Beware silver bullets: The dangers of relying too heavily on carbon offsets in commercial property

May 1, 2023

Levels of carbon emission are up again after a drop in 2020 during the early stages of the pandemic. These carbon compounds that make up or contribute to greenhouse gasses need to be at least halved to reach a worldwide net zero carbon goal by 2030.

Meanwhile, extreme weather events — whether bushfires in Australia, endless cyclones in the Indian Ocean, or massive snowstorms in Southern California — are on the rise, indicating failure to control the earth’s carbon footprint. This, combined with macroeconomic uncertainty is impacting decision-making in the commercial property sector. There are answers, but property owners need to heed two caveats.

First, they need to understand the urgency of acting now rather than delaying. There is good work being accomplished in the sustainability space by commercial property owners, but it needs to be expedited.

Second, property owners need to resist the urge to rely only on carbon offsetting to move the needle on carbon neutrality. Carbon offsets have a place in helping the planet reach Net Zero, but it can't be the sole strategy, nor should it precede other more impactful measures. Property owners must understand the potential pitfalls with carbon offsetting and seek to reprioritise it after more foundational steps have been undertaken.

Carbon offsetting has been erroneously touted as a silver bullet

In the last decade, the practice of carbon offsetting has been promulgated as an almost magic solution to reaching carbon neutrality or net zero, particularly for global enterprises and commercial property portfolio owners. However, the last few years have demonstrated how potentially unreliable and costly carbon offsetting actually can be when not practiced responsibly.

Few checks and balances have existed for carbon offset abuse, particularly additionality methods, such as reforestation, revegetation, and wind farming. It is shockingly easy to establish a carbon offset registry, and certification regimes have been rightfully undergoing increased scrutiny lately in attempts to track offset funding.

Compliance is even more challenging to assess in offsets involving protection of timber from harvesting, for example. Some offset certifications have been given to properties that had no intention of deforestation in the first place, and in other instances, harvesting simply moved to a nearby tract of land, nullifying the offset. Deforestation deferments as a form of carbon offset can last as little as one year, making them essentially worthless as a long-term solution.

At present, accusations of greenwashing because of the above — many of them justified — have put some household name corporations in the hot seat. This type of reputation issue can equally place real estate owners in jeopardy, affecting development financing and property valuation alike.

There is little to no attempt to factor in climate change-related deforestation due to wildfires, which would increase the need for overall carbon reductions as well as possibly wipe out some carbon offsets being used by corporations across the globe. In an even more complex cycle, commercial property emissions are likely further contributing to severe weather events. In the case of wildfires, some may be so large that they then create their own weather patterns, spawning more heat, more fires, more deforestation, and so on.

Precise measurement of greenhouse gases, including carbon dioxide, methane, hydrofluorocarbons, and sulphur hexafluoride, has been difficult since the start of the carbon offsetting movement, both in terms of emissions produced and emissions reduced, removed, or captured. In some regions, the environment is changing so rapidly that it’s nearly impossible to quantify these gases.

In certain nations, government entities have confiscated land for large-scale carbon offset projects, evicting local farmers to make way for newly planted forests or wind farms. But there’s only so much space remaining for additionality in carbon offsets. And then what?

The first answer will be to increase the cost of carbon offsets. Whilst it’s possible today to offset 1 tonne of CO2 for a few dollars (at least on paper), in less than a decade, this price is expected to increase by exponentially more. Prices for carbon offsets could be as high as $120/ton or as low as $47/ton in 2050, according to research company BloombergNEF (BNEF).

That leads to the question of how long voluntary offsets will continue to exist. Lack of regulation and ease of use today is no guarantee of future laxity. A tightening of requirements in Australia, New Zealand, Japan, Hong Kong, the US, the EU, and the UK is already underway, and more is sure to follow.

Real estate investment trusts run the risk of failing to future-proof their portfolios for stricter regulations or the disappearance of carbon offsets entirely, which may result in citations carrying penalties, ruptured rapport with regulatory bodies, and a rush to catch up to new standards. As the gap between green and brown properties widens, some investments certainly will fail.

Additional strategies beyond carbon offsets are already available

Whilst carbon offsets are definitely one piece of the puzzle in solving the sustainability    challenge, they shouldn't be relied on as a band-aid approach and should be implemented only after other vehicles have been put in place. As CBRE wisely states, "Reduce what you can, offset what you can't." Fortunately, there are additional methods in existence to improve sustainability and reach global emissions goals, and these are readily available to commercial property owners.

One key solution is building structures that require minimal carbon offsetting from the start or retrofitting existing properties for improved operational efficiency. It’s worth noting that increasing efficiency has the added benefit of boosting overall financial performance whilst minimising climate impact.

"Energy efficiency is one of the most important short-term steps. The more energy use is reduced, the less burden on other decarbonization tactics. Energy efficiency creates a practical and immediate reduction in emissions, making it the low-hanging fruit to pick." - CBRE Decarbonizing Commercial Real Estate Report

There are numerous green building elements that can be harnessed individually or in combination to reduce any property’s carbon footprint. These include:

  • Monitoring via analytics (more below)
  • Optimisation strategies using data that might be otherwise ignored (see below)
  • Biowalls (aka living walls) that provide insulation, absorb rainwater, and capture CO2
  • Commercial solar installations and microgrids to reduce reliance on other utilities that source their energy from fossil fuels
  • Dual plumbing systems that make use of recycled greywater
  • Hydronic boiler systems that provide more even heat with less energy
  • Electrochromic (aka smart) glass that adjusts with the sun, reducing the load on HVAC systems
  • Natural ventilation to improve air quality and decrease electricity usage
  • LED lighting rather than incandescent or fluorescent, which lasts longer and draws considerably less electricity
  • Additions for building occupants to reduce fossil fuel use, such as electric vehicle charging stations, bicycle storage, and connections to public transit, as well as mixed-use plans for residential and commercial leases in one building to minimise the need for a car

Building operations can then be streamlined using automated systems and real-time analytics. Manpower can be reallocated or reduced, along with energy consumption, and building systems can be monitored across multiple properties simultaneously and remotely.

The key is to have the software to analyse building components accurately and in a timely manner. What would be wasted data can be captured and optimised to uncover opportunities to stamp out inefficiencies and make quick corrections. Climate impact is reduced, financial performance is enhanced, and the user experience befits top-tier pricing hierarchies.

The need to reduce carbon emissions is urgent and should be at the forefront of real estate development and ownership today. Carbon offsets are only going to become more of a pain point for portfolio holders in the coming years. The real future of net neutrality lies in greener building infrastructure and sophisticated systems to run commercial properties more efficiently. That technology is already here and must replace quick fixes like sketchy carbon offsetting that is having minimal effect on the planet’s dire situation.

David Wright
May 1, 2023