The Effect of Carbon Accounting and Pricing on a Discounted Cash Flow-based Investment Decision in Real Estate

Jorg de Jonge; Michaël Peeters; Arjan van Timmeren; Ellen van Bueren

doi:10.55845/jos-2025-1272

Authors

Jorg de Jonge Delft University of Technology
Michaël Peeters Delft University of Technology
Arjan van Timmeren Delft University of Technology
Ellen van Bueren Delft University of Technology

DOI:

https://doi.org/10.55845/jos-2025-1272

Keywords:

Real Estate, Sustainability, Investment Decision, Discounted Cash Flow, Carbon Pricing, Carbon Costs

Abstract

The real estate sector must transition towards a low-carbon economy. In current investment decisions, carbon emissions are insufficiently considered and may not contribute to a low-carbon portfolio aligned with the sector's target. Therefore, investors require a change in the current DCF model-based investment decision to direct capital to projects that support this goal.

This paper examines the impact of carbon accounting and pricing on a standard investment model using the Discounted Cash Flow (DCF) model. Three additional cash flows are modelled, representing the costs for Embodied Carbon (ECC), Operational Carbon Cost (OCC), and Maintenance Carbon Cost (MCC). This paper introduces a novel application of carbon pricing in real estate investment, accounting for embodied, operational, and maintenance-related emissions during the use phase, which results in a practical framework and guide for practitioners.

The Carbon Price needs to be sufficiently high to make an impact and contribute to excluding energy-inefficient assets as an investment opportunity. Furthermore, the influence of ECC is minor compared to OCC, making carbon pricing for ECC less relevant in investment decisions. Ultimately, the MCC is a significant factor to consider when making an investment decision.

Carbon pricing can encourage the use of circular and biobased materials, reducing emissions during the construction, renovation, and use phases. Investors should apply a carbon price to affect investment decisions by excluding carbon-intensive assets from investment portfolios. Investors could align their capital with the sector's low-carbon goal by including monetised carbon emissions in an investment decision.

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