Carbon credits can incentivize the use of renewable energy, the construction of green buildings, and deep energy retrofits for existing properties. When governments establish emission reduction targets, they normally have penalties for companies with a high environmental impact. However, this only creates an incentive to reach the minimum performance level, and no rewards for surpassing it. On the other hand, a carbon credit program creates an incentive to lower emissions further:
- Organizations can be rewarded for reaching emission levels below the target, and also for reaching net zero. This performance can be converted into carbon credits.
- Liable organizations can be given the option to purchase these carbon credits, which count towards their own emission limits.
Many climate offset programs use credits that are based on direct carbon reductions - for example, one 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 used Renewable Energy Certificates or RECs, which are awarded at a rate of one REC for every 1,000 kWh of clean energy produced onsite.
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Carbon credits can support legislation such as the NYC Climate Mobilization Act, which includes Local Law 97 of 2019. The law only presented the emission limits and corresponding penalties when first introduced, but it also mentioned that carbon trading and renewable energy credits are being discussed.
Why Carbon Trading Programs Make Sense
Climate laws could simply apply the same emissions target for all buildings, but this is not feasible. Some buildings have conditions that allow emission cuts to be achieved easily, while others need major investment. In this case, the law has a very different impact on each property:
- Building owners who can reduce emissions easily have no incentive to go below the limit since they avoid all penalties at that point.
- On the other hand, if a building is difficult to upgrade, the cost of reaching the emissions target can be prohibitive.
The Rocky Mountain Institute analyzed the cost of deep energy retrofits in buildings, and they found that typical project costs range from $25 to $150 per square foot. Building owners on the lower end of this range can cut their emissions more easily, compared with owners who have high retrofit costs. A carbon trading program can encourage building owners with lower retrofit costs to reduce their emissions further, generating credits that can be purchased by others.
What Is the Difference Between Carbon Credits and Energy Credits?
Energy consumption and carbon emissions are closely related. Actually, LL97 of 2019 estimates building emissions and penalties based on their usage of different energy sources. The exact emissions cut will depend on the energy source saved; for example, the emissions from 1,000 BTU of #4 fuel oil are higher than those from 1,000 BTU of natural gas.
Carbon trading programs can use credits that are directly based on avoided emissions. They can also be based on the savings achieved by energy efficiency measures, or the kWh output of a renewable energy system. Each program has its own rules, but credits are normally generated with the following rates:
- One carbon credit is normally equivalent to one metric ton of CO2, or one metric tonne of CO2 equivalent gases.
- One renewable energy credit is normally equivalent to one megawatt-hour (1,000 kWh) of generation from eligible sources.
Energy credit programs normally focus on clean generation, but they often cover electric heating systems that use high-efficiency heat pumps. Since there is no generation in these cases, the credits are awarded per megawatt-hour saved.
How Carbon Credits and Renewable Energy Credits Benefit Green Buildings
Green buildings generally have higher upfront 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 getting 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 is shortened and the ROI improves.
Carbon offsets and renewable energy credits also create an additional compliance option for high-emitting buildings with high upgrade costs. In extreme cases, owning a building may no longer be financially viable after the cost of a major retrofit. With carbon trading programs, the option of purchasing credits generated by green buildings becomes available.