Digital MagazineYear 2021

Carbon offsets: compliance or opportunity?


Carbon offsets are an investment for renewable energy somewhere around the world; such energy would cancel out, or compensate for the buyer’s GHG emissions.

energy capital team

By Energy Capital

The carbon neutrality goal, or net-zero, commits governments and industries to address their whole emissions package through an equivalent amount of greenhouse gas (GHG) emissions removals or compensations.

For example, governments and companies can invest in carbon capture and storage solutions or invest in a renewable energy facility to substitute fossil fuel-fired generation plants. They can also buy clean energy from a third party, known as Power Purchase Agreement (PPA) in the US, or, finally, they can invest in carbon offsets.

Leveraging carbon offsets

Carbon offsets are an investment for renewable energy somewhere around the world; such energy would cancel out, or compensate for the buyer’s GHG emissions. The money invested in those offsets supports green energy projects, whether it is from renewable generation, methane capture, sustainable farms, or even companies that procure forest rehabilitation, aimed at carbon dioxide absorption. Therefore, businesses pay to outsource their emissions reductions rather than doing so in-house.

Carbon offsets, however, can represent a paradox. On one hand, they offer companies a cost-effective tool to reduce net emissions in an evolving carbon-constrained economy. On the other, their critics argue that offsets do little to drive innovations for companies to meet the required levels of reduction (50-80% reduction in GHG needed by 2050).

Despite their drawbacks, carbon offsets are creating the most complex commodity market in history and should not be ignored. More importantly, it is crucial to know the factors enabling companies to do this transition and their reasons. Is it just because they have to be compliant or because they see an opportunity for both their users and themselves?

Shell & Amazon

The net-zero target is complex to achieve by governments alone; in this regard, the target requires support from the industrial sector, businesses, and communities alike. Thus, a wide range of industrial activities have committed to carbon neutrality, from energy to retail, transportation, food and beverage, and automotive.

That’s why many industry players aren’t tackling the issue alone; in fact, almost all of them are establishing partnerships with energy companies to stablish baselines from which they leverage their neutrality goals.

Such is the case of Shell and Amazon. In early February 2021, the oil major signed an agreement with retail giant Amazon. Specifically, the partnership is between Shell Energy Europe BV and Amazon Web Services (AWS).

The agreement considers the offtake by AWS from a subsidy-free offshore wind farm being constructed off the coasts of The Netherlands. The wind complex will be operated by the CrossWind consortium, a joint venture between Shell and Eneco.

By the project’s completion, expected by 2024, AWS will offtake 250 megawatts from Shell and 130 MW from Eneco, for a total of 380 MW; which will power Amazon Web Services operations, pushing them one step closer to their objective of a 100% renewable powered by 2025.

It is essential to underline that this agreement is for a PPA, which considers the direct supply of renewable energy for company’s operations, unlike what happened with Dominion Energy and Facebook, in early January 2021.

Dominion, Invenergy & Facebook

Back then, the Virginia-based energy company signed a long-term agreement for renewable energy credits with the social media behemoth. The deal contemplates acquiring a 150 MW solar facility in Hardin County, Ohio, by Dominion from Invenergy.

Such amount of power will be injected into the state’s grid. It will also allow Facebook to acquire the renewable energy credits for the same amount, as compensation. This is known as a Virtual Power Purchase Agreement; and, enables companies to compensate their carbon footprint by funding renewable energy projects instead of using the energy themselves. 

Enel Green Power & Clorox Company

Clorox Company achieved one of its goals with this same scheme, in late January 2021. Then, the company announced it had reached a 100% renewable electricity for its American and Canadian operations; thus, four years earlier than initially planned.

The deal was signed with Enel Green Power and its Roadrunner Solar project in Texas. Moreover, Clorox committed to buying from the complex 70 MW of renewable energy every year, for twelve years. Therefore, this would be the amount of energy equivalent to Clorox’s historical electricity consumption in the region.

By buying such amount of energy, the company compensates its carbon footprint in the U.S and Canada. In fact, it is approximately of 180,000 metric tons of CO2 each year. Furthermore, with this transaction, Clorox funds and allows Enel Green Power to produce green energy for nearly 30,000 American homes each year.

Although the VPPA does not imply the actual cease of emissions; it creates a carbon market, needed to fund renewable energy projects.

RWE & American Honda Motor Company

Among the companies that do buy and operate with renewable energy, is the American Honda Motor Company, which, back in 2019, signed a Power Purchase Agreement for twelve years with RWE.

Furthermore, the contract contemplates the procurement of 120 MW from the Boiling Springs Wind Farm, in Woodward County, Oklahoma, to the carmaker for its operations in America. Indeed, this offtake is one of the largest-ever renewable energy purchases, in the US, by the automotive industry.

BP & Finite Carbon

Another example of decarbonization efforts by the industry is the acquisition of a majority stake in Finite Carbon, North America’s most prominent developer of forest carbon offsets, by oil major BP.

In December 2020, Finite Carbon announced the agreement in which BP would bring the firm into its in-house business accelerator, BP Launchpad. With this, Finite Carbon would expand onto new geographical markets. Additionally, it will advance its forest restoration portfolio. Simultaneously, supporting efforts to restore, maintain, and enhance biodiversity.

Enabling factors

According to 2020 information from the Business for Social Responsibility (BSR) organization, the most critical elements to consider by companies that use carbon offsets are; fixed costs, market research, and the design and administration of a corporate carbon offset program.

It is also essential for users to understand a carbon offset provider’s basic profile. Also, to examine its relative strengths, based on critical traits such as experience, headquarters, project locations, and types of projects offered. Furthermore, users should assess what carbon offset they purchase; for example, energy efficiency, renewable energy, methane capture and destruction, biological sequestration, and biomass solutions.

In the same way, the goals companies establish to implement a successful carbon offset practice are crucial. For instance, those companies that are experienced in setting clear goals for their offsetting prove to obtain better results; just offsetting real emissions, evaluating their GHGs constantly, assuring the legitimacy of the practice through reports and follow-ups.

The latter has also turned into a better brand-reception since several offsetting organizations are frequently accused of “greenwashing”. That’s why BSR also identified four-key principles to lower the criticism towards carbon offsets; they have to be permanent, verifiable, synchronic, and enforceable. Overall, companies that have these traits are the ones most engaged with carbon offsetting.

Opportunity or compliance? 

Not everyone agrees that carbon offsets accomplish the net-zero and carbon neutrality goals. For instance, several detractors often say offsets distract companies and governments from developing real solutions. Furthermore, some critics argue these solutions give polluters license to continue polluting.

Consequently, many worry the programs are an excuse for not to take stricter measures to curb climate change. That’s why many companies have been subject to “greenwashing” criticism. Since, if not done right, the purchase of offsets can act more like a marketing campaign than as a real solution.

For this reason, and given the social pressure within our growing carbon-priced and carbon-constrained economy, several companies are taking actions to remain competitive and funding-attractive. However, carbon offset projects aren’t all created equal, and the concept may not be a solution for every company.

Accordingly, firms should consider carbon offsets as an innovation and creative opportunity. According to experts, purchasing carbon offsets “is clearly better than doing nothing.” Thus, organizations should try it. Furthermore, if they have tried everything else to reduce their emissions and pollute less in the past.  

Therefore, carbon offsets can help finance emerging green practices, technologies, and services. Besides, they might be essential, in the long term, to force carbon-polluting industries to become a bit more creative. Furthermore, for providers, the carbon offset market entails a bright future. Particularly, in the realms of development and prosperity, in which they’re the main drivers. 

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