How green taxation will impact your project’s bottom line

As the world struggles to come to terms with the actions necessary to contain climate change to the 2°C commitments of the Paris Agreement, governments are looking at the role that taxation may play in driving change. In some instances that taxation will impact the global supply and demand of construction materials and, as a result, the cost of construction, writes Heather Evans, Partner – National Head of Sustainability.

Construction projects of the future will face increasing cost pressures aligned with carbon intensity. As green taxation drives national and international policy to achieve net zero goals, project teams will need to become adept at navigating cost and carbon. Low carbon will not just become a value sought by some but will impact the cost side of the viability equation, too.

Understanding the fundamentals

Embodied carbon

The carbon emissions associated with construction including the production of materials and the subsequent maintenance, repair, refurbishment and demolition of a building or piece of infrastructure.

Emission trading system (ETS)

To address carbon hotspots some countries cap emissions from some actors, such as aviation and heavy industry, through emission trading systems (ETS). Polluters pay for emissions above an allowance and buy or trade additional emissions. Allowances reduce over time, with each country moving at its own pace.

Carbon leakage

Emission trading systems have been effective at reducing domestic heavy industry emissions in some jurisdictions, but additional ETS costs on domestic production can incentivise cheaper, more carbon-intensive imports for items like steel and cement in building supply chains. This impact is called ‘carbon leakage’.

Carbon Border Adjustment Mechanism (CBAM)

Project

Lucent W1

Location

London, UK

The RLB logo appeared on the world-famous Piccadilly Lights as part of the celebrations for the launch of the new landmark destination behind it – Lucent W1, Landsec’s latest office-led development in central London. Our cost management experts played a key role in this complex project’s successful delivery.

Countries with green taxation initiatives

The EU is the first region to embrace Carbon Border Adjustment Mechanism (CBAM). Several countries are considering following suit. The UK, US, Canada and Australia are all consulting on the introduction of schemes. A wider variety of countries have ETS systems which may lead to CBAM. While each country may in due course have a version of CBAM, implementation and enforcement are likely to look different.

How does carbon taxation affect construction costs?

Construction supply chains are highly fragmented. This makes the tracking of embodied carbon complex. Each part of the supply chain can be affected by ETS. Given the often cross border trade associated with raw materials, construction materials and components, CBAM, where implemented, will also have an impact as shown here:

What’s the impact now and in the future?

The impact of green taxes on construction costs is likely to impact regions differently and they will change over time:

Which elements of a building cost are impacted?

Construction’s impact on global emissions is significant with cement and steel alone accounting for 14% of emissions. The swapping out of high carbon-intensive materials can have a significant contribution to global net zero carbon trajectories. Focusing on carbon-intense materials and elements is also going to be where costs are found and saved as the impact of CBAM increases over time.

The chart below shows the relative carbon intensity of embodied carbon in an atypical concrete-framed apartment building in Western Europe, broken down by the life cycle of the asset (left-hand side), building element (centre) and trade/material (right-hand side).

The EU’s CBAM coverage includes steel, aluminium and cement – which are the most carbon-intensive materials used in most construction projects, as seen on the right-hand side of the graphic.

Next steps

Start calculating your embodied carbon

For those who regularly invest in the built environment, understanding embodied carbon is key to tracking future cost pressures.

Value engineering of the future is likely to see convergence of cost and sustainable outcomes. Carbon taxation is likely to drive cheaper alternatives to be greener ones.

Set an embodied carbon brief

What is measured gets done. Setting an embodied carbon brief not only contributes to your own net zero carbon pathway but readies you and your project teams for the likely increasing cost burden of CBAM.

Setting a brief gets you used to reducing embodied carbon.

Invest in your supply chain

A carbon-intensive supply chain is going to become more costly.

Building capacity and skills through the supply chain is an investment in time and trust. Waiting for the supply chain to catch up after the

introduction of CBAM will introduce a lag where less carbon-intense alternatives are scarce and more costly.

Building capacity now is an investment in mitigating your future construction costs.

Embrace the circular economy

Building less is the most impactful way to reduce embodied carbon. Embracing circular economy principles of the reuse and repurposing of assets, or component parts of them, will reduce embodied carbon.

Design for longevity, flexibility and adaptability are key components of a circular economy strategy. We expect to see increasing legislation as well as taxation driving circular economy principles.

Heather Evans
Partner – National Head of Sustainability, RLB UK, Global Sustainability Committee Chair
heather.evans@uk.rlb.com