As purchasers in the voluntary carbon market, commercial real estate players can tap into a wider range of offset credits at a lower price point than their industrial peers compelled to participate in the regulated carbon pricing system. However, more choice comes with complexity and due diligence demands to determine the quality of what’s on offer.
The field is crowded with standards — Verra, Gold Standard, Climate Action Reserve and American Carbon Registry being the four most commonly recognized — that each have somewhat differing criteria for how credits can be generated. From there, project developers, financiers and traders come into the mix, creating more fodder for consultants and giving rise to oversight bodies like the Integrity Council for the Voluntary Carbon Market (ICVCM).
“It’s a very opaque market,” Adi Dunkelman, director of policy and strategy with the consulting firm, Clear Blue Markets, told attendees at The Buildings Show in Toronto last fall. “These bodies that are giving information and guidance on what is a good offset are part of trying to shore up some of the integrity in the market and move away from the greenwashing that we’ve seen from some bad actors.”
Offset credits have some universal features whether traded in voluntary or regulated carbon markets. In both cases, a credit equates to one tonne of carbon dioxide equivalent (CO2e) that has been reduced, avoided or removed from the atmosphere. It must also conform with six defining characteristics that affirm its validity.
First off, credits must relate to a “real” reduction, avoidance or capture of emissions, meaning something that has in fact occurred and is not merely a prospect for the future. Those reductions must be “quantified” and “verified” — i.e. measured and proven — in a recognized credible way, and each credit must be “unique”, meaning that the reduced, avoided or captured tonne of CO2e is counted just once toward total emissions reductions.
The two other underpinning concepts — “permanent” and “additional” — can be less straightforward. Proponents must show they have achieved a lasting result through an effort they would not ordinarily undertake in their core business. Challenges lie in credits that can literally turn into ash and varying parameters to interpret how an activity or investment stands out from usual practices.
“Planting trees as an offset can do great things in terms of reducing emissions and improving local air quality, but, with high temperatures and forest fires, depending on how well they’re maintained and where they’re located, the longevity of that offset may be more limited than we would like,” Julianne Pickrell-Barr, climate action specialist with Prism Engineering, observed during a recent webinar in conjunction with the Building Owner and Managers Association (BOMA) of Canada’s Enspire program to encourage and support decarbonization in commercial buildings.
Meanwhile, sources of credits are expected to go beyond routine legal, financial and operational conventions to be considered additional. They cannot be gleaned from an activity that’s part of standard regulatory compliance; they must be tied to an investment that’s surplus to normal capital expenditures and can be justified only with the payback from the offsets; and they should be associated with a process or technology that is outside the realm of common practices within the industry sector.
“Additionality is one of the early screening tools you can use to determine if this is something that could potentially generate credits and in which markets,” Dunkelman advised. “Those three key pillars are kind of the boundaries, but it can get very grey because how do you determine what’s common practice? How do you determine the financial requirements to prove that this project could not continue without the revenue from offsets?”
Considerations for developers and purchasers
Canada’s regulated carbon market has thus far approved protocols for four types of offset projects:
- recovery and destruction of methane from landfill sites
- reduction of enteric methane emissions from beef cattle;
- reduction of greenhouse gas emissions from refrigeration systems; and
- forest management on private land.
Those are all ancillary to the credits that regulated market participants can earn and bank or sell for achieving an emissions intensity that is below the required benchmark for their sector.
“That’s a reduction at your site and a reduction in your carbon compliance obligation, but that is not an offset. An offset is usually (created) outside the compliance market,” Dunkelman explained. “In the compliance market, the government will determine what is considered an offset project activity. In the voluntary market, the rules are prescribed by governing bodies or registries.”
The latter are specific to each of the standards in the voluntary marketplace. These rules set out allowed sources of carbon offset credits and the required procedures for developing and verifying them.
“They’re very complicated,” reported Tracy Hodges, senior sustainability manager with the North American cement and concrete manufacturer, Amrize, who was speaking alongside Dunkelman at The Buildings Show. “If you want to get a project approved, you’re looking at USD $75,000 to $150,000. That’s just to say: yes, my project will qualify for one of these registries. Then you have to do yearly monitoring and verification, which is maybe another $50,000 a year.”
From the cement industry’s perspective, she argues it’s difficult to make a business case for developing and shepherding most avoidance-related carbon offset credits through that process when they currently trade in the voluntary market for about $5. Carbon capture, which is a removal-related offset, is the exception in trading for about $300, but it also highlights a sore point for some industrial producers with emissions output that propels them into the regulated carbon market.
Dunkelman decried the prescriptiveness of Ontario’s emissions performance standard, governing industrial emitters, which allows for credits to be issued only for activities that are specified in the regulation.
“It’s very prescriptive of what activities are eligible and how those activities are defined. Because the regulation does not recognize carbon capture at this time, that (activity) doesn’t give you a benefit under the system. Or if you’re reducing clinker by replacing it with another material, if that new product does not meet this definition, then again you’re not getting the benefit,” she said. “This shows that a lot of times industry is moving faster than regulation, and why we have to consistently engage with the regulators to make sure those decarbonization projects get recognized and rewarded.”
The economics of offset development flows through to purchasers’ ability to pick projects and credits that can be more directly linked to resources, products and materials their own sectors consume — such as cement in the buildings sector. Among other considerations, Pickrell-Barr recommended prospective buyers look for reputable carbon accounting methods, including proof that qualified, objective third parties have verified emissions reductions, and avoid credits from projects that have spinoff detrimental social or environmental consequences.
For purchasers who are looking simply to offset indirect Scope 2 emissions, related to the production of electricity their buildings consume, renewable energy credits (REC) could also be an option. One REC is equivalent to one kilowatt-hour (kWh) of electricity.
“You’re financially supporting the expansion of renewable energy and you can claim the environmental benefit. It’s a simple and practical way to support indirect emission reduction,” Pickrell-Barr noted.
“There’s always a debate whether removal — projects like sequestration or forestry or direct air capture that remove actual CO2 from the atmosphere — is better than avoided emissions,” Dunkelman said. “Our guidance is that they’re both good. It’s good to have a diversified portfolio of offsets.”
Yet, a small portfolio is arguably better still.
“Renewable energy credits or carbon offsets are things that you would purchase, ideally, after you’ve done everything else to reduce emissions in your buildings,” Pickrell-Barr reiterated. “The last little piece of the puzzle is offsetting what’s remaining.”
