Understanding Carbon Offsets

Renewable Energy Direct Investment

What is a renewable energy investment?

This option involves directly taking a significant equity stake in a new renewable energy investment, such as a solar wind farm project. This option differs from the REC options in that the purchaser would be owning part of the renewable energy project. Effectively, you would be a carbon offset project developer. (This approach can also be taken with project types other than renewable energy.) The purchaser would likely need to work with an investment bank and a renewable energy project developer and provide up front financing for the project. And then contractually put in place ownership provisions for the resulting RECs and/or carbon offset credits.

The same distinguishing characteristics between the voluntary REC and RPS compliance REC markets identified with the RECs option apply to this option too. A project that is within the jurisdiction of a RPS with a REC scarcity would be additional if the resulting compliance RECs were retained and retired.

Location

Renewable energy project could be located locally, in the U.S. or internationally.

Cost and Management Burden

Cost per metric ton of CO2e: Varies widely.

Becoming a direct project investor would provide the possibility of acquiring lower cost emission reductions over the long-term, as you would be entering earlier in the process and accepting more of the upfront project risk compared to a PPA transaction.

This option would entail the largest management and transaction cost burden, although these costs may be balanced by the lower cost per metric ton of reductions. Further analysis would be needed to quantity the cost of this option.

Environmental Integrity

There are recognized methodologies for quantifying the emission reductions from renewable energy projects that have been widely used and tested under the UN Clean Development Mechanism as well as the voluntary carbon offset market. However, unlike for carbon offsets, there are no independent authorities certifying that these methods have been properly applied to renewable energy investments.

The same environmental integrity issues differentiating voluntary versus RPS compliance RECs apply to this option. Evaluating the additionality of this option is not difficult if the project is within the eligibility of an RPS and the resulting RECs are retired without being used for compliance. The assessment of additionality becomes more difficult for a project that takes place outside of a jurisdiction with a binding RPS quota. In this case, it would need to be demonstrated that the investment intervention was necessary for the project to go forward. This analysis would be complicated in the United States by the uncertainty surrounding renewal of federal tax credit for wind and solar. In these circumstances, it may be preferable to simply register a renewable energy investment as a carbon offset project, and therefore ensure that it meets rigorous additionality testing; renewable energy investments are otherwise not subject to the same kinds of explicit criteria and accounting rules applied by carbon offset programs.

Social and Environmental Co-Benefits

Same as RECs.

Potential Risks

While most universities and companies have opted to sign long term PPA for renewable energy, rather than owning and operating their own facilities, a few companies have gravitated towards the latter. For example, Apple owns and operates renewable energy generation systems at some data centers. Apple registers and retires the associated RECs to meet its voluntary emission reduction targets.

As discussed above, purchasing (or investing in) compliance RECs offers the opportunity to publicly distinguish itself from the common practice in the corporate world of using voluntary RECs to meet targets.

Conclusions

A direct investment in a renewable energy project does not guarantee increased environmental integrity relative to other options. It would be easy to engage directly as an investor in a project that would have gone forward without the purchaser’s equity contribution. It would be necessary to distinguish the portion of the purchaser’s intervention that is simply looking for a return on equity versus the portion that is intended to acquire emission reductions. From a PR perspective, it will be difficult for an organization to both approach such an investment with a profit motive and credibly claim to have caused additional emission reductions. The advantages of this option are likely outweighed by its added complexity.