Financing Building Decarbonization: The Roles of Government and Private Sector Investors

Executive Summary

In the United States, buildings account for approximately 40% of total primary energy consumption and about 30% of operational greenhouse gas (GHG) emissions. Further, approximately 80% of all buildings that will be standing in 2050 have already been built. Thus, while updating building codes to increase the efficiency of new buildings is essential to reducing GHG emissions, decarbonizing existing buildings is a key component of GHG emission reduction strategies.

We estimate that approximately $100 billion to $150 billion per year of financing will be needed over the next 30 years to retrofit existing buildings in the United States alone, if their operational emissions are to be reduced significantly to contribute toward reaching net zero emissions economy-wide by 2050. Currently, some jurisdictions offer public and ratepayer funding to help pay for the upfront capital necessary to retrofit both commercial and residential buildings, but this is not enough. It is essential to attract private funding into this area of investment to achieve any of the stated climate targets.

Private investors have been slow to finance existing residential decarbonization projects because of a range of barriers. Chief among them is a highly disaggregated and diverse market. Residential buildings include both single and multi-family buildings and retrofit solutions are highly heterogenous. Further, many building owners are unfamiliar with the upgrades necessary, unclear about their options for the near and longer term, and uncertain about their costs (both upfront capital and ongoing operational costs). On the supply side, each building’s retrofit needs are met with tailor-made solutions, while contractors with varied levels of training and knowledge are just beginning to expand their expertise to help building owners find the most efficient and effective solutions.

Overall, building retrofit projects range from investments that can yield positive returns because certain low-cost energy efficiency interventions are sufficient to capture large energy cost savings, to costly investments that are unlikely to pay for themselves through energy savings alone. Since the supply and demand for building decarbonization investments and services are quite diverse, there is little economy of scale to be captured to reduce the costs of retrofits, particularly for residential buildings. In addition, the financing need for each project is typically relatively small and the transaction costs are high for financiers to meet individual one-off needs. This is particularly challenging when the same financiers can finance large-scale renewable energy projects that have become much more standardized over the past decade. These challenges are particularly acute for residential properties compared to commercial buildings. In fact, commercial building owners typically work on a larger scale and have better access to capital, contractors, and planning techniques.

Figure 1 summarizes the challenges: