Environmental Externalities: The Hidden Cost of the Construction Industry

📌 Key Points

• Environmental externalities are the effects—often unaccounted for in financial records—that an activity imposes on society and the natural environment without paying the cost.
• The building and public works sector accounts for nearly 37 percent of global energy-related CO₂ emissions and consumes approximately 40 percent of the world’s mined resources.
• Climate regulations, the emissions trading system (ETS), and the carbon border adjustment mechanism (CBAM): these external costs are becoming very real expenses on the income statement.
• Mesurer son empreinte via un bilan GES fiable (méthode Bilan Carbone® de l’ADEME, ISO 14064, GHG Protocol) est le premier pas pour internaliser et réduire ces impacts. Sur le terrain, cela commence souvent par le bilan carbone du chantier.
• Platforms such as Decarbo’Solution® help construction industry stakeholders turn this challenge into a competitive advantage and cost savings.

What is an environmental externality?

Environmental externalities refer to the consequences of an economic activity that affect third parties—such as the community, local residents, and ecosystems—without a market transaction determining their price. In short, they are effects borne by others that neither the producer nor the consumer pays for directly.

The concept dates back a long time. As early as the beginning of the 20th century, economist Arthur Pigou theorized about the gap between private cost and social cost. Later, Ronald Coase offered a complementary perspective based on property rights and negotiation among agents. These two approaches continue to shape all environmental public policies today.

📗 Definition

An externality is the effect of an economic agent’s (business, household, government) actions on the well-being of another agent, without monetary consideration or compensation through the market. When these actions degrade the environment—through air, water, or soil pollution, or greenhouse gas emissions—this is referred to as a negative externality.

Negative Externalities and Positive Externalities

Not all of these impacts are equal. We can distinguish between two categories.

Negative externalities place a burden on society: air pollution, water pollution, destruction of biodiversity, and noise pollution. A cement plant that emits CO₂ imposes a climate cost on the planet that it does not pass on to its customers.

Positive externalities, on the other hand, generate an uncompensated benefit. A project that restores a wetland or a building that produces more energy than it consumes creates ecological value that benefits society as a whole.

💜 Did you know?

According to the OECD, outdoor air pollution costs developed economies several percentage points of GDP each year, due to healthcare costs, reduced productivity, and premature deaths. These colossal amounts are a perfect illustration of an uncompensated external cost that no one “pays” for directly on a bill.

The Specific Case of the Construction Industry

By its very nature, the construction and public works sector is a material-intensive industry. Aggregate extraction, steel and cement production, the transport of heavy materials, water consumption, and waste generation: each stage of the process has a negative impact on the natural environment.

For a construction director or manager, understanding these impacts is no longer a matter of economic philosophy. It has become an issue of cost, compliance, and competitiveness, because European lawmakers have decided to assign a price to them.

Why Environmental Externalities Have Such a Significant Impact on the Construction Industry

No other sector has as many environmental impacts as the construction industry. The numbers speak for themselves and explain why regulators are focusing their attention on this sector.

🏗️ Order of magnitude figures for the construction industry:

• According to the United Nations Environment Programme, the building sector accounts for approximately 37 percent of global CO₂ emissions from energy and industrial processes.
• The construction industry accounts for nearly 40 percent of the natural resources extracted worldwide.
• In France, the construction industry generates more than 220 million metric tons of waste per year, making it the country's largest source of waste.
• Cement and steel, on their own, are among the materials that contribute the most to global emissions.

Materials: The Hidden Side of Carbon

The bulk of a structure’s carbon footprint is determined even before it is put into service, in what is known as embodied carbon. The production of one metric ton of cement releases nearly one metric ton of CO₂. Steel, aluminum, and glass follow similar patterns.

For a company in this sector, this means that its largest source of emissions is not its offices or its fleet, but its procurement of materials —that is, its Scope 3 emissions. This category typically accounts for 50 to 90 percent of an organization’s total carbon footprint.

💜 Did you know?

In most carbon footprint assessments for the construction sector, purchases of materials and services alone account for the majority of the total. That is why managing suppliers and the composition of the supply chain is the most powerful lever for reduction—far more so than focusing solely on energy consumption at construction sites.

Pollution, Water, and Biodiversity

Beyond its impact on the climate, construction affects other resources as well. Soil sealing disrupts the water cycle. Construction sites consume large volumes of water and can compromise the quality of groundwater. Land development encroaches on natural habitats and undermines biodiversity.

This damage, which was long overlooked in operating statements, is now closely scrutinized by investors, insurers, public-sector contractors, and, increasingly, by customers themselves.

Internalizing External Costs: From Economic Concept to a Price on CO₂

The central question—for economists and business leaders alike—is simple: How can we make the party responsible for a harmful effect pay the true cost of that effect? This is known asinternalization.

Pigouvian tax or emissions trading: two schools of thought

There are two major approaches that are both contrasting and complementary.

The first, derived from Pigou, involves imposing a tax equal to the social cost of pollution. The price of the product then reflects this negative impact: this is the logic behind the carbon tax.

The second approach, inspired by Coase, is based on the creation of tradable property rights. By setting a cap on permitted pollution and allowing companies to trade allowances among themselves, the price is allowed to emerge from the interaction between market participants. This is exactly the principle behind the European Emissions Trading System.

📗 Definition

The EU ETS (Emissions Trading System) is the European emissions trading market. It caps emissions from the sectors it covers and requires companies to hold one allowance for every metric ton of CO₂ emitted. The price of this allowance—around 70 to 90 euros per metric ton in recent years—finally assigns an explicit value to a form of damage that has long been free of charge.

When Damage Becomes a Burden

For the industry, this internalization is no longer merely theoretical. Several measures are directly converting these impacts into financial burdens:

• ⚖️ The ETS1, which has been in effect since 2024, already covers heavy industry, including cement and steel producers—and this additional cost is automatically passed on to material prices.
• 🚚 The ETS2, expected in 2027–2028, will extend the system to road transport and the construction industry.
• 🌍 Since 2026, the MACF (Carbon Border Adjustment Mechanism) has imposed a tax on imports of high-emission products—steel, aluminum, and cement—to prevent carbon leakage.

⚠️ Warning:

Under the MACF, a manufacturer or construction company that imports steel or cement from outside the European Union will be required—in the absence of actual data from its suppliers—to pay based on marked-up default values.⚠️These markups increase year after year. Having a verified product carbon footprint (PCF) for its supplies therefore becomes a direct tax issue, not just a regulatory one.

The message for a leader is crystal clear: these aren't just communication topics. They are expenses that affect the income statement. And what can't be measured can't be managed.

Measuring to Drive Action: From GHG Assessments to Climate Strategy

Internalizing these impacts first requires quantifying them. Without reliable measurements, it is impossible to anticipate tax liability, compare materials, or set a credible reduction trajectory.

Choosing an Emissions Accounting Methodology

There are several standards for calculating an organization’s greenhouse gas emissions. It is important to distinguish between them.

The ADEME’s Bilan Carbone® method, now administered by the Association for the Low-Carbon Transition (ABC), is the long-standing French standard. It is a comprehensive methodology that covers all emission categories using a proven approach.

Internationally, the GHG Protocol (WRI/WBCSD framework) categorizes emissions into three scopes and serves as the foundation for 92% of Fortune 500 companies. The ISO 14064-1:2018 standard, meanwhile, organizes emissions into six categories, in line with French regulations.

📗 Definition

When we refer to an emissions calculation without specifying a proprietary method, we are referring to a GHG inventory (greenhouse gas inventory). The term Bilan Carbone® specifically refers to the registered methodology of ADEME/ABC. The two are therefore not interchangeable: the latter is a specific methodological trademark, while the former is a generic term.

The basic formula remains the same regardless of the method used: Activity data × Emission factor = Emissions. The challenge lies in the quality of the data collected and the reliability of the factors used.

A legal requirement, not an option

⚠️ Warning

The regulatory BEGES (greenhouse gas emissions inventory) is mandatory for companies with more than 500 employees, local governments with more than 50,000 residents, and the federal government. It must be accompanied by a transition plan. In the event of noncompliance, penalties can reach €10,000, increasing to €20,000 for repeat offenses (Article L229-25 of the Environmental Code).

Beyond regulatory requirements, pressure is now coming from clients. Public procurement, in particular, is increasingly incorporating carbon criteria into the awarding of contracts—a major shift for a sector that relies heavily on government contracts.

It is precisely at this stage that a structured measurement tool becomes essential. Platforms like Decarbo’Solution® enable construction industry stakeholders to calculate their GHG footprint using the Decarbo’Inventory® module, then directly link this data to their procurement strategy and their responses to requests for proposals. The idea is not to pile on tools, but to build on a single data foundation—from the GHG assessment all the way to tax liability.

Reducing Environmental Externalities in the Construction Industry: Practical Measures

Once the assessment is complete, the focus shifts to taking action. The good news is that in the construction industry, the most significant impacts are also those over which companies have real control.

Taking Action on Purchasing and Materials

Since procurement accounts for the bulk of emissions, this is where climate performance is determined. Comparing the product carbon footprint (PCF) of two cement suppliers, prioritizing low-carbon concrete, and including a specific clause in contracts—these decisions have an immediate impact.

🌱 Three tips for carbon-neutral shopping:

• Require the actual (rather than default) carbon footprint of each strategic material.
• Balance the interests of suppliers by factoring climate-related cost increases—including the future MACF—into the cost price.
• Document and track these decisions to ensure they can be verified during an audit.

The Decarbo’Supply® module transforms the GHG footprint into a practical procurement tool: it enables companies to objectively evaluate each procurement decision and give preferential treatment to the most environmentally responsible suppliers. For imported materials subject to the MACF, the ETS-Monitor® module helps reconstruct the actual cost and reduce the taxable base.

Managing the Environmental Footprint of Assets

A building, infrastructure, or a fleet of equipment: these are all assets whose environmental footprint is measured and managed throughout their entire life cycle. Monitoring the energy consumption of a real estate portfolio, planning renovations, and preparing for the implementation of ETS2 for the building—these topics fall under the umbrella of energy-efficient asset management.

The Decarbo’Asset® module is designed for this purpose: to manage the environmental footprint of real estate and industrial assets and to prioritize renovation investments based on their environmental and financial returns.

Securing and Winning Public Contracts

💜 Did you know?

Starting inAugust 2026, the incorporation of environmental considerations into public procurement will be significantly strengthened with the implementation of the Climate and Resilience Act. A climate criterion that is not properly addressed could weaken a bid or even expose a contract to the risk of being declared null and void. For this sector, which depends on public procurement, this is a matter that directly affects revenue.

Submitting a bid with a quantified, traceable, and justifiable carbon footprint is becoming a key differentiator. The Decarbo’Tender® module allows you to incorporate carbon criteria into your bid responses and turn regulatory requirements into a competitive advantage.

📊 From constraint to opportunity: measuring, comparing, optimizing, and showcasing your environmental footprint allows you to reduce regulatory exposure, win contracts, and strengthen your brand with clients. These impacts then cease to be a burden and become a driver of growth.

📗 Definition

Carbon Competitiveness® is the concept that environmental performance—when properly measured—becomes a commercial and financial advantage. A company that keeps its emissions under control pays fewer taxes, wins more contracts, and safeguards its supply chain against regulatory shocks.

Environmental externalities are no longer an abstraction for economists. In the construction industry, they have become tangible costs: material prices driven by the ETS, the MACF border tax, climate criteria in public procurement, and penalties for failing to report. Ignoring these signals means accepting their consequences; measuring and managing them means regaining control.

The path is now clearly marked. Quantifying one’s carbon footprint using a robust methodology—such as ADEME’s Bilan Carbone®, the GHG Protocol, or ISO 14064—is the first step. Next comes taking action on the areas with the greatest impact: material procurement, asset management, and responding to requests for proposals. At every step, the goal remains the same: to pay the fair price for your impact—no more, no less—and turn it into an asset.

This is precisely what Decarbo’Solution® offers: a suite that links GHG accounting to procurement strategy, asset management, and market expansion, all built on a single data foundation. From Decarbo’Inventory® to Decarbo’Supply®, Decarbo’Asset®, and Decarbo’Tender®, each module helps construction industry stakeholders transform their environmental impacts into sustainable performance.

👉 Want to quantify your climate risk and identify opportunities to unlock value right now? Find out how Decarbo’Solution® supports construction companies at www.decarbosolution.com.