This column is designed to raise awareness among the renewable energy sector, of the challenges and opportunities in the growing international trade of emission credits. This 'carbon market' allows high emitters which cannot reduce their own GHG emissions, to purchase environmental attributes from facilities elsewhere in the world.
The fundamental objective of this is to reduce the global impact of emissions, regardless of locale.
The concept is predicated on the belief that a tonne of carbon not released in one part of the world, has the same benefit to mitigation as a tonne of carbon not released in any other region.
Despite criticism that the availability of such credits is a licence that lets companies continue to pollute the world, the practice is recognised by most jurisdictions as an effective and necessary means to reduce emissions, providing the revenue that is generated from the sale of offsets is applied to the development of low-carbon options, such as renewable energy facilities.
Although the market is estimated at US$60 billion and growing exponentially, the world is still in the relative early stages of developing a carbon market, and many facilities which install emerging renewable energy technologies – such as wind turbines and solar PV – are expected to be at a disadvantage when other sources of verifiable emission reductions can be obtained at a lower price. For instance, many tree planting operations and methane capture can mitigate emissions at less cost than a windfarm or solar facility (this is sometimes referred to as the so-called “low hanging fruit” scenario).
There are two carbon markets which exist:
- Mandatory/certified emissions reductions (CERs), which are quantified under programs such as the Clean Development Mechanism – where project eligibility and verification are tightly scrutinised under the provisions of the Kyoto Protocol;
- Voluntary offset market, where anyone can claim to be a seller of offset credits.
While the CER market is well documented, with certificates traded on the growing number of emission trading exchanges (led by the European Union Emissions Trading Scheme – ETS – which is already into its second phase of operation) the VER market is still fairly fluid.
There is a trend towards the adoption of standards, with the Gold Standard being endorsed by a number of environmental groups, but even under such quality control, consumers must still exercise caveat emptor (buyer beware). Although that standard does not allow tree planting in its portfolio – and insists that eligible projects provide the additionality which demonstrates that they are reducing emissions that otherwise would not have been achieved – there remains room for marketplace confusion.
I recently calculated the cost to fly across Canada from five sellers of offset credits listed under the Gold Standard, and found that they all included the same type of project (many favour new installations of emerging renewable energy technologies) and all charged close to the same price (US$40 per tonne). However, the emissions for the flights ranged from 800 kg to 1,600 kg for a basic flight, or up to 2,600 kg for a high altitude flight (experts say radiative forcing for an aeroplane in the stratosphere has a higher impact on global warming, than a plane flying in the lower troposphere).
One offset provider calculated emissions of 3,900 kg for the same distance if I flew in a first class seat, which means a consumer could pay for 0.8 of a tonne of emissions (or 3.9 tonnes), and still claim to be offsetting personal emissions under the Gold Standard.
This anecdote illustrates that the voluntary carbon offset market still has some wrinkles to iron out, before there is confusion among voluntary buyers which – in turn – could have a negative impact on the sellers of voluntary credits. Although green power facilities are more likely to be included in voluntary offset schemes which strive for some level of standardisation and quality, they still may be at a price-point disadvantage in the market.
Although the renewable energies have many advantages which stem from those project's involvement in renewable portfolio standards and similar quota regulations, the sector must ensure that consumers are aware of the numerous environmental benefits of renewables mitigation when compared to other options. Not only does a wind turbine allow easy quantification of offsets (a metre tracks the electrical output which can be contrasted to fossil-based generation sources to calculate the offset), it also lasts longer and is more secure than other options on the market.
The voluntary market tends to be less volatile than the certified market, where offset credits are sold on open stock exchanges at fluctuating prices depending on supply and demand.
In the former market, a green power developer would likely receive a set price for the facility's output, and the third party seller would handle much of the attendant market risk. The increasing interest in offsets and the growing demand for them makes it a safe bet that the price will rise (gradually or more quickly) but industry dislikes uncertainty and many developers would probably prefer to have a contracted set price for their power output, and their environmental attributes.
There have been some valid – and many non-valid – criticisms of the global carbon market, with terms such as “Russian hot air” being used to cast doubt on the validity of emissions trading. There were significant variances in the price of offsets sold under the first phase of the European ETS due to how industry allocations were handled on the continent, but it is important to remember that the renewable energy industry and its installations are not part of that debate. Those are policy questions which the regulators must correct; a windfarm simply “feeds” the carbon offsets into the market for sale, and is not related to or implicated in any criticism of the policy itself.
That said, the renewable energy sector must remain fully cognisant of the discussions and trends (both regional and global) on emissions trading, which includes the current negotiations leading to the next Kyoto Conference of Parties in Copenhagen next December. It is expected that renewables will remain fully eligible in the certified offset market, but complacency is a dangerous mindset and the various industry trade associations are following these discussions carefully to ensure that wind, solar, geothermal and other emerging renewable energy options remain at the forefront of emissions trading.
|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.|