Flipping the Script on Carbon Offsets: One Megawatt at a Time

In case you missed it last week, the Science Based Target initiative (SBTi) made one of the most anticipated announcements regarding the use of Environmental Attribute Certificates (EACs) towards corporate climate targets. In a statement released on April 9th, the SBTi Board of Trustees opened the door to enabling corporations to use EACs – including but not limited to carbon offsets – to address Scope 3 emissions from their supply chains. Just two days later, this announcement triggered upheaval amongst SBTi staff calling for the CEO and board members to resign based on concerns that new rules may enable greenwashing and compromise the SBTi's legitimacy. However, not all offsets are created equal, and EACs play an essential role in reaching Net Zero. Also, carbon markets are enabling innovative companies like Tierra Climate to pave the way to permanent decarbonization, which is at risk if SBTi backtracks on Scope 3.

Potential Boon for Carbon Markets

As a company that closely follows carbon markets, our news feeds were initially flooded with positive posts about how the SBTi might singlehandedly expand the voluntary carbon market 10x from ~$2B to ~$19B today and possibly even ~$65B by 2030, if implemented immediately (according to MSCI). This means more capital flowing into decarbonization projects ranging from nature-based solutions to new innovative engineered solutions (like Tierra Climate’s), and perhaps more companies adopting science-based targets in the process. For Scope 1 & 2, science-based targets prescribe permanent reductions in operating emissions. The trouble is that costs escalate rather quickly as you approach full decarbonization (e.g., marginal abatement cost curve) and Scope 3 emissions are notoriously much more difficult to root out of supply chains than Scope 1 & 2 in one’s own operations.

Rising Costs of Decarbonization

At some point, the cost to decarbonize one's operations far exceeds the cost of simply buying a high-quality carbon offset. Hypothetically, let’s say you lead a publicly traded company that is miraculously 90% of the way to your total decarbonization target but you still have 10% to go. Your company generates $150 of profits per tonne CO2e emitted, yet the marginal costs associated with eliminating the last 10% of operating emissions is really expensive: $200/tonne! The cost of eliminating the last 10% of emissions will not only wipe out your profits but make you incur a loss. Keep in mind that your company is publicly traded, so you must balance your fiduciary duty to shareholders with also remaining competitive. So, given the alternative to support a high-fidelity carbon project – even at >$100/tonne – would you take it?

Advantages of Offsets in Power Markets

Within the context of supporting utility-scale energy storage, carbon offsets pose several advantages for potential buyers. Given carbon offsets are denominated in tonnes of CO2e, they are inherently more fungible across market boundaries than energy and REC products. Fungibility unlocks greater market liquidity, improved price discovery, and better asset diversification, which translate into lower market risks for buyers relative to other products. In addition to low market risk, carbon offsets also provide buyers with substantially more robust additionality claims. Because the Greenhouse Gas Protocol is primarily an attributional emissions framework used to report and reconcile emissions across supply chains, current environmental attributes within power markets are not subject to additionality tests that require counterfactual claims. In contrast, carbon offsets require project proponents to prove an activity to avoid or remove emissions is additional under a consequential framework. These tests also affect how projects are baselined and eventually credited for avoided emissions. Therefore, corporate buyers stand to make more robust additionality claims of their procurements. Lastly, carbon offsets enable corporates to allocate capital into the most cost-efficient means of decarbonization.

Conclusion

This brings us to another question: is it inherently bad to ‘outsource’ the decarbonization to someone else? Not necessarily… Especially if you can rest assured that the underlying decarbonization activity is truly additional, the avoided/removed emissions are appropriately baselined, and there is no risk of double-counting (with the necessary corresponding adjustments, etc.). Undoubtedly, the voluntary carbon market has been mired in controversy and takedown pieces as of late. Yet, the beauty of carbon markets is that they leverage what Adam Smith coined the ‘Invisible Hand’ to efficiently allocate self-interested resources to maximize general societal welfare. With the right standards and checks in place, voluntary carbon markets can still be a very effective force for good! And we believe SBTi could potentially play a complementary role alongside existing carbon registries, third-party VVBs, and carbon rating agencies.

Tierra Climate is building a new category of EACs to compensate utility-scale energy storage for avoided emissions, accelerate battery deployments, and fully decarbonize the electricity grid. Tierra Climate is also leading the Energy Storage Solutions Consortium (ESSC), an industry group of 80 other member companies that represent over $10 trillion market value, in creating a new carbon methodology with Verra.