Will Embodied Carbon Be The New Defect?

By Bianca Hoare

Introduction

The introduction of mandatory embodied carbon reporting in January marks the beginning of a new era of regulatory reform, as the Australian Building Codes Board (ABCB) drives broader measures to support Australia’s transition towards a net zero built environment. While these reforms are crucial for fostering a more sustainable future, they also carry significant risk for businesses in the construction sector. Experts suggest that claims related to the CO₂ produced during the construction phase – embodied carbon – are “inevitable” and could become “the defects claims of the future”, exposing businesses to “significant liability”.

The 2025 reforms in context

Historically, climate reporting in the Australian construction sector has been a mixed landscape. While some entities voluntarily disclosed environmental data and some regulatory frameworks applied across various states, there was no overarching mandatory standard — and none required disclosure of Scope 3 emissions.

That changed with the Treasury Laws Amendment Act, effective from 1 January 2025, which now mandates that large construction entities submit standardised sustainability reports alongside financial reports. For the first time, companies must report Scope 1, 2, and 3 emissions. Scope 3, in particular, captures emissions across the full lifecycle of construction materials — from extraction and manufacturing to transport, installation, and disposal. Known as embodied carbon, these emissions are embedded in the physical structure of a building and are far more complex to measure, making their inclusion a significant and demanding shift in reporting requirements.

Nonetheless, this shift is especially critical for a sector responsible for over 18% of Australia’s carbon footprint, the majority of which stems from indirect sources like electricity, transport, and material waste.

The trajectory of Australian and Global reforms

These 2025 reforms are only the beginning of a staged national rollout. By 2027, thousands more entities will be captured, with assurance obligations phased in — ultimately exposing entities to liability under the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001 (ASIC Act) for misleading conduct, breaches of director duties, and disclosure failures. These reforms mark a convergence towards the global trajectory of penalising the excessive use of carbon in construction projects. Jurisdictions like the European Union (EU) are already advancing beyond disclosure, implementing embodied carbon limits and more demanding revisions to the Energy Performance of Buildings Directive (EPBD). Notably, the Australian Building Codes Board (ABCB) is investigating how to incorporate and fund the inclusion of a future minimum standard for embodied carbon in the National Construction Code by 2028. If realised, these limits would drive system-wide changes, affecting vast aspects of design and construction.

The significance for construction contracts

Consequently, experts warn embodied carbon may soon carry liability comparable to building defects. As Anne-Marie Friel of Pinsent Masons observes, such claims could, within five to ten years, “gather similar momentum to what we have seen with fire safety defects,” exposing entities to “significant liability”.

Unlike traditional defects, embodied carbon cannot be undone without causing further emissions, rendering conventional remedies ineffective. Given the difficulty in quantifying losses and enforcing traditional obligations, a ‘systems-thinking approach’ is critical — one that recognises the interconnected environmental impacts of a project. To future-proof against this emerging risk, construction contracts should adopt a three-pronged strategy: set quantifiable carbon targets, require robust data reporting, and establish clear incentives and liabilities.

Establishing quantifiable targets

Entities subject to mandatory climate reporting must disclose any climate-related targets they have set, along with their approach and progress. The pressure to set and track credible, quantifiable goals is mounting considering the potential liability directors may face under the Corporations Act for misleading or deceptive emissions forecasts.

In this context, future-proofing construction contracts means embedding clear and measurable carbon performance requirements — preferably using fixed ‘carbon budgets’ that set out the minimum thresholds for embodied carbon at a project level. These should be established during procurement and codified in contract documents as enforceable baselines for compliance.

Leading examples include the NEC4 Option X29 clause, which requires contractors to work collaboratively with designated Climate Change Partners and provide early warnings of risks to achieving specified climate outcomes. Similarly, the JCT Design and Build contract now includes sustainability amendments that similarly facilitate emissions management at a contractual level. The Chancery Lane Project’s model clauses further this trend by hardcoding net-zero objectives and supply chain obligations that reflect broader emissions reduction targets.

Implementing robust data reporting mechanisms

Building on quantifiable targets, the second pillar of future-proofing contracts is the implementation of robust data reporting mechanisms. As highlighted in the December 2024 MECLA conference, access to emissions data is rapidly becoming a “ticket to play” in construction procurement, underscoring the necessity for transparency throughout the supply chain.

Contracts can formalise this data imperative by mandating suppliers to undertake Life Cycle Assessments (LCAs) and disclose Environmental Product Declarations (EPDs), which are increasingly viewed as critical tools for managing embodied carbon. They can also require the use of digital tools — such as Building Information Modelling (BIM) — to support real-time emissions tracking and biodiversity reporting.

To ensure data integrity, contracts should also compel parties to prepare and maintain a documented basis of preparation, outlining methodologies for emissions calculations and data collection. This not only supports compliance with mandatory reporting but also creates a feedback loop — where contractual data informs evolving industry benchmarks, and those benchmarks shape the requirements of future contracts.

Embedding strong data governance into contracts ensures entities produce credible, verifiable emissions data that can withstand regulatory scrutiny and support director accountability under the Corporations Act.

Structuring incentives and liability

Finally, with embodied carbon increasingly framed as the “defects claims of the future”, contracts must clearly articulate the consequences of failing to meet carbon targets. Traditional remedies are often inadequate — excess carbon can’t be remediated like a physical defect, and quantifying losses is inherently complex. As Anne-Marie Friel notes, this demands proactive contractual design, including clear liability provisions.

Incentivising performance is equally critical. Contracts can reward contractors and suppliers who meet or exceed emissions targets, creating a competitive edge that may influence future tender outcomes. There is already a shift towards using environmental performance as an evaluation criterion, signalling that strong carbon performance is no longer just about compliance, but about positioning in a changing market.

As embodied carbon shifts from a peripheral issue to a central source of legal and commercial risk, ensure your business is well-equipped to manage these climate-related obligations — get in touch with Crisp Law to future-proof your contracts.

References
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