From Market Value to “Climate Value”: Quantifying EU ETS-2 Risks in Real Estate Valuations within the Austrian Real Estate Market and its Mitigation through Carbon Neutral Heating and Cooling

In 2023, the European Union’s second Emissions Trading System (EU ETS-2) was launched and is planned to take effect in 2027 (EUROPEAN PARLIAMENT, 2023).This scheme will cover buildings and road transport sector and represents a fundamental shift in how decarbonization in real estate economics operates. This regulatory framework is the second step, after EU-ETS 1, of the EUs ambition to reduce carbon emissions through a market-based pricing approach. This strategy introduces a market-based carbon pricing mechanism that differs significantly from the existing national fixed-price systems, which is in Austria currently under use (Republic of Austria, 2022), known as “Nationales Emissionszertifikatehandelsgesetz 2022” (NEHG 2022).As the existing legislation in Austria governs currently no cost-sharing between landlords and tenants, all carbon costs have to be carried by the tenant through their energy spending due to NEHG 2022 as of yet and EU ETS-2 in future. This most likelywill impact rental levels, no matter what future legislation exactly will look like, as energyefficiency is already influencing property pricing, as other research indicates (Chegut et al, 2020). Property valuers, investors and lenders potentially face with this transition a future challenge, as established and accepted valuation methods in Austria do not adequately take potentially rising carbon costs currently into account. As a consequence, carbon neutral heat and cooling production from renewables on site currently does not get fully awarded, as property valuerscurrently don’t distinguish between carbon intense and less carbon intense heating and cooling.By analyzing a comprehensive set of real estate valuations and the focusingon their current integration of environmental aspects, we will understand how Austrian real estate appraisers currently are considering environmental issues as of today in the real estate valuation process. Further, by employing a sophisticated Discounted Cash Flow (DCF) model, as used in other studies (de Joung et at, 2025), we can project carbon price scenarios what introduces a new metric, the “Climate-Adjusted Market Value” (Carbon Delta AG, 2017) as discussed in the recent past (MSCI, 2024) to quantify the spread between a building’s current market price and its value after accounting for future carbon obligations.The findings demonstrate that the mitigation provided by carbon-neutral heating and cooling systems, prevents existing assets from facing a "brown discount, " rendering them economically obsolete – or “stranded” – long before their physical lifespan ends.Consequently, this study give evidence if integrating carbon-neutral technology is no longer merely of an ecological choice but a fundamental financial imperative to secure long-term property income streams and avoid asset stranding in the wake of EU ETS-2.