Real estate clients are increasingly making corporate commitments to become net zero within a relatively short period of time.
Without a fully decarbonised energy system in the UK, the current reality is that developers with plans to deliver a net zero new-build or refurbished asset need an offsetting strategy to help bridge the gap in the short term.
When doing so, corporate real estate developers and investors need to consider offsetting at the outset of a project in parallel with their net zero pathway as part of the development appraisal process.
A key driver for this is understanding the cost impact and exposure to a fluctuating carbon price across the lifecycle of an asset. The current cost of carbon is around £70 per tonne according to the UK Green Building Council, however this could increase to £120 per tonne or more by the end of this decade. It is also feasible that given the slow current pace of carbon action, high demand for offsets in 2025 and 2030 when many corporate net zero pledges are set to be achieved could lead to a supply spike and a further premium – particularly if there is a lack of quality offset schemes available.
This financial risk needs to be accounted for and the offsetting cost of embodied and operational carbon must be forecast across an asset’s lifetime to determine the best strategy.
The offsetting strategy can elect to support projects that are local, national or global. My experience is that the best strategies are considered and aligned with a client organisation’s corporate ESG strategy.
Critically, the offsetting scheme should be independently accredited and also able to evolve, if it is to succeed.
Schemes must also take into account climate risk associated with offsetting projects alongside the climate emergency and changing weather patterns. For example, reforestation offsetting projects in some parts of the world are already increasingly coming under threat from more frequent and widespread wildfires.
Offsetting strategies are currently required in the transition to net zero real estate but they do not represent a climate fix. As we reduce emissions, the industry will need to move away from avoidance projects and towards removal projects. What this means is that projects that actively remove CO2 already in the atmosphere will need to start being prioritised over those that simply limit further emissions.
Developers must consider the cost and carbon implications of their projects and, as energy networks decarbonise, understand how to evolve and reduce reliance on offsetting.
Peter McGettrick is managing director of advisory at Turner & Townsend