Carbon Credits and Energy Attribute Certificates: Essential Tools for a Net Zero Future

At last November’s COP27, the UN Group on Net Zero Commitments highlighted the necessity of drawing “a red line around greenwashing” and called, among other things, on the scaling of integrity in voluntary carbon markets and the inclusion of renewable energy procurement targets as part of net zero pledges (1). In four articles to be published in the upcoming weeks, we will outline EACs and carbon credits and address current issues and potential improvements for the integrity of voluntary carbon markets and EAC procurement.

In this article, we will touch on what carbon credits and EACs are, how they differ, and how renewable energy generation fits into the methodology of both instruments. In the two following articles, we will dive into the current shortcomings of the voluntary carbon market and the critical role that start-ups play in driving positive change. Lastly, we will explore how increasing productization and the emergence of different procurement channels drive the maturity of EAC markets.

Carbon credits as key enablers of companies’ net zero transitions

Carbon credits – also known as offsets – are tradable certificates or permits representing a given amount of carbon dioxide emissions (or CO2 equivalents of other GHG). These credits can be bought, retired, or sold to help companies meet their carbon reduction goals and net zero pledges. Carbon credits are traded on either voluntary carbon markets (VCM) or compliance carbon markets (CCM). The three most significant CCMs are Europe (EU Emissions Trading System (ETS)), California, and China. Carbon credits were first implemented following the 1997 Kyoto Protocol and have since created a global market valued at $270bn as of 2021, with 99% of market value stemming from CCMs (2).

Carbon offsetting technologies and the role of renewable energy:

Credits traded in CCMs are issued by regulatory agencies unrelated to emissions-reducing projects. In contrast, credits traded on the VCM are generated and issued by private-sector players. Project developers must set up projects eligible for carbon credit issuance to actively create carbon credits. Since private-sector players have far more influence on the VCM than CCMs – particularly when it comes to altering supply and demand voluntarily – we want to focus primarily on the VCM moving forward and draw parallels to CCMs where applicable. Figure 1 shows a comprehensive overview of methods for carbon offsets that are typically traded on VCMs.

Renewable energy generation plays a special role in this overview. It is a low-permanence (i.e., no storage), low-additionality offsetting method. Offsets display additionality if a project is economically viable and its implementation doesn’t hinge on revenues from carbon markets.

For long, market-leading registries such as Verra and Gold Standard issued carbon credits for the avoided emissions caused by renewable energy projects. However, two developments have changed this dynamic over the past years. Firstly, Verra and Gold Standard have been phasing out the certification of renewable energy offsets in high- and upper-middle-income countries since increasing usage of such carbon credits as a simple improvement of developers’ business cases in established renewable energy markets aren’t in line with the principle of additionality (4). Secondly, companies have come under heavy scrutiny for buying cheap, low-quality offsets (so-called “junk offsets”) from renewable energy projects in China and India to claim their carbon neutrality (5). Both dampened the credibility of VCMs.

For renewable energy developers or generators in developed markets, this means that they will not benefit from cash flows generated by crediting renewable energy projects in the medium term. Alternatively, EACs offer similar cash flows to renewable energy projects and can substitute carbon offsets in providing financial support for renewable energy development.

Putting the “greenness” into electricity: the role of Energy Attribute Certificates

Although EACs have – similarly to carbon credits – been around since the late 1990s, they are generally much less addressed in public and made up “only” a global market of about $12.71bn in 2021 (6). Regardless, they’ve been a key policy instrument to foster the roll-out of renewable energy and inform sustainable purchasing decisions of consumers. There are three main EAC markets globally, namely the Guarantees of Origin (GoO) market in the EU, the Renewable Energy Certificate (REC) market in North America, and the International-REC (I-REC) standard covering Australasia, Asia, Africa, and South America.

Fundamentally, EACs are tradable instruments issued to renewable energy generators and represent the environmental attributes of renewable energy generation. In other words, an EAC proves the production of 1MWh of renewable energy (7). For renewable energy generators, tapping into EACs can be seen as a win-win: the certificates generate extra revenues over the lifetime of the assets whilst requiring zero additional cost.

Companies, in turn, can buy EACs, claim the usage of renewable (or green) electricity, and reduce their reported scope two emissions, i.e., indirect GHG emissions related to electricity, steam, heating, and cooling. Purchasing EACs allows companies to disclose and demonstrate compliance with the Greenhouse Gas Protocol standard, CDP reporting, or the Dow Jones Sustainability Index, which tracks publicly traded companies’ sustainability performance. EACs are an essential tool to verify the use of green electricity, as the distinction of renewable electricity from fossil-fuel-based electricity is impossible once it enters the grid. This means that even though companies seemingly have several procurement options for renewable electricity (which we will highlight in our fourth article), EACs are at the foundation of the claim of “green” electricity. As such, EAC markets have significant implications on the perception of companies’ net zero pledges, future development of renewable energy, and public discourse on the “greenness” of products.

To conclude this introduction to carbon credits and EACs, Figure 2 summarizes the main differences between both instruments (8).

As companies pursue ambitious net zero targets, carbon credits and energy certificates will play a vital role in determining the success of the net zero transition. In this first article, we outlined the premises of both instruments. Moving forward, we will look into both the voluntary carbon market and the EAC market, highlighting current shortcomings and private-sector initiatives. Stay tuned!

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Sources:

1. United Nations (2022). Integrity Matters: Net Zero Commitments by Businesses, Financial Institutions, Cities and Regions. Link to source.
2. Hitendra Varsani and Rohit Gupta. Introducing the Carbon Market Age. MSCI. Link to source.
3. The University of Oxford Smith School of Enterprise and the Environment (2020). Oxford Principles for Net Zero Aligned Offsetting. Link to source.
4. Kanchan Yadav (2022). Reckoning with renewables: As carbon certifiers tighten rules, renewable energy may re-evaluate options. S&P Global Commodity Insights. Link to source.
5. Akshat Rathi, Natasha White, and Demetrios Pogkas (2022). Junk Carbon Offsets Are What Makes These Companies ‘Carbon Neutral’. Bloomberg Green. Link to source.
6. Precedence Research (2022). Renewable Energy Certificate Market. Link to source.
7. Cyril Bricaud (2022). What is an Energy Attribute Certificate? Ecohz. Link to source.
8. US Environmental Protection Agency (2018). Offsets and RECs: What’s the Difference? Link to source.