Offsetting CO2 emissions may provide a competitive edge for properties.
and carbon credits can help to reduce variable operating expenses, increase net
operating incomes, lower capitalization rates, increase internal rates of
return, and mitigate risk. These dynamics reflect the changing characteristics
of socially responsible investment models and create a sustainable competitive
edge. Property owners and investors who set independent, verifiable audit
baselines first can generate added income and value from emission reductions
via conservation and renewable energy efforts.
commercial real estate industry is already moving toward a socially responsible
investment model. ASTM’s recently adopted “Standard Practice for Building
Energy Performance Assessment” is expected to have a significant impact on the
commercial real estate industry, similar to the effect of ASTM’s Phase I
environmental site assessment standard.
assessments standardize energy due diligence, investment grade audits are
standardizing the generation of carbon credits. These credits are becoming an
essential tool for businesses, investors, and polluters. They can be used to
comply with reduction requirements and create added value by monetizing carbon
and mitigating risk.
a Carbon Credit?
dioxide makes up about 85 percent of the seven damaging greenhouse gases, and
all other emissions are expressed in carbon dioxide equivalents, or CO2e.
Carbon credits are created by offsetting carbon dioxide emissions with
conservation; solar, wind, and waste conversion to energy; and other
technologies. The credits are then traded on both voluntary and compliance
the world, markets are set up for trading carbon credits. For example,
California now has a compliant carbon market using four methods for generating
carbon credits. Many new models are emerging, from harvesting emission
reductions from energy conservation in buildings, to providing energy
management as a value-added service with pay-forward savings.
Does It Mean?
investment grade audit sets a building’s energy audit baseline and balances
bills, equipment, and use to within 5 percent. This audit identifies opportunities
in lighting and electrical outlet controls, behavior modification, and upgraded
mechanical systems that can reduce the fixed overhead by 30 to 40 percent. In
addition to saving this power, carbon credits in the form of voluntary emission
reductions, or VERs, are generated every year for the 10- to 25-year life of
the investment. Today VERs are trading around $6 per credit and are expected to
go up in value 10 to 20 percent a year, according to Bloomberg. VERs can be
generated in the U.S. and sold internationally. VERs are about 3 percent of
conservation income and 20 percent of renewable energy upgrade income.
income stream is significant and is part of a building’s financial stack. For
example, a recent project provided a $900,000-a-year reduction in operating
expenses and increased the NOI. Using a 6 percent overall capitalization rate
on this savings creates $15 million in added value. For portfolio owners,
significant gains in operating efficiency using conservation and renewable
energy strategies can create an edge in real estate transactions. New
technologies include insurance wraps, independent auditing/reporting software,
and remote and automated building management technologies. This can turn real
estate operators into energy service companies that sell power to their
building portfolios there is a two-phase investment grade audit. Phase I
involves an audit of the buildings and billings that identifies inefficient
equipment, lighting, controls, and business practices that can be adjusted to
typically achieve 10 percent savings at no cost by changing behavior and time
of day activities.
of the audit identifies and develops a capital expenditure program of equipment
upgrades to achieve energy savings and possible co-generation or renewable
energy additions. National and state energy conservation programs, along with
the non-cash benefits of ownership, such as component depreciation, contribute
to the after-tax IRR. For qualified clients, full project funding from audits
to improvements to carbon reporting make monetization viable.
owners who develop and put into place a carbon-based energy management strategy
create a sustainable competitive edge. Along with managing risk to meet
socially responsible investment models, those who set audit baselines first can
generate added income and value. The future is now.
Watkins is president of Carbon Consultants and Kurt Goeppner, CCIM, is a
principal with Carbon Consultants, based in San Juan Capistrano, Calif. Contact
them at email@example.com