There are clear signs that discussion about carbon emissions trading is entering the board rooms of Canadian commercial real estate companies.
Gray Taylor of the Climate Change Trading Practice at Bennett Jones LLP recently completed a report titled An Introduction to Emissions Trading for the Commercial Real Estate Sector that was published in February 2009. The Real Estate Property Association of Canada (REALpac) who represents over $150 billion dollars in real estate commissioned the report.
Taylor’s research provides an overview of the legislative environment in North America with respect to carbon emission trading, and highlights important issues for the Canadian property industry. The report is available on the REALpac website and Taylor will be presenting at the up and coming Green Real Estate Conference .
More recently, last week, REALpac released a revised version of its National Green Lease for Office Buildings. The Lease includes clauses dedicated to carbon-offset credits and costs for landlords. REALpac’s Green Lease Committee that has broad representation from the commercial real estate sector prepared the document. (See RENX article on the Green Lease ).
There are two possible markets in which carbon emissions can be traded; the first is a voluntary market with voluntary buyers and the second is a regulated market with regulated buyers.
In a voluntary market a buyer would choose to buy carbon to mitigate their impact on climate change. A voluntary carbon market is what we currently have on a national basis in Canada. In a regulated market a buyer is compelled by legislation to purchase carbon to offset emissions in excess of a legislated emission threshold.
While there are many differences between a voluntary and legislated market a significant one is that the price of carbon is higher in a regulated market and could be pegged to a certain value. While carbon emissions from buildings are not currently regulated in North America there is the possibility that if a broader carbon market were to exist building owners could become sellers of emission credits (See An Introduction to Emissions Trading for the Commercial Real Estate Sector mentioned above for details).
While carbon trading is just entering the boardrooms of North American property owners, the European Union, and the U.K. in particular, is implementing groundbreaking cap-and-trade regulations that includes commercial real estate.
Francisca Quinn is the Business Manager and Sustainability Strategy Developer, with Loop Initiatives in Toronto. Loop Initiatives works with its clients to design and implement strategies and processes to establish sustainability as a core value in their organization. Her background includes four years employed by the Carbon Trust in London, England, working with companies and investors on climate change and carbon. Quinn will be presenting at the up and coming Green Real Estate Conference.
Quinn identifies two regulatory steps taken by the European Union that have led to the emergence of a carbon market applicable to buildings in the U.K. The first step was establishment of the European Union Emission Trading System enacted in 2005 and the second was the Directive on the Energy Performance of Buildings (EPBD) implemented in January of 2006.
The European Union Emission Trading System (EU ETS) covers 10,000 installations in the energy and industrial sector and regulates 40% of Europe’s GHG emissions. According to Quinn the legislation forced a carbon market into the economy and as a result every industry began to consider the implications of carbon to their operations.
The second piece of critical legislation, the Directive on the Energy Performance of Buildings (EPBD) requires that every property owner produce both an asset and an operation certificate that together measure the energy performance of a building. Buildings are then identified as performing within a particular quartile (the top 25% of all buildings, the next 25%, and so on). These certificates are publicly available to any prospective owner or occupant of a building.
The UK government as a commercial tenant leases approximately 18% of all office space in the country and it requires that commercial buildings it leases perform in the top quartile as determined by the EPBD. This has compelled property owners to look at their entire portfolios and to identify non-viable buildings and those suitable for renovation. Similarly the best tenants have started to favour the top quartile buildings and to determine how to move between leases.
A carbon cap is also about to be legislated in the U.K. for every large company including commercial real estate firms. The Carbon Reduction Commitment is scheduled to begin in April 2010 with a three-year introductory phase with a set carbon price at around $21 CAN per tonne of carbon. A company must estimate its carbon usage two years into the future and pre-pay the allowances. Quinn said these payments could be as high as $7.2-million CAN for some companies.
Canada, and North America are clearly a long way from establishing a regulated emissions trading scheme such as the one developing in the U.K. In the absence of regulation, the price of carbon is going to be a critical factor driving a carbon market in North America and for building related offsets.
Carbon is currently trading in Europe at about $18 CAN and reached about $49 CAN in 2008. According to Quinn the voluntary price for carbon is $2-4 CAN. The high cost of the process for validating carbon usage in commercial building means that at today's low price of carbon there is little financial incentive for property owners to determine carbon credits in Canada.
Quinn offered a cautionary note when considering the emissions trading issue. She said it is important to keep in mind that at this time carbon offsetting is a tiny part of a much bigger picture that is establishing an effective sustainability strategy.
This article has just scratched the surface of the issues concerning emissions trading and commercial real estate. To learn more register for the Green Real Estate Conference to be held on April 30th in Toronto.