The skyrocketing cost of housing affects people across the United States, particularly lower to middle income residents1. Many households also struggle to pay their energy bills, adding to their cost burden. Could better energy efficiency provide housing cost relief while also cutting emissions? In this paper, we explore the contribution of real estate to global carbon emissions, and tools that may lead to a better understanding of the intersection between the two.

There are several factors contributing to soaring housing costs, including rising interest rates, higher inflation, and a growing imbalance between housing supply and demand. Increasingly, there is also growing appreciation from policymakers about the role that energy consumption plays in driving up housing costs. Of note, The Federal Inflation Reduction Act of 2022 and Bipartisan Infrastructure Law of 2021 include billions in loans and grants to promote energy efficiency and help reduce residential heating and electricity bills2.

This focus on energy efficiency seems logical from both an environmental and cost perspective. Residential homes account for over 20% of direct carbon emissions nationwide, and most of these emissions come from energy consumption3. Accordingly, over 25% of all U.S. households report energy cost concerns or have difficulty paying energy bills4. Therefore, improving energy efficiency and the decarbonization of electricity and home heating may yield dual benefits: reduced emissions and housing cost relief. Despite this, policymakers and the public have limited visibility into the carbon footprint of residential properties and how this increases costs for homeowners and renters. Furthermore, real estate lenders and investors are paying attention. Housing affordability can influence the likelihood of mortgage delinquencies and an increasing number of lenders are also interested in the environmental and social benefits derived from decarbonizing real estate5.

ICE Sustainable Finance is seeking to advance the understanding of the intersection of carbon emissions and real estate costs. Our initial approach for carbon footprinting in U.S. real estate covers residential properties and mortgages (whole loans and serviced loans) as well as residential mortgage-backed securities (RMBS). For mortgages and RMBS, we can estimate emissions for residential portfolios and loan pools comprised of properties within the continental U.S., in alignment with the Partnership for Carbon Accounting Financials (PCAF) Financed Emissions Standard. Importantly, our methodology estimates residential carbon footprints without compromising borrower privacy at the property level.

Our estimates of carbon emissions are derived from our proprietary geospatial dataset comprising most of the residential properties in the continental United States. We then incorporate building energy models (BEMs) to inform property-level energy demand. BEMs are detailed physics-based models of the factors that influence energy demand, from weather response (home insulation characteristics, heating fuels, HVAC efficiencies) to behavioral factors (cooking fuels, common washer/dryer efficiencies, electric vehicle uptake rates). We also incorporate hourly electricity grid emissions data to model energy demand under a set of actual meteorological conditions and expected usage patterns. All these components contribute to an estimate of scope 1 and scope 2 emissions for residential properties.