Three New Business Models to Achieve Carbon-Reduction Goals
Tetra Tech International Development
Improving livelihoods and empowering local communities through integrated, locally-led global development
This is the second in a series of articles on how Article 6 of the Paris Agreement can spur the clean energy transition, by Tetra Tech Senior Climate Advisor,?Rodrigo Chaparro .
The most recent Intergovernmental Panel on Climate Change (IPCC) report indicates that around 2,400 gigatons (Gt) of net CO2 emissions were generated globally from 1850 to 2019, with more than 1,000 Gt (42 percent) occurring in the last 30 years. If we want to limit global warming to 1.5° C by 2100, we can only afford another 500 Gt in the next 80 years—a target that seems unlikely given current emissions reductions pledges set forth in nationally determined contributions (NDCs).
Our best hope for deep emissions reductions lies with the energy sector.?Cooperative Approaches provide a market-based path forward.
Our best hope for deep emissions reductions lies with the energy sector. Countries must cut or eliminate fossil fuels, deploy low-emission technologies, transition to alternative energy sources, and prioritize energy efficiency. They will also need new business models that support CO2 reductions, such as the Cooperative Approaches defined at COP26 in Article 6, paragraph 2 of the Paris Agreement . Developed countries are interested in using the Cooperative Approaches to acquire supplementary CO2 emissions reductions, while developing countries stand to benefit from receiving technical assistance and the transfer of costly advanced technologies that will help them meet the conditional targets defined in their NDCs. The Cooperative Approaches provide a market-based path forward and can take many forms, including the three models outlined below:
1. Joint Credit Mechanisms
Japan instituted the Joint Crediting Mechanism (JCM), a pioneering project-based option under Article 6 to cooperate with developing countries on greenhouse gas (GHG) reductions and sustainable development. Under the JCM, Japan works with 17 partner countries to facilitate uptake of leading low-carbon technologies. Each project’s resulting emissions reduction is assessed as a contribution by both the partner country and Japan and produces a tradable credit. To avoid double-counting, each country is committed to maintain a registry, issue credits in a timely manner, and refrain from using JCM mitigation projects for any other international climate mitigation mechanisms. The goal of the JCM is to reach a cumulative GHG emissions reduction of 100 million tons of CO2e by 2030.
Through the JCM, the Thai company, SNC Former Public Co., installed 3.4 megawatts of rooftop solar at six factories that produce air-conditioning components. The project utilizes high-durability crystalline silicon photovoltaic modules produced by Sharp Energy Solutions, a Japanese corporation with more stringent standards than those of the International Electrotechnical Commission. The solar power displaces electricity generated by fossil fuel?based power plants, contributing to GHG emissions reductions. The distribution of verified credits generated by the project is determined by agreement between the participants, who may allocate part of the credits to the respective countries. In this case, the project was partially supported by Japan’s Ministry of the Environment with the aim to understand the operational aspects of the mechanism, acquire JCM credits toward Japan’s NDCs, and promote the transfer of low-carbon technologies. Both the Japanese technology manufacturer and the Thai company benefit, creating net GHG emissions reductions.
Most JCM projects involve renewable energy and energy efficiency, but there are also some waste-to-energy and transport projects.
Most JCM projects involve renewable energy and energy efficiency, but there are also some waste-to-energy and transport projects. As more countries adopt Cooperative Approaches, the diversity of projects, types of support, and partnership models could extend to areas like electromobility, green hydrogen, and advanced technologies where utilities can play an important role. The current phase is key to building the necessary infrastructure in developing countries so that these Cooperative Approaches can operate smoothly.
2. Utility-Transportation Partnerships
Companies like Enel X are leading partnerships using models that offer financing, intelligent charging solutions and green certificates. Enel X’s successes include the delivery?of six electro-terminals?and?401 electric buses?in Bogota, as well as 11 electro-terminals, 40 smart bus stops and 245 chargers in Santiago. Global utilities could use the carbon market mechanism under Article 6 to develop an entirely new business model that links power utility know-how with local public transportation operators and companies launching electric transportation fleets.
A foreign or regional utility could establish a contract with a local bus concessionaire to build or finance a renewable energy plant that delivers clean electricity and the required charging infrastructure. In exchange, the utility could receive a share of the CO2 emissions reductions associated with the project, which can be used to meet NDC targets.
The scheme can be used at a global or regional scale as it is structured to promote South-South cooperation, as well. A foreign or regional utility, for example, could establish a contract with a local bus concessionaire to build or finance a renewable energy plant that delivers clean electricity and the required charging infrastructure. In exchange, the utility could receive a share of the CO2 emissions reductions associated with the project, which can be used to meet NDC targets. This type of agreement also helps distribute the project risks, facilitating access to finance.
3. Utility?Green Hydrogen Partnerships
The hydrogen supply chain is key for developed economies in achieving decarbonization goals, especially in light of the expected steady increase in carbon taxes. Concerns related to the security fossil fuel supply, the drop in renewable energy costs, and hydrogen’s ability to increase demand-side flexibility through storage applications are driving growth in the green hydrogen market, which is predicted to reach $417.5 million by 2028 from an estimated $223 million in 2022. In advanced economies, green hydrogen can play a role in the clean energy transition as an enabler for integrating higher shares of renewable energy in the power sector and in sectors struggling to decarbonize, such as trucking, aviation, shipping, heating, and other energy-intensive industries. In most developing countries, green hydrogen is not seen as a competitive source of energy in the short term, but it can certainly become a valuable export
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A Cooperative Approach could be used to facilitate international deployment of technology, bring concessional climate finance to investors, and structure the exchange of carbon credits.?
Utilities are also exploring new international avenues with green hydrogen. The Haru Oni pilot project in Chile will harness the strong winds of the Magallanes region to produce green hydrogen that will be used to create a synthetic fuel for export. The project combines the experience of an Italian utility subsidiary of Siemens, a petroleum company and German car manufacturer Porsche, which will use the fuel in its motorsports fleet. A Cooperative Approach could be used to facilitate international deployment of the technology produced in Germany, bring concessional climate finance to the investors, and structure the exchange of carbon credits. While it is likely that most of the CO2 emissions reductions would be transferred to the foreign country—in this case, Germany—the local country would benefit not only from the export of hydrogen but also from introducing more renewable energy to the grid.
Inventing?New Models for the New Normal
As decarbonization leaders, many power and utility companies are looking to reinvent themselves, experimenting with new business models that serve the energy transition and the bottom line. While the details of partnerships between sectors and countries are diverse, there is a common thread—planning, innovation, and international collaboration. The Cooperative Approach can play a pivotal role in these initiatives by also facilitating access to new technologies, climate finance and carbon trading.?
How Can Tetra Tech Help You Use Cooperative Approaches?
Tetra Tech’s energy consulting and technical implementation experts can support governments and private sector clients in the following areas:
1.?Deployment of new carbon markets.
2.?Design and implementation of decarbonization pathways for utilities and private corporations.
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Article 6 of the Paris Agreement and the Clean Energy Transition: