Voluntary Carbon Market And Offsetting In The Real Estate Sector

REAL ESTATE – A QUICK GUIDE TO CARBON OFFSETTING

Introduction

Carbon offsetting is increasingly used in the real estate sector, particularly in relation to development projects. This guide provides an overview of the essential concepts and key points you need to know to implement effective carbon reduction strategies and help mitigate the carbon footprint of real estate assets.

What are carbon emissions?

The carbon footprint of a company is a measure of the greenhouse gas (GHG) emissions (including, among others, carbon dioxide (CO2) and methane) resulting from the company's activities.

A company's activities might include the running of a building and transport for its staff.

When considering the carbon footprint of buildings, it's useful to understand the different sources of GHG emissions, namely:

Operational carbon – the carbon emitted while a building is occupied including its maintenance and its heating, cooling and lighting; and
Embodied carbon – the carbon emitted during the non-operational phase of a building, including emissions caused by manufacturing, construction, retrofitting, deconstruction and end-of-life.

GHG emissions are measured in tonnes of carbon dioxide equivalent (CO2e). This is because not all GHGs have the same warming potential as CO2, and the concept of CO2e exists to allow comparability. For example, on a 100-year timescale, methane is 28 times more potent than CO2 and so one tonne of methane is quantified as 28 tonnes of CO2e.

How does a company calculate its carbon emissions?

The Greenhouse Gas Protocol (GHG Protocol) separates emissions into three scopes:

Scope 1 - covers direct emissions from the company's owned or controlled sources eg emissions from gas, oil or other fuel used in buildings, vehicles or other equipment owned or under the company's control;
Scope 2 – covers indirect emissions from the purchase and use of electricity, steam, heating and cooling; and
Scope 3 – covers all other indirect emissions that occur in the upstream and downstream activities of an organisation.

The GHG Protocol is the main agreed international methodology for measuring GHG emissions and the major disclosure regimes (ESRS in the EU, SEC Rules in the US and ISSB in many jurisdictions, including the UK) all refer back to the GHG Protocol.

For buildings, the total amount of carbon emitted throughout the life of a building can be measured through tools such as the Royal Institute of Chartered Surveyors (RICS) Whole Life Carbon Assessment for the built environment (WLCA).

Are companies required to disclose their carbon emissions?

Many jurisdictions require listed and/or large companies to disclose their GHG emissions.

In the UK, this is currently required under the dual mechanism of:

for listed companies, FCA mandated disclosures under the Taskforce for Climate- Related Financial Disclosures (TCFD) as set out in Primary Market Bulletin 36; and
listed companies as well as large private companies and large LLPs are required under sections 414CA and 414CB of the Companies Act 2006 to publish a Non-Financial and Sustainability Information Statement (NFSIS) which requires disclosures, largely in line with the TCFD framework, as set out in the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022. The applicable large private companies and large LLPs include:
- all UK companies that are currently required to produce a non-financial information statement, being UK companies that have more than 500 employees and have either transferable securities admitted to trading on a UK regulated market or are banking companies or insurance companies;
- UK registered companies with securities admitted to AIM with more than 500 employees;
- UK registered companies not included in the categories above, which have more than 500 employees and a turnover of more than £500m;
- large LLPs, which are not traded or banking LLPs, and have more than 500 employees and a turnover of more than £500m; and
- traded or banking LLPs which have more than 500 employees.

In the UK, there are currently plans for the regime applicable to listed companies to eventually shift away from the TCFD and towards the International Sustainability Standards Board's (ISSB) Sustainability Standards, which require a higher breadth and depth of information, including in relation to GHG emissions. The ISSB is part of the International Financial Reporting Standards Foundation, which publishes the internationally accepted IFRS Accounting Standards. The ISSB Sustainability Standards are an attempt to create the same degree of 'gold standard' reporting for non-financial reporting as the IFRS Accounting Standards provide for financial reporting. This regime is expected to be introduced into the UK listing regimes by the FCA following a consultation in Q2 2025. It is also expected that this will see an implementation of the Transition Plan Taskforce framework for Climate Transition Plans as a formal reporting requirement.

What is net zero?

At its simplest, "net zero" means cutting carbon emissions to the smallest amount possible, with any residual emissions that remain being balanced out by the removal of CO2 from the atmosphere.

Note that this is different from both:

"absolute zero" which means a total cutting of GHG emissions with no offsets or balancing of residual emissions. In contrast, "net zero" allows for a small amount of residual emissions which can be offset; and
"carbon neutrality" which is generally accepted to mean cutting Scope 1 and Scope 2 emissions, but where cutting Scope 3 emissions is optional. In contrast, the widely accepted scope of "net zero" includes Scope 1, Scope 2 and Scope 3 emissions (see, for example, the requirements of the Science Based Targets Initiative on Net Zero).
To keep global warming to no more than 1.5°C – as called for in the Paris Agreement – the currently recognised position is that emissions need to be reduced by at least 45% by 2030 and reach net zero by 2050.
Given this, governments (including the UK's) and companies have publicly committed to targets to reach net zero by 2050.

How does England's planning system support net zero?

In relation to development, national planning policy in England requires the planning system to support the transition to net zero by 2050. Development plans will include their own net zero targets.

Policy SI 2 of The London Plan requires major development to be net zero-carbon by maximising on-site carbon reductions in accordance with the "energy hierarchy" which is:

Be Lean (use less energy);
Be Clean (supply energy efficiently and cleanly);
Be Green (maximise renewable energy); and
Be Seen (monitor, verify and report energy performance).

The London Plan provides that, where the zero-carbon target cannot be fully achieved on-site, any shortall may be met by contributing to the relevant borough's carbon offset fund or by an agreed off-site proposal. Guidance sets out how developments can achieve the net zero target, how energy performance post-construction can be monitored and how planning applications should calculate and reduce whole life-cycle carbon emissions.

There are challenges to achieving net zero, such as cutting residual emissions which are hard to avoid or fully eliminate, and a lack of control over Scope 3 emissions.

Why are companies using carbon offsetting?

There are challenges to achieving net zero, such as cutting residual emissions which are hard to avoid or fully eliminate, and a lack of control over Scope 3 emissions.

As the concept of net zero allows for a small amount of offsetting, many companies, including real estate companies, therefore turn to offsetting to address these. However, companies are required to clearly outline what portion of their actual emissions are offset, and cannot simply claim an offset as an emission reduction in its overall reporting.

What is a carbon offset?

Carbon offsetting is the process of compensating for carbon emissions by participating in schemes designed to make equivalent reductions of CO2 in the atmosphere.

The terms carbon offset and carbon offset credit (or simply "offset credit") are used interchangeably, though they can mean slightly different things:

a carbon offset often refers to a reduction in GHG emissions, or an increase in carbon storage (eg through land restoration or the planting of trees), that is used to compensate for emissions that occur elsewhere. However, it may also refer to an avoidance credit, where a credit is issued in relation to a project which avoided future emissions (eg switching a coal power plant to a gas power plant); and
a carbon offset credit is a transferrable instrument certified by governments or independent certification bodies to represent an emission reduction of one metric tonne of CO2, or an equivalent amount of other GHGs.

Typically, offset credits will be certified and then held, transferred, sold and ultimately retired on a public registry. The registries set the quality standards which the relevant offset credit must meet and the credibility of the offset credit is therefore dependent on the credibility of the registry.

When the owner of an offset credit "retires" it, they can claim the underlying reduction towards their own GHG reduction goals.

How does carbon offsetting work?

A variety of GHG projects can create offsets and offset credits. These include forestry projects (such as sapling planting), carbon capture and storage projects and renewable energy projects (although the latter are often in the category of avoidance credits rather than providing a tangible reduction in the atmosphere).

A company could carry out a carbon offset project itself eg by planting saplings. However, often a company will look to purchase offset credits relating to a third-party carbon offset project via the voluntary carbon market.

Where carbon offsetting is a requirement governing the development of a building, eg in a planning condition or obligation, such condition or obligation may determine how carbon should be offset, eg by making a cash-in-lieu contribution to the local planning authority's carbon offset fund.

What are the rules governing carbon offsets and offset credits?

No common "best practice" has crystalised yet for the carbon offset market. For example, there is no single methodology for assessing the quality of an offset project or an offset credit generated by it, no ceiling to the number of offset credits that can be generated, and prices are determined based on supply and demand in the open market.

For this reason, standard setting bodies have arisen which carbon offset projects can certify against to evidence a minimum compliance level.

However, the EU and UK have recently started to focus on the regulation of the voluntary carbon market.

The EU voluntary carbon market is now regulated by the Carbon Removals and Carbon Farming (CRCF) Regulation (EU/2024/3012), published in December 2024. This regulation establishes an EU-wide voluntary certification framework for carbon removals, carbon farming, and carbon storage. It aims to create a transparent and standardised system for certifying carbon credits, ensuring their quality and preventing greenwashing.

The UK Government is currently seeking market views on its proposed policy and governance framework for ensuring the integrity of voluntary carbon and nature markets (VCNMs). It launched its six Principles for VCNM Integrity (the Principles) in November 2024 at COP 29 as a voluntary framework to set out good practice; build trust and confidence in the use of offset credits; provide clarity for stakeholders; promote transparency and support coherence across the markets.

It is now consulting (in this Consultation) on the implementation of the six Principles:

use credits in addition to ambitious actions within value chain;
use high integrity credits;
measure and disclose the planned use of credits as part of sustainability reporting;
plan ahead;
make accurate green claims using appropriate terminology; and
co-operate with others to support the growth of high integrity markets.

The Consultation is an important intervention by the UK Government in the evolving VCNM sector and a welcome signal of the UK Government's intentions in the area. The Consultation closes on 10 July 2025 and provides a good opportunity for market participants to give their views on a range of important issues in the development of these nascent markets.

What is the tax treatment of offset credits?

VAT

From a VAT perspective, since September 2024, the supply of offset credits will typically be standard rated, subject to certain exceptions. This marks a change in approach by HMRC as they had previously considered offset credits to be outside the scope of VAT. Real estate clients, especially in the residential sector where VAT recovery rates may be lower, should take this into account (and for such clients it may be worth seeing if an offset credit solution which falls within the exceptions to standard rating can be used instead).

Direct Tax

From a direct tax perspective, the key question is often whether the cost of offset credits can be deducted from trading or property income profits as an expense of the business. In most cases, the question is whether the expense is "wholly and exclusively" for the purpose of the business.

How to assess the quality of a carbon offset project

The lack of consistent rules and best practice standards has led to concerns on how to demonstrate that a carbon offset is credible.

There is no single recognised position as to what is a high-quality carbon offset project or high-quality offset credit and there is no single scientific standard for methodology.

Quality of carbon offset project and calculation of offset credit

Certain key issues to consider are, for example:

the offset credit needs to be tied to real and verifiable carbon removal or avoidance;
the offset credit should demonstrate permanence, that is to say that the removal effects will be long term and will not be reversed (eg a forest burning down);
the offset credit should prove that the emissions reduction or removal would not have occurred in the absence of the offset credit (eg buying an offset credit attached to a forest which has already been planned and funded would not move the needle); " the offset credit must be unique and should not be double-sold, ie only one company can claim an offset per credit generated. For this reason, it is important to ensure offset credits are duly retired; and
it is also important to consider the wider attributes of the offset credit beyond its simple carbon attributes. There have been cases where projects which effectively stored or removed carbon still had adverse impacts on local communities or the wider environment, and these can be reputationally damaging to buyers.

Reputation of offset credit market

For these reasons, information needs to be available to assess an offset credit's calculation and integrity. Many reputable registries require projects wishing to sell offset credits on the registry to provide independent verification reports in relation to the project.

There are various registries which are considered reputable and which aim to ensure higher standards of the offset credits housed on their platforms. For example, a company may wish to buy offset credits certified by accreditations such as the Verified Carbon Standard or the Gold Standard knowing these projects have been subject to due diligence.

There are also other organisations aimed at enhancing integrity in the carbon market. Including the International Emissions Trading Association (IETA) which is an independent, non-profit, industry-led organisation dedicated to advancing international cooperation in GHG emissions trading and promoting best practices for the offset market. For example, last year, it issued guidelines on the corporate use of carbon credits and it provides standardised documentation for emissions trading.

However, even within the reputable carbon standard space, companies (such as VERRA who administers the Verified Carbon Standard) have been subject to accusations of quality issues with their certified offset credits.

Where does carbon offsetting arise on real estate transactions?

Planning Agreements

Planning conditions and section 106 agreements may provide how development which cannot fully achieve net zero carbon on-site should meet the shortfall off-site, for example by contributing to carbon offset funds established and administered by the local planning authority.

Agreement for lease

Planning obligations aside, we are starting to see more development deals where the developer and occupier want to target the embodied carbon relating to the development having a net zero or carbon neutral footprint.

In these situations, the agreement for lease might contain provisions relating to carbon offsetting in relation to the embodied carbon of the developer's, and the tenant's, works. Such as:

an obligation for an assessment to be carried out following practical completion to calculate the carbon footprint of the works based upon a certain model (such as the NABERS UK DfP model) with such assessment to include the amount required to be paid to purchase offset credits to result in the works having a net zero or carbon neutral footprint;
an obligation on the developer and/or the tenant to purchase offset credits to result in their respective works having a net zero or carbon neutral footprint. This obligation might be subject to a financial limit; and
provisions aiming to ensure the quality of the offset credit, such as the parties discussing and agreeing:
- the carbon projects in which to invest;
- the brokers from which offset credits are to be purchased; and/or
- the offset credits having certain accreditations.

Building contracts

Requirements to meet, and provide information in relation to, targets for embodied carbon in the works will also need to be stepped down into the building contracts.

Carbon offset purchase platform for real estate developments

Real estate clients, particularly developers, are increasingly seeking help with their offset strategies and documentation for the purchase of offset credits. For example, creating a carbon offset purchase platform for future real estate developments.

Where developers want to offer their clients the ability to purchase offset credits to offset the emissions of their developments during the development phase but they do not have the capacity to identify and assess carbon offset projects individually, they may choose to go down the route of working with a broker who can identify and purchase the credits on behalf of the developer and its clients.

We have helped developers by reviewing their offset credit strategy documents, drafting the contract with the broker, and rolling the structure out to specific projects.

As the voluntary carbon market is unregulated, and there is no market consensus on quality standards and standard documentation, it is important to assess the risks and priorities for the developer and to reflect this in the agreement.

Establishing structures which invest in offset credits as an asset class

There is also increasing interest in establishing structures, including funds, which then invest in offset credits as an asset class with a view to onward selling – creating both a new way to invest in this asset class and a secondary market for offset credits.

How will the forthcoming UK Net Zero Carbon Buildings Standard treat carbon offsetting?

The aim of the UK Net Zero Carbon Buildings Standard (the Standard) is to provide a new single and clear definition of net zero carbon for all building types against which buildings can be verified. The hope is that this should provide uniformity in claims of net zero buildings and drive the decarbonisation of the built environment to help achieve the UK's net zero carbon target by 2050.

The Standard is currently being piloted on different schemes before Version 1 is published which is expected to be late this year.

In terms of carbon offsetting, the pilot version of the Standard provides carbon offsets may be used to complement, but not replace, the mandatory elements of the Standard, and may be used to achieve net zero carbon at the asset level. The carbon offsets are not restricted in type or location but the vintage (year) of the carbon credits must be no more than five years before or after the reporting period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.