So far, the articles in this series have examined (a) the policies leading to the introduction of Energy Performance Certificates for buildings1 and (b) the important relationship between the owner and the occupier of a building regarding its operation and use and (c) the rise of the "green" lease2.

Whatever your connection to real estate, whether as an owner, occupier, funder or manager, it should also be looked at as part of your business's comprehensive approach to sustainability.

This article summarises two items of increasing importance for the real estate sector: sustainability and the proposed Carbon Reduction Commitment. Those businesses who have a large real estate portfolio should take particular note of the spread of "green" regulation in this area, and take advantage of the opportunities to become truly "lean, mean and green".

Improving sustainability of buildings

It is increasingly well-known that there is much that an occupier can do to improve energy performance, reduce waste and increase water efficiency.

The table below summarises some simple steps and 'quick wins'.

To view table click here

The benefits are many: more efficient use of the real estate that a business occupies and a linked reduction in operating costs. Your business may also benefit from other less tangible benefits e.g. a genuine "feel-good-factor" rather than cynicism or accusations of 'greenwash' by employees, shareholders and customers alike.

An additional benefit of taking these measures is that this information and any financial savings, can be used both in your internal policy communications and in external reports, for example, in the Directors' Report as required by the Companies Act 2006.3

We should here distinguish between existing and new buildings. For energy performance standards, new buildings will have to comply with the 2006 Buildings Regulations4. It is also useful to involve the occupier at an early stage in the design to encourage efficiency for the particular use of the building. This will include negotiating a proper green lease5.

The problems are more acute with existing buildings. On any refurbishment, the opportunity should be taken by the occupier in discussion with the owner to introduce energy saving measures, with large refurbishments being caught, in any event, by the 2006 Building Regulations.

The Carbon Reduction Commitment

If you have a large portfolio of properties which you occupy in the UK, for example, you are a large bank with numerous office locations, a supermarket chain, a hotel operator, a local authority (including any schools in its area) or a hospital trust, there is a further incentive, beyond sustainability and reduced operating costs. This is the proposed Carbon Reduction Commitment scheme ("CRC").

Background to the CRC

In November 2006 DEFRA consulted on how to reduce greenhouse gas emissions from non-energy intensive businesses in both private and public sectors6. We already had Climate Change Agreements, which formed part of the Climate Change Levy arrangement, and the EU Emissions Trading Scheme ("EU ETS"), which targets energy-intensive industries for some time, but it was recognised that other business and public sectors also contributed greatly to the UK's CO2 emissions7.

The Government therefore announced its decision to implement such a scheme in its Energy White Paper (published in May 2007). Initially this was to be called the "Energy Performance Commitment" and has been designed to reduce carbon emissions in large non-energy intensive organisation by 1.2 million tonnes of carbon per year by 2020.

The UK Climate Change Bill, which is currently at Committee stage in the House of Commons, includes enabling powers to introduce this mandatory cap-and-trade scheme. As currently proposed it will cover all organisations whose half-hourly metered electricity consumption in 2008 in the UK will be greater than 6,000 MWh per year - which translates into an annual electricity bill of approximately £500,000 or more. On this basis it is expected to affect up to 4,800 large organisations whose emissions are not currently included in the EU ETS scheme or covered by Climate Change Agreements. The regulations are expected to come into force in October 2009.

The CRC has been designed to encourage the adoption of energy efficiency measures by appealing to businesses from both a costs perspective and a reputational angle. For example guidance from the Department for Children, Schools and Families estimates that over 20% energy reduction is achievable in primary and secondary schools from low to no cost measures8. Energy-saving measures can be divided into behavioural and structural measures including, under the latter, the gradual introduction of more energy efficient technologies.

Qualification criteria

So if your business (and this includes your subsidiary companies, as it will be the highest UK parent organisation who will have to comply), has an electricity consumption of greater than 6,000 MWh per year the scheme will apply to you. For 2008 you will therefore need to calculate your total electricity use based on information from your suppliers. DEFRA will publish a user guide to help you calculate this and the current timetable envisages that early in 2009 the Environment Agency will send a registration pack to all UK billing addresses with half-hourly meters.

The qualification for the scheme is based solely on mandatory half-hourly metered9 electricity consumption. Once in the scheme you will have to monitor and report all your energy use and emissions from all sources save for any transport emissions, emissions covered by the EU ETS and emissions covered by any Climate Change Agreement to which you are a party.

It is worth noting that the Partial Regulatory Impact Assessment, June 2007 ("RIA") also looked at the threshold being 3,000 MWh and over time you can expect that the qualification criteria will be lowered so as to cover more organisations.

If covered by the scheme you will have to provide annual data statements of your emissions so the CRC will rely on self-certification of emissions supported by an independent audit regime of approximately 20% of those caught by the scheme. This scheme therefore differs from the EU ETS in that the EU ETS requires third-party verification of all organisations or of all sites.

Although initially it was proposed that the CRC would work on a calendar year basis it has now been agreed that this will be changed to the financial year i.e. 1 April to 31 March and so the scheme, if introduced will start to have effect in April 2010. 

Cap and trade

At the start of each compliance year an organisation can purchase allowances. The proposal is that the first sale will take place in April 2011 and this is to be a fixed-price sale during the introductory phase (which will run until 2013) with, as currently proposed, a fixed price of £12 per tonne of CO2 to cover its total emissions. The first sale will in fact cover both 2010/11 allowances and 2011/12 allowances but after that all subsequent sales/auctions will be for allowances only for the year ahead. The auctioning of carbon allowances will commence in April 2013.

An organisation will then monitor, assess and manage its emissions throughout the compliance year looking at carbon abatement strategies and energy efficiency measures and will have the ability to buy or sell allowances on the secondary market or via a link to the EU ETS scheme. An organisation will be required to report its emissions, and surrender sufficient allowances to cover those emission levels, by the end of July via an online registry. The system is designed to provide flexibility by allowing the participants to decide how they will comply - either by reducing their own emissions or by purchasing more allowances.

The UK Government proposals are that all the monies raised from the sale of allowances will be recycled back to the participants, so it will be broadly revenue neutral to the Exchequer, and that this will all take place within the same financial year. This will be achieved by a direct payment to the participants in proportion to their annual average emissions reductions since the start of the scheme, with a small bonus or penalty depending on their position in a CRC league table. The CRC league table will also be published.

Those who perform best will be rewarded financially for their efforts. It is not hard to see, therefore, that there will be an incentive for each organisation to improve its efficiency as to energy and resource use and to reduce emissions. This will also be relevant to any corporate social responsibility/sustainability policies as these become even more high profile.

There are criticisms that the CRC will not create additional incentives to purchase green tariff electricity but the Government argues that it wishes to ensure that the carbon savings from the CRC are additional to those that would be delivered by the Renewables Obligation10. The CRC scheme's primary aim is to improve energy efficiency and reduce emissions within those organisations caught by the scheme.

The CRC target sector accounts for approximately 10% of the UK's emissions and when you look at the amount of real estate that these organisations occupy you can see the real incentive for a better understanding of how buildings operate and the measures that can be taken to reduce the emissions. This is particularly pertinent to existing buildings as opposed to new buildings (i.e. post April 2006) which should already meet new energy performance targets12.

The UK Government will set a limit on the number of allowances available for auction at the beginning of each compliance year and this will be reduced in each subsequent year. In this way there will be an additional incentive on organisations to take steps to reduce their emissions year-on-year as there will be a diminishing number of allowances available over time. So if a participant does not hold a sufficient number of allowances to cover their emissions it is more likely to find itself subject to a penalty payment.

Costs and benefits

The RIA analysed the potential costs and benefits of the CRC scheme and notes that the up-front and ongoing costs will be more than offset by lower energy bills for the organisations concerned over time but with this time period varying for different sub-sectors. For example, for the real estate sector a time frame of 7 years is stated.

The RIA lists the benefits of the scheme as including:

  • environmental benefits in terms of reduced emissions of CO2;
  • monetary benefits to the participant organisations - e.g. saving on energy bills; and
  • ancillary benefits in terms of improvement in local air quality.

As to costs, the RIA identified three categories:

  • the cost of emissions control or abatement measures;
  • the administrative costs of participating in the scheme, including transaction and management costs; and
  • the costs of any remaining allowances needed to cover residual emissions.

Already we are seeing consultants offering services to improve a company's environmental performance so as to avoid the extra costs and to take advantage of the financial gains that will be available under the proposed CRC scheme.

To view text box click here

Detailed consultation on the draft CRC regulations is expected to take place this autumn and this should be taken very seriously by this business sector if it wishes to influence the outcome of how this scheme will operate.

Focus on the construction and housing sectors

All sectors of business can expect to see more and more regulation as the UK Government is now committed to achieving emission reductions targets as part of the energy plan set by the EU. The UK Government itself has set targets for its own buildings to cut office emissions, against a 1990-2000 baseline, by 12.5% by 2010-2011 and by 30% by 2020. The Sixth Annual Report 2007 by the Sustainable Development Commission notes however that the UK Government has reported a 4% reduction in carbon emissions from its offices whereas a reduction of at least 8% would have been needed to put the UK Government on track to achieve its target. Clearly it needs to focus on its own activities if regulation for other sectors is to be taken seriously.

Looking at the construction industry, the Strategy for Sustainable Construction was published in June 2008 following consultation that took place from July to November 2007. This is a joint industry and UK Government initiative and refers to a target of a 50% reduction in construction, demolition and excavation waste to landfill by 2012 compared to 2008. This is expected to be achieved as a result of reduction, re-use, recycling and recovery. It is interesting to note that the draft Strategy for Sustainable Construction published in 2007 also advocated a target of zero net waste at construction sites by 2015 and zero waste to landfill by 2020. Neither of these targets is however mentioned in the final strategy.

This target of 50% reduction is not a surprise when you consider that the construction industry in England uses around 400 million tonnes of materials every year with around 90 million tonnes of inert waste being produced and 25 million of that is estimated as being disposed of via landfill.13 A number of policies already exist to encourage this reduction, for example: the landfill tax will increase to £48/tonne in 2010/11 for non-inert material; the aggregates levy, which will increase to £42 per tonne from 1 April 2009, encourages the use of recycled rather than virgin materials; site waste management plans are now mandatory (as from 6 April 2008) for construction projects over £300,000 and the Code for Sustainable Homes became mandatory on 1 May 2008 which sets a national and minimum standard for the design and construction of sustainable new homes.14

The construction industry is also being asked to consider how the change in climate should alter the design of buildings for example because of the risks to foundations from either excessive rainfall or a drought or hotter drier summers. Innovation will be needed in the construction industry to "future-proof" new structures and to adapt existing buildings. Adaptation is now accepted as a necessary response to climate change and the Climate Change Bill also includes a duty on the Secretary of State to prepare an "adaptation programme" covering the UK Government's objectives for adapting to climate change, with the first of these reports to be made within 3 years of the Bill coming into force.

In the housing sector, the UK Government has set the goal for all new homes to be zero-carbon by 2016 which it aims to achieve in stages by improvements to energy requirements in the Building Regulations in 2010, 2013 and 2016. House builders have already expressed their concern over the definition of "zero-carbon"15.

The Calcutt Review 2007 looks at how housebuilding as a business operates and the implications for sustainability, in particular the energy efficiency, of new housing. The Review comments that the existing regulatory and warranty frameworks are inadequate and recommend new arrangements for design review and for construction which incentivise good quality and impose real penalties for poor quality. The Review believes the industry will be stretched to meet the zero-carbon new homes goal by 2016 and that strong leadership and direction is required with a framework of incentives and opportunities being required to create a strong commercial motive on the housebuilding sector to deliver this target. As part of the zero-carbon home initiative, SDLT has been amended so that there will be relief from this tax on the first acquisition of a dwelling qualifying as a zero-carbon home and this relief is back dated to any acquisitions made on or after 1 October 2007.

There is also an ambition to extend the zero-carbon requirement to new schools, public sector non-domestic buildings and all new commercial buildings by 2016, 2018 and 2019 respectively. The feasibility of these ambitions is being explored by the UK Government and will be subject to consultation later in 2008. The UK Green Building Council was commissioned by the UK Government to see whether similar targets contained in the Code for Sustainable Homes could be set for the non-domestic sector and on what timescale.16 The report found that the energy use data for non-domestic buildings was inconsistent, ad hoc and by no means complete. It was clear that a greater understanding of energy use in buildings was needed so as to understand the feasibility and cost of zero-carbon new non-domestic buildings and also for the successful implementation of policy measures to achieve this goal. The report makes a number of recommendations which we summarise below.

First of all it recommends that the requirement for EPCs and DECs for all commercial buildings was introduced as soon as possible together with the establishment of a national database to collate and store this data. As reported in our earlier Alerts17 these requirements have now been implemented and from 1 October 2008 an EPC will be required for all commercial buildings whatever their size.

Secondly the report found that, in general, the electricity to heat ratio is significantly higher for non-domestic buildings than it is for domestic property. This means the implementation of on-site renewable energy solutions is much more challenging. As a result it recommends the implementation of an effective hierarchy for carbon emission reductions including energy efficiency in design and the use of on-site, near-site and off-site renewable energy generation solutions. The ideal is that generation capacity is located as close to the development as possible to avoid unnecessary distribution losses, increase local awareness of supply issues and to ensure that all available renewable energy capacity is exploited.

Linked to this is the need, and the third recommendation by the report, to have a UK-wide renewable resource estimation tool which would be used at the planning stage of developments to assess their renewable energy potential. This would need to be look at both the potential for renewable energy generation on site and for a decentralised energy network. The report notes that the options for renewables are limited on many sites due, for example, to a lack of solar access or unreliable and turbulent wind resources. The options for incorporation of renewable energy generation vary in relation to urban and rural sites and the geographical availability of natural resources such as wind and sunshine. A mix of buildings and building uses and therefore a range of energy demands may however result in some 'big wins' and should, the report feels, be explored further.

The report found that the economic drivers to mitigate climate change are not in place and so recommends that policy intervention is required and that this should cut across many policy areas with planning, buildings regulations and energy as a minimum. The report highlights the fact that energy-demand reductions for occupiers are not financially incentivised. The report goes on to recommend that the occupier be required to pay the actual amount of carbon emitted as detailed, for example, on the DEC for that building over and above that predicted to be used by the EPC for the building.

As to the estimated cost of making these carbon reductions the report found there was a wide range of costs, little empirical evidence and a concern that any costing estimate runs the risk of significant error. The modelling that was undertaken suggests the cost premium could range from over 30% down to 5-10% of current baseline building costs.

As to the timeframe for achieving the target of zero-carbon, the report proposes using a similar trajectory as for housing and on that basis states that a date of 2020 could be adopted.

The report finally makes it very clear that looking at zero-carbon for new non-domestic buildings does not present the whole picture and that attention must be given to existing buildings. It estimates that at current demolition and new-build rates that around only 30% of existing stock would be replaced by 2050. On this basis the report concludes that unless the existing building stock is tackled the chances of meeting any of the UK Government's targets for carbon reductions by 2050 are slim.

How should the real estate sector react?

In conclusion the pressure to reduce the energy you use, the way you source supplies, as an owner or occupier, how you get to work and how you use your buildings will continue to grow and measures taken now will mean that you will be better prepared to adapt and respond to legislative changes as they come into force. We have referred to a number of the initiatives and proposals but you can expect these to continue to grow in number and scope. The CBI Climate Change Task Force has coined the phrase "Climate Change: everyone's business" and this, without a doubt, includes the real estate sector.