Carbon Market 2.0 : Shifting to a Global Non-Fossil Fuel Baseline for the Issuance of Carbon Credits
Matt Prescott
Director of Research, Lantern Insights. Specializing in sustainability and financial services thought leadership
Carbon Market 2.0 : Shifting to a Global Non-Fossil Fuel Baseline for the Issuance of Carbon Credits
Global Carbon Credits
In this article, I’m going to explore how the next iteration of the carbon market for energy could be made more globally consistent, more scientifically credible and more successful at accelerating the world’s transition away from fossil fuels, and tackling climate change.?
No more carbon credits for fossil fuels
Our [Carbon Clarity’s] main proposal is simple, we need to stop giving carbon credits (allowances) to any business burning fossil fuels, and to focus on adding value to the carbon emission reductions (offsets) that can be achieved by investors and projects using renewable energy technologies, instead of fossil fuels.
The simplest way of doing this is to establish a new global, non-fossil fuel baseline for the issuance of carbon credits, with all fossil fuel power stations ineligible for carbon credits and having to purchase renewable energy offsets for all of their carbon emissions.
By contrast, we believe that all renewable energy technologies on the planet should be eligible for carbon credits, based on how much they outperform the carbon emissions (CO2e) produced by the most efficient natural gas facility on the planet per unit of energy generated (MWh).
With all industrial fossil fuel emissions requiring non-fossil fuel offsets until their use is ended.
Emission Reductions are what matter
Global emissions reductions are what matter, and this is what should be rewarded.
If solar panels and wind turbines can be made and installed cheaply enough to be economically competitive, anywhere in the world, we should exploit this and do more to scale up their use, until they are able to meet 100% of our needs, all year round.
It doesn’t matter where renewable technologies are added to the world’s energy system, as any surplus generating capacity in one country can be used to replace carbon-based alternatives in neighbouring countries.
The issue that really matters is the rate and scale at which renewable energy technologies are used to eliminate humanity’s carbon emissions from fossil fuels.
This may sound obvious… but this is not how the carbon market currently operates in respect to carbon emissions.
Who gets carbon credits now?
Today, the large energy companies and other heavy industries that burn most fossil fuels are given generous support, in the form of carbon credits and other subsidies.
By contrast, their renewable energy peers, who emit ~90% fewer carbon emissions per unit of energy, and offer low cost carbon emission reductions (offsets) are often told that they’re ineligible for carbon credits, or other support, for an assortment of framework reasons.
This situation is perverse and must change!
The general assumption by society is that renewable energy technologies receive the majority of carbon credits in the energy sector, because they offer the biggest emission reductions.
This assumption is understandable, and logical, but not how the carbon market works.
Carbon Clarity’s proposal is that this SHOULD be how the carbon market works!
Historic Allowances
As things stand, large energy users are typically given free and/or low cost allocations of carbon credits, by their host countries, based on their historic carbon emissions.
Any portion of their carbon allowance, which they do not use, they are allowed to sell to others, who have exceeded their carbon emissions allowance (see Carbon Market 1.0 infographic below).
Shuffling around carbon emissions
With low carbon prices and minimal pressure to change, this situation has generally resulted in emissions being shuffled around, rather than significantly reduced or removed, in absolute and atmospheric terms.
The total quantity of carbon emissions within the world’s existing carbon market trading system was supposed to be capped, and then steadily reduced over time, but so many carbon emissions have effectively been outsourced to developing countries, through the transfer of industry, that this cap has never been real at the global scale or in atmospheric terms.
Atmospheric concentration of CO2 : The Sky’s the Limit
After decades of political arguing and technical tinkering carbon emissions are still being added to the atmosphere in huge quantities each year (~35,000,000,000 tonnes in 2021) and the total concentration of greenhouse gases in the atmosphere shows absolutely no sign of being reduced any time soon (see Fig 1 below).
Fig 1 : Fluctuating carbon dioxide concentrations during the past thousand years, from measurements of air trapped in Antarctic ice (supplied by the Australian Antarctic Division) and, since the late 1970s, from analysis by the Cape Grim Baseline Air Pollution Station in Tasmania.
Failing Upwards
Given the potential consequences for the climate and humanity of this upward trajectory, the present design and functioning of the carbon market represents an unmitigated failure.
Historic Business-as-Usual Baseline
To date, the baseline for the allocation of carbon credits has been defined by the quantity of carbon emissions that each large company released into the atmosphere in the past, as a result of burning fossil fuels, and compared to how many they emit now… in other words their business-as-usual.
If they emit one tonne less of carbon dioxide, in comparison to their historic business-as-usual baseline, they get one carbon credit.
This historic business-as-usual baseline was originally designed to encourage countries and large emitters, such as energy companies, to sign up to the creation of a carbon market but, after 30 years, this approach has failed to reduce carbon emissions worldwide and has become totally unfit for purpose.
Today’s carbon market (Carbon Market 1.0) has developed many of the monitoring, reporting, verification, issuance and certification processes needed to manage our proposed initiative (Carbon Market 2.0), but it has failed at its primary purpose, which has always been to stabilise and reduce the concentration of greenhouse gases in the Earth’s atmosphere.
Tomorrow Never Comes
When I was born the concentration of carbon dioxide in the atmosphere was 326.98ppm CO2. This has since increased by about 2ppm per year ever since. When I finished school the greenhouse gases was 356ppm CO2. As of 10 October 2022 it was 415ppm CO2. Other greenhouse gases such as methane have also increased in their concentrations in a similar fashion, without interruption, over the same period.
Annual emissions of CO2 : Year-on-Year
Fig 2. Atmospheric carbon dioxide measured at NOAA’s Mauna Loa Atmospheric Baseline Observatory peaked for 2021 in May at a monthly average of 419 parts per million (ppm), the highest level since accurate measurements began 63 years ago, scientists from NOAA and Scripps Institution of Oceanography at the University of California San Diego announced. This graph depicts the upward trajectory of carbon dioxide in the atmosphere as measured at the Mauna Loa Atmospheric Baseline Observatory by NOAA and the Scripps Institution of Oceanography. The annual fluctuation is known as the Keeling Curve. Credit: NOAA Global Monitoring Laboratory
Turkeys Voting for Christmas
In many ways, it is understandable that the established fossil fuel-based energy companies have been in no hurry to collapse their business model, and agreed to be measured against their historic baselines.
The core problem being that these baselines have not been tough enough to reduce carbon emissions worldwide, or to consistently reward the risk-taking innovators pushing what is technologically possible.?
Negligible Penalties, Puny Incentives
Even worse, under the existing rules low-carbon, renewable energy technologies are often excluded from the issuance of carbon credits, or otherwise limited in the role that they are allowed to play.
Taken together this all means that, worldwide, the carbon market-based penalties for burning fossil fuels remain negligible, and the carbon market-based incentives for switching to the renewable energy technologies remain puny.
Barriers to Entry
Over time the frameworks and processes that have developed around the issuance of carbon credits have also grown in complexity and started to act as barriers to entry for new technologies and approaches.
National Emission Factors
For example, when a new energy project is connected to a national grid under the present carbon market (Carbon market 1.0), it has to emit fewer carbon emissions than the average of all the energy generators found on that national grid, in order to be awarded carbon credits.
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This means that the carbon credits available to an energy project do not depend on the emission reductions they could offer the world, but on what everyone else has done before them, in their own country. A less polluting carbon emission fuel or technology can receive carbon credits as long as it is lower than the national average.
This matters, because it makes it harder for a large financial institution, in places like New York to back a single low-carbon, renewable energy technology, such a new “plug and play” solar panel design, and to roll it out worldwide.
National grids also vary in their emission factors. This means that international investors are forced to understand the emission factors in each country, when calculating their likely returns on investment.
A Global Non-Fossil Fuel Baseline
In our view, it would be much better if investors could simply focus on scaling up their wind and solar investments around the world, and on out-performing a single universally-applied, global non-fossil fuel baseline, based on beating the carbon emission performance achieved by the best fossil fuel power station in the world, by as much as possible.
To do this, we need to think slightly differently about how carbon emissions are quantified and how carbon credits are rationalised.
After all, everyone on the planet shares the atmosphere. It would make sense, if the criteria used to judge what merits a carbon credit also operated at this scale…
But how do we develop universally applicable metrics for carbon emission reductions, which can be applied worldwide?
Combining a Non-Fossil Fuel Baseline with Energy Measurements
A global non-fossil fuel baseline gives each technology a universal benchmark for carbon emissions per unit of energy, which they have to beat.
The next step is to measure the number of units of energy (MWhs) produced by a given project in order to calculate the total number of emissions reductions achieved in comparison to the highest performance natural gas power station in the world.
We will then verify and issue an appropriate number of carbon credits within a year of a project joining its national grid.
Renewable Energy Certificates (RECs)
This is where the methods used for Renewable Energy Certificates (RECs) are worth mentioning...
Renewable Energy Certificates (RECs) are a different sustainability tool, and used to help users keep track of their carbon footprint and renewable energy production / consumption.
RECs do not certify carbon dioxide emission reductions, but instead certify the number of MWh of electricity generated by a renewable energy project, their ownership and eventual consumption by a designated end user.
This accounting, certification and tracking between energy producers and consumers, is necessary because the electricity generated by wind turbines or solar panels, becomes indistinguishable from electricity generated by coal, oil or gas power stations the moment it joins a national grid.
RECs also allow project developers to claim subsidies from Governments, and consumers to make public claims that they are using green or low carbon electricity.
Interestingly, around the world, countries have tended to use RECs very differently.
ROCs in the UK
In the UK, the Government called their version of RECs, ROCs or Renewable Obligation Certificates.
The UK Government initially wanted more wind turbines and solar added to the grid and offered projects, that were accredited within a given the relevant period, a specific level of financial support.
Surprisingly, the UK Government unexpectedly closed the Renewables Obligation Certificate (ROC) subsidy scheme for large solar PV installations (above 5MW) two years early, because of unforeseen growth in the renewables sector, and they decided that their ROC scheme had become too generous.
This decision was challenged in the courts by Solar Century and three other solar operators, but upheld as legal.
This moving of the goal posts was unfair, but not judged to be unlawful. However, it has since meant that renewable energy technology developers have been unable to rely on offers made by the UK Government.
Relying on Natural Gas instead of Local Solar and Wind Power
The simplicity and clarity of ROCs based on MWh was successful at scaling up renewables but resented, and limited, because it became too expensive for the government, which opted to save itself money and rely on natural gas instead...
Climate change has remained a serious threat, and natural gas prices have since shot up because of Russia’s invasion of Ukraine, but these weren’t the issues that the UK Government was bothered about at the time.
The Next Generation of Global Carbon Credit
At Carbon Clarity, we plan to integrate the emission reductions achieved by given renewable energy technologies with the measurement of MWhs of non-fossil energy produced by a project to issue a new generation of premium global carbon credits, which incentivise all renewables and penalise all fossil fuels in a consistent fashion worldwide.
This new generation of voluntary carbon credit will not only be far more scientifically credible than traditional energy carbon credits, which still allow the burning of fossil fuels, but will make it much easier for investors, projects and governments to know that they will be helping to create premium carbon credits which will help humanity to reduce its annual carbon emissions and, if widely adopted, the concentration of greenhouse gases in the atmosphere.
The UN system will still be there as a fall back for those who wish to stick with fossil fuels and the present carbon market, but we intend to work with those who plan to aim higher, sooner.
Carbon Market 1.0
Under today’s carbon market (Carbon Market 1.0, see Fig 3) a power station can burn a fossil fuel, such as natural gas, more efficiently than it was historically allowed and earn carbon credits.
These carbon credits can then be bought by other dirtier power stations, struggling to stay within their historic allowance, such as a coal power plant, and used to offset their extra carbon emissions. This is better than nothing, but has never created a strong incentive to end the use of fossil fuels or for the world to reduce its overall carbon emissions.
As the past 30 years have shown, the use of an historic business-as-usual baseline has established a gentle pressure to make existing power plants slightly more efficient and enabled investors to carry on upgrading existing fossil fuel infrastructure, assets and reserves.
Carbon Market 2.0
Our proposal is for the next iteration of the carbon market (Carbon Market 2.0) to establish a tougher global, non-fossil fuel baseline for the issuance of carbon credits (see Fig 3, below). This would mean that no power plant burning fossil fuels could earn carbon credits, and that all fossil fuel emissions had to be offset using premium carbon credits, produced using renewable energy technologies.
We cannot mandate this, but using the voluntary carbon market large financial institutions and investors, such as pension funds and insurers, could require their portfolio companies to offset all of their fossil fuel emissions, using premium carbon credits generated using renewable energy technologies, without waiting for global treaties to be signed by large fossil fuel producing nations.
Fig 3. By shifting the issuance of carbon credits to a global non-fossil fuel baseline Carbon Clarity intends to incentivize renewable energy technologies worldwide, based on a consistent framework. This new global baseline will reward the adoption of renewable energy technologies worldwide, using a single baseline, offer traders high quality carbon credits free of fossil fuel “greenwashing” and create a scientifically credible carbon credit, which can be used to offset the carbon emissions produced by fossil fuel-based industries in a more meaningful way.
Greener, Cheaper and More Secure
In the old days, a convincing case could be made that poorer countries should not be penalised by being expected to adopt renewables, but this argument no longer applies for available solar or wind technologies, and various complementary energy storage technologies.
In the UK, domestically-produced renewable electricity is currently 9x cheaper than natural gas from places like Russia and the Middle East, and low carbon.
Best of all, by combining a tougher non-fossil fuel baseline for the creation of carbon credits, with the transparent measurement of renewable energy in MWhs, we can enable project developers and investors ANYWHERE IN THE WORLD to find a consistent revenue stream to underpin the viability of the project and enable R&D through the carbon market, instead of relying on fickle government subsidies, varied national emission factors and complex technological methodologies.
Commodity traders can also trade a premium product, which has nothing to do with the continued burning of fossil fuels and the taint of greenwashing.
Let Markets Work
If governments don’t want to pay a subsidy for the amount of renewable electricity made or mandate a move away from fossil fuels, why not let a global voluntary carbon market incentivise and finance the carbon emission reduction associated with ending the use of fossil fuels quickly and efficiently?
With MWhs of renewable electricity and carbon dioxide emissions bundled together, worldwide, to create the next generation of non-fossil fuel carbon credits, rather than unbundled and handled erratically, from country-to-country, as they are at present.
The UN system will still be there, but governments could opt to set aside a portion of the national carbon allocations for a voluntary commercial contractual partnership with us, which aims higher than is possible within the UN-backed carbon market.
Work With Us
If you have a new renewable energy project, and would like to discuss how our new voluntary non-fossil carbon credits could work for you, please get in touch to set up a call.
If you are a large financial institution that wants to back higher quality carbon credits, which are more scientifically credible please also get in touch to explore how a global non-fossil fuel baseline could help you to achieve your climate change investment and impact goals.
contact : [email protected]
Encouraging businesses to lead from the front
2 年Great piece of work Matt.