What is Decarbonization?

Sustainable Development
By Daniel Robert, P.Eng

The 2015 Paris Agreement has changed the game in global decarbonization efforts. With its long-term goal to limit planetary warming to 1.5°C compared to pre-industrial levels, stakeholders must adopt more robust and concrete measures. The building sector alone accounts for 40% of global carbon emissions. Therefore, decarbonizing this sector is crucial for meeting the commitments of the Paris Agreement and the United Nations Sustainable Development Goals. Decarbonizing real estate not only addresses global environmental challenges but can also reduce operating costs and preserve the health and well-being of occupants.

Two pivotal years in the decarbonization process are 2030, aiming for a 50% reduction in greenhouse gas (GHG) emissions, and 2050, aiming for carbon neutrality. Since 80% of today’s buildings will still be standing in 2050, decarbonizing existing real estate is not only essential for combating climate change but also offers a way to reduce the operational costs of commercial properties. The built environment has significant implications for global warming, and we have the expertise, technology, and experience to reduce GHGs, so let’s do it.

Investors are rebalancing their portfolios to align with the Paris Agreement, placing environmental, social, and governance (ESG) criteria, as well as climate change, at the core of their investment strategy. Members of the Net Zero Asset Owner Alliance, representing about $5 trillion in assets, have committed to transition their investment portfolios to net-zero emissions by 2050. As part of Climate Action 100+, over 500 global investors with over $47 trillion in assets are urging the companies they invest in to commit to carbon-neutral business strategies and disclose climate-related risks according to the recommendations of the Task Force on Climate-related Financial Disclosures. Why is this a good deal? Because the building mechanical industry is poised to benefit, as it is part of the solution!

It’s not just the financial aspect that matters; the expectations of employees, customers, and tenants are also crucial. They demand more environmentally friendly buildings. Numerous global surveys among millennials reveal that climate change and environmental protection are among their top concerns. Moreover, a survey indicates that 74% of customers expect companies to source electricity from renewable sources.

What impedes decarbonization in the real estate sector?
Injecting capital into clean technologies may seem challenging to justify, especially in a context of high-interest rates, low occupancy rates, and an uncertain real estate market. Thus, many owners are suspending capital projects, including those aimed at energy efficiency. Working with advisors who understand the challenges of decarbonization, have completed multiple projects, know how to leverage generous government subsidies, and focus on already budgeted projects (mostly related to asset maintenance) is the best way to move forward. The need to reduce carbon footprint is not just a passing trend, and postponing these projects in the hope that environmental pressure subsides is not the solution.

How can an owner navigate the uncharted waters of industry uncertainty and investor pressure to decarbonize?
In an asset renewal project, take the time to consider the immediate and, more importantly, future needs of the building rather than simply replacing equipment with newer ones with roughly the same environmental characteristics. Considering the overall benefits and subsidies that an owner can obtain, along with the added value and the ability to lease or sell the asset in the medium and long term, the additional costs can be justified.

Are there differences between provinces regarding subsidies and overall outcomes of decarbonization projects?
It is currently very advantageous to start a decarbonization project in Quebec. Government subsidies change the financial equation, while in Ontario, it may take between 10 and 12 years, or even longer, to recoup the invested capital—half as much time in Quebec. Note: Projects whose sole objective is decarbonization usually do not generate a return on investment. Implementation costs are significant and vary depending on the type and configuration of heating, ventilation, and air conditioning (HVAC) systems and existing hydraulic networks of buildings. Hence, it is crucial to carry out such work as part of an asset renewal.

Can design-build be considered in decarbonization projects?
Since energy performance is at the core of a decarbonization project and requires an integrated approach, design-build is the best way to achieve it. According to the traditional approach (design-bid-build), consultants design, and contractors build. Thus, the final concept is far from optimal in terms of installation and operating costs. To fully benefit from all advantages and subsidies offered, it is imperative that an energy model be developed during preliminary engineering and used to guide the selection of systems.

What is the urgency? Why now?
Carbon-neutral goals of cities like Montreal, Quebec, and Toronto require owners of private residences or buildings to decarbonize their assets by 2040. This is very ambitious! Just in Quebec City, Montreal, Ottawa, and Toronto, there are over 15,000 commercial, office, industrial, and residential buildings over 5000 m². All will need some form of upgrade to their HVAC systems in the next 17 years. Do the math: that’s nearly 900 modernization projects per year—only in eastern Canada!

It is clear that the needs outweigh the means of implementation. Groups that take on decarbonization first will have a head start, as they will secure investment money to finance or refinance their assets and negotiate their resale prices more effectively.

Are there groups decarbonizing their portfolio?
Already, industry leaders understand the need to be fully engaged and the strategic advantage of starting the decarbonization process as early as possible. Soon, owners will realize that decarbonization is a necessity, not an option. At that point, waiting lists will be very long. By addressing decarbonization now, visionary owners stabilize their investments while ensuring the sustainability of their rents and consolidating the value of their assets. For them, decarbonization is no longer seen as a regulatory obligation or an environmental necessity but as operational risk management.

Is it possible to simplify the decarbonization issue?
The term “decarbonization” and the range of measures it entails are very vague. However, by adding ESG criteria to the equation, it is possible to mobilize many stakeholders and decision-makers. If the conversation, however, shifts towards intrinsic carbon, it could become more philosophical than practical. Avoid this trap and focus on GHGs.

The most significant reduction in a building’s GHGs comes from a change in user behavior and the modernization or replacement of mechanical elements. For example, if your car has an old V8 engine, replacing it with an electric motor and driving less aggressively are the best ways to reduce your footprint. In comparison, inflating the tires or painting the car white will have very little impact. Decarbonization is essentially a smart asset renewal decision. Every owner must update their investment budget and plan the mechanical improvements to be implemented in the coming years, as these are perfect opportunities to decarbonize the asset.

What are the obstacles to the decarbonization revolution in the industry?
The revolution has already begun, led by major investment and pension funds, banks, and large landowners. Every major real estate company has appointed a sustainability ambassador. Most have entrusted the mandate to leading advisory groups to develop a decarbonization roadmap. Some of our clients have already decarbonized a significant portion of their portfolio or reduced their GHG emissions because they understand the added value of such an approach.

Unfortunately, harmony does not reign between the sustainability development team and the finance team. One aims to please the eyes of major investors, while the other aims to offer the highest return on investment. The conflict between environmental and financial imperatives remains one of the main obstacles. However, banks seem to be adapting quickly, increasingly imposing on their clients the implementation of necessary structural and operational improvements to protect their investments. The year 2024 is expected to mark the acceptance of decarbonization by all players in the real estate sector, accelerating the revolution.

Be prepared, change is knocking on our doors!

About Daniel Robert, P.Eng
As Senior VP of Special Projects, Daniel Robert, ing. oversees project engineering while leading the sales team of a building mechanical engineering company that undertakes numerous large-scale turnkey projects in Montreal and Toronto. He is an active member of ASHRAE and served as Chair of the CTTC (Technology Transfer Committee) at the Society in 2022-2023. He is a member of the Provincial Administration Committee and President of the Members Committee at CMMTQ (Corporation des Maîtres Mécaniciens en Tuyauterie du Québec).

About Kolostat

Kolostat is a fully integrated mechanical contractor in the industrial and commercial HVAC fields with offices in Montreal and Toronto, delivering projects around the world. From our beginning as a heating contractor in 1927, we have evolved to become a multidisciplinary team of engineers, designers, draftsmen, controls technicians, project managers, site mechanics, along with service and maintenance professionals.