Column: Carbon credits - ‘low hanging fruit’ no more?

Bill Eggertson

Up until now, renewables projects have been viewed as an expensive way for companies to generate carbon credits. But according to one recent report, the era of cheaper projects may be coming to an end.

Some things can evolve very quickly in the markets for renewable energies.

The objective of this column is to spark discussion around the role for renewables in the carbon market. As the world scrambles towards a low-carbon future, every silver bullet is being considered, from conservation to carbon capture, from fission to fusion.

One cost-effective solution has been the use of carbon credits in emissions trading, where high-emitting entities purchase environmental attributes from low-emitting developments. Since anthropogenic global warming can be addressed by mitigation activities anywhere around the world, this carbon market relies on the least-cost technologies to be installed for the most appropriate applications in the most cost-effective sites.

There to date, most of the trading in carbon offsets has come from the destruction of nitrous oxides and hydrofluorocarbon refrigerants from industrial operations.

The environmental damage from these waste gases is much higher than the other greenhouse gases covered under the Kyoto Protocol, such as methane and carbon dioxide (CO2), and their trading value has been significant because the cost of stopping their release into the atmosphere has been lower than other options.

One of my recent columns bemoaned the fact that renewable energy technologies often have been viewed as a “premium cost” by companies involved in Kyoto-related mitigation schemes, although wind is becoming more mainstream because it can also tap into the consumer demand encouraged by renewable portfolio standards. For other technologies, the cost to install a centralised green power plant is often too high in comparison.

No sooner did I paint this bad news scenario than New Energy Finance releases a prediction that easy carbon credits are coming to an end. The UK-based research group says “many of the low hanging fruit of cheap carbon credits in the developing world have now been harvested”, and predeicts that future opportunities to reduce emissions will require more effort, thereby encouraging market investments in renewables and energy efficiency.

The cost to remove the equivalent of one tonne of CO2 by using destroying HFC-23 and N2O is €1, while comparable costs from renewable energy and efficiency projects can range from €5-€15, the company notes. Projects using the former techniques account for 72% of the emission credits issued, down slightly from the 75% level of last year. By 2010, New Energy Finance predicts that this level will drop to 30%, and decrease to 24% by 2012 when the first phase of the Kyoto Protocol expires.

The report echoes this column's contention that projects which destroy HFC and N2O gases do not offer long-term benefits of sustainability, and it also adds another criticism. That the profits from these credits can generate more profit than the industrial facility itself, “thereby encouraging further expansion in output and emissions.”

Project developers on the other hand claim the reduction in emissions would not have been possible without the credit, and deny that any new facilities have been built to take advantage of the carbon credits.

“The fear has been that the lucrative nature of HFC-23 and N2O projects diverts investment into developing these as carbon offset projects rather than more ambitious ventures, such as renewables,” explains Maria Carvalho, an analyst with New Carbon Finance. “What critics fail to recognise is that reducing emissions from HFC and N2O projects can never be a long term solution to reducing global emissions — these projects are merely a precursor to a broader and deeper global carbon market.”

The dominance of industrial gas projects will soon diminish, the report explains, because most of the HFC-23 and N2O projects which are eligible under Kyoto's Clean Development Mechanism have already been developed. The United Nations process has imposed strict criteria to prevent new industrial facilities which emit these gases from being eligible for future credits and, although China accounts for most of the emissions from developing countries (80% of HFC and 60% of N2O emissions, the report adds), similar projects in other countries are expected to be rare.

Renewables set to gain

The result is that renewables and efficiency will become relatively more competitive in the carbon market, and New Carbon Finance predicts that the share for renewable energy offset projects will increase from 17% this year to 22% in 2012, while energy efficiency projects will increase from 5% now to 10% in 2012.

Other recent reports note that China and India are expanding their renewable energy installations at an unprecedented pace, and the NCF report expects these developing economies to produce 38% and 17% (respectively) of the new credits, with notable shares from Brazil, South Korea and Mexico.

The shift to higher credits from renewable energy and energy efficiency projects will require sustained flows of capital funding, to ensure that a sufficient number of projects are implemented for the 2012 compliance deadline, and New Carbon Finance estimates that €9 billion needs to be invested within the next four years to ensure the projects reduce emissions to the Kyoto targets.

The report includes wind, solar, small hydro and biomass in its definition of renewable energy, as well as the capture of methane from landfill gas.

This shift from industrial gas capture to renewables has been a relatively rapid one, and the NCF report shows that it is becoming a transition that will start to pick up speed very rapidly. And the report examines only the credits generated under the CDM; the market for carbon offsets in specific countries (to meet RPS minima or emission trading schemes) is another potential source of revenue and recognition for project developers.

This column has encouraged the renewable energy sector to become more aware of the opportunities available in the carbon market, which also come with some risks and challenges.

Regulators in many countries are trying to build and maintain consumer confidence in offsets, by ensuring that credits go to credible projects but, as with many other not-completely-understood concepts, unscrupulous developers can tarnish the market and the business opportunity it offers…if the renewable energy sector is not well-versed in the nuances of the implementation.

We'll look in more detail at how the developers in renewable energy projects around the world can help to ensure an orderly and credible rollover, which will recognise all the direct and indirect benefits of our technologies.

About the author
Bill Eggertson is a freelance correspondent for renewable energy focus, and has written on a variety of renewable energy topics for the magazine — including “Green Heat”. He is based in Canada.


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