The global housing sector faces two interconnected challenges. Rapid urbanization is driving unprecedented demand for new homes—Sub-Saharan Africa's urban population alone is projected to nearly double by 2050—yet for hundreds of millions of low- and middle-income households, formal housing finance remains out of reach. At the same time, construction is one of the world's largest sources of greenhouse gas emissions, accounting for roughly 37% of global CO₂ emissions. Meeting the housing deficit the conventional way would come at an enormous cost to the climate.
The continued development of global carbon markets, paired with rapid innovation in green building technologies, provides an opportunity to address both challenges at once. Our partnerships in Kenya are already showing how this could work.
Leveraging carbon markets to make green housing more affordable
Across the globe, housing relies on building materials that are overwhelmingly carbon-intensive. Conventional concrete, steel, and fired brick production constitute 55% of construction sector emissions. As cities grow and housing demand rises, these emissions will too unless the materials themselves change.
Innovations in green building materials hold the potential to accelerate decarbonization of the housing sector. But cost remains a barrier to their adoption in affordable housing, with many materials priced higher than conventional alternatives. This is where carbon finance can play a role.
Certain green building materials—including sustainably sourced timber, biobased composites, and green concrete—can avoid CO2 emissions linked to construction, while also actively removing carbon from the atmosphere. Voluntary carbon market standards already provide pathways to certify many of these technologies, opening up opportunities for manufacturers to issue and sell carbon credits. This additional revenue stream can help lower costs, making green materials more cost-competitive and lowering barriers to their use in affordable housing.
In Kenya, a small but growing group of manufacturers is beginning to tap into this opportunity. Under the Rainbow carbon standard, Pyrogen is producing biochar-infused concrete blocks that lock in carbon from organic waste, while Easy Housing is certified by Climate Cleanup for building prefabricated timber homes that sequester carbon while supporting sustainable forest management. Several other companies, such as StartSomewhere, Mycotile, and EarthEnable, are earlier in their carbon certification journey, but further underscore the emerging opportunity to leverage carbon finance to scale low-cost, low-carbon housing solutions.
Turning carbon value into inclusive housing finance
Reducing the cost of green building materials is a critical first step to decarbonizing affordable housing. But these homes will remain out of reach for many low-income households unless we also address the gap in access to housing finance. Across most African countries, mortgage debt represents less than 3% of GDP—compared to over 50% in most developed markets. In Kenya, a country of 56 million people, only 30,015 active mortgages are on record, and just 11% of Kenyan adults are able to afford a traditional mortgage. High down payment requirements, collateral demands, and documentation burdens lock out households with informal or irregular incomes, which account for the majority of the urban poor.
CGAP is exploring how carbon revenue from certified green building materials could go beyond reducing the cost of construction to also help address these financing barriers. In other words, can carbon markets help to subsidize and derisk inclusive housing finance?
Depending on where the barrier is greatest, a portion of carbon revenue can be deployed in a variety of different ways. For households that can service a loan but cannot accumulate a lump-sum deposit, carbon revenues could be converted into down payment assistance to close the gap between what a buyer has saved and what a bank requires. Where monthly affordability is the constraint, revenues could be applied as an interest rate buydown or a construction rebate paid to the lender upon verified completion. Where lender risk appetite is the binding problem, carbon revenues can capitalize a first-loss guarantee fund, absorbing initial default losses and giving institutions the confidence to lend to borrower segments they currently avoid.
There is also potential for a second-order benefit. Financial institutions require property developers to obtain green building certifications, such as EDGE or LEED, in order to access concessional green financing from development banks and impact investors. These certifications measure the embodied emissions of a building, but come at an additional cost to property developers, further adding a premium price to building green. However, since carbon certification similarly requires rigorous third-party verification, it may enable financial institutions to qualify for concessional rates, but at no added cost to the property developer.
To move from concept to evidence, CGAP has partnered with Habitat for Humanity’s Terwilliger Centre for Innovation in Shelter (TCIS), Pyrogen, and HFCB, Kenya's leading mortgage institution, to test how this could work in practice. Our goal is to generate practical lessons that others can replicate, and ultimately to make green, affordable housing the default for the world's growing urban poor.
The way forward: making carbon markets work for housing finance
The idea of linking carbon finance to end-user finance is not new. In sectors like clean energy, carbon revenues have been used to subsidize the cost of green asset finance by reducing the principal a borrower needs to finance a cookstove or a solar-powered device. But housing requires a different approach. The difference between the shared carbon revenues from any single building material and the market cost of a home is too large for principal subsidization to have a real impact. More importantly, it doesn't address the two most fundamental barriers facing low-income borrowers: the inability to qualify for financing and the high interest rates that make financing prohibitively expensive for those who do. Rethinking carbon revenues as a targeted instrument—structured as first-loss guarantees, interest rate buydowns, or down payment support—will be critical.
Our experience so far in Kenya suggests that this approach is possible, but not straightforward. While the technological readiness of many green building materials is in place, existing carbon methodologies do not account for full embodied emissions, limiting the potential carbon revenue per housing unit. Channeling carbon finance through a fragmented housing value chain adds further complexity, requiring better-aligned incentives and supportive policies. The pilot is an early effort to navigate these challenges and generate evidence others can build on, but it is only the first step in a much longer journey to close the housing deficit sustainably.
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