Pressure from the public, corporate, regulatory, and capital markets is pushing businesses to align their operations with sustainability. While sustainability actions take many forms, climate neutrality — the idea of achieving net zero greenhouse gas (GHG) emissions by balancing emissions with the planet’s natural absorption rate — is the core component of the legally binding UNFCC’s 2015 Paris Agreement. Adopted globally by 198 Parties including the United States, The Paris Agreement combined with the global impact of GHG emissions; government and securities exchange regulatory requirements; investor demands; corporate risk mitigation; and the recent consolidation of sustainability standards and carbon accounting frameworks have propelled net-zero greenhouse gas emissions targets to the forefront of organizations’ sustainability objectives. 

Climate neutrality can be a source of an organization’s competitive advantage, but integrating sustainability into operations is a long-term strategic and capital-intensive process. Meanwhile, the capital markets’ short-term targets pressure organizations to demonstrate immediate results without sacrificing profitability. These opposing dynamics to reduce emissions in pursuit of a more sustainable future have created a new market. 

Enter the realm of tradable credits — Renewable Energy Credits (RECs) and Carbon Offsets — which serve as transitional tools for achieving net-zero emissions along the path to climate neutrality. 

The Significance of Scope 2 Emissions 

To shed light on the complexity and scale of the challenge to achieve climate neutrality, let’s consider the purchase of electricity, steam, heating, or cooling. In and of itself, the purchase does not generate emissions. However, organizations' use of these energy services is indirectly linked to the emissions generated during their production. These indirect emissions, also known as Scope 2 emissions account for nearly 40% of global emissions. 

Since consumers do not directly control the production, there are several ways to reduce these emissions: 

• Combine maximum implementation of energy conservation measures (ECM) with onsite renewable (or non-renewable) energy production to eliminate purchases of energy services. 
• Purchase energy from only renewable sources via renewable energy credits (RECs). 
• Calculate Scope 2 GHG emissions and purchase Carbon Offsets as a counterbalance. 

Decoding RECs and Carbon Offsets 

Achieving climate neutrality requires a fundamental change in the way organizations source, generate, manage, and use energy. We have demonstrated LEED for Existing Buildings: Operations and Management supports this effort through the identification and implementation of energy conservation measures. The development of onsite renewable energy capacity is essential to achieving climate neutrality and is sometimes identified as an ECM; however, what if onsite renewable energy production is not an option? This is where RECs and carbon offsets come in as a transitional solution. 

Renewable Energy Credits (RECs) 

A REC represents proof that 1 megawatt-hour (MWh) of electricity was generated from a renewable energy source and fed into the grid. Utility providers that produce renewable energy are granted RECs by the government for the quantity of renewable power they generate. Utilities then have the option to sell the RECs. Organizations that choose or are required to ensure their Scope 2 emissions come from renewable sources can purchase these RECs to eliminate indirect emissions.  

The U.S. federal government used the Inflation Reduction Act to extend investment and production tax credits (transitioning to clean energy investment tax credits in 2025) as one of the primary underlying mechanisms used to stimulate and monetize the production of renewable energy.  

Carbon Offsets 

Carbon offsets, on the other hand, represent one metric ton of carbon dioxide equivalent (CO2e) removed or prevented from entering the atmosphere. Through the development of verification standards, several non-government organizations have established this voluntary market.

Companies seeking to reduce their emissions purchase carbon offsets equivalent to the reduction in the quantity of emissions desired. Offsets can come from various projects, including renewable energy, but also encompass areas like reforestation and methane capture.  

Differences & Suitability 

RECs and carbon offsets both play crucial roles in combating climate change, but they serve different purposes. RECs specifically support the development of renewable energy projects and allow businesses to claim the use of zero-emissions energy production. Carbon offsets address a broader array of emission reduction projects. For example, RECs are only for purchased or Scope 2 energy-related emissions, whereas offsets can be used for Scope 1, 2, or 3 emissions. 

Since the UNFCC was ratified, both emerged as important transitional market mechanisms facilitating the evolution of the energy market towards climate neutrality. Although the goal is global, local implementation can differ significantly depending on how nations pursue the binding targets.  

The U.S., for example, relies on tax credits, grants, and loan programs to stimulate action toward climate neutrality. The mechanisms are financially based, aiming to develop robust commercial markets. In contrast, the EU, uses regulatory mechanisms to mandate the transition through required targets. For instance, Guarantees of Origin, similar to RECs, track the origin of renewable energy, but they are not monetized. Instead of using the market to stimulate change, the EU’s Renewable Energy Directive uses binding requirements along with the Emissions Trading System to promote the transition to a sustainable energy system.       

Whatever the mechanism may be, the journey to climate neutrality depends on an organization’s context and its specific sustainability goals. 

Benefiting Renewable Energy Developers 

Beyond benefiting organizations seeking to reduce Scope 2 emissions, RECs also serve as a valuable tool for the renewable energy sector. The monetization of RECs provides an additional financial incentive for renewable energy developers, supporting the expansion of green energy projects. The transferability of RECs establish a new market and source of revenue encouraging investment in renewable energy and enhancing the quantity of renewable energy making up the grid’s energy mix — a core component of the U.S.’s 2050 net-zero emissions target. 

The Journey to Net Zero: A Win-Win for Business and Planet 

Developing a plan to reduce your emissions is not just an environmental imperative, but also a business one. Achieving climate-neutral operations requires evaluation of an organization’s context, materiality judgments related to identifying its sustainability-related risks and opportunities, and the development of short to mid-term goals as a part of a long-term business strategy. This process can drive cost savings, enhance public image, as well as align an organization’s operations and reporting requirements with rapidly changing regulations. As the United States pushes towards its long-term decarbonization goals, the role of RECs and carbon offsets will grow in importance, helping businesses navigate the complexities of achieving net-zero emissions.  

Emerald Built Environments specializes in helping businesses develop and implement sustainability strategies. Whether pursuing initial transitional net-zero emissions goals or longer-term climate-neutral strategies, having a partner knowledgeable about ways to leverage the integration of RECs and carbon offsets into sustainability planning will complement your organization’s short-, mid-, and long-term performance and prospects. Learn how we can help you achieve your emissions reduction goals.