Legal and economic aspects of data for circular economy solutions in the construction industry

Asymmetric information and transaction costs

Data changes two fundamental aspects of the economy (besides more efficient production through automation): information asymmetry and transaction costs.

Asymmetric information occurs when preferences, characteristics or choices of consumers or firms are not visible to parties buying products or services from them or supplying them. The classic example of a market with asymmetric information is the used car market, as described by George Akerlof2. Because potential buyers do not know the quality of the car, they have their eye on, they want to underpay for good-quality cars. In the end, only low-quality cars are sold Ditto for materials from buildings.

Transaction costs are costs such as search costs, contract costs or control costs in this process. Both are of great importance within organising markets or organisations for the optimal use of secondary materials in and out of buildings.

The nature of data

Data differ from 'normal' products, such as consumer goods or services, in three ways:

1. Data are non-rivalrous, meaning that the same data can be used in multiple applications simultaneously without creating barriers to use by another party (Jones and Tonetti, 2020). Not only do average costs decrease as more data are added, but data collection also becomes increasingly valuable when more data can be combined.
2. The value created with data is difficult to determine, as is the quality of data by non-users. Thus, a user cannot verify in advance how 'good' the data is. As a result, the “Lemons Problem3 (Akerlof, 19704) may recur, not only for building materials themselves but also for data on building materials in buildings, and good quality may be squeezed out of the market by poorer quality. This makes it difficult to contractually define how this value will be reliably recorded and shared (Hart, 2017)5. This problem of non-contractability is compounded when data from different sources are combined, and these sources are also managed by various parties. The problem of non-contractability lowers the incentive to invest in data collection and management. Non-contractability of data can be improved by establishing ownership rights to it (Berry and Maskin, 2009).
3. A third important property of data is that it can be privacy sensitive (Acquisti et al., 2016)6. Privacy sensitive data contain information about personal characteristics or preferences, which individuals and companies often only want to share with third parties they trust sufficiently. Incidentally, not all data is privacy-sensitive - aggregated data does not suffer from this.

A private provider of (unique) data has market power and may monetize this value by ring-fencing it for use by third parties. As a result, some of the data analyses that do have value are not made, and various forms of process innovation are omitted.

The fundamental problem of exchange

The transition towards a digital, data-driven economy, important for circularity in the built environment, is historically unique and difficult to fathom. However, an analogy with the emergence of the market economy shows that property rights are crucial to reap the full benefits of development. North (1989)7 has shown in classic analyses that "The Fundamental Problem of Exchange" has long held back the emergence of the market economy. Thus, clear property rights and institutional framework conditions were needed for the market economy to flourish and the Industrial Revolution to take off. In the new data economy, and with it the circular economy, there also seems to be a fundamental exchange problem.

Property rights of data and how they relate to the property rights of the physical objects they refer to are unclear and the exchange that takes place between data producer and data company is not clearly regulated. In a circular building materials economy, circularity mainly assumes that current materials are simply reusable in the future. They must be able to compete on economic grounds with newly manufactured materials now and again at some point in the future. The lack of clarity of property rights and, linked to this, transactions leads to distrust - a feeling that has increased significantly in recent years due to all sorts of scandals. As a result, the growth potential of the data economy and hence the circular economy remains underused. Institutions are therefore needed to ensure that this data exchange serves the public interest.

Property rights and transaction costs

In their book "Blockchain Revolution" (2016), father and son Tapscott give Ronald Coase a prominent place. His 1937 published article “The Nature of The Firm” and how transaction costs affect the organisation of companies and society play a central role in their book.

Coase made his mark not only in economics, but also in law. This is evidenced, for instance, by the fact that his 1960 article “The Problem of Social Cost” is the most cited article in American legal scholarship. To achieve an optimal outcome, it is necessary that the property rights of the costs and benefits resulting from a transaction are fully and accurately assigned (full contract), so that always someone bears responsibility for the outcome.

When the thinking of Coase and Tapscott & Tapscott is translated to the circular economy for buildings, the emphatic advice is to properly establish ownership rights to information about materials. One way to do this is to establish registrations of materials in material passports, while logging their ownership irrefutably. In the past, this would be done by a notary, but nowadays Blockchain registrations, such as the Unique Object Identifier (UOI) methodology developed by FIBREE8, can be used for this purpose.

The IBA'27 circular economy project

The Stuttgart region has about 2.5 million inhabitants living in over 1 million homes. In addition, there is a significant volume of commercial real estate. The built stock dates from different construction periods. A rough estimate shows that more than 75% of the existing stock will have to be renovated in the coming two decades to meet climate targets. The IBA'27 project seeks to establish both a regional knowledge base and a regional marketplace so that reusable building materials that become available during renovations and demolition projects can be reused as much as possible within the Stuttgart region. To fulfil its intended regional platform function, anyone should be able to present offers of reusable building materials. And the regional platform should also be able to easily facilitate relevant information depending on the specific role and process of the inquirer. From an information management perspective, this means that data structures and definitions of the various providers and demanders need to be properly aligned. But also, that information ownership and transfer can be facilitated in such a way that relevant information is retained in the complex logistics involved in offering, planning, dismantling, transporting, recycling or remanufacturing and finally reapplying reusable materials to various new locations. At what point in this complex process, who owns what data and who is responsible for updating data quality? The ultimate ambition here is that for every renovation, demolition or new construction project, the amount of recycled building materials that have been made available for reuse or applied can be indicated.

Practical economic and legal data aspects of circular construction

That theory and practice often reveal recalcitrant contradictions and obstacles are evident when we mirror economic theories to contemporary practice in the IBA'27 project. A change of mindset and behaviour is needed, and to foster that, convincing experiments are needed that put the finger on the different current pain points in this systematic transition.

Image 1: A change of mindset and behaviour is needed to foster broad adoption of circular construction principles

Data needs depend on circular ambition level

Applying circular economy principles when renovating buildings can reduce the use of new materials in existing buildings and minimise emissions in building materials. For each demolition, renovation, and construction project and within it for each of the materials, the relevant data quality requirements should be determined, depending on its circular ambition level.

A choice must be made by the various actors for one of the following circular ambition levels (from I. to VI. descending in the degree of sustainability):

1. Try to avoid building at all;
2. High-quality reuse of released building materials;
3. Upgrade released materials, after which they can be reused as high-quality building products;
4. Recycling of released materials into high-quality raw materials for new building products;
5. Low-grade reuse of recycled or non-recycled released materials;
6. If even low-grade reuse no longer seems possible, only then landfill or incineration as waste.

The most effective circular renovation measures to reduce embedded emissions are extending the lifetime of existing buildings, avoiding or delaying the use of new materials in buildings, and increasing the intensity of use of buildings. Extending the life of existing materials can significantly help reduce embedded Greenhouse Gas (GHG)-emissions. It is estimated that 20-25% of the life-cycle emissions of the current EU building stock are embedded in building materials9.

In the IBA project, we experienced the level of ambition is mostly driven by financial value s, which seems defensible from an economic market perspective. However, there are also compelling external factors that hinder circularity. For instance, there is an example where the decision to demolish a complete building is driven by the simple fact that in the existing situation, the applicable public parking standard for the site cannot be met.

Reuse building materials while maintaining their high quality

Currently, only 3% of all materials in a building are reused in a high-quality manner and many opportunities and alternative solutions remain unexploited. Materials are currently not well marketable and deployable for reuse, because the value of materials has not been validated, the quality of secondary materials is in doubt and property rights on these materials are not sufficiently established. The question is whether this is justified, especially from an economic point of view. In the IBA'27 project, this is particularly evident when applying existing legislation, which requires certification of materials establishing their compliance with current fire resistance regulations and structural safety requirements. This also applies to reusable building materials, except that each individual reusable building material has to be assessed and certified individually. This is a costly matter. Another example is that to preserve existing materials in a building, specific life-extending treatments take place to individual materials. This means more diversity in seemingly similar materials. To keep such specific information, which may be important in future maintenance, renovation or reuse considerations, available with the specific material, the combination of UOI and material passports can be a solution. With the UOI, the individual material always remains traceable with the linked material passport recording its specifications.

Developing ESG disclosure lawsuit

The built environment has a significant impact on many sectors of the economy10, on local employment and on the quality of life. GHG emissions from materials extraction, manufacture of construction products and construction and renovation of buildings are estimated at 5-12% of total national GHG emissions. Greater material efficiency could save 80% of those emissions. The "Renovation Wave11" plays a key role in the European Green Deal ambitions to improve and make existing buildings in the EU more energy efficient. Reliable and structured data will be very helpful in greenhouse gas accounting (scope 1, 2 and 3 emissions) of buildings in reporting, risk and opportunity management, and reconciliation of financial flows under European Green Deal regulations such as: SFDR12, CSRD13 or EPBD14,or the Paris Climate Agreement. During the many conversations in the IBA’27 project it became obvious that all stakeholders are currently struggling what exactly this new legislation entails to them and how they can prepare for it in an efficient way.

How can data be made more interoperable? Owners and developers, but also building tenants, will have to disclose how sustainable - or not - their buildings are and what their carbon footprint is. By recording information in a structured way, it can be easily reported at different spatial scales. Here, too, the combination of UOI with material passports seems to offer a valuable solution. The different (sub)contractors on behalf of the developer provide their info at the different levels of the entire building, the tenant then gets the info it needs at the scale level of the space it rents, while the asset-manager can further consolidate the building-level information down to the portfolio level.