Can economically viable projects generate carbon offsets? A journalist asked me this question the other day, hoping for a simple yes or no answer. The answer is yes, but understanding why is not necessarily so simple.
This might seem counterintuitive. If a project is economically viable, surely it doesn’t need the income from offsets to coax it into existence? There are at least two reasons why economically viable projects might require income from offsets. The first is that some other, non-financial barriers exist that require additional money to surmount. The second is that the project is economically viable, but not as attractive as alternatives.
The first scenario applies mostly to developing countries that lack the necessary technical expertise to undertake large-scale renewable energy projects. These projects must pass a barriers analysis, showing that necessary skills are not available in the area without the technical assistance that carbon credits fund. For example, a CDM project to improve the beer brewing process in Lao Brewery (yum!), uses a technical barriers test rather than a financial test.
The second scenario is more complex. Renewable energy projects by definition have some economic return from the sale of electricity. The question is not whether these projects are able to break even, but whether they are at least as attractive as the available alternatives — typically coal.
As a case study, take a look at the economic model for the Inner Mongolia Huitengxile Jingneng wind farm, a 100-megawatt installation. Note that the rate of return without carbon credits is 6.46%, below the 8% government benchmark, and 8.9% with carbon credit income. Just a little bit of money — in this case about $2.5m per year for seven years — is enough to shift a capital investment of $100m from a dirty technology into a clean one. The project was arguably “viable” even without the credits, but carbon revenue made it actually competitive with alternatives.
Establishing financial additionality for American wind farms is likely to take a course similar to the standard being set internationally. Last week, the second draft of the Center for Resource Solutions Greenhouse Gas standard was was released for stakeholder comment. This version contains a lot more specific language on additionality. We and and lots of other marketplace participants are looking forward to a revised rule that helps the retailers determine additionality for American wind projects in a simple transparent manner.
With some $30 trillion to be invested in energy production over the next 30 years, making the right low-carbon investments is one of the keys to fighting climate change. Carbon offsets help put a price on the climate change consequences of these investment decisions, and if properly structured can help move a portion of that $30 trillion investment into clean energy. While a lot of that investment will be in the developing world, some of it will be domestic. Demand for new power continues to rise in the US. It is our hope that carbon offsets can help new domestic energy be as clean as possible.