Economic Tools for Climate Change Adaptation: Private Real Estate Decisions

To better understand decision-making in the real estate sector and how it influences climate change adaptation in British Columbia, All One Sky Foundation undertook an analysis in 2015 to identity barriers to efficient adaptation. The real estate sector plays a crucial role in providing people with places to live and work. Its assets and infrastructure, with their long lifecycle, are vulnerable to climate change. The impacts of climate change must be addressed at each stage of the real estate life-cycle (from land acquisition, through development, occupancy, renovation and redevelopment). If not, climate change could render some real estate developments too uncomfortable or risky to live in, too expensive to operate and manage, too costly to insure, and not sufficiently profitable to attract capital from investors. To better understand decision-making in the real estate sector and where it may break down in the context of climate change adaptation, All One Sky looked at the real estate development process as a whole, before choosing three areas that usefully illustrate the case for intervention. These three areas (planning developments, property occupancy and renovation, and property redevelopment) provide a reliable case study of the barriers to efficient adaptation decisions by private individuals and businesses in the sector, and the economic instruments that governments in BC could potentially use to overcome them.

Understanding and Assessing Impacts

Real estate—in particular, infrastructure and buildings—has an expected design life of between 20 and 100 years; some developments may well be used for much longer. Both new and existing developments will therefore likely experience the full extent of projected climate change this century across their lifecycle. It is vital that potential climate-related impacts are considered at each stage of the real estate lifecycle.

In order to capture the risk that climate change presents for the real estate sector in British Columbia, All One Sky Foundation collected climate data from several sources. Future climate projections until 2080 were taken from the Pacific Climate Impacts Consortium given the average lifespan of most real estate assets. Additionally, insurance data was analyzed, showing a significant increasing trend in severe weather damage to buildings and other infrastructure over the last half century. It is noted that there is limited data or literature on how these changes will impact the real estate sector specifically. In order to fill this research gap, All One Sky Foundation completed an assessment using available data to identify specific impacts on the real estate in British Columbia. The study organized the findings of potential impacts by climate hazard, distinguishing between slow-onset climate-related physical events (e.g., increasing temperatures, precipitation, and sea-level) and sudden-onset climate related extreme physical events (e.g., storm surge, extreme precipitation and flooding, wildfires, damaging storms, drought, and heatwaves). A few examples are provided below:

Slow-onset Climate Impacts

  • Increased temperatures may lead to increased summer cooling requirements for buildings and increased load on air conditioning with implicit capital and operational cost implications.
  • Increased precipitation may increase biological degradation (e.g. through mold growth) of building materials and components and reduced structural integrity.
  • Sea-level rise may cause permanent inundation of low-lying lands and property, including high amenity areas (beaches, coastlines) that may hold (high value) potential for real estate development.

Sudden-onset Extreme Events

  • Storm surge, coastal flooding and erosion could cause injuries, fatalities, and disruption to livelihoods.
  • Wildfire may cause damage to, loss of, buildings, green spaces and infrastructure (communications, power).
  • Extreme temperatures and heatwaves could result in construction and renovation delays and loss of work days during heatwaves.

 

Identifying Actions

The overall approach to the project is grounded in the concept of “climate resilient pathways”. In the current context, climate resilient pathways are trajectories for real estate development in BC that combine adaptation and mitigation to reduce climate change and its impacts in order to achieve long-term sustainable growth. The report is structured around the concept of climate resilient pathways and includes sections on:

  1. The potential impacts of climate change on private real estate in BC;
  2. The real estate development process in BC and the main activities-decision points;
  3. The range of adaptation actions and behaviours (by hazard) that private actors could take to manage climate change impacts;
  4. Potential barriers to efficient adaptation decisions by private actors in the real estate sector; and
  5. Economic instruments that government(s) in BC could use to overcome barriers to good adaptation choices by private actors.
Concept of a Climate Resilient Pathway for Real Estate in BC

Adapted from Denton, et al. (2014)

The concept of a climate resilient pathway for real estate in BC

Implementation

The analysis found that the most effective policy response for effective adaptation combines regulatory tools with economic instruments designed to overcome specific barriers, as well as economic instruments to overcome barriers cutting across the sector. Some examples of the economic and policy mechanisms that were identified for different levels of government to use to overcome adaptation barriers in the real estate market included:

  • Updating Official Community Plans to include project climate risks
  • Hazard mapping to encourage private actors to take proactive measures
  • Zoning tools and bylaws to mitigate increased risk
  • Development Cost Charges to increase the resiliency of homes.

The analysis also provides several planning and regulatory tools and economic instruments that the provincial government or local governments in British Columbia could use to overcome barriers to effective adaptation by private actors in the real estate sector. Examples of recommendations include:

  • Reform (e.g., reduce, restructure, or eliminate) perverse subsidies that fuel the self-reinforcing cycle of continued growth in coastal or riverfront zones prone to flooding;
  • Expand BC Real Estate Association’s requirement to disclose deficiencies to potential buyers to include climate-related hazards; and in support of a managed retreat strategy, investigate regulatory options to restrict the construction of property-level flood defenses by property owners.

Outcomes and Monitoring Progress

The report found that prominent barriers to efficient adaptation by actors in the real estate sector fall into two broad categories:

  1. Market Failures – Market failures occur when freely-functioning real estate markets, operating without adequate government intervention, fail to deliver outcomes that are satisfactory from the point of view of society. This happens when the private returns which an individual or business receives from carrying out a particular action (like undertaking adaptations to climate change) diverge from the returns to society as a whole—resulting in a sub-optimal amount of adaptation. Real estate markets can also fail when the individual or business does not have sufficient information to recognize the returns from climate change adaptation
  2. Behavioral failures – Even when markets are providing the right price incentives to individuals and businesses, alongside accurate and adequate information, people do not always respond in a ‘perfectly rational’ way. There are a number of anomalies and biases that affect the way people process information and make decision. These behavioural failures can also result in a sub-optimal amount of adaptation.

Next Steps

The provincial government received the recommendations made by All One Sky Foundation and were to consider them in future decision-making processes for implementation.

Resources

Link to Full Case Study

Additional Resources: