Carbon credits can encourage the use of renewable energy, the construction of green buildings and the deep energy modernization of existing properties. When governments set emissions reduction targets, they typically apply sanctions to companies with a high environmental impact. However, this only creates an incentive to achieve the minimum level of performance and no reward for exceeding it. On the other hand, a carbon credit program creates an incentive to further reduce emissions:
- Organizations can be rewarded for achieving below-target emissions levels and also for achieving net-zero emissions. This performance can be converted into carbon credits.
- Responsible organizations may have the option to purchase these carbon credits, which count towards their own emissions limits.
Many climate compensation programs use credits based on direct carbon reductions – for example, a carbon credit for every metric ton of CO2 avoided. There are also programs that calculate credits based on energy units, since carbon emissions are closely related to energy consumption. For example, several states have utilized Renewable Energy Certificates or RECs, which are awarded at the rate of one REC for every 1,000 kWh of clean energy produced on site.
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Carbon credits can support legislation like New York's Climate Mobilization Law, which includes Local Law 97 of 2019. The law only outlined emission limits and corresponding sanctions when it was first introduced, but it also mentioned that the carbon trading and renewable energy credits are being discussed.
Why carbon trading programs make sense
Climate laws could simply apply the same emissions target to all buildings, but this is not feasible. Some buildings have conditions that allow them to easily reduce emissions, while others require large investments. In this case, the law has a very different impact on each property:
- Building owners who can easily reduce emissions have no incentive to go below the limit, as they avoid all sanctions at that point.
- On the other hand, if a building is difficult to retrofit, the cost of meeting the emissions target may be prohibitive.
The Rocky Mountain Institute analyzed the cost of major building energy retrofits and found that typical project costs range from $25 to $150 per square foot. Owners of buildings at the lower end of this range can reduce their emissions more easily, compared to owners who have high retrofit costs. A carbon trading program can incentivize building owners with lower retrofit costs to further reduce their emissions, generating credits that can be purchased by third parties.
What is the difference between carbon credits and energy credits?
Energy consumption and carbon emissions are closely related. In fact, the 2019 LL97 estimates building emissions and penalties based on the use of different energy sources. The exact reduction in emissions will depend on the source of energy saved; for example, the emissions of 1,000 BTU of #4 fuel oil are greater than those of 1,000 BTU of natural gas.
Carbon trading programs can use credits directly based on avoided emissions. They can also be based on savings achieved through energy efficiency measures or the kWh production of a renewable energy system. Each program has its own rules, but credits are normally generated at the following rates:
- A carbon credit is typically equivalent to one metric ton of CO2 or one metric ton of CO2-equivalent gases.
- A renewable energy credit is typically equivalent to one megawatt-hour (1,000 kWh) of generation from eligible sources.
Energy credit programs typically focus on clean generation, but often cover electric heating systems that use high-efficiency heat pumps. As there is no generation in these cases, credits are granted per megawatt-hour saved.
How carbon credits and renewable energy credits benefit green buildings
Green buildings generally have higher initial costs, but these are recovered over time thanks to energy and water savings. Green building projects also focus on indoor environmental quality, creating a healthier environment that helps occupants save on medical expenses.
To complement these benefits, carbon offsets and renewable energy credits can reward green buildings for their environmental performance. This improves the business case for obtaining a certification like LEED, WELL or EDGE. If you run financial projections for a green building with carbon and energy credits considered, the payback period will be reduced and ROI will improve.
Carbon offsets and renewable energy credits also create an additional compliance option for buildings with high emissions and high upgrade costs. In extreme cases, owning a building may no longer be financially viable after the cost of a major upgrade. With carbon trading programs, the option to purchase credits generated by green buildings becomes available.
