As more building owners have begun to explore the advantages of pursuing energy efficient or “green” initiatives in their properties, some might wonder how carbon credits come into play. Although these credits have received a lot of attention over the past decade or so, many business owners don’t understand how they work and how they can benefit owners.
How the credit works
Carbon credits are generally earned by offsetting carbon dioxide (CO2) emissions through conservation, alternative energy and other technologies. A single carbon credit represents a metric ton of CO2 or CO2-equivalent gases removed or reduced from the atmosphere.
The credits represent transferable rights to emit greenhouse gases and can be traded (or sold) on voluntary and “compliance” carbon markets. Compliance markets include legally binding mandatory emission-trading mechanisms established under, for example, the Kyoto Protocol. Regional compliance markets can also be found in areas of the United States and Australia.
Businesses purchase the credits to offset their own emissions, whether to meet their corporate social responsibility goals or external carbon reduction goals. Increasing numbers of companies are experiencing stakeholder pressure to improve their emissions.
To earn credits, a property owner would first need to set verifiable audit baselines through an investment-grade audit (a type of audit used to justify investment in a capital-intensive energy-efficient initiative). The audit would identify opportunities to improve energy efficiency and generate credits that can be traded on a market. Such opportunities can range from behavioral changes, such as powering down computers overnight, to capital projects, such as installation of solar panels. Credits generated in the United States typically can be traded domestically or abroad.
Benefits of carbon credits
Carbon credits produce favorable financial results on several fronts. A building with energy-efficient features will obviously reap savings on energy costs and could trigger tax breaks. That, in turn, would reduce operating expenses while increasing net operating income and internal rates of return. Increasingly, such buildings come with a competitive edge, as growing numbers of potential tenants consider sustainability when selecting their spaces. Moreover, trading or selling credits on a voluntary or compliance market provides an owner with additional revenues.
Carbon markets aren’t yet commonplace, and an eventual mandatory cap-and-trade system in the United States isn’t a given. But the bottom-line benefits of energy-efficient efforts have been clear for some time now, and the potential of carbon credits to build revenues can be a bonus.