The CRREM North America Project: The top five things to know

The CRREM North America Project was launched in response to the urgent need for tailored carbon reduction strategies. The initiative was led by key organizations including CRREM, the Urban Land Institute (ULI), and the Lawrence Berkeley National Laboratory (LBNL), with leadership from LaSalle Investment Management. It aimed to establish regionally salient decarbonization pathways for the United States and Canada. 

For more details, visit the CRREM North America Project webpage. 

The GRESB team thoroughly reviewed the resulting deliverables, offering detailed feedback during the public consultation. This article shares five important feedback points in advance of the highly anticipated incorporation of the pathways into CRREM, which will be announced on December 4 during the “CRREM North America Project Final Update” webinar.

Since its inception, CRREM has attempted to straddle two related yet distinct purposes: as a climate ambition alignment standard (e.g., Net Zero, Paris alignment, 1.5°C) and as a transition risk tool (e.g., stranded assets, carbon pricing, etc.). While its decarbonization curves are used as best practice by many financial institutions for the former – via the Net Zero Investment Framework of the IIGCC or the Net Zero Asset Owners Alliance – the name “Carbon Risk Real Estate Monitor” and that of its associated “Risk Assessment Tool” allude to the latter. 

The confusion in the industry has been so apparent that the SBTi and CRREM recently released a joint explainer document hoping to provide some clarity with regard to how each organization uses the pathways. (In short, SBTi has claimed the net zero target setting aspect, and CRREM has claimed the transition risk assessment aspect.) 

Indeed, many organizations use CRREM decarbonization pathways as a benchmark for expected transition risk. This use case becomes stronger insofar as local building legislation follows increasing levels of strictness over time, in a manner closely following the ambition of the pathways. This can be particularly useful for globally diversified portfolios looking for insights into average levels of risk in the absence of specific information on local legislation and regulation. However, in the end, it is only a proxy. No assets will actually become “stranded,” nor will a carbon price actually be imposed upon a building, simply by virtue of their performance crossing a theoretical curve. 

So why must we choose between purposes? Unfortunately, trying to serve two different purposes creates confusion – not only in communication and industry understanding but also in making decisions about how the methodology should evolve. When the purpose of the pathways is unclear, it complicates the process of refining them. The ultimate meaning of the pathways significantly influences how they should be developed. If that meaning is uncertain, it can lead to inconsistencies in the methodology, which could undermine the pathways’ utility, relevance, and adoption. 

The greatest value that CRREM provides to the industry is a science-based, top-down, globally consistent set of carbon intensity targets that real estate must shoot for to be consistent with global climate ambitions. In light of this, we might have recommended that CRREM clarify that this is its primary purpose and make methodological developments in line with this purpose. It can still be used for transition risk applications, but the methodology should be driven by the former. 

Alas, it seems that the industry must navigate this uncertainty for a bit longer. 

According to the project’s methodology memo, “the energy market ratios sourced from IEA Energy Technology Perspective 2017 for residential (Res) and commercial (Com) sectors are applied to the emission rates to get the weighted emission factors (EF).” This means a few different things. 

Namely, that all commercial property types are assumed to have the exact same energy mix ratio between electricity and other energy types like natural gas. This is a significant and consequential assumption. 

GRESB data on over 200,000 real estate assets globally indicates that energy mix ratios vary significantly between various property types within commercial real estate across climate zones. 

The box encloses the 25th and 75th percentile, the line within each box represents the median (50th percentile), and the whiskers extend to the 2.5th and 97.5th percentiles. The percentage of on-site combustion in the total energy use is generally higher in Canada than the US, while district heating and cooling is negligible in the US and small but present in Canada. The combustion percentage is highest in Industrial assets and lowest in Residential – with medians going from ~70% to ~5%. Offices in both countries show a more balanced split between combustion and grid electricity, with the latter dominating. District heating and cooling is a significant portion of the total only in Residential. These plots are based on data reported for 2023 calendar year, though these trends hold true for the last four years of GRESB submissions.

The implication of the methodological assumption is that those property types that inherently have a higher ratio of natural gas consumption are put at a disadvantage in terms of attempting to stay under its CRREM decarbonization pathway. For example, industrial properties, demonstrating a higher natural gas to electricity ratio due to specific heating and operational requirements, could have a harder time getting below its corresponding GHG intensity pathway because the pathway assumed a lower weighted emission factor. 

Furthermore, page 27 states, “Note that the percentages denoted in table 4 are not expected to add to 100 percent, as renewable/carbon-neutral energy is assumed to make up the remainder of the energy mix at the asset, with an assumed emissions factor zero (also aligned with CRREM’s global methodology).” An extract of Table 4 is reproduced below. 

Any renewable/carbon-neutral energy should already be accounted for in the location-based electricity EF. Thus, the Elec% and Gas% should add up to 100%. If the rationale for not adding up to 100% is that there exist on-site renewables, then the proposed methodology automatically assumes that an individual asset will benefit from on-site renewables, thus making the associated GHG targets more aggressive, which is a serious assumption to make. 

In the end, assumptions regarding the energy mix of buildings, as well as their evolution in the future, have an impact on how closely the pathways reflect the reality of property type-specific GHG intensities and thus, how relevant they are for adoption. It’s worth considering how sensitive the pathways are to such assumptions. 

Let’s start with some definitions: 

Exploratory (or descriptive) scenarios describe how the future might unfold, according to known processes of change or as extrapolations of past trends. They are sometimes described as BAU scenarios; often they involve no major interventions or paradigm shifts in the organization or functioning of a system, but merely respect established constraints on future development (e.g., finite resources, limits on consumption). However, the term “business-as-usual” may be misleading because exploratory scenarios also can describe futures that bifurcate at some point (an example might be uptake or rejection of a new technology) or that make some assumptions about regulation and/or adaptation of a system.¹

Normative (or prescriptive) scenarios describe a prespecified future, presenting “a picture of the world achievable (or avoidable) only through certain actions. The scenario itself becomes an argument for taking those actions” (Ogilvy, 1992).²

All net-zero scenarios are, thus, normative by nature. 

The “Accounting and Reporting of GHG Emissions from Real Estate Operations: Technical Guidance for the Financial Industry” authored by PCAF, GRESB, and even CRREM itself states:

“In the projection of future building performance to comply with science-based targets, financial institutions may also incorporate foreseeable trends in grid decarbonization. These scenarios imply decreasing scope 2 emissions per unit of consumed electricity, contributing to the achievement of sectoral decarbonization targets. Projected EFs should attempt to incorporate robust and plausible forecast of predicted development, which may of course consider publicly communicated policy statements in their construction but should not rely solely on policy statements or normative scenarios of future development. The reason for this is that some policy statements, and even some econometric models, amount to wishful thinking without concrete plans attached to them.”

This was done to ensure that scenario planners are not being unjustifiably optimistic about decarbonization of other sectors (e.g., energy) that would make the decarbonization of sectors of interest (e.g., real estate) look more easily achievable. 

The IEA Energy Technology Perspective 2017 (used above as the basis for the energy mix of real estate) “looks at how far clean energy technologies could move the energy sector towards higher climate change ambitions if technological innovations were pushed to their maximum practical limits”.³ Thus, it is a normative scenario and not reflective of how building energy mix is most likely to evolve over time.  

Similarly, the IEA NZE 2050 scenario is a normative one. Setting building energy use intensity (EUI) targets based on this idealized vision of future renewable energy resources, rather than on the technical feasibility of making buildings as energy efficient as possible, risks creating a disconnect between targets and reality. If building targets are based on the assumption that the energy sector will reach its ‘maximum practical limits,’ these targets may be too lenient. Given that the energy sector is unlikely to achieve its absolute maximum potential, the current pathways may be setting the bar too low, potentially undermining the level of action and ambition needed within the real estate sector. 

Of course, the opposite situation is equally unhelpful – one in which the rest of the world does nothing and the burden of reaching a net-zero future is placed solely on the real estate industry. Therefore, a wider conversation regarding the balance of exploratory and normative scenarios that are used to set the parameters of future building-related emissions needs to be had in order to have a more refined understanding of the relative level of ambition that should be targeted by the global real estate sector.
 

There is a fundamental difference between setting top-down targets for building performance and setting bottom-up targets for building performance. Setting top-down targets for GHG makes sense in the context of allocating a set carbon budget across various sectors and subsectors. However, when attempting to set targets describing how such GHG targets are to be achieved (e.g., energy reduction pathways), the use of top-down derivation, dependent on a wide range of local factors, loses its meaning and its connection to the physical world. Nowhere is this more clear than in the issue of the EUI leveling year. 

Suppose renewable energy growth projections grow far beyond what they are now. Under the current methodology, the future energy efficiency targets will consequently become less and less ambitious, irrespective of any action from the building sector. Ad absurdum, if renewable energy adoption becomes extraordinarily high, buildings will be “CRREM Net Zero” without the necessity of energy efficiency at all, but simply by purchasing green energy.  

The opposite is also true – i.e., if renewable energy growth turns out to be much less than previously projected, CRREM net-zero targets would become so aggressive relative to what is technically feasible that they become irrelevant. This results in the same problem as experienced by the CRREM EUI pathways v1. 

This goes against the philosophy that real estate should take on some of the burden in the push towards a low-carbon future. The fact that the real estate targets are so disconnected from the reality of the real estate sector, but simply on projections of a completely different sector (i.e., the energy sector) is a fundamental problem. 

As stated above, any similarity between the current CRREM EUI targets and external targets (e.g., ASH100/NBI) here is purely coincidental and does not mean anything. If the projections of the underlying scenario (IEA NZE2050) change, the EUI targets change, without any greater understanding of whether this represents a feasible energy efficiency target for buildings. 

The reintroduction of 2°C pathways for the sake of not disenfranchising less ambitious real estate actors sets a dangerous precedent of relaxing climate ambition. CRREM is seen as a guide for best practice of climate alignment. The very development of 2°C pathways allows companies to claim “Paris alignment” that is out of sync with the SBTi and other leading institutions. 

At GRESB, we recognize Paris alignment as on par with a 1.5°C or net-zero future. Of course, getting close is better than no progress, and reductions, even if not quite reaching the levels associated with 1.5°C pathways, should be encouraged and praised. However, the goal posts need not be moved. 

It is crucial to address the methodological and fundamental shortcomings of some current aspects of CRREM. As detailed in this article: 

• While it has claimed its role as a transition risk tool, CRREM’s widespread role as a top-down, science-based set of globally consistent pathways far outweighs its use as a transition risk tool, and methodological decisions should reflect this. 

• The framework presumes largely homogeneous energy mixes across distinct property types, which may obscure the vital role of building electrification in sector decarbonization. 

• CRREM’s reliance on a very specific set of normative scenarios is inconsistent with the diverse analytical approaches used by authoritative bodies like the IPCC and the US Global Change Research Program and has large implications for the role that the real estate sector is entrusted to bear in the global transition to a low-carbon economy. 

• The energy use targets in CRREM are not explicitly aligned with the current or future understanding of technical potential or feasibility. 

• The inclusion of a 2°C pathway provides the perception of a “good enough” option when CRREM should focus on solidifying its position as the benchmark for 1.5°C target setting. 

These limitations highlight significant areas that need attention to make CRREM fit-for-purpose. 

Despite these challenges, it is equally important to acknowledge the pivotal role CRREM plays within the industry. The framework represents a significant step forward in guiding the real estate sector toward a more sustainable future, with a real potential to drive meaningful change. If the issues mentioned are addressed, CRREM can evolve into an even more robust tool that will withstand scrutiny and lead the industry in its pursuit of decarbonization goals. 

The CRREM North America project serves as a prime example of how regional multi-stakeholder efforts can refine the framework to make it more applicable to specific markets. The project has made significant improvements, including: 

• Incorporating Energy Star values 
• Utilizing the updated CBECS dataset 
• Implementing e-GRID zones 
• Adapting to US-specific climate zones 
• Using NREL grid projections 

These achievements are real and tangible, making CRREM more relevant and effective in the North American context. However, it is essential to recognize that these improvements do not address the fundamental limitations of CRREM as a framework. 

The community must ultimately decide how and when CRREM should be applied. The progress made by the CRREM North America project is commendable, and we are grateful for the attention it has brought to these issues. By focusing the community on tangible solutions, it has set a positive precedent for future developments. The ongoing evolution of CRREM will be crucial in ensuring it remains a vital tool in the fight against climate change. 

References:

^{1 & 2} Intergovernmental Panel on Climate Change. Climate Change 2001: Impacts, Adaptation, and Vulnerability. Contribution of Working Group II to the Third Assessment Report of the Intergovernmental Panel on Climate Change. Accessed November 19, 2024. https://archive.ipcc.ch/ipccreports/tar/wg2/index.php?idp=126.

³ International Energy Agency. Energy Technology Perspectives 2017: Catalysing Energy Technology Transformations. Paris: IEA, 2017. Accessed November 19, 2024. https://www.iea.org/reports/energy-technology-perspectives-2017.