Carbon offset payments and the borough offset fund
A carbon offset payment covers the gap between what a London scheme achieves on site and net zero carbon. Here is how the sum is worked out and secured.
A carbon offset payment in London is the cash-in-lieu contribution a major development makes when its design cannot reach net zero carbon on site. London Plan 2021 policy SI 2 asks major development to be net zero-carbon, sets a minimum on-site improvement over the Building Regulations baseline, and then requires any shortfall to be met through a contribution to the borough's carbon offset fund or by offsetting elsewhere. The payment is not a penalty. It is the price of the residual tonnes your energy strategy has failed to design out.
Most applicants meet it late, at the section 106 stage, and discover the sum is larger than the contingency they set aside. The number is predictable from the moment the energy model is run.
Where the obligation comes from
Policy SI 2 of the London Plan 2021 works in stages. Major development must apply the "be lean, be clean, be green, be seen" energy hierarchy, achieve at least a 35 per cent reduction in regulated carbon emissions beyond the Part L baseline, and deliver part of that reduction through fabric and efficiency measures before any low-carbon or renewable technology is counted. Residential schemes are expected to find 10 per cent through energy efficiency and non-residential schemes 15 per cent.
Whatever regulated carbon remains after the on-site measures is the residual. That residual is what gets priced.
Boroughs apply the policy through their own local plan policies and their own published offset rates, so the mechanism is London-wide while the administration is local. Check the borough's adopted policy and its current offset price before you model anything, because a few boroughs set a rate above the figure the Greater London Authority recommends.
Working out the residual
The calculation is arithmetic once the energy assessment is complete. Take the regulated emissions of the proposed development as modelled under the applicable Part L methodology, subtract the emissions the scheme actually achieves after the hierarchy has been applied, and compare the result against a zero-carbon target. The gap, in tonnes of carbon dioxide per year, is the residual.
That annual figure is then multiplied by 30 to give a tonnage over the assumed 30-year accounting period, and the tonnage is multiplied by the price per tonne.
Three things routinely distort the number. The Part L baseline used matters, and a scheme modelled against an older edition will produce a different residual from one modelled against the current edition. Unregulated emissions sit outside the regulated figure, so cooking and small power do not enter the sum even though they are real. And phased schemes are often assessed plot by plot, which can shift the obligation between phases in a way the section 106 drafting needs to anticipate.
An energy statement is where all of this is set out, with the baseline, the stage-by-stage savings and the residual tonnage shown as a table the borough's energy officer can check line by line.
The price per tonne
The price is not in the London Plan itself. The Greater London Authority publishes energy assessment guidance that recommends a price per tonne for boroughs to apply, and that recommended figure has been revised as construction and carbon costs have moved. Boroughs then adopt it, or set their own, through local policy or a supplementary planning document.
Because the recommended rate changes, treat any figure you have seen in an older appraisal as out of date. Check the current GLA energy assessment guidance and the borough's own published rate at the point you are budgeting, and say in the energy statement which rate you have applied and on what date.
What the fund is for
The money goes into a ring-fenced borough carbon offset fund and must be spent on projects that reduce carbon emissions in that borough. In practice that means retrofit of council housing and public buildings, fabric improvements in schools, heat network connections, and energy advice or fuel poverty programmes.
Boroughs report on the fund, and those reports repay a read before you argue about the rate. They show what the borough has actually delivered per pound, which is a stronger basis for a conversation than an abstract complaint about the price. The borough's infrastructure funding statement is the usual place to find the figures, and the same borough documents that record levy spending record offset spending too. Where a site sits in a growth area the fund tends to be larger, which our note on opportunity areas touches on.
Securing the payment
The contribution is secured by a planning obligation under section 106 of the Town and Country Planning Act 1990. The drafting matters more than applicants expect, and the points to settle are these.
- The trigger. Payment is commonly tied to commencement or to implementation of a particular phase, and the earlier the trigger, the worse the cash-flow effect.
- Indexation. Most agreements index the sum from the date of the agreement to the date of payment, so confirm which index applies and from when.
- Recalculation. Some boroughs allow the final sum to be recalculated against the as-built position, which rewards a scheme that improves on its design-stage model.
- Phasing. Where plots come forward separately, each plot's residual and payment should be identified rather than apportioned from a single global figure.
- Review. A clause allowing review if the Building Regulations baseline changes mid-build is sensible on a long programme.
Illustrative example: a 60-unit scheme in an outer borough models a residual of 12 tonnes of carbon dioxide a year after fabric improvements and an air source heat pump strategy. Over the 30-year period that is 360 tonnes, and at whatever rate the borough has adopted the payment follows directly from that tonnage. This example is illustrative only, and the rate and the modelled residual on any real site will differ.
Monitoring under "be seen"
The fourth limb of the hierarchy is reporting. Policy SI 2 requires development to monitor and report actual energy use and carbon performance after completion, through the GLA's monitoring portal, for at least five years of operation. The obligation usually appears as both a planning condition and a section 106 covenant.
This is the limb most applicants ignore at design stage and then struggle with on site, because reporting needs metering strategy, submeter locations and a responsible party named in the agreement. Decide early who holds that duty after the developer has sold the units. Get the metering specified in the technical design rather than retrofitted.
Designing the payment down
Every tonne removed at design stage removes 30 tonnes from the obligation, which makes fabric work unusually good value in offset terms. The measures that move the number most are orientation and form factor, air-tightness and continuity of insulation, the heating and hot water strategy, and the realistic treatment of overheating so that cooling loads are not added back in later.
Heat network connection, where a network exists or is committed, often does more for the residual than any amount of roof-mounted generation on a constrained site. And a scheme that is pushing hard on carbon should look at embodied emissions in parallel through a whole life carbon assessment, because the two assessments share inputs and the borough will read them together.
What you should not do is treat the offset payment as the soft option. Boroughs have become less willing to accept a thin on-site case paired with a large cheque, and a design-led reduction is the stronger position at committee. Our note on optimising site capacity covers the same design-led logic applied to density.
This is general guidance, not legal advice. Check the position with your local planning authority or a qualified professional before relying on it.
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Frequently asked questions
Is a carbon offset payment the same as the Community Infrastructure Levy?
No. The levy is a charge per square metre set out in a borough's charging schedule and spent on infrastructure generally. A carbon offset payment is a planning obligation under section 106 that prices the residual regulated carbon your scheme does not design out, and it must be spent on carbon reduction projects in that borough.
Do minor developments in London pay a carbon offset contribution?
Policy SI 2 of the London Plan 2021 applies the net zero-carbon target to major development. Some boroughs extend an energy or carbon requirement to smaller schemes through their own local plan policy, so check the adopted borough policy rather than assuming the threshold. Below the threshold the expectation is usually a simpler energy statement.
Can the payment be reduced if the building performs better than modelled?
Only if the section 106 agreement allows a recalculation against the as-built or post-completion position. Many agreements fix the sum at the design stage figure. If you expect to outperform the model, ask for a recalculation mechanism when the heads of terms are being negotiated rather than after completion.
Who is responsible for the five years of post-occupancy reporting?
Whoever the section 106 agreement names. On build-to-sell schemes that duty often lands with a management company or a freeholder after the developer has exited, so identify the party and the metering arrangements before the agreement is signed. The reporting is submitted through the Greater London Authority's monitoring platform.
Does connecting to a heat network remove the offset payment entirely?
Rarely. A network connection can cut the residual sharply, particularly where the network itself is low carbon, but the residual is measured against a zero-carbon target rather than against a notional building. Most connected schemes still carry some payment, and the saving depends on the carbon factor the network can evidence.
Sources and further reading
This article is general guidance about the planning system in England and, where stated, the rest of the UK. It is not legal or professional advice. Check your local planning authority’s validation requirements and take professional advice for your specific site.