Building net zero: The construction sector's role in hitting COP's climate goals

Key areas of dispute that we expect to see in the transition away from fossil fuels include governments' cancellation of oil and gas exploration licences or denial of planning permission for new or existing projects. Such decisions are likely to lead to claims from energy companies and other investors – including, in the case of cross-border investments, claims brought under international investment treaties. For instance, the Irish Government recently faced its first known investment treaty claim after refusing to grant a UK-domiciled energy company a lease for the development of an oil and gas field. Energy companies may also see themselves exposed to the risk of 'greenwashing' claims brought by civil society groups if they renege on previously publicised net-zero commitments. Indeed, this is also emerging as a consideration in the procurement process if, for instance, it comes to light that contractors' claims about their sustainability credentials have been overstated (see, for instance, this recent Scottish Court of Session case).

Funding for renewables: a boost to the coffers

Another key component of the COP28 final statement was the pledge made by participating states to triple the world's installed renewable energy generation capacity by 2030.

There have been numerous developments on this front over the last year. At a national level, 2024 has seen the UK Parliament pass the Great British Energy Bill, a flagship policy of the new Labour Government to set up a publicly-owned clean power company aimed at accelerating investment in renewable energy. In China, meanwhile, state-owned companies have continued to embark on a vast expansion of China's wind and solar generating capacity, with around 339GW of power under construction compared to approximately 40GW in the USA. In turn, investment in US clean energy projects is expected to reach an unprecedented USD 300 billion in 2024, boosted by federal spending increases allowed under the US Inflation Reduction Act.

The opportunities afforded to energy companies by this increase in state-backed financing are evident. Nevertheless, energy companies will need to carefully weigh up the risks associated with adopting the kinds of new technology, often untested, that are required for renewable energy projects. Waste-to-energy and biomass-based power plants (some of which only just qualify as 'green' projects) are among the types of projects on which we see technology-based construction disputes as being most likely to arise, along with green hydrogen and LNG extraction.

To address this risk, we are seeing some employers and contractors move away from conventional or adversarial procurement approaches towards more collaborative or incentives-based practices. These generally seek to achieve a more balanced risk profile while allowing parties flexibility to react, for instance, to further technological developments. One approach that has seen some take-up is alliancing, particularly on the basis of the NEC4 standard form alliance contract. This form of contract sees uninsurable risks shared between participants (a pain/gain share mechanism), claims between parties disallowed and common objectives forming the basis of parties' obligations. High-profile projects such as the Hinkley Point C nuclear power plant are among those on which the NEC4 alliance contract has been used.

Green public procurement: hydrogen and low-emission steel

COP28 also saw the governments of the USA, the UK, Canada and Germany sign the Green Public Procurement Pledge, a set of timebound commitments to procure low-emission steel, cement and concrete.

In line with this, recent years have seen a proliferation of green hydrogen projects for steel manufacturing, an area in which hydrogen is seen as particularly promising in reducing carbon emissions. Northern Europe counts a number of high-profile initiatives, including Copenhagen Infrastructure Partners' 'BrintØ' green hydrogen artificial island project, the EUR 6 billion Stegra green steel project in Sweden and a joint venture between Copenhagen Infrastructure Partners and Uniper for a green hydrogen pipeline supplying the German market.

The scope for energy companies to capitalise on the expansion of green hydrogen is apparent. However, this is also an area in which the risk of adopting new technologies remains relatively high. The engineering behind green hydrogen projects is often first-of-a-kind – one example being Australia's Latrobe Valley HESC project, in which hydrogen is extracted from coal before being liquified at -253°C and delivered by tanker to Japan. Technical failures, fluctuating demand in a nascent market and the challenges of scaling up to commercial production levels all combine to create an environment that is ripe for disputes. New technologies often also carry an inherent risk that the plant and equipment will not meet the project's specified performance requirements, leaving a gap between the planned output and actual performance. Parties should again ensure that their contractual arrangements clearly deal with the allocation of risk and contain appropriate dispute resolution provisions.

Built environment: the drive for near-zero emission buildings

The built environment was also a focus of COP28, with the signing of a further pledge by 28 countries to facilitate the universal adoption of near-zero emission buildings by 2030. Signatories include the US, China, the UK and the European Commission, representing between them more than half of global emissions.

At a regional level, the European Performance of Buildings Directive is currently being reworked in line with the COP28 commitment. The revised Directive requires all new buildings to have zero on-site fossil fuel emissions by the start of 2028 (for publicly-owned buildings) or by 2030 (for all other new buildings). Likewise, the new UK Net Zero Carbon Buildings standard has recently been drawn up in an attempt to create a single, clear definition of 'net-zero carbon' against which all types of building can be verified.

However, progress on decarbonising the built environment has been patchy. The March 2024 edition of the UN Environment Programme's Global Status Report for Buildings and Construction, which monitors progress of the global construction sector in aligning with the goals of the Paris Agreement, found that emissions from the built environment globally have not reduced at all between 2015 (when the Paris Agreement was signed) and 2022. The report also found that emissions from the construction sector are much higher than they would need to be in order to decarbonise the built environment by 2050 in line with the Paris Agreement.

Attention is therefore turning to construction and engineering companies ensuring that low- or zero-carbon practices are incorporated into their way of operating. In this regard, a number of standard-form construction contracts now include ESG drafting by default. The Silver, Yellow and Red Books of the FIDIC 2017 suite oblige contractors to "take all necessary measures to protect the environment" (sub-clause 4.18), while the NEC4 contract provides a contractual framework (at clause X29) for parties to allocate climate-related risk while incentivising emission reductions. Whilst the use of such contractual provisions may give rise to novel disputes between parties looking to enforce climate-related obligations, they are also likely to be instrumental in managing climate-related risks between parties.

The UK Net Zero Carbon Buildings standard is another important development in this regard. This standard emphasises the need for the adoption of a 'whole life' carbon approach, considering both embodied carbon (emitted during the non-operational phase of a building, including emissions caused by manufacturing, construction, deconstruction and end-of-life) and operational carbon (the carbon emitted while the building is occupied e.g. heating, cooling and lighting). To ensure stronger progress on decarbonising buildings is achieved, construction companies will increasingly need to demonstrate that they have taken into account the whole carbon lifecycle of a building at design stage. We expect this to be of particular concern for construction companies when managing their supply chains in order to ensure that sustainable materials and production processes are used.

COP 29 – What the construction sector can expect

New Climate Finance Goal: Financing the transition

The New Collective Quantified Goal (NCQG) on Climate Finance is likely to be at the top of COP29's agenda. The NCQG aims to create a unified structure for providing financing to developing countries, helping those countries mitigate their climate impact and adapt to climate change. COP29 participants will negotiate upwards from a floor of USD 100 billion per year to fill the current climate funding shortfall (with independent analyses concluding that emerging markets, excluding China, need to invest close to USD 2.4 trillion per year by 2030 to achieve their climate goals).

The initiative acknowledges that many countries lack the same energy infrastructure as developed nations. The scheme is therefore envisaged as a way of assisting beneficiary states to overcome their existing energy deficits while ensuring that richer nations pay their share (ensuring that the green transition is "equitable").

The impact of the NCQG on the construction sector in target countries is likely to be significant. Developing countries' adaptation to climate change will require large-scale investment in green energy projects, improvements in existing buildings' energy efficiency and the incorporation of carbon capture systems within existing infrastructure, all of which the NCQG's funding should help facilitate. Major infrastructure projects backed by the UN's existing (but much smaller) Green Climate Fund (GCF) give an idea of the kind of schemes likely to be financed by the NCQG. Of particular note are a number of solar power projects in the Sahel region of West/Central Africa and South Africa's national water reuse programme.

Public-private partnerships (PPPs) under the aegis of the NCQG are likely to be a promising vehicle for construction companies wishing to capitalise on this expansion of multi-lateral funding. Allocating risk is a key concern in such partnerships given the higher number of stakeholders, the long-term nature of projects and the enhanced degree of environmental and social accountability that they demand. It is also our experience that disputes frequently arise in the context of PPPs around an asset's underperformance once constructed.  

There are a number of procurement options available to companies entering into PPPs to help manage these risks. Of particular note is the Design Build Operate (DBO) model, under which a contractor is responsible for the design and construction of an asset, but also for its operation in the initial project period (generally between 15 and 25 years, depending on the type of asset). Given the contractor's continuing role on the project after completion, the DBO route can help align long-term goals between the project parties in line with environmental and social criteria. By keeping the contractor engaged – and potentially liable – during the operational phase of the asset, the contractor is likely to be properly incentivised to 'do the right thing' during design and construction since it is to their benefit in the long term. This structure may also assist with ensuring the continuing operability of the asset given that the party responsible for its design and construction remains involved for longer.

Conclusion

As we approach COP29, it is clear that the construction sector is at the forefront of the global transition towards a net-zero future. The commitments made at COP28 have already started to shape national and regional policies, with significant implications for businesses operating in the sector. We anticipate that COP29 will prove similarly impactful, with a particular focus likely to be on the financing of climate change adaptation and mitigation efforts.

Of course, the transition away from fossil fuels, the expansion of state-backed and multilateral financing for renewables projects and the adoption of low carbon building practices together bring novel risks which may give rise to new construction disputes. However, many of these risks can be managed by, for example, adopting an appropriate procurement model that promotes long-term environmental objectives, as well as proactively using interim dispute resolution mechanisms as a way of resolving issues early before they evolve into formal disputes.