Net Zero, Carbon neutrality, Carbon Offsetting
The term “net zero” describes a scenario in which compensation and removal of GHGs from the atmosphere equals the amount of anthropogenic GHGs emitted within a certain time frame.
Many organisations follow voluntary schemes and guidelines in order to define the scope, timing, and approach to achieve their net zero pledges, and the progress accomplished by these organisations along their decarbonisation pathway can be evaluated by different frameworks like Carbon Disclosure Project or Transition Pathway Initiative.
In order to reach the balance between carbon dioxide releases and removals from the atmosphere the organisations are forced to activate a strategy of decarbonisation that includes a process called “carbon offsetting”.
Carbon Offset Credits
Carbon offsetting is the process of compensating for an actor’s GHG emissions through activities that provide an equivalent GHG reduction or removal elsewhere. Offsetting should be used to mitigate residual emissions that organisations are not capable to avoid with current technologies in a cost-effective way.
Usually, offsetting is organised through an exchange system or a market for carbon offset credits.
A carbon offset credit represents the reduction of one metric tonne of equivalent carbon dioxide (CO2eq) emissions(*) that have been certified by an independent certification body or a government.
Carbon credits are transferred from the entity that achieved the removals or reductions of GHG emissions to another entity that retires these credits to offset or compensate for their own emissions. Once the emission reduction is claimed, the carbon credit is retired and is no longer tradeable.
(*) Equivalent carbon dioxide is a unit of measurement adopted to compare the effects that different GHGs have on the climate according to their global warming potential.
Carbon Markets
Carbon credits are produced by carbon offset projects, which are composed of a wide range of activities aimed at reducing GHG emissions or increasing the absorption. These projects may involve the development of renewable energy, carbon sequestration, and reforestation actions.
Carbon markets exist under compliance and voluntary schemes: the compliance market is regulated by mandatory international, national, or regional carbon reduction regimes, while voluntary markets are neither enforced nor legally required. Carbon offset credits are present in both market mechanisms, but their price and application vary according to the market under which they are traded.
Carbon pricing mechanisms can be classified into two different groups: direct and indirect carbon pricing instruments. Direct carbon pricing mechanisms set a price incentive that is directly proportional to the GHG emissions associated with a product or released during a specific activity. The main direct pricing mechanisms are carbon taxes and Emission Trading Systems (ETSs), which are generally included in the compliance market.
High Quality Carbon Offset
A network of standards and certification bodies, project creators, and verifiers exists to ensure that only “real, measurable, and additional” emission reductions are recognized in voluntary and compliance markets.
In order to comply with these minimum quality thresholds, a number of factors are relevant, including monitoring data quality and accuracy, credibility of the crediting baseline, accuracy of impact quantification, use of conservative and credible methods, and reliability of objective verifications.
The “Carbon Offset Guide”, an initiative of the Stockholm Environment Institute and the Greenhouse Gas Management Institute, specifies five criteria that offsets should meet to be considered of high quality.
The carbon offset credits must be additional, not overestimated, permanent, not claimed by another entity, not associated with significant social or environmental harms.
- Additionality
GHG reductions are considered additional if they would not have occurred in the absence of an offset credit market. A solar plant in a jurisdiction that already has a renewable portfolio standard or other renewable energy obligation, for example, would not be eligible for carbon offset credits under a properly operated scheme. According to the Taskforce on Scaling the Voluntary Carbon Market, initiatives that are additional provide larger GHG reductions than the business-as-usual scenario and must go above and beyond regulatory standards. - Avoiding overestimation
Offset credits must be correctly linked to projects and initiatives that produce and deliver them. If a GHG reduction project reports reducing more than the project actually does, the delta between the two would not actually contribute in mitigating climate change. Overestimation can occur in several ways including overestimation of a project baseline emissions (GHG “costs” directly related to building/implementing a given project), underestimation of actual emission, failing to account for an activity’s indirect effects on greenhouse gas emissions at other sources (e.g. a forest preservation initiative that simply shifts the production of timber to other areas). - Permanence
Offset credits must be linked to permanent emission reductions (e.g. nature-based initiatives like forestry may store carbon for several decades, the risk of reversal must be considered and managed through safeguards). - Exclusive claim to GHG reductions
Double counting can be caused by double issuance (more than one offset credit is issued for a single GHG reduction), by double use (when two entities claim the same offset credit for their emission reduction), or by double claiming (when an offset credit is issued to a project but is also used to count towards the emission reduction targets of another entity). - No substantial social or environmental harms associated
A project should not significantly contribute to social or environmental problems, it must comply with all applicable laws in the area in which it is located and avoid unexpected impacts that are not related to GHG emissions.
Carbon Offset Programs
Carbon offset programs, run by NGOs, international bodies, or regulatory entities, aim at setting standards and ensuring the quality of carbon offsets. Voluntary carbon offset programs such as Gold Standard or Climate Action Reserve have emerged as leadingorganisations in guaranteeing offset purchasers the quality of the carbon credits acquired.
Offset programs identify and implement initiatives that benefit society more cost-effectively than would be possible with other types of policy tools. They specify eligibility criteria and norms for creating and conducting carbon offset projects, as well as guidelines for their monitoring, reporting, validation, and accreditation.
Throughout the design, validation and verification process of an offset project, carbon offset programs sometimes use the standard ISO 14064 “Greenhouse gases” which is divided into three parts: specification for the quantification, monitoring and reporting of organization emissions and removals.
Carbon offset prices in the voluntary carbon market
Carbon offsetting by procurement of renewable electricity
- The electricity must be produced from non-fossil renewable sources, e.g. wind power, solar energy, hydropower, geo-, hydro- and aerothermal, biomass, and less conventional renewable sources, such as landfill gas, ocean energy, and biogas and gas from sewage treatment plants.
- The energy attributes of renewable electricity are exclusively owned and claimed by acquiring Energy Attribute Certificates (EACs), e.g. Guarantees of Origin (GOs) in the EU.
- The attributes of renewable electricity can be achieved by closing a Power Purchase Agreement (PPA) that derives in the construction of a new power facility that would not have been constructed without the organisation’s financial support.
- Energy suppliers that are renewable sourced can offer Green Tariffs to their customers, which state that a percentage or all of the energy acquired by a customer is powered by renewable sources.
- Carbon offsetting by procurement of renewable electricity should not be used as a substitute for direct business emissions reduction.
Energy Attribute Certificates (EACs)
EACs are global instruments that guarantee that a certain quantity of electricity, typically 1 MWh, is generated from renewable sources. These certificates are a particular kind of tradable environmental commodity that is in line with the GHG Protocol’s Guidance. EACs can be purchased bundled with electricity or separately from the underlying power, which are referred to as bundled and unbundled EACs, respectively. The most common EAC systems are GOs, RECs and i-RECs.
The mechanism used by the European Union is a voluntary system called Guarantee of Origin (GO), which is an electronic document designed solely to prove to a final customer that a specific share or amount of energy was generated from renewable sources; plants with Guarantee of Origin (certified IGO plants) are able to issue a GO certificate for every MWh of renewable energy they input into the grid, pursuant to Directive 2009/28/EC. RECs are the primary tool used in the United States and Canada, and they exist under compliance and voluntary schemes. In other parts of the world where green energy certification systems do not yet exist, International REC Standards (i-RECs) are adopted to allow the traceability of clean energy even in nations without their own certification systems.
Power Purchase Agreement (PPA)
PPA is a contract between renewable energy generators and customers that sets a quantity and a price for the purchase of renewable energy over a prolonged period.
The purchaser enters into an agreement directly with a manufacturer of renewable electricity, which includes the EACs for retirement. In addition to purchasing renewable energy, PPAs give the client assurance and transparency on the wholesale pricing component of the costs of the energy delivered; it imposes a cost on the purchase of power, but currently, there is no standard methodology for quantifying its emissions reduction impact, so estimating the price per metric tonne of CO2 is not straightforward.
PPAs can be classified asvirtual (or financial) PPAs and physical (or back-to-back) PPAs.
Virtual PPAs are most commonly used, where the electricity buyer is generally not within the same geographical area as the renewable energy project, so that the producer injects the energy into the grid, and the buyer purchases electricity from the grid at a predetermined price. Instead, when the renewable power plant is located close to the buyer, physical PPAs can be established.
Green Tariffs
Energy suppliers that are renewable sourced can offer green tariffs to their customers, which state that a percentage or all of the energy acquired by a customer is powered by renewable sources.
High-quality green tariffs are provided by suppliers that only offer these types of tariffs and which either generate renewable electricity or acquire bundled EACs through PPAs.
Green tariffs provided by suppliers that are not 100% renewable sourced are considered as being of low quality. This is because these suppliers continue to drive investments in fossil fuels and offer renewable energy backed by unbundled EACs.
Before selecting the appropriate solution, it should be investigated which is the current situation and availability of PPAs and green tariffs in the location of the acquirer, because there are not many electricity suppliers that currently can prove that the electricity is produced by non-fossil renewable sources, that they have exclusive ownership of this electricity, and that the generation of renewable energy power plants would not have been constructed without the financial support of the contracting organization.
Carbon offsetting by purchasing of offset credits
There is a large portfolio of carbon offset projects driving emissions reductions or carbon removals from the atmosphere.
Even though carbon offset programs and standards improve the reliability of carbon credits, each type of project is associated with a certain level of quality risk related to additionality, monitoring methods, permanence, and leakage control. Therefore, it is recommended to choose projects associated with lower risk, and to purchase offsets through a reliable retailer or engage a consultant’s services.
In the paper “The Oxford principles for net zero aligned carbon offsetting”(*) offset projects are classified in five different types: (I) avoided emissions, or emissions reduction, without storage; (II) emissions reduction with short-lived storage; (III) emissions reduction with long-lived storage; (IV) carbon removal with short-lived storage; (IV)carbon removal with long-lived storage.
(*) Allen, M., Axelsson, K., Caldecott, B., Hale, T., Hepburn, C., Hickey, C. and Smith, S. “The Oxford principles for net zero aligned carbon offsetting”. Smith School of Enterprise and the Environment. University of Oxford. September 2020
Among the cited carbon offset projects are included renewable energy investments, where the buyer would be directly investing as a project developer in a new renewable energy initiative, owning part of it and incorporating ownership clauses in the contract for the resultant EACs and carbon offset credits. Despite high administration and procedural costs, this option allows the project developer to acquire emission reduction certificates at lower prices per metric tonne due to its higher risk (this can pose a valuable solution for corporations needing large numbers of emission reduction certificates over the long run). With this approach, worries emerge mainly because there are currently no organisations that certify the methodologies applied for calculating the amount of GHG emissions avoided or reduced as a result of the project, contrary to carbon offset credits.
Other projects that can be mentioned are N2O abatement; methane destruction/capture and utilization of energy; direct air capture and carbon storage; bioenergy with carbon capture and storage; biochar; mineralization; enhanced weathering; carbon mineralization in concrete.
A special place among the offset projects is occupied by Nature Climate Solutions which consistsofnatural loss and nature-based sequestration.
Projects aimed at improving agricultural practices and avoiding deforestation and other damages to ecosystems are strategies that reduce emissions with short-lived storage (offset projects type II). Projects of this type have high additionality and permanence risks, but also provide numerous co-benefits, such as enhancing biodiversity and land productivity, decreasing runoff and recharging aquifers through the infiltration of water, as well as improving the livelihood of local people.
Activities of afforestation and reforestation, enhancement of carbon stored in soils, and restoration of natural ecosystems are considered carbon removal strategies with short-lived storage (offset projects type IV). These projects absorb carbon directly from the environment but have also risks of reversal and permanence.
While the purchase of avoidance or removal offset credits is considered as a crucial instrument for enhancing sustainability and accelerating decarbonisation at the global level, the effectiveness and reliability of this approach are still controversial.
There is a high price variability, which depends on the carbon offset programme, quality, type of offset, and availability.
In order to make a credible climate commitment, low-quality offsets mustbe avoided and a long-term decarbonisation strategies should be pursued.
Due to the high uncertainty of carbon offset prices and availability, reducing the operational energy emissions to the maximum possible by renewable energy remains a priority. It allows for better management and future projection of electricity and offsetting costs.
Services provided by GET
The decarbonisation strategy is a transversal tool to sustainability certifications, assessing carbon risk factors and opportunities associated with projects.
It proposes a comprehensive analysis, evaluating both mandatory and voluntary criteria in line with local, national and global regulatory frameworks.
A Decarbonisation strategy provides guidance on:
- CO2 accounting for status assessment report
- Decision making matrix based on “investment-result ratio” approach
- Carbon footprint and Net Zero balance report
- Guideline for carbon strategy implementation and CO2 reporting
Get in touch: Talk to Teodoro for more information about Decarbonisation and Carbon offsetting
Teodoro Maiorano – Head of Energy and Decarbonisation
teodoro.maiorano@get-consulting.it
