Offsetting CO2 Costs: Reducing Emissions Using Government Regulation as the Carrot and the Stick

In tough economic times the focus for businesses is inevitably on minimizing capital spend and increasing efficiency to protect revenue. Over the last 12 months companies have been reviewing their planned commitments, including their environmental spend, and rationalizing where these are considered to be a drain on their financial resources.

It would be easy for sustainability to be pushed down corporate agendas through the lack of budget and resources and it is clear that in some instances this has been happening. Business cannot, however, afford to move its focus too far from the sustainability agenda, even in the short term, as it is now widely acknowledged that sustainability will be a key part of our economic recovery and future growth. Smart companies cannot afford to “wait and see” or “do nothing for now.”

On 8 July 2009 the G8 leaders declared their commitment to reduce carbon emissions by industrialized nations with 80 percent by 2050. Developing nations are being called upon to reduce their own emissions by 50 percent in the same period. The underlying aim is to limit global temperature rise due to climate change to 2 degrees Celsius.

The UK previously adopted its own target for an 80 percent reduction by 2050 and set an example for other countries by making this target legally binding. In terms of the Climate Change Act (2008) future UK Governments will be held accountable for successive five-yearly ‘carbon budgets’ (starting with 2008 — 2012).

With real estate energy consumption accounting for circa 40 percent of Europe’s CO₂ emissions, a large proportion of savings will clearly need to come from corporate real estate portfolios. In the UK the Carbon Reduction Commitment (CRC), the government’s new mandatory cap-and-trade scheme, will place organizations in both the private and public sector under increasing pressure to reduce their carbon emissions by internalizing the cost of carbon in operational costs and penalizing organizations that perform badly. At the same time CRC will create the opportunity for real, and potentially very significant, financial rewards for good performance through incentivized recycled payments and the net value of each additional kilogram of carbon saved (expected to be around $83/ton by 2015). The UK is leading Europe and the world in this regard, a bold move to be a leader in carbon offsetting and trading as the means to have companies comply.

CRC will come into effect in 2010. It applies to all companies using in excess of 6000Mwh electricity per annum (approximately $830,000 per year spend) through half—hourly meters and reporting is required for those companies using between 300,000MWh and 600,000MWh per annum. Most important, it will require a Main Board Director to sign off the energy usage of the company.

Whilst it has to be accepted that major capital investment (per se, but specifically in ‘sustainable’ options) is likely to remain unrealistic in the short term, business can clearly not afford inaction. The emphasis therefore has to be on cost savings and optimizing existing operations and assets.

There are many options open to the enlightened corporate which sees the sustainability agenda as a potential business opportunity. It will increasingly be in their best interest to reduce carbon emissions as much as possible and at the earliest opportunity.

What Should the Smart Companies Do?

First, and as an absolute minimum, organizations need to develop standards across their businesses to comply with the EU, national and global policies on climate change and sustainability currently in place or being developed.

Second, they need to consider ways of reducing operating costs. It is possible, for example, to reduce electricity consumption attributed to lighting by up to 90 percent using state of the art lighting systems and controls.

Third, they can develop programs that set them apart from their competitors. Smart organizations are already seeking out, and tapping into, the opportunities for additional revenue offered as a result of the sustainability agenda (e.g. CRC trading).

What Should Occupiers Be Thinking about When Reviewing Space?

Moving forward, the inherent sustainability of property is likely to become increasingly important. Through the site selection process, importance should be placed on the optimal floor plate configuration with primary circulation no more than 5-10 percent. This coupled with space designed for the specific business use will maximize the capacity of the space and allow an optimal number of users in the right sized floor plate, thus reducing the overall space requirement and resources used. As highlighted recently by McKinsey, “most companies in most sectors have profitable opportunities to save money by cutting energy consumption and gas emissions. Our studies indicate that a lot of companies can reduce them by 20 to 50 percent.”

While in such circumstances additional air-conditioning may be required (which in turn will increase the amount of energy and CO₂ per unit of floor space) it will result in a reduction in energy and CO₂ per occupant (i.e. higher efficiency). To ensure optimum efficiency of equipment and to minimize the environmental effects, occupiers will however need to ensure that they are meeting the EU requirements for air-conditioning unit environmental audits.

The fall in the rental market and the shift towards more favorable terms for occupiers presents an opportunity to open negotiations on capital contributions in order to fund required upgrades such as the installation of efficient lighting, increasing the efficiency of existing buildings or entering into a collaborative framework with one another in order to improve the optimization of the building and its resources.

With commercial rents falling across Europe, landlords are faced with a reduction in rental levels and increased incentives such as rent free periods and capital contributions to occupiers. For smart occupiers who are looking to renegotiate or relocate in order to minimize their operational expenditure, there is the opportunity to take advantage of the market and offset capital contributions with the required capital expense to meet EU standards.

A 2008 report by CoreNet Global highlighted that green buildings can attract a 3 percent increase in rents and a 7.5 percent increase in value; a reflection of their increased value to the occupier through reputational value as well as a reduction in operating costs. However, as occupiers will be less willing to expend the initial outlay, landlords will need to think innovatively about occupiers’ requirements and their current business drivers. Although rent free periods provide temporary rent relief, landlords will need to look at other incentives such as water, waste and management systems that will provide occupiers with further benefits. Landlords need to appreciate that occupiers see such building systems as a minimum standard for them to consider a building for the future.

Green Leases Are Coming

For various reasons, the uptake of green leases in the UK has been relatively subdued to date, albeit that there has been more interest in the less formal “Memorandum of Understanding” approach. Moving forward, the current economic conditions together with impending CRC requirements will increasingly require landlords and tenants to work together on sustainability matters in ways they have not before. Clearly, lease agreements will need to be re-worded accordingly. A standard form of green lease therefore seems inevitable in the future. Again enlightened landlords are already talking to their tenants about what this could mean and occupiers should have a programmed of discussions with all their landlords to ensure their service charge payments are being spent on the building in an efficient and “green” way.

Although the financial markets remain severely depressed, with very few “green shoots” visible in the property sector to date, the markets will eventually recover. For now, the focus companies has shifted to coping with a severe financial recession. Done smartly, however, improved efficiency can lead to cost savings in the short term without compromising the goals of sustainable development, and indeed can help companies to ensure sustainability becomes more integrated with their overall business and real estate strategies.

The way in which corporate occupiers review buildings has shifted and is on a path that incorporates not only minimum governmental standards but their own beliefs in what their companies stand for — and invariably that in part incorporates the green agenda. Landlords ignore this at their peril.

About the Authors

Michael Creamer is Head of Client Solutions, EMEA — FRICS for Cushman & Wakefield.

Andries van der Walt is Associate, Planning & Sustainability for Cushman & Wakefield.