such as carbon transition bonds and financiers will be an essential tool over the next carbon retirement portfolios, for decarbonizing or decade to reduce emissions in construction value decommissioning brown plants. chains, especially in hard-to-abate and carbon- intensive construction materials. Given the risk of ineffective fiscal programs, for ANNEXES BUILDING GREEN Page 118 Annex 1: The General Equilibrium—Circular Economy (CGE-CE) Model IFC has partnered with Global Trade Analysis Project material by country. Information from IFC projects (GTAP)-Purdue University who developed for this on detailed cost structures of abatement costs for report a computable general equilibrium – circular cement and other materials as well as incremental economy (CGE-CE) model. CGE-CE aggregates capital costs of green buildings relative to conventional information on national accounts, balance of alternatives was also included. payments, and input-output matrices in a consistent The database was coupled with the global recursive- representation of the dynamic inter-dependencies dynamic CGE model ENVISAGE for the 2022–2035 across sectors, agents, and markets. period. The model nests energy demand in the To analyze the effects of economic and population simulations, assuming energy preferences are agent- growth and alternative mitigation policies on specific and providing a representation of alternative emissions and other environmental indicators, the generation technologies. The model also assumes CGE-CE model incorporates an explicit representation preference shifts and technological changes over time of production technologies (e.g. primary, secondary, relating to decreasing cost of renewables; increasing and recycling activities) and materials (e.g. steel, preferences toward renewable energy; increasing cement, glass, fossil fuels, minerals, among others). electrification rates; increasing share of services; By capturing changes in both supply and demand, energy efficiency improvements; and increasing energy the model simulates adjustments in the economy efficiency of new green buildings. Finally, the model following the implementation of a policy shock. incorporates the following dynamics: exogenous labor growth; capital growth (as a function of savings); For the report, a new database was developed and exogenous land, energy, and trade productivity. covering 141 countries and 98 sectors. The database The model also assumes trajectories for carbon prices also incorporates detailed information on the share varying by country and region (Table 1.2.). of green buildings and production of low-emission Page 119 Annexes TABLE 1.1 Details the New Sectors That Were Developed for the Report GTAP New sector Description 1 oxt nmn Non-metallic minerals mining 2 mio Mining of iron ores 3 mao Mining of aluminum ores 4 mco Mining of copper ores 5 moo Mining of other ores 6 rpp rbr Rubber products 7 plp Plastic products – primary 8 pls Plastic products – secondary 9 plr Recycling - plastics 10 nmm cmc Cement conventional 11 cmg Cement ‘green’ 12 nmx Other mineral products 13 i_s isp Iron and steel – primary 14 iss Iron and steel – secondary 15 ris Recycling - iron and steel 16 isc Iron and steel casting 17 nfm app Aluminum – primary 18 aps Aluminum – secondary 19 ral Recycling - aluminum 20 cpp Copper – primary 21 cps Copper – secondary 22 rcp Recycling - copper 23 mpp Other metals – primary 24 mps Other metals – secondary 25 rom Recycling - other metals 26 nfc Non-ferrous metals casting 27 cns cnc Construction conventional 28 cng Construction ‘green’ Source: IFC staff calculations based on Global Trade Analysis Project BUILDING GREEN Page 120 The CGE-model simulated four scenarios: a) no and materials in the no mitigation scenario and the net mitigation, which assumes continuation of the zero-aligned scenario. current climate policies without additional mitigation The global scenarios simulated for this report align measures; b) NDC, which assumes countries comply with the Climate Action Tracker (CAT) pathways, with their Nationally Determined Contributions the main reference for climate-related simulations (NDCs); c) energy efficiency, that includes compliance using similar CGE models to ENVISAGE employed with the NDCs, and electrification of brown buildings here.250 CAT quantifies and evaluates climate with cleaner energies and decarbonization of change mitigation targets, policies, and actions. It construction materials and new buildings with non- also aggregates country action to the global level, fossil fuels and improved energy efficiency; and d) ‘net- determining likely temperature increases during the zero-aligned’, that includes compliance with NDCs, 21st century using the MAGICC climate model. and direct taxation of brown buildings and materials and subsidies to green alternatives. This global pathway of CAT is then used as input to a reduced-complexity carbon-cycle / climate model Two additional policy scenarios simulating alternative (MAGICC7) which is calibrated against data from revenue recycling programs carbon taxes were carried complex general circulation models (GCMs), including out as a sensitivity check without significant changes climate sensitivity and carbon cycle information. relative to the main scenarios (b) and (b) and therefore The MAGICC emulations reflect the complex model those scenarios are not reported: reducing labor response ranges for the assessed scenarios in the taxes and boosting investment in green construction calibration datasets, in particular the Representative activities. Concentration Pathways (RCPs). MAGICC7 is run Investment needs were calculated as the difference multiple times to obtain a probability distribution between the investment in electrification with non- of outcomes such as global mean temperature, fossil fuels and improvements in energy efficiency CO2 concentration, and total greenhouse gas in existing and new buildings in the no mitigation concentration. These distributions are used for deriving scenario and the energy efficiency scenario. the central median estimate of e.g. the global mean Investment needs were similarly calculated as the warming in 2100 and corresponding temperature difference between investment in new green buildings exceedance likelihoods over the 21st century. 250 For more information on CAT, see: https://climateactiontracker.org/ Page 121 Annexes TABLE 1.2 Assumed Carbon Prices, $/Ton of CO2 Country/region 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 EU-27+EFTA 69 82 95 107 120 132 145 157 162 167 172 177 182 Rest of OECD 23.2 28.6 33.9 39.3 44.7 50 55.4 60.7 63.7 66.9 70.3 73.8 77.5 High-income Asia 3.9 9.2 14.5 19.7 25 30.7 36.5 42.2 44.3 46.5 48.9 51.3 53.9 Japan 3.9 9.2 14.5 19.7 25 30.7 36.5 42.2 44.3 46.5 48.9 51.3 53.9 China 9.5 10.5 11.6 12.9 14.3 15.8 17.5 19.3 20.3 21.3 22.3 23.5 24.6 Middle East and North 3.1 5.6 8.1 10.5 13 15.1 17.1 19.2 20.2 21.2 22.2 23.3 24.5 Africa United States 2.2 4.4 6.6 8.7 10.9 13 15.1 17.2 18.1 19 19.9 20.9 22 Brazil 1.9 3.7 5.5 7.4 9.2 10.9 12.6 14.3 15 15.8 16.6 17.4 18.3 Rest of Latin America and 1.9 3.7 5.5 7.4 9.2 10.9 12.6 14.3 15 15.8 16.6 17.4 18.3 Caribbean Europe and Central Asia 1.3 2.7 4.1 5.5 6.9 8.3 9.7 11.1 11.7 12.2 12.8 13.5 14.2 India 1.4 2.4 3.4 4.5 5.5 6.4 7.3 8.2 8.6 9 9.5 10 10.5 Indonesia 1.4 2.4 3.4 4.5 5.5 6.4 7.3 8.2 8.6 9 9.5 10 10.5 Low-income Asia and the 1.4 2.4 3.4 4.5 5.5 6.4 7.3 8.2 8.6 9 9.5 10 10.5 Americas Rest of Southeast Asia and 1.4 2.4 3.4 4.5 5.5 6.4 7.3 8.2 8.6 9 9.5 10 10.5 Pacific Sub-Saharan Africa 0.6 1.1 1.6 2 2.5 2.9 3.3 3.7 3.9 4.1 4.3 4.5 4.7 Source: IFC staff calculations based on Global Trade Analysis Project BUILDING GREEN Page 122 Annex 2: Supplementary Tables and Figures TABLE 2.1 Cement Output by Country and Region, 2022 Percent of Total Global Output Regional Output China China 61% 100% EU-27+EFTA 4.9% 42.3% United States 2% 17.5% High Income Japan 1.8% 15.5% High-income Asia 1.7% 14.7% Rest of OECD 1.1% 10% India 6.9% 26.7% Middle East and North Africa 4.8% 18.6% Rest of Southeast Asia and Pacific 3.8% 14.5% Europe and Central Asia 3.6% 14% Other Emerging Markets Rest of Latin America & Caribbean 3.1% 11.8% Indonesia 1.4% 5.5% Brazil 1.5% 5.8% Low-income Asia and the Americas 0.8% 3.2% Ethiopia 0.5% 32.5% Nigeria 0.3% 20.6% Sub-Saharan Africa Rest of Sub-Saharan Africa 0.4% 26% South Africa 0.3% 21% Source: IFC based on Global Trade Analysis Project, GCCA, IEA and other sources. Only the largest countries measured by GDP are reported for each region. Page 123 Annexes TABLE 2.2 Steel Output by Country and Region, 2022 Percent of Total Global Output Regional Output China China 54% 100% EU-27+EFTA 9.3% 28.1% United States 5.1% 15.4% High Income High-income Asia 6.4% 19.3% Japan 10% 30.2% Rest of OECD 2.3% 6.9% Middle East and North Africa 1.6% 13% India 2.7% 22.2% Europe and Central Asia 3.6% 29.5% Rest of Latin America and the Caribbean 1.3% 10.3% Other Emerging Markets Rest of Southeast Asia and Pacific 0.8% 6.8% Brazil 1.7% 13.8% Indonesia 0.3% 2.1% Low-income Asia and the Americas 0.3% 2.4% Ethiopia 0.3% 38.4% Nigeria 0.1% 11.7% Sub-Saharan Africa Rest of Sub-Saharan Africa 0.2% 28.4% South Africa 0.2% 21.48% Source: IFC based on Global Trade Analysis Project, GCCA, IEA and other sources. Only the largest countries measured by GDP are reported for each region. BUILDING GREEN Page 124 TABLE 2.3 Simulated Trajectory of Construction-Related Emissions by Country and Region in the No-Mitigation Scenario Millions of CO2 Equivalent Tons 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 China China 6,069 6,240 6,411 6,467 6,524 6,612 6,701 6,738 6,775 6,762 6,748 6,740 6,731 6,735 EU-27+EFTA 936 903 871 849 826 808 789 773 757 752 747 742 738 734 High-income Asia 427 434 442 452 462 471 480 490 499 508 517 527 536 545 High Income Japan 491 491 491 493 495 497 499 500 502 503 504 505 506 507 United States 2,262 2,284 2,305 2,330 2,356 2,386 2,416 2,446 2,476 2,504 2,532 2,558 2,584 2,611 Rest of OECD 547 548 550 555 561 567 573 580 586 593 601 609 617 626 Brazil 111 112 113 117 122 123 125 127 128 130 131 133 134 136 Europe and Central 1,058 1,060 1,061 1,066 1,070 1,083 1,095 1,105 1,114 1,123 1,131 1,138 1,145 1,150 Asia Indonesia 218 224 230 231 232 235 239 242 245 248 250 254 257 260 India 927 967 1,008 1,015 1,021 1,037 1,053 1,065 1,077 1,088 1,099 1,109 1,119 1,129 Other Emerging Markets Low-income Asia and 117 121 125 126 128 130 131 133 134 135 136 137 138 139 the Americas Middle East and North 861 869 877 890 903 920 937 953 970 984 999 1,012 1,026 1,039 Africa Rest of Latin America 349 352 356 371 386 395 403 412 421 431 441 451 460 468 and the Caribbean Rest of Southeast Asia 404 415 427 430 434 439 444 448 451 454 457 460 463 467 and the Pacific Sub-Saharan Africa Sub-Saharan Africa 244 250 255 270 284 294 305 317 328 341 354 368 382 396 Source: IFC based on Global Trade Analysis Project, GCCA, IEA and other sources. Only the largest countries measured by GDP are reported for each region. Page 125 Annexes TABLE 2.4 Construction Decarbonization and Potential Finance Providers and Instruments Energy Efficiency Segment of Construction Buildings Materials Value Chain Type of Technologies and Energy efficient lighting and air Waste heat recovery systems, improving Examples conditioning, reflective paint, air sealing, furnace-basic oxygen furnace (BF-BOF) building envelope design efficiency, optimizing thermal efficiency in cement kilns Type of Providers Private capital, DFIs, public finance Private capital, DFIs, public finance251 Type of Instruments Debt (e.g., green mortgages, green bonds Debt (e.g., green bonds and loans, and loans, sustainability-linked bonds sustainability-linked bonds and loans, and loans, transition bonds)252 and equity transition bonds) and equity, off-balance (e.g., green REITS), off-balance sheet (via sheet financing (via energy service contracts energy service contracts or leasing), tax or leasing254), tax and subsidy-based incentives253 incentives, grants Origin of Financial Provider Primarily domestic Domestic and international Examples of Potential U.K.-IFC Market Accelerator for Green The EBRD’s Green Transition Bonds Providers Construction, Bancolombia Green Mortgage (allocated through its Green Transition Program, Infonavit Green Mortgage Portfolio), U.K. Department of Business, Program, Kimco Realty (green REIT) Energy & Industrial Strategy (BEIS)255 Examples of Projects The Infonavit Green Mortgage Program In 2019, IFC provided both debt and equity in Mexico provides households seeking investments to NCCL, Kenya’s largest mortgages for green homes an additional cement producer. These investments credit on top of their standard mortgage, have helped NCCL to increase its energy which can be used to cover the cost of efficiency through utilizing a lower clinker- eco-friendly technology upgrades (i.e., to-cement production ratio and a waste roof insulation, energy-saving lamps, solar heat recovery plant—the first of its kind water heaters). Sixty percent of mortgage in East Africa. In 2019, the EBRD issued customers are low-income256 a transition bond and allocated funds toward its Green Transition Portfolio, which includes efficiency in cement and steel manufacturing and buildings renovation 251 For example, the UK Department of Business, Energy & Industrial Strategy (BEIS) announced up to 18 million pounds of grant funding to support industrial heat recovery projects. 252 In 2019, the EBRD issued a transition bond, allocating funds towards its ‘Green Transition Portfolio’, which includes buildings renovation (IEA, 2021). 253 For example, the U.S. government provides federal income tax credits for energy-efficient new homes, as well as home and commercial building upgrades. 254 IEA (2021). 255 BEIS (2020). 256 Word Habitat Awards, Mexico 2012 Winner. BUILDING GREEN Page 126 Alternative Fuels Segment of Construction Buildings Materials Value Chain Type of Technologies and Substitution of clinker in cement- Use of biomass in integrated steelmaking, Examples making (i.e., clinker free cement), use of use of alternative fuels for heating cement construction & demolition waste to replace kilns aggregates in concrete, scrap based EAF steelmaking Type of Providers Private capital, DFIs, public finance Private capital, DFIs, public finance Type of Instruments Debt (e.g., green bonds and loans,257 • Debt (e.g., green bonds and loans, sustainability-linked bonds and loans, sustainability-linked bonds and loans, transition bonds), equity, carbon credits,258 transition bonds), equity, off-balance sheet finance259 • off-balance sheet finance Origin of Financial Provider Domestic and international Domestic and international Examples of Potential Government of France U.K. Department of Business, Energy & Providers Industrial Strategy (BEIS) Examples of Projects Hoffman Green Cement, the world’s first Heidelberg Cement has operated a cement producer of clinker-free cement, was kiln on a net zero fuel mix composed of initially funded with help from the French tanker-delivered hydrogen and biomass government (unclear if via debt or equity). components (i.e., ‘grey hydrogen’) as a The company later raised €75 million on demonstration trial. The trial received grant Euronext market (in equity).260 It also sells funding from BEIS as part of its Industrial carbon credits to other firms looking to Fuel Switching Competition261 offset their emissions 257 For example, expenditures toward the substitution of clinker is listed as an eligible project in CEMEX’s green financing framework (CEMEX, 2022). 258 For example, Hoffman Green Cement, the world’s first producer of clinker-free cement, sells carbon credits. 259 IEA (2021). 260 Hoffman Cement webpage, accessed (2023). 261 Heidelberg Cement (2021). Page 127 Annexes Carbon Capture, Utilization, and Storage Segment of Construction Value Materials Chain Type of Technologies and Examples Used in both the cement (e.g., capturing and storing CO2 emissions for exhaust cases produced during lime production)262 and steel industries (e.g., capturing and storing CO2 emissions form the blast furnace process). Type of Providers Private capital, DFIs, public finance Type of Instruments • Primarily balance sheet and equity finance initially, with likely a growing role for debt (e.g., green bonds and loans,263 sustainability-linked bonds and loans, transition bonds) and project finance as technologies develop a track record264. • Other instruments include special purpose vehicles and joint ventures, state- owned enterprise investments, public grants,265 and tax incentives.266 Origin of Financial Provider Primarily domestic Examples of Potential Providers • Climate Funds (Green Climate Fund, Global Environment Facility) • EU Emissions Trading System Innovation Fund • CCUS Trust Funds (ADB, World Bank) • Norwegian government267 Examples of Projects The first commercial steel CCUS project was launched by Al Reyadah and Emirates Steel at a gas-based, direct reduced iron plant in Abu Dhabi, United Arab Emirates. The capital investment of $15 billion was provided by the Abu Dhabi government.268 262 European Commission (2022). 263 These instruments may not be available to all CCUS projects given the high-emission nature of the industry (IEA, 2021). 264 IEA (2021). 265 SPV/JV, SOE investments, and public grants all commonly used instruments for financing CCUS (IEA, 2021). 266 For example, the U.S.-based 45Q tax credit for CO2 storage, computed per metric ton of qualified carbon oxide sequestered. 267 Reuters (2023). 268 Scottish Carbon Capture & Storage (2023). BUILDING GREEN Page 128 Green Hydrogen Type of Technologies and Can be used in the cement industry (e.g., to fuel cement kilns269) and the steel industry Examples (i.e., as an alternative reductant to produce direct reduced iron that is processed into steel). Type of Providers Private capital, DFIs,270 public finance271 Type of Instruments • Primarily balance sheet and equity finance initially, with likely a growing role for debt (e.g., green bonds and loans,272 sustainability-linked bonds and loans, transition bonds) and project finance as technologies develop a track record. • Other instruments include special purpose vehicles and joint ventures, state-owned enterprise investments, public grants, and tax Incentives. Origin of Financial Provider Domestic and international Examples of Potential • SDG Namibia One Fund273 Providers • The World Bank Hydrogen for Development Partnership (H4D)274 Examples of Projects In South Africa, for instance, Sasol and ArcerlorMittal launched in 2022 a joint venture that will assess the use of green hydrogen to convert captured carbon from ArcelorMittal South Africa’s Vanderbijlpark’s steel plant into sustainable fuels and chemicals. 269 Green hydrogen in this context is not yet implemented as it is currently not cost-effective. 270 For example, the EBRD has committed to providing a $80 million loan to Egypt Green to fund the nation’s first green hydrogen plant. 271 Public finance will have a key role in the beginning, especially as a mechanism for credit enhancement (e.g., via guarantees) (IEA, 2021). 272 These instruments may not be available to all CCUS projects given the high-emission nature of the industry (IEA, 2021). 273 The SDG Namibia One Fund is a blended finance platform used to accelerate the green hydrogen sector in Namibia. 274 World Bank H4D is a partnership intended to raise and utilize low-carbon hydrogen production in developing countries. Page 129 Annexes TABLE 2.5 Number of Countries Using Public Sector Decarbonization Tools Tools High-Income Countries Emerging Markets Carbon Taxes 24 5 Tax Breaks 13 2 (credits, rebates, other policies with a tax-based component) Grants 33 4 Regulation 39 44 Minimum Energy Performance Standards 25 37 Building Codes and Standards 22 10 Carbon Trading: ETS 6 3 Notes: Carbon tax figures do not include subnational carbon taxes: three subnational carbon tax systems exist in Mexico, while all other subnational carbon tax systems are in advanced countries. ETS figures do not include subnational systems (Japan and the United States both have subnational ETS systems but not national systems, and hence are not counted in figures). Figures do include the regional EU ETS, which is counted as an advanced country. Data for voluntary markets is not included, as cross-border markets make it difficult to associate markets to specific countries. Source: Carbon taxes and ETS data comes from World Bank Group Carbon Pricing Dashboard. All other data are IFC calculations based on IEA PAMS database. TABLE 2.6 Total Certified Emission Reduction (CER) Credits Issued for CDM Green Building and Cement, Glass, Steel Projects 2006–2022 First Issuance Other Building Green Building Cement Glass Steel & Iron Year of Project Materials Total, 2006–2022 12,139,107 23,910,704 41,087 54,302,943 731,907 Notes: CERs are generated by climate-friendly projects, with each CER representing one metric ton of CO2 reduced. CERs are then sold to investors and companies in developed economies regulated by emission caps. Source: IFC staff calculations based on CDM and UNFCCC BUILDING GREEN Page 130 Annex 3: Methodology for Green Building Finance and Policy Tools The green building label was introduced by the relatively small segment of the total sustainable debt International Capital Market Association Green Bond market. Principles in 2017—hence all data on debt markets is Green bonds are like conventional, fixed-income bonds reported from 2017 onwards. All data uses World Bank except funds raised are intended to be used to finance region and income definitions for regional and income specific green projects. Recent research has shown breakouts. that green bonds command an ‘issuer premium’, All financing volumes (except those from Bloomberg) meaning borrowers may benefit from a competitive presented are geographically assigned by domicile advantage in the form of lower interest rates when of firm headquarters. Note that actual expenditure issuing green bonds versus conventional bonds. of funds may be different in practice, especially for Sustainability bonds are similar to green bonds except multinational firms; however, it is not possible to track funds can also be allocated toward social objectives. these given data limitations. For Bloomberg figures, While green and sustainability loans are ring-fenced volumes are assigned by country of risk, which is for specific projects and typically fund the underlying determined by geographical exposure of operations. green asset, sustainability-linked finance is used Green loans are a form of debt financing that to improve the borrower’s overall sustainability enables borrowers, such as real estate developers, profile. Sustainability-linked finance consists of to fund projects which have a significant positive loans and bonds in which compliance with a set environmental impact. These products are typically of pre-determined sustainability targets triggers financed by commercial banks, but also sometimes reductions in interest rates. By reducing screening institutional investors, and can be earmarked for green and monitoring costs for lenders, these products can, building projects such as the construction of energy- at least in principle, contribute to aligning incentives efficient buildings and energy-efficient retrofits of of investors and brown construction companies existing buildings. Green loans can also be issued by for reducing carbon emissions. Furthermore, the construction material producers looking to implement ability to use proceeds for general business purposes decarbonization or other green eligible projects. provides additional flexibility to such borrowers where Similar to green loans in design, sustainability loans green projects may not be currently or concretely are used to finance projects with a combination of identifiable. environmental and social objectives, such as affordable energy-efficient homebuilding. However, these products are less frequently used and constitute a Page 131 Annexes Bonds institutions were manually reclassified to include central state banks and state-owned financial Environmental Finance institutions in the government figures (and likewise Environmental Finance (EF) collects data on social, to exclude these from the private sector figures). green, sustainability, sustainability-linked, and However, financial institutions with minority or transition bonds. All social bonds were excluded from majority (but not whole) state ownership (e.g., the data analysis, as were all bonds issued outside Bank of China) are included in private sector figures. of the 2017–2021 range. The EF database includes ‘Corporates’ include both private and state-owned information on head office of the issuer (for each bond enterprises, as manual reclassification was not and loan issuance). This variable is used to provide possible because of the volume of issuances. As such, regional and country-level categorizations in bond all corporates (including all types of state-owned figures shown in the draft. enterprises) have been included in the private sector figures as opposed to the public sector figures. EF uses in-house analysis to identify use of proceeds and key performance indicator (KPI) information for Government figures in graphs include municipals, each bond issuance listed in their database. However, public financial institutions, sovereigns, the EU there are some instances of missing information. Not (originally classified within the ‘supranational’ all bonds had ‘use of proceeds’ or KPI data available category), as well as some agencies (including U.S.- (15 percent missing). For bonds with both variables based Fannie Mae). Among the ‘agency’ category, missing, correlations were used from available data to local development finance institutions which primarily extrapolate green building issuance in the real estate invest domestically were included in government sector, addressing 10 percent of missing data. figures, while bilateral institutions that invest abroad were excluded from government figures. Multilateral Most green, sustainability, and transition debt development bank figures are composed of all issuers instruments have multiple uses of proceeds, and in the ‘supranational’ category, apart from the EU. most sustainability-linked debt instruments have multiple KPIs. A small percentage of sustainability- EF does not have loan issuer type categories (akin linked products have use of proceeds information to the bond issuer type categories used to separate instead of KPIs, and a small percentage of green and public and private entities). Instead, manual analysis sustainability products have KPI information instead of of 213 green building loans was conducted, combined the use of proceeds (or, have both). In all cases, bonds with assumptions made using the available borrower were included in relevant green building figures if they sector information. For example, all REITs are assumed had green buildings listed in either the use of proceeds to be private, whereas firms categorized as financial, or KPI categories. energy, industrial machinery and engineering, healthcare, logistics, public transportation, and real EF provides classification by issuer type, including estate development and management were manually ‘corporate’, ‘financial institution’, ‘agency’, ‘municipal’, investigated. Only six loan issuances were ‘sovereign’, and ‘supranational’. Bonds earmarked determined to be public sector. for green building that were issued by financial BUILDING GREEN Page 132 For the decarbonization analysis, the EF database Loans includes issuer sector (as well as the use of proceeds and KPI information), which were used, alongside Environmental Finance manual identification, to determine bonds issued EF collects data on social, green, sustainability, and by the glass, steel, and cement firms to fund sustainability-linked loans. All social loans were decarbonization efforts. Cement and glass firms excluded from the data analysis, as were loans issued were identified among the ‘real estate – construction outside of the 2017–2021 range. A small subset of loans and construction materials’ sector, while steel was classified by EF as both ‘green’ and ‘sustainability- firms were identified among the ‘mining/metals’ linked’ – these are categorized as sustainability-linked and “manufacturing – other’ categories. Other loans in all figures. building material firms outside these three specific The EF database includes information on head office industries were identified among both the ‘real of the issuer (for each bond and loan issuance). This estate – construction and construction materials’ variable is used to provide regional and country-level and ‘manufacturing – other’ sectors. To determine categorizations in the green building loan figures if funding was going to decarbonization efforts shown in the draft. However, the building material specifically, a combination of the use-of-proceeds decarbonization figures are sourced from Bloomberg, information, KPI information, and bond type where ‘country of risk’ was provided instead. ‘Country information was used. Of the sixteen relevant bonds, of risk’ is a proprietary Bloomberg value which is six were sustainability-linked bonds, of which five had driven by four core factors: country of domicile, ‘carbon/GHG emissions intensity – other/unspecified’ country of listing, country of largest revenue, and listed in the KPIs. The remaining sustainability- reporting currency. In these figures, the ‘country of linked bond had missing KPI information, but outside risk’ variable is used for all regional and country-level research revealed the bond was tied to CO2 emissions categorizations. intensity. There were three sustainability bonds, which all had renewable energy or energy efficiency EF uses in-house analysis to identify use of proceeds listed in KPIs (among other environmental and social and KPI information for each loan issuance listed in categories). Finally, there were seven green bonds, their database. However, there are some instances of of which three had ‘green buildings’ listed in use of missing information. Not all loans had ‘use of proceeds’ proceeds (one with ‘energy efficiency’ listed as well), or KPI data available (5 percent missing). Correlations an additional three had either ‘energy efficiency’ or were used from available data to extrapolate green ‘renewable energy’ listed, and one had ‘pollution building issuance in the real estate sector addressing prevention and control’ listed. All 16 bonds were 30 percent of missing data. included in the figures. Bloomberg Bloomberg data were used for the analysis of sustainability-linked loan issuance in the decarbonization sector because of superior loan Page 133 Annexes coverage compared to EF. However, Bloomberg’s • Of the three ‘ESG score’ loans, one was classified data has not been used for the green building loan as ‘general ESG rating’ and the two others analysis, in part because its database does not utilize had missing information. Based on manual a specific ‘green building’ use-of-proceeds category, investigation, one of these loans with missing but a ‘building & infrastructure’ category. While the information was manually reclassified as ‘general first sustainability-linked loan was issued in 2017, ESG rating’ based on online research. It was not Bloomberg coverage is from 2018 onwards. According possible to identify more information on the other to Bloomberg’s database, no green or sustainability loan with missing information issued by Formosa loans were issued for the decarbonization of cement, Ha Tinh Cayman Ltd. All three of these loans were steel, or glass for buildings. Hence, we have only thus excluded from figures given that specific shown figures for sustainability-linked loans. environmental indicators were not listed and/or found online. Bloomberg data include issuer sector and project KPI categorizations which were used, alongside manual • The two loans classified as ‘unknown’ under the identification, to determine loans issued by glass, ‘Tier 1 sustainability performance indicators’ had steel, and cement firms to fund decarbonization no additional useful information under ‘Tier 2 efforts. Steel firms were identified among the ‘metals metric categories.’ Based on outside research, the & mining’ sector classification, while cement and loan issued by Wienerberger AG was manually other building materials firms were identified among reclassified as ‘general ESG rating’, while no the ‘construction materials manufacturing’ sector other information was found on the ‘unknown’ classification. Additional building material firms were loan issued by BEWI Invest AS. Both loans were also identified within the ‘home improvement’ sector thus excluded from figures, given that specific classification. One glass-packaging firm was identified environmental indicators were not listed and/or among the ‘containers & packaging’ category, but no found online. glass firms were identified among the ‘construction Among the 31 loans listed as ‘environmental’ under materials manufacturing’ sector. After identifying all ‘Tier 2 metric categories’, 23 had GHGs listed under ‘Tier loans issued by relevant sectors, KPI metrics were 2 metric categories’ – many of which also had ‘other analyzed to isolate only those where loan funding was E’, ‘renewable energy’, or ‘energy efficiency’ listed as used to finance decarbonization efforts. well. An additional four loans had other E’ solely listed Bloomberg provides a variable called ‘Tier 1 and an additional loan had ‘water’ solely listed, and sustainability performance indicators’ which classifies thus were excluded. An additional two ‘environmental’ the loan as either being based on ‘metrics’ (31 loans) loans issued by CEMEX with missing ‘Tier 2 metric or ‘ESG score’ (3 loans) or ‘unknown’ (2 loans). ‘Tier categories’ data were manually classified as ‘GHGs’ 2 metric categories’ provides further details, with all based on outside research (including reference to relevant loans classified as ‘metrics’ also classified as other CEMEX loans with complete data listed as ‘environmental’ under this variable. ‘GHGs’). BUILDING GREEN Page 134 Multilateral Development Banks (MDBs) Government policy data are calculated using information from the IEA, which tracks government The EF Green, Social, and Sustainability Bonds green building policies in two different databases. database was used to estimate the total green building bond issuance of MDBs. In alignment with the private and government debt figures, all bonds issued TABLE 3.1 by MDBs with ‘green building’ listed in either the use of proceeds or KPI categories were included in figures. IEA PAMS Database, ‘Buildings’ Policy In all cases, bonds were classified as ‘green building’ Categories alongside other use of proceeds or KPI categories. There were no relevant loans in the EF database issued Residential • Detached house by MDBs, so only MDB bond figures are shown. • Attached house • Apartment in low-rise building In addition to bond data, figures are also shown • Apartment in high-rise building which come directly from IFC and the EBRD publicly Services • Public administration published sources. For example, according to IFC data, • Education as of 2019 IFC had invested and mobilized nearly $4.4 • Information & communication billion in green buildings since 2014. This included • Data center $387 million of direct investment from IFC in 2019. • Warehousing and support for The EBRD also reported €24 billion in green building transportation activities projects. • Health and social activities • Accommodation and food Additionally, Climate Assessment for Financial services Institutions data—anonymized internal IFC client data • Restaurants on green building projects—is utilized. Figures are • Administration and offices based on IFC defined green building categories. To • Wholesale and retail note, coverage is not complete, with about 70 percent • Food retail of IFC clients responding to the relevant surveys. • Public assembly Data includes both the total project size, and the size • Water supply • Sewerage, waste and of the loan disbursed by the IFC client to the project remediation developer. Data is available broken out by the fiscal • Repair, industrial and other year based on the date the project was created and service activities the fiscal year based on the commitment date (i.e., New buildings when the bank funded the project). The former metric Existing buildings may be several years after the project was funded and retrofits because the bank reports it to the IFC ex-post, thus it is used for year breakdowns. Page 135 Annexes The IEA PAMS database covers government policies industry’ category, which includes 224 policies with issued since 1975 to reduce greenhouse gas emissions, budget volume. However, there are 81 policies from improve energy efficiency, and increase development relevant subsector categories that are used in the of renewables. However, there is no budget final figures, including ‘efficient new builds,’ ‘energy information per policy, thus all analysis is based on efficient retrofits,’ ‘heat pumps,’ and ‘appliances.’ All 81 frequencies. Figures look specifically at the PAMS policies were issued by high-income countries. Like the ‘buildings’ sector, which includes the below categories. PAMS database, policies in the Sustainability Recovery Most of these policies relate to building energy codes, Tracker may be classified under multiple ‘policy types’. energy labels, and building-related incentive programs. Carbon Trading – Compliance Markets The database includes categorizations for ‘policy The UNFCC Clean Development Mechanism (CDM) type’ (i.e., regulation, codes/standards, grants, etc.), database contains project-level data on CDM- however policy types are not mutually exclusive, and authorized carbon issuances. The database includes most policies are categorized as multiple policy types. information on the year of the first issuance for each World Bank region and income classification data were project, and total credits are allotted to the project appended to produce regional and income breakouts. over its lifetime. To note, many projects have missing However, many policies are issued by the EU, which information under the ‘total CERs issued’ variable. does not have a specific income classification, and thus Thus, figures only represent totals among projects the EU is not included in any income breakout figures. with complete information at this variable. IEA PAMS data limitations also include the fact that Project type and sub-project type information was coverage of emerging and developing economies’ leveraged to narrow down relevant green buildings energy policies is less detailed compared to OECD and building materials projects. Credits issued by member countries – due mostly to resource and projects listed as ‘air conditioning,’ ‘appliances,’ ‘district translation issues. IEA has also caveated that there heating,’ ‘EE new buildings,’ ‘EE public buildings,’ are disparities across time, thus making historical ‘geothermal heating,’ ‘lighting,’ ‘lighting & insulation comparisons less reliable. & solar,’ ‘solar lamps,’ and ‘solar water heating’ were The IEA has also published a Sustainable Recovery including in the ‘green building’ figures. Credits issued Tracker. This tracker shows policy-level data, by projects listed under the project type ‘building including the total amount committed, not spent, via materials’ and ‘building materials heat’ were included government policies including total fiscal support in in ‘building materials’ figures. Credits issued by projects response to COVID-19, economic recovery spending, listed as ‘clinker replacement,’ ‘cement heat,’ and government spending on sustainable recovery as ‘cement’ were included in the ‘cement’ figures, while highlighted in the IEA Sustainable Recovery Plan, projects listed under ‘iron & steel heat’ or ‘iron & steel’ and total mobilized sustainable recovery. Detailed were included in ‘iron & steel’ figures. Finally, projects definitions of categories can be found here. This classified under the subtype ‘glass’ or ‘glass heat’ were database includes an ‘energy-efficient buildings and included in ‘glass’ figures. Note that projects were not BUILDING GREEN Page 136 manually analyzed to isolate solely those producing materials specifically for buildings. Similarly, ‘iron & steel’ projects were not analyzed to isolate only steel projects. Carbon Trading – Voluntary Markets The Berkeley Carbon Credit Data Base contains all carbon offset projects listed by the four major project registries (CAR, ACR, VCS, Gold Standard). These four registries represent most of the total voluntary market (and to note, are also eligible to be used under the Quebec and California cap and trade compliance programs). The Berkley database contains project level data, each with total CER issued and information on the first year of the project. Firm sector information was leveraged to narrow down relevant green buildings projects. 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