SustainaWeekly - Dutch government’s insulation programme falls short

Economist: A significant part of the Dutch government’s emissions reduction target must be delivered from the built environment. Among other policies, the government is committed to home insulation and is making funds available for this purpose. However, the funds available are only a fraction of the total insulation costs. Moreover, the 2030 reduction target cannot be met with insulation alone.

Strategist: The greenium for EUR IG corporates has been extremely volatile in 2022. Our analysis shows that swings in the greenium for corporates outside of the real estate sector have been driven by the risk-off sentiment by investors this year. Investors in a risk-off mode tend to prefer green bonds. On the other hand, the greenium for real estate companies seems to have been impacted by the abnormal behaviour of bond spreads in this sector.

Sectors: The ECB has published a study on the impact of carbon-related concentration risks at banks. Exposures mainly consist of climate-related transition risks. Study proves strong positive correlation between expected losses from transition risks and carbon-related concentration risk.

ESG in figures: In a regular section of our weekly, we present a chart book on some of the key indicators for ESG financing and the energy transition.

Dutch government’s insulation programme falls short

• The government aims to reduce greenhouse gas emissions in the Netherlands

• Total emissions, which stood at 168 Mton in 2021, must fall to 100 Mton by 2030

• A significant part of the emissions reduction target must be delivered by the built environment

• Building emissions must fall from 25 Mton in 2021 to 10 Mton in 2030 and zero in 2050

• Among other things, the government is committed to home insulation and is making funds available for this purpose

• However, the funds available are only a fraction of the total insulation costs

• Moreover, the 2030 reduction target cannot be met with insulation alone

• Making the built environment more sustainable in the Netherlands

The Netherlands has agreed to reduce greenhouse gas emissions. The target is for Dutch emissions to be at least 55% lower in 2030 than in 1990. This means reducing emissions from 168 Mton in 2021 to 100 Mton in 2030. In its policy, the government even assumes a 60% reduction to 88 Mton. Part of the reduction must come from the built environment, which is responsible for 15% of total emissions. Homes in particular are in the spotlight of policymakers. Private households, of which homes have a significant share, account for more than 70% of emissions from the built environment (CBS). Insulating homes is a good first step towards sustainability, though switching towards renewable energy sources and behavioural changes are also crucial.

Making the built environment more sustainable in the Netherlands

In the built environment, emissions must be reduced from 25 Mton in 2021 to 10 Mton (CBS) in 2030. Climate-neutrality is the goal for 2050. To get there, there are five main routes:

• Electrification (through electric or hybrid heat pumps, heat pump boilers, electric water heaters, air conditioning, electric cooking, among others)

• Energy efficiency (by e.g. digitalisation, smart lighting, appliances and control systems)

• Behavioural changes (through e.g. education and awareness, changing consumption patterns and adapting habitual behaviour)

• Renewable energy (through e.g. bioenergy, solar panels, utilisation of residual heat)

• Building insulation (through e.g. roof, wall and floor insulation and double glazing).

A value chain approach can kick-start the transition to a climate-neutral built environment. This means a more sector-wide transformation throughout the entire life cycle of the built environment, with building owners, producers of building materials, installers, energy companies and municipalities cooperating and coordinating intensively. The government should be the lubricant in this value chain approach. This means that they commit to: clear and transparent building codes and energy standards that apply for a longer period of time, short procedures around licensing and sufficient financial incentives to make the climate-neutral goal attainable for every owner, user and resident. The National Insulation Programme (NIP) fits into this approach.

The National Insulation Programme

The NIP is an incentive for homeowners to work towards making their homes more sustainable. Everyone who is going to renovate will be affected by this programme in one way or another. The aim of the NIP is to accelerate the insulation of poorly insulated homes in particular in the period up to and including 2030. Within the NIP, there are five action lines for making the built environment more sustainable:

These relate to:

• An area-based approach to heat transition

• The preservation of individual homes

• The preservation of utility buildings

• Using sustainable sources and infrastructure

• And promoting innovation and implementation capacity in construction

Insulation runs as a thread through the NIP's programmes. The approximately 4 billion euros of funds that the government has earmarked for this in total come from the 2021 Budget (514 million euros), the coalition agreement (3.35 billion euros), the scheme Investment Subsidy for Renewable Energy and Energy Saving (ISDE) and 62.5 million euros from the Climate Fund as an additional investment to accelerate the local approach NIP. Finally, the government will make a total of 300 million euros available for the NIP in 2023 and 2024 to support vulnerable households in taking energy-saving measures.

Current housing stock

To assess how the funds released by the government through the NIP for home insulation relate to the total investment costs, it is necessary to have insight into the quality of the housing stock. According to CBS, the Netherlands has a total of 8.1 million homes. Of these, 3.8 million had a valid energy label on 1 January 2020. The energy label indicates how the house scores in terms of insulation, what kind of installations are used, whether there is a natural gas connection, what heat is needed in the winter months and the share of renewable energy. The higher the label, the lower the energy consumption and the lower the emissions. The figure below shows that most homes have energy label C.

Possible outcomes of current policy

The government has a target of insulating 2.5 million homes. The focus is on poorly insulated homes with energy labels E, F and G. It is estimated that around 1.5 million homes fall into this category. The cost of making these more sustainable is significantly higher than for homes with a high energy label. For instance, upgrading a G-label house to an A-label house costs an average of EUR 32,500, compared to about EUR 13,000 for a C-label house. Making homes with E, F and G to label A sustainable requires a total of about 35 billion euros and is estimated to yield a CO2 reduction of about 1.5 mton, only a fraction of the total task.

Upgrading the entire housing stock sustainable to label A amounts to an investment of 100 billion euros and leads to a CO2 reduction of 5 mton, still insufficient to meet the reduction target in 2030. This will require further upgrades to A++ and above. According to the Economic Institute for Construction, it will cost 235 billion euros to make the housing stock nearly energy-neutral (BENG). That is an average of 30,000 euros per house (235 billion divided by the total housing stock), but the variation in costs between houses is large, as the final burden depends heavily on the alternative to gas chosen. Added to this, the strong demand for housing sustainability combined with the lack of skilled workers and materials can lead to substantial price fluctuation.

Conclusion

Insulation is an important and necessary step in making the built environment more sustainable. But it is insufficient to meet the emissions target. The amounts provided by the government are only a fraction of the total costs, though enabling households – which in some cases are liquidity or credit constrained – to make the investment is also likely to be part of the buildings transition. On balance, lower energy costs are the main financial incentive for homeowners to make their homes more sustainable. We will follow up on the financial incentives in an upcoming note.