The Road to Carbon Zero – Offsets

The Road to Carbon Zero – Offsets

Date
July 16, 2020
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Whilst most businesses have the desire to go green, very few have a clear path and strategy to achieve that goal. There is no straightforward answer to this problem as what works for one business may not be suitable for another. The path to carbon zero is complex and uncertain but here at Hartree Solutions, our goal is to independently offer you clear, transparent and ethically sound solutions to achieve your target.

In an ideal world, your business would be located next to an unconstrained electricity connection, low-grade flat land with high annual sun hours, high wind speeds, no national or local planning constraints, visually not overlooked and not in a greenbelt zone. If you are lucky enough to be able to tick all these boxes and have access to unlimited capital over the long term, then the road to carbon zero is a simple one! For everyone else, the path is unclear at best.

At Hartree Solutions we have the capital, team and skillsets to offer you energy solutions that are achievable today that will enable you to meet your long-term carbon reduction targets.

In this article, we offer you an in-depth overview of carbon offsets. Not only are the savings they generate real and immediate, they are also permanent and do not lead to additional emissions elsewhere.

If you’d like to learn more about Hartree’s carbon offset solutions or have any questions regarding this article, please contact us.

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What are carbon offsets?

Carbon offsets are defined as “a unit of CO2e that is reduced, avoided, or sequestered to compensate for emissions occurring elsewhere”.

Offsetting compensates for the emissions that polluters cannot avoid through internal measures by supporting projects that reduce emissions somewhere else.

Offsets are deployed in both compliance and voluntary markets. In the former, entities buy carbon offsets against a portion of their compliance obligation which sets out the total carbon dioxide they are permitted to emit. In the latter, entities can purchase carbon offsets to mitigate their greenhouse gas emissions (GHG) outside of compliance markets.

Balancing Carbon Emissions and Carbon Offsets

For a carbon offset to be issued, proposed projects must meet the following condition precedents:

  1. Baselines are the benchmark level of emissions that a project needs to outperform in order to issue carbon credits.
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  1. Quantification of GHG emissions represents an accurate and precise measurement of GHG reductions and removals.
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  1. Additionality relates to the requirement that emission reductions would not have happened without the incentive of carbon credits.
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  1. Permanence is defined by the need for an emission reduction to represent a long-term mitigation benefit.
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  1. Leakage reflects the requirement for the project to not increase emissions outside of its boundaries (due to a displaced activity).
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  1. Independent verification of emission reductions proposed for certification as carbon offsets must be monitored, verified and approved by an authorised independent third-party.
Standards and certification for carbon projects
Examples of standards and certification for projects[1]

 

Global heat map of voluntary carbon offset projects
Locations of Voluntary Carbon Offset Projects[2]

How carbon offsets are created and certified

All projects supplied by Hartree must be certified and validated by recognised carbon standards such as the Verified Carbon Standard or Gold Standard.  These standards establish a rigorous set of rules and requirements, as well as specific emission reduction quantification methodologies that set out specific parameters for measuring, accounting and monitoring impacts.

All projects supported by Hartree achieve certification by following the process below. The steps ensure that the projects are of high quality and deliver high impact environmental and social results and that the emission reductions and removals they generate are real, permanent, and additional.

Registering and certifying a project under a specific standard can take up to 2 years and is overseen by independent third-party validation and verification bodies (VVBs).

Learn more about the certification process.

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The role of offsets as a transition tool

A Marginal Abatement Cost Curve (MACC) is a tool for presenting carbon emissions abatement options relative to a baseline (typically a business-as-usual pathway). It permits an easy to read visualisation of various mitigation options or measures organised by a single, understandable metric: the economic cost of emissions abatement.

The graph below represents the MACC in relation to the EU Emissions Trading Scheme. As can be seen from the chart, the more CO2 needs to be reduced, the more expensive it becomes to do so. A higher CO2 reduction target or a reduction in oversupply will, therefore, require higher CO2 prices to achieve the necessary reductions.

Graph showing levels of decarbonisation in line with the marginal cost of reducing carbon emissions
The X-axis indicates the share of decarbonisation as a percentage of total economy-wide carbon emissions and the Y-axis estimates the marginal cost of reducing the carbon emissions (USD/MtCO2e). The abatement measures are ordered by lowest to highest cost options[3]
Furthermore, according to the graph below on the investments required to reduce emissions per sector on a global scale, most industrial abatement investments that reduce emissions are above current benchmark carbon market prices making offsets extremely competitive. Offsets find themselves at the lower end of the cost spectrum and provide emitters with the option of maximising decarbonisation cost-effectively.

Graph of carbon offset costs relating to technology
Marginal abatement costs by technology and sector[4]
Moreover, it is estimated that around 25% of global GHG emissions are non-abatable[5], raising the need for technological innovation, which can require a lot of time and investments. Below are some examples of industries with non-abatable emissions that will need to look to alternative methods of carbon reduction such as offsets.

Limitations non-abatable emissions by industry

It is expected that as companies will gradually phase into lower-carbon technologies, the above sectors will rely on carbon offsets in the short to medium term, via voluntary markets or expansion of existing compliance markets.

Carbon offsets are not meant to substitute technological advancements in areas such as carbon capture, hydrogen or energy storage that can reduce carbon emissions in the long-term; they are also not intended to support emitters achieving their science-based targets (the climate targets that meet the goals of the Paris Agreement of limiting global warming to well below 2 degrees – explained in more detail below). Carbon offsets though are a vital, economic tool in the transition and decarbonisation of hard-to-abate sectors. They play a key role in sectors with high carbon intensities and a low transition pace given current commercially viable technologies.

Project types eligible to generate credits

Carbon credits can be produced from multiple approved project types:

  1. Agriculture, forestry and other land use (AFOLU)
  2. Energy (renewable/non-renewable)
  3. Energy distribution
  4. Energy demand
  5. Manufacturing industries (increase energy efficiency in production)
  6. Chemical industry
  7. Construction
  8. Transport
  9. Mining/mineral production
  10. Fugitive emissions – from fuels (solid, oil and gas)
  11. Solvents use
  12. Waste handling and disposal
  13. Livestock and manure management

Hartree believes that credits generated from AFOLU projects are the offset of choice for polluters globally. Credits generated through these projects provide emitters with the lowest cost, highest impact solution to decarbonising their business operations outside of compliance carbon markets.

These projects protect at-risk environments, biodiversity, create jobs for local communities, and ensure that the emission reductions are real.

Institutions not currently governed by compliance carbon markets are turning to forestry credits as their primary solution to offsetting. They ensure the offsetting of carbon emissions by protecting native forests against deforestation and degradation.

Committing to act against climate change

2019 was the year of climate change, with consumers all over the world taking a more active role and pushing for environmental and social action. Studies have shown that consumers are prepared to change their habits, reduce their environmental impact, and put pressure on companies to adopt a more socially and environmentally responsible behaviour. This has also meant that responsible investment has been demanded by a greater number of people and at a larger scale than ever before. Investors have been increasingly applying non-financial factors into their investment analysis and more often than not supply chains are feeling end-user pressure to demonstrate their sustainability policy.

There are several initiatives in place that require participating companies to commit to a path towards decarbonisation.

  1. The Science Based Targets initiative
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Graph detailing progress of SBTI membership
Progress of SBTI membership[6]
  1. The RE 100 Initiative
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Graph detailing progress of RE100 membership
Progress of RE100 membership[7]
  1. Business Ambition for 1.5°C Campaign
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  1. Net Zero Commitment
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What are the differences between carbon offsets and renewable energy credits?

As can be seen from the table below, the major differences between offsets and renewable energy credits (RECs) lie in their purpose and element of additionality.

Table comparing carbon offsets with renewable energy credits and guarantees of origin

Firstly, given the nature of the projects that generate carbon offsets, especially those in the AFOLU category, offsets can generate co-benefits that align with other aspects of sustainable development, such as promoting gender equality, supporting local communities, job creation, water supply management and biodiversity protection etc. For example, the local neighbouring communities of a project area can re-invest the funds generated from the sale of offsets into the development of schools and medical centres, water and sanitation infrastructures, or use them to organise training around sustainable agriculture. These investments will increase the livelihoods and independence of the local communities, which will ultimately benefit the project in the long-term.

Several standards either incorporate such co-benefits in their requirements or offer add-on certifications that measure them. Most of the project developers and standards have begun matching these co-benefits metrics with the United Nations’ Sustainable Development Goals (SDGs) which range from ending hunger to providing access to energy and conserving marine life.

The UN Sustainable Development Goals

Looking specifically at the goals below, by reducing carbon emissions through the purchase of offsets, companies are working towards achieving SDGs 9, 11 and 13. Moreover, funds raised from offsets can support project developers to implement, roll out and invest in clean energy projects from which local communities benefit too, essentially supporting SDG 1,2,3,5 and 6. Project developers with projects generating offsets publish all their third party monitoring and verification reports highlighting achieved co-benefits on registry databases such as VERRA.

Visual of the UN Global Goal's objectives

With RECs, on the other hand, purchasers are pairing emissions reductions with renewable, emissions-free electricity generation with electricity usage and its associated emissions profile. Renewable projects generating RECs are more limited in scope and their success relies solely on their ability to generate electricity which in turn displaces fossil fuel generation.

Offsets face strict rules for certification, including the requirement that the emission reduction credit is real, permanent, and most importantly, additional to a business-as-usual scenario. This “additionality” requirement is central to ensuring that the ton used as an offset is fully equivalent to the ton emitted in its place. Tests include legal/regulatory, financial, barriers, common practice and performance tests. The combination of tests that is best suited to demonstrate additionality depends on the type of the project.

In contrast, RECs are not typically held to additionality standards, and therefore can be supplied from renewable resources that are business as usual, or only partially additional to a ‘business as usual’ scenario. As renewable energy becomes cheaper than traditional sources of electricity, installing renewables and buying RECs and GOs will no longer pass the additionality test for corporates, developers and institutions looking to achieve net carbon neutrality.

Examples of companies that have already committed to using offsets over the last few years are listed below. Contact Hartree Solutions to add your company to this list.

List of company logos committed to reducing carbon output

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Footnotes

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written by
Ariel Perez

More market insights

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The ever-changing landscape of the UK energy market

What started out a couple of months ago as a surge in prices amid low…

What started out a couple of months ago as a surge in prices amid low wind and concerns about storage levels has fast accelerated into a full-blown crisis with new records being set on an almost daily basis, resulting in about 2 million households seeing their energy supplier go bust and the UK government forced to step in and help out energy intensive businesses.

At the start of October, the UK gas price passed 400p per therm during extremely volatile trading, with intraday gains up to 39%. Although prices have dropped since the early October pinnacle, the UK’s fundamental outlook hasn’t changed. The supply/demand balance for this winter is still tight and prices are likely to remain elevated for a number of months yet.

Historic and Forward UK Gas prices
Historic and Forward UK Gas prices as per ICE forward Curve 22.10.21

So far, the rise in wholesale prices have forced 15 suppliers of gas and electricity to UK homes go out of business with likely further casualties yet. The more recent rise of storage levels to around 77% full is, however, providing a glimmer of hope to gas balances.

North West European Gas storage levels graph
Graph showing North West European Gas storage levels

While the energy price cap, which limits the rates a supplier can charge a domestic customer for their default tariffs, is protecting households, there is no such mechanism in place for businesses who have to absorb ever-higher gas and power prices into their production and manufacturing costs. For the most energy-intensive companies, this has forced them to consider whether they can continue operating in the current environment.

A prime example was fertilizer manufacturer CF Fertilisers shutting sites in September before the government agreed an exceptional 3-week arrangement with the company that allowed it to continue operating. With CF Fertilisers also the UK’s largest producer of carbon dioxide, the government went a step further and forced the CO2 industry to agree a price for CF Fertilisers’ supplies while global gas prices remain high.

This government intervention has led to other energy intensive industries, such as steel producers and paper mills, similarly calling for help to see them through this period of elevated prices.

These price surges and extremely volatility in gas and electricity prices highlight the value Hartree Solutions can offer to energy intensive businesses by developing localised generating assets such as solar, combined heat and power (CHP) or battery storage and then optimising the asset to ensure it provides security of supply and protects businesses from these wild price swings.

This gas crisis is set against the backdrop of the UK’s ambitious target to eliminate fossil fuels from electricity generation by 2035, which Prime Minister Boris Johnson announced at the start of October. With gas and coal the source of more than 36% of the UK’s electricity in 2020, the country needs to set clear policy to meet these goals. For example, in just a few months’ time the government-backed Capacity Mechanism, designed to ensure the UK’s security of supply, will likely contract new gas generators that will be providing power well past this 2035 target date.

The National Grid’s recently released Winter Outlook states that “there is sufficient generation availability and interconnector imports to meet demand” while warning the network provider may well have to issue Electricity Margin Notices (EMNs), particularly in December through to mid-January when tight margins are likely. Last winter, the Grid issued six EMNs, the first time it has had to resort to these measures since 2016, further illustrating the challenges the country faces as it transitions towards a renewable future.

One unwitting side effect of the extreme gas prices is that coal generation has become profitable again. With emitters needing to buy more carbon allowances to cover this unexpected coal usage, the cost of these permits has risen sharply too increasing the likelihood of the government being forced to involve itself in this market too.

The UK created its own Emissions Trading Scheme earlier this year, after leaving the EU ETS as a result of Brexit, if the carbon price remains high for another two months the Cost Containment Mechanism (CCM) will be triggered in December. The mechanism enables the UK ETS Authority to intervene if the average allowance price is double the average price for 3 consecutive months. The average carbon price in September was £58.36/ton, more than 10% above the threshold needed to trigger the CCM. If the average price stays above £52.88/metric ton in October and November, then the authority will consider what action to take.

With so many different strands to the energy markets and the potential for government intervention across a broad range of factors, Hartree Solutions’ 20+ years expertise in tracking and understanding energy markets along with advanced asset optimisation can help support businesses through these unprecedented, headline-making times.

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Environmental technology concept. Sustainable development goals

Understanding REGOs: Do you know where your renewable energy is coming from?

One of the key drivers for the UK to reach net-zero is the continued development…

One of the key drivers for the UK to reach net-zero is the continued development of renewable energy projects to supply clean power to the grid and reduce carbon intensity. These projects can be powered by different energy solutions, including wind, wave, marine, hydro, biomass, or solar.

The recent report by the Intergovernmental Panel on Climate Change (IPCC) highlighted the urgent need for the world to transition away from fossil fuels to renewable energy. As this focus on reaching net-zero intensifies, particularly in the run-up to the key UN climate conference, COP26, we look at the role of the Renewable Energy Guarantees of Origin scheme (REGOs). This government scheme, which was established to support the energy transition away from fossil fuels, provides transparency about the proportion of electricity suppliers source from renewable generation.

The REGO scheme is part of the EU’s Renewable Energy Directive, which requires all EU Member States to report what proportion of electricity consumption is from renewable sources. Following Brexit, the REGO scheme is under review in the UK. However, it appears it is the Government’s intention for the scheme to continue. The UK is now in a position where it can review this scheme and decide on a future approach that could expedite the journey to net-zero whilst improving transparency.

Currently, the scheme works by granting one REGO certificate to a renewable generator for every megawatt-hour (MWh) of renewable electricity produced. Energy suppliers must purchase and “retire” REGO certificates as part of their Fuel Mix Disclosure Regulatory requirements, therefore evidencing to end consumers the proportion of power produced from various fuels (renewables, coal, gas, nuclear, etc.).

REGOs can be sold separately to the power with which they are associated. Suppliers often purchase these REGOs without the associated power generation to ‘green’ their fossil fuel-based supply. This means the certificates don’t necessarily support or incentivise the development of new renewable projects, or “additional” projects, often referred to as additionality.

Additionality is becoming increasingly important to customers. It enables them to clearly demonstrate that they are actively involved with a new renewable project, rather than just buying REGOs from an existing project. This is often achieved through a Power Purchase Agreement (PPA).

A customer will guarantee to purchase the power at an agreed price for an agreed length of time and receive the REGOs attached to that power through a PPA. This provides a level of certainty to the developer/investor of the renewable project to build it. The customer can claim the REGOs attached to this specific project and state that they are “additional REGOs”. It also has the benefit that a proportion of the customers’ electricity consumption will be fixed for the long term, which is usually more cost-effective than current energy market prices and also protects against rising electricity costs.

If an organisation is making a true commitment to zero carbon emissions like “Microsoft’s 100/100/0 vision and commitment for a decarbonized grid”, then REGOs are likely to play a smaller part. To truly operate with carbon neutrality 24/7, renewable technologies will need to be paired with energy storage and state-of-the-art energy optimisation to match supply and demand in real-time.

At Hartree Solutions, we can guide you through a net-zero strategy, signposting the best technologies to reduce your carbon from day one. We also have several options to help you access “additional” REGOs with both on-site and off-site solar. Additionally, for hard to abate emissions we can provide verified carbon offsets to set you on the right path from day one as part of your journey to net zero.

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