Why buildings are the linchpin of the EU’s climate and green recovery plans

This article first appeared on Reuters Sustainable Business, here. 

“This is going to be bloody hard to do”, said European Commission Vice-President Frans Timmermans, making no bones about the implications of raising the EU’s 2030 greenhouse gas emissions reduction target to at least 55%. “But we have to do it”.

“Doing it” will require renovating the buildings we live and work in. Why? Buildings are the EU’s biggest carbon emitter, responsible for 36% of greenhouse gas emissions. They are also our most valuable financial asset, worth tens of trillions of euros. And crucially in times of Covid, buildings are a job-creation machine: per billion invested, renovating our homes is estimated to create 18,000 jobs.

This is why the Commission’s new Renovation Wave strategy is so important. It acknowledges the high stakes: we either double renovation rates by the end of the decade or we fail on climate action and the green recovery. And it maps out a convincing mix of policies: minimum energy performance standards to guarantee comprehensive building upgrades, more funding and technical assistance to make renovation programmes work better.

There are more than 200 million old, energy-inefficient buildings in Europe. According to RAP, fewer than 1% are renovated in an average year and even then most retrofits are cosmetic. Yet only “deep renovations” – typically defined as delivering at least 60% energy savings – make a real difference to utility bills and greenhouse gas emissions. This type of energy renovation means systematically upgrading insulation, windows and heating and cooling systems. And it also requires a simple, convincing system so that building owners, businesses and public authorities are able and willing to act.

This is what the Renovation Wave sets out to do. Start with minimum energy performance standards: just like emission standards for cars, the idea is that a building can only be sold or leased if it meets an agreed energy performance standard. This is already happening in the Netherlands, for example, where 2 million rental homes are on track to being energy class B by next year, and all offices must be C class by 2023.

The big advantage of performance standards is that they are relatively straightforward to explain and implement. EU member states are already assessing the energy performance of their building stock. Improvements in energy classes can be tracked with before and after audits. And like energy labels on refrigerators and washing machines, standards make immediate sense to owners and tenants. This is the way to deliver the all-important deep renovations.

Meanwhile, the best way to implement energy performance standards is to make them as financially attractive as possible. One of the ironies of the Covid crisis is that it has swept away opposition to a bigger, greener EU budget. On top of the core seven-year budget, member states have agreed a special new €750bn recovery fund. Precisely 37% of that must be used for green investments, which would mean €100bn for buildings if the money is shared out according to each sector’s share of carbon emissions.

Size matters here, but the way the recovery money is spent is even more important. This is why the interplay between finance and technical assistance, the third major component of the Renovation Wave, is so important. At EU level alone there is already a long list of extremely smart funding mechanisms for building renovation. One example is “first loss” pieces, in which EU funds are used as guarantees to cover potential defaults on energy efficiency loans. This reduces risk and allows local banks to offer lower interest rates.

There are also layered financing structures combining grants, low-interest loans and households’ own savings. And there are big-business operations, in which the European Investment Bank offers pension funds and other institutional investors AAA ratings and attractive returns if they co-invest in renovation projects.

Tools like these can turn billions of euros into trillions over the next decades. But there is a potential glitch: the EU’s financial and advisory services are little-known and under-used. A new Commission department, DG Reform, has a budget of almost €1bn over the next seven years to help engineer a green recovery. It specialises in arranging high-quality consulting expertise so ministries, cities and local authorities can implement EU policies.

Building renovation is a recognised top priority. Commission staff are impressively dedicated. But DG Reform operates on a demand-based model; it must be asked for help to provide help. And so far not many renovation programme managers have heard of it. The Commission and other technical assistance providers like the European Investment Bank are well-aware of these information challenges but must move fast to address them.

So what comes next? The Commission will propose mandatory energy performance standards in new buildings legislation next year. Before that, it must work out which building sectors to start with, which ambition levels to propose (energy class A by 2030 seems essential), and how to design subsidies as well as penalties for non-compliance.

The bottom line is that buildings are the linchpin of the EU’s climate and green recovery plans. The Renovation Wave will only succeed if it blends legislation, finance and technical assistance. Do that and it will be a triumph, comparable in its way to Europe’s reconstruction after the Second World War.