Facility Directors Must Look Beyond Market-Based Mechanisms When Defining Net Zero Strategies

Facility Directors Must Look Beyond Market-Based Mechanisms When Defining Net Zero Strategies

The rapid rise of CEO-led net zero targets is driving renewed interest in carbon reduction across the built environment. Facility executives are coming under pressure to refresh their legacy carbon reduction programmes, many of which were established during the 2010s when carbon management first came to the fore. For example, the Commonwealth Bank of Australia has committed to owning or occupying buildings with net zero operating emissions by 2030. Real estate investor Mirvac plans to exceed net zero within its building portfolio by 2030.

Facility directors devising a net zero strategy have a wide range of options to consider. In our recent report Planning For Net Zero Carbon Buildings, we analysed eight decarbonization strategies, including energy efficiency, electrification, green electricity and carbon offsets. The primary conclusion from our analysis is that firms must select their net zero roadmap carefully; strategies that appear straightforward today will bring growing levels of risk in the future.

On the face of it, market-based mechanisms are the most cost-effective and simple options for operational decarbonization. For example, firms can purchase Renewable Energy Certificates (RECs) to claim a 100% renewable power supply, often paying just a 2% premium on the standard cost of power. Similarly, carbon offsets enable firms to drive carbon reductions while avoiding high upfront capital costs associated with efficiency or renewables projects. Firms in the financial services sectors already use RECs to claim carbon neutrality across their operations.

The problem is strategies that weigh heavily on market-based mechanisms will bring higher levels of risk in the future. Firms are becoming increasingly alert to the limitations of RECs in driving carbon reductions; they often do not lead to additional renewable energy infrastructure being developed and primarily result in the re-shuffling of the existing energy supply on the market. In addition, firms can buy RECs associated with power grids located in different regions to their own operations. Lazard Asset Management warns firms that are presenting themselves as carbon neutral using unbundled RECs risks public backlash, which could negatively impact their value. This has driven firms, including IBM and Salesforce, to move away from procuring unbundled RECs.

Firms also need to be alert to the risks of carbon offset price increases as global demand grows. This is highlighted in research by University College London and Trove Research, which forecasts that carbon credits used by firms to offset their emissions are on track to increase from $3 to $5 per tonne of carbon in 2021 to over $20 per tonne by 2030. Current prices are unsustainably low given an excess supply of carbon offsetting projects.

Building managers must therefore develop a multiple dimensional net zero roadmap that blends on-site emissions reduction projects and market-based solutions over a multi-year period. Firms should also focus on the transparency of their programme to avoid the reputational risks associated with setting out big targets with opaque plans. For more insights on devising a net zero programme for your building portfolio, read our recent report Best Practices: Planning For Net Zero Carbon Buildings.