Green building will drive innovation and create new industries

INSEAD's Sami Mahroum

Governments are also providing other incentives, ranging from support for R&D activities, to new regulations and standards on transport, buildings and manufacturing. The aim is to become greener while staying competitive. To reach that delicate balance the OECD is working towards a Green Growth Strategy for its thirty plus members.

To succeed, any green growth strategy has to deal with the main source of CO2 emissions - that is the built environment - and by extension the construction sector. Last year the UN Intergovernmental Panel on Climate Change (IPCC) identified building improvements as one way to reduce global warming pollution with net economic benefits.

The built environment is the biggest contributor of CO2 emissions – nearly 50 per cent of the total – largely through electricity consumption and heating, but also through building materials, especially cement and steel, and related manufacturing and transport activities.

Building greener

Without tackling the problem of emissions in the built environment, little progress can be made towards a greener and more sustainable economy. For example in the US, ‘green buildings’, which are defined as ‘environmentally preferable practices and materials in the design, location, construction, operation and disposal of buildings’, represents only two per cent of commercial buildings in the US and 0.3 per cent of new homes.

The problem is that the construction sector is notorious for its low level of innovation. Many builders are loath to invest extra money in more efficient energy and water systems that only translate into cost savings for the eventual owners.

Around the world, innovation surveys have repeatedly confirmed that only a small minority of construction firms is innovative. The result is an industrial sector that is economically significant, contributing between four and 12 per cent of GDP in OECD countries, but very highly polluting and very poor in innovation.

This is why, recently, five international economic institutions around the world: ABN AMRO, Citi, Deutsche Bank, JPMorgan Chase, and UBS; along with as four multinational energy services companies: Honeywell, Johnson Controls, Siemens, and Trane; have cut a $5 billion deal to work together to retrofit existing buildings and boost their green credentials, in sixteen cities, including New York, London, Johannesburg, Karachi, Mexico City, Mumbai, and Tokyo.

A revolution in construction

But the governments of one region in particular have a unique chance to revolutionise the construction sector, and with it change the built environment forever, and that is the Gulf region. According to a recent study by the management consultants Deloitte, the Gulf Cooperation Countries (GCC) of Bahrain, Qatar, Oman, Kuwait, Saudi, and UAE have a pipeline of construction projects worth around $2,677 billion.

This means the Gulf is one of the leading regions in the world in terms of market share. While the money is expected to come from both the public and private sectors, governments remain the most influential clients and investors in construction projects in the GCC.

As a result, GCC governments are in a unique and powerful position from which to drive and shape the future of eco-innovation globally through their leverage over firms operating in the built environment. They can use their influence to push for eco-innovation in this sector, and also use it as an engine for knowledge transfer and economic diversification.

In fact, the construction industry can do for innovation in these countries what the defence industry did for US innovation 60 years ago: become the springboard of new innovation-based industries.

This is not far-fetched: the region is becoming better known for its large construction projects than for oil and gas. The recent opening of the world’s tallest free-standing structure, Burj Khalifa in Dubai, is only one attestation of this image change. Very large construction projects, such as the King Abdullah Economic City, the Jazzan Economic City, and the Knowledge City in Saudi Arabia; or the Abu Dhabi central business district, Saadiyat Island, and Reem Island projects in the UAE, and many other large-scale investments in schools, universities, museums across the region provide excellent platforms for governments to create strong incentives for local innovation activities to be developed around the niche of “eco-construction”.

Masdar Eco-city

Already the governments of both Abu Dhabi, which is building an eco-city named Masdar, and Dubai, have introduced a green buildings code to help make their cities more energy efficient and environmentally friendly. But the opportunities presented by the large portfolio of infrastructure and construction projects in the region mean governments may combine the use of building codes with public procurement of major construction projects to spark the emergence of a local eco-tech industry.

By taking active steps, the governments in the region can lay the foundations for a domestic eco-construction industry that is both green and internationally competitive. In particular, GCC governments may impose high ecological standards on major construction projects, demand that knowledge transfer elements be included in these projects, and provide various incentives for the domestication of related high value-added activities, such as R&D.

Without a proactive government strategy to view the construction boom as a springboard to economic diversification, many of today’s construction projects might risk becoming castles in the sand 50 years from now.

Sami Mahroum is a Senior Research Fellow and the Director of INSEAD’s Innovation & Policy Initiative in Abu Dhabi.

This piece also appeared in also appeared at INSEAD’s newsletter Knowledge.