Carbon offsets – Part 1: Why GreenPower and LGCs are not carbon offsets

Yesterday, the Department of the Environment and Energy released a statement on the treatment of Renewable Energy Certificates (RECs) for the purpose of making carbon neutral claims against the National Carbon Offset Standard (NCOS). Under the NCOS, RECs in form of large-scale generation certificates (LGCs) can be used to offset scope 2 electricity carbon emissions. These LGCs are created by accredited power stations that generate eligible renewable energy under the Large-scale Renewable Energy Target. GreenPower also uses LGCs; when you purchase GreenPower, a corresponding amount of LGCs is being retired on your behalf.

After going out to consultation, the Department has decided to continue with the treatment of LGCs and GreenPower as eligible carbon offsets for scope 2 emissions. What you may not know is that there is a discussion going on whether, given our current carbon accounting practices and state of the voluntary REC market, treating LGCs and GreenPower as carbon offset equivalents is adequate and correct. Here is a breakdown of the arguments.

Definition

Let’s start with the definition of a carbon offset. A carbon offset is defined as a reduction, removal, or avoidance of CO2-e emissions that is used by corporations and individuals to compensate for their CO2-e emissions that occur elsewhere, and one carbon offset unit is equal to one metric tonne of carbon dioxide equivalent. It represents one ton of CO2-e emissions reduced or sequestered as the result of an activity undertaken for the purpose of reducing emissions. In other words, a reduction in CO2-e emissions has actually occurred.

Compare that to the definition of an LGCs. One LGC is equal to one megawatt hour of eligible renewable electricity generated and delivered to the grid.

As you can see, there is a difference in what is being measured. The carbon offset unit represents an actual CO2-e emission reduction, the LGC the generation of one MWh of renewable energy. And if an LGC is the same as a carbon offset unit, then why is it denoted in MWh instead of tonnes CO2-e?

Ownership

How can you prove that the purchase of one LGC displaced electricity from a coal-fired power plant, let alone that the electricity you purchased and that comes out of the socket is actually green and clean? The problem here is that all electricity (provided you have do not have a direct power line connection of course), is fed from the generator into the grid. Unless you have a residual energy mix factor (discussed below), you just don’t get to claim the wind electrons and the rest of us are stuck with the coal electrons (#electromagnetism). But let’s assume that a newly built renewable energy generator reduces the output of an existing coal-fired power plant, thus reducing CO2-e emissions. The emission reduction does not occur directly at the renewable energy generator, but indirectly at the coal-fired power plant. Should you be able to claim ownership over the emission reduction that is out of the direct control of the renewable energy generator? Maybe that is the reason why LGCs are measured in MWh generated and not tonnes CO2-e emissions abated?

Questionable additionality

Additionality assesses cause (revenue from selling a carbon offset unit for producing a public good) and effect (generation of renewable energy and/or reduced CO2-e emissions), and is measured as a change compared to a business-as-usual baseline. Additionality can be assessed against different criteria, including the requirements that the project is not mandated by law, is not common practice, involves an eligible technology, or is not profitable without revenue from carbon offsets.

LGCs are tested for additionality. Yet these additionality tests are rather minimal.

The regulatory test requires that the renewable energy generation must not be counted toward RET compliance (LGCs are also the compliance instrument of the RET, and the RET does not work without LGCs). However, to determine this adequacy of this assumption requires consideration of the economics of investments in renewable energy. The question is whether private business bases investment decisions on the willingness of customers in the voluntary market to make a long-term commitment, instead of relying on a long-term revenue stream from selling into the compliance market (under the RET, liable entities are required to purchase and surrender a certain amount of LGCs each year).

In this context, it is also necessary to discuss the residual energy mix factor. A residual energy mix factor is the emission factor after contracted renewable energy has been removed from the grid.  In other words, if 10% of the grid’s electricity had been bought as GreenPower, those 10% of renewable energy would not be counted towards the emissions intensity of the electricity supply (market-based approach). Currently, excluding GreenPower sales from current state-based emission factors to calculate a residual mix emission factor results in a difference that is less than the existing uncertainty associated with scope 2 emission factor estimates. As such, the Department for the Environment and Energy advises that the residual mix emission factor for use under the market-based method can be deemed to be identical to the state-based grid factors. If the contribution to the voluntary market is so small, then it appears highly unlikely that selling GreenPower or LGCs for voluntary surrender is a significant driver for investment.

A technology test confirms that electricity is generated from an eligible renewable energy technology (e.g. wind, solar, or geothermal).

The start date test sets the earliest acceptable start date of a project (i.e. 1997). Any renewable energy capacity installed before this start date is not eligible to produce LGCs.

To define LGCs that have passed these three tests as additional, implies that all renewable energy generation capacity outside the RET and built after 1 January 1997 was built because of the revenue they are generating from LGC and GreenPower sales into the voluntary market.

Double-counting of the environmental benefit.

Lastly, there is the issue of double counting the environmental benefit of voluntarily surrendered LGCs and GreenPower. Emissions associated with the consumption of electricity are estimated by multiplying the state-based emission factor with total electricity consumption. This emission factor represents the emission intensity of the total electricity generation of a state (e.g. 70% coal, 10%gas, 20% renewables). We already know that LGCs are equivalent to renewable energy generated and delivered to the grid. That means that the increased proportion of renewable energy in the mix also leads to a lower grid emission intensity. Can you see where this is going? An organisation can benefit from both the LGCs and GreenPower serving as offsets, as well as from a lower emission factor for grid electricity to calculate its carbon footprint.

Granted, this is inherently technical. And it does not mean that we should not continue to encourage and incentivise the uptake of renewable energy projects, nor that renewable energy projects cannot be treated as carbon offsets. However, carbon accounting is technical and it is critically important that we ensure technical credibility and address additionality in estimating an organisation’s CO2-e emissions and assessing its offsets.

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