Amid a growing collection of corporate net-zero claims and growing evidence of the devastating consequences of climate change, there has been increasing focus on voluntary carbon credit projects that claim to either reduce, avoid or remove greenhouse gas emissions.
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Nowhere has this attention been more evident than the shift in the conversation around Renewable Energy projects.
"The aim was to focus on decarbonization, but now carbon credits are being used a business model," one source said, adding that this "will hamper the credibility of carbon markets in the long run."
Historically, renewable energy projects have produced the largest proportion of carbon credits available in the voluntary carbon market for offsetting claims, with major economies like China, India and Brazil acting as host to the largest renewable energy projects, and often generating the bulk of the credits available in the market.
Traditionally, a renewable energy project has been able to claim certification from a voluntary carbon credit standard such as the Clean Development Mechanism, Verra or Gold Standard by demonstrating that it was displacing a power generation project that would have otherwise been powered by fossil fuels such as coal or natural gas. Many of the renewable energy projects currently generating credits for sale in the voluntary carbon market were greenlit during the early 2010s when renewable energy alternatives for power generation like wind, solar and hydro were prohibitively expensive relative to coal and natural gas; voluntary carbon credits were one way to ensure these projects would be able to operate.
However, the renewable energy landscape of the 2020s is vastly different to the one of the early 2010s, and as the number of renewable energy projects has increased -- particularly in rapidly developing countries like India, Brazil and China -- it has become increasingly possible not only to use the voluntary carbon markets as a financing tool, but also to use them to generate profits that exceed the original financing aim, sources said.
Particularly over the last year, as the cost of credits has soared across the voluntary market, there has been a growing concern that many renewable energy project owners have turned carbon financing into a business model, which undermines the central premise of additionality in carbon financing through the voluntary market, a source told S&P Global Platts.
Additionality means emission reductions from a project must be "above business as usual", or that the cut in emissions hinges on the implementation of the project.
Platts Renewable Energy Current Year price hit a record high of $7.65/mtCO2e on Jan. 19, more than triple the $2.30/mtCO2e first assessment on Aug. 9, 2021. While prices have subsequently dropped back to around $7/mtCO2e, they remain at a hefty premium to a price of mere cents seen throughout much of the last decade.
Another source said many renewable energy projects in middle-income countries were no longer additional. "These projects were going to set up anyway," the source said. "The cost of electricity from renewable energy projects has come down drastically as well, making them non-additional."
Focus on Least Developed Countries
And the Standards have taken notice. In 2019, Gold Standard had announced that starting 2020 "any national or a regional grid connected Renewable Energy project located in an Upper Middle- and High-Income Country (as classified by the World Bank) shall be deemed ineligible for the issuance of GS-VERs or GS-CERs."
The Verified Carbon Standard made a similar announcement. GS and VCS are the two largest non-profit project certifiers.
In the announcement, VCS said additionality "is, of course, a key part of environmental integrity. Accordingly, where certain project types have moved beyond their need to be supported by carbon financing, it is not appropriate for Verra to continue supporting such project types."
A carbon project originator based in India said the focus of these standards was now on the "Least Developed Countries", which was "how it should be."
"[The rate of return] is 15%-16% for renewable energy projects, while the payback period is six years. What is the point of incentivizing renewable energy plants through carbon credits then?" another project developer and trader based in India said. "The tariff rates are also very similar to the conventional power plants. These projects are already self-sustainable".
The surplus of credits from Renewable Energy projects in middle-income countries has been a weight on the broader carbon market, sources have said, with credits from projects hosted in China and India often trading at discounts of anywhere between $1/mtCO2e and $3/mtCO2e to renewable energy projects from LDC host countries, depending on the vintage of the credit.
The shift away from certification of Renewable Energy projects has prompted many project owners to seek alternatives to the traditional voluntary carbon market standardization process, either by looking for alternative Standard certifications with potentially less-stringent standards around additionality, or by transitioning away from voluntary carbon credits altogether and towards the Renewable Energy Certificates market.
Both GS and Verra have categorically said regulations levied on renewable energy credits do not apply to REC certification.
Increasing the share of power generation globally through renewable energy projects remains a critical part of the fight for a 2-degree warming scenario -- let alone a 1.5-degree one -- and data shows that even as renewable energy has become a more cost-effective alternative to traditional fossil fuels than it has been in the past, there is still a lot of work to do in the transition towards all-renewable power generation.
As per the data collected by S&P Global Platts Analytics, the share of renewable energy in India's total power generation averaged around 21% in 2021, while for China it averaged around 28%.
"LDCs need the carbon financing the most," a source said. "Countries like China, India, Turkey, Brazil etc. have made carbon financing a business model."
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