Housing is a major greenhouse gas (GHG) emitting sector, consuming about 24 per cent of the country’s electricity and emitting over 20 per cent of total GHG. These percentages are expected to increase as housing demand accelerates, jeopardising India’s green transition targets.

Conventional housing materials such as concrete and steel are made with energy-intensive processes. Also, households’ electricity consumption has trebled from 2000 to 2017. This is projected to surge eight times over 2018-50, as climate change effects such as heat waves increase heavy-duty HVAC appliances and refrigerator usages. There is a need to reimagine the mindset towards the sector.

The use of low-carbon materials, following sustainable construction processes, and recycling building materials can lower the GHG footprint. An appropriate blend of active and passive design elements when constructing can reduce energy usage by over 35 per cent.

Retrofitting roofs, windows, and doors that have higher energy performance can reduce heating and cooling demands by up to 40 per cent. Replacing incandescent lights with LEDs reduces energy consumption by about 80 per cent.

But builders have no economic incentives to implement sustainability, as ‘green’ homes do not command premium pricing. Buyers have no motivation to pay more, especially if it is rented out.

To mitigate the risk due to lower-than-expected performance of energy-saving measures, manufacturer guarantees and warranties can be augmented with standardised performance certifications from government agencies.

Financial interventions

Even if there is an intent, finding capital is not easy. Commercial banks are unlikely to provide debt as they wish to avoid an increase in the ‘loan-value to house-value’ ratio.

Similarly, banks rarely provide capital for retrofitting as the borrowers are reluctant to provide their houses as collateral. This is a classic case of market failure that warrants public policy interventions.

Additionally, the government and Multilateral Development Banks (MDBs), and Domestic Development Banks (DDBs) can support green housing sector through a credit enhancement mechanism. For instance, a subordinate loan can be funded by these institutions to cover only the incremental cost of construction and design of energy-efficient houses. The savings from these houses over a period can be used to pay the loan back.

An alternative is for DDBs and MDBs to offer partial credit guarantees on energy-efficient homes that pay the lender if the borrower defaults. These schemes have been used in the past to support lending by commercial banks to underserved segments and can work for the green housing sector. Similar models can be used for retrofitting existing houses.

A ‘green price premium’ can also be accrued from the resale of such properties. The National Housing Bank (NHB) launched SUNREF Green Housing programme in association with the French Development Agency (AFD) and the European Union (EU). NHB can test these innovative financing solutions to attract private capital to green housing.

Energy-efficient projects in the housing sector are financially feasible. In China, green housing mortgage securities are traded at a premium over conventional ones. In Singapore, Green Mark (GM) rated properties are expected to fetch a higher market premium.

Hence, private financers can generate an expected return from such transactions. Through innovative financing models and policies, public institutions can nudge the private players to fund the much-needed low-carbon housing sector.

Labanya is Regional Climate Finance Adviser, The Commonwealth Secretariat, and Prasad is an alumnus of IIM Ahmedabad and IIT Bombay. Views expressed are personal

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