So, is it a Carbon Offset or What?

Semantics and carbon accounting

A little over a year ago, Canary Media published a profile of WattCarbon titled “Carbon Credits Could Soon Fund Distributed Clean Energy Projects”; about six months before that, we released a blog post titled “Introducing Carbon Offsets from Buildings”. Elsewhere, I’ve been pretty critical of carbon offsets, describing them as a scam designed to perpetuate our reliance on fossil fuels. This week, after a couple of news articles (see here and here) described the new WEATS registry as enabling companies to offset their carbon emissions, some folks raised their eyebrows at what seems like a double standard. Carbon offsets for me, but not for thee, perhaps.

This question is valid and I’d like to spend some time in this blog post reconciling this seeming contradiction, but also describing how my understanding of the problem has continued to evolve as we’ve gone deeper over the past year or so.

EACs versus Carbon Offsets

Of all of the ways in which my thinking has evolved since starting WattCarbon, probably the single biggest change comes in the unit of measurement. Today, we think in terms of EACs (which represent watt-hours of electricity). When I started the company, I thought in terms of tons of carbon (the common currency of offsets). The reasoning at the time was that “carbon” better reflected the environmental costs and benefits of energy than a metric that was focused solely on the energy unit. At the time (and mostly still today), RECs in the United States and Guarantees of Origin in Europe are farcical in their false equivalency for clean energy projects. If we could calculate in carbon instead of in megawatt hours, we might better see the difference between a wind REC from west Texas versus a solar REC from West Virginia.

However, by the time we launched our pilot marketplace last summer, we had transitioned to using EACs as our unit of measurement. Even still, we were using watt-hours to measure solar and demand response and tons of carbon to measure heat pumps. One could be forgiven for being confused about what was what.

We plucked the term EAC (Energy Attribute Certificate) from the WRI’s GHG Protocols, where the guidance states,

“Energy attribute certificates are a category of contractual instrument that represents certain information (or attributes) about the energy generated, but does not represent the energy itself…Historically, most certificates for policies or consumer programs have been generated from renewable energy resources…but depending on their intended purpose or usage certificates can be generated from any or all generation technology types. For example, all-generation certificate tracking exists in the northeast U.S. (pg. 80)".

The WRI used the term “energy attribute certificate” as a catch-all to be inclusive of the different systems of clean energy claims in place in the U.S., Europe, Australia, and elsewhere. But the more we worked through the concept of an EAC, the more the watt-hour began to resonate as an appropriate unit of measurement, both practically and conceptually. At the same time, as scandal after scandal emerged from the carbon offset market, the more distance we wanted to put between our work and those schemes that enabled all that greenwashing.

What we like about EACs

It’s a little odd to think about energy as having environmental benefits. There are lots of benefits that we get from energy, but a better environment is not really one of them (we can use energy to improve the environment, such as by sucking CO2 out of the air, but direct environmental benefits are rare). A better way to think about it is that some forms of energy have fewer environmental costs than other forms of energy, and to the extent that we can avoid the energy that comes with high amounts of environmental harm, we should try to price that avoidance value into our markets. However, since most energy markets don’t price environmental costs and benefits directly, we’ve had to invent other ways to recognize the relative value of clean energy.

Today in the United States, environmental commodity markets for energy are organized around RECs, which represent the (otherwise unspecified) environmental benefits of a megawatt-hour (one thousand kilowatt-hours) of clean energy generation. As the WRI notes, these certificates do not represent the energy itself. They represent the attributes of the energy. What makes EACs like RECs valuable is that each one represents a specific unit of energy (as in each gets its own unique ID). The EAC can be registered, certified, and retired to prevent a duplicate claim on the same unit of energy by another party. Given a limited supply of EACs in a market, the price will go up as more and more demand for credible clean energy claims develops. As we create stronger incentives to match energy consumption with a unique claim on an EAC, the demand for EACs will go up, thus increasing the value of clean energy generation. A higher value for clean energy would presumably encourage more investment.

Where the REC markets in the U.S. and Europe have become somewhat dysfunctional (and where claims to net-zero are most bogus) is in the practice of allowing clean energy claims to rest on the purchase of ANY sort of EAC. Without enforcing geographical restrictions, for example, a REC produced in California could get used by a company based in Florida. Without enforcing time matching, a REC produced during the late Spring surplus could be used as a claim against energy consumption during the summer peak. Without requiring any new load requirements, a REC from a decades-old wind farm could be used as a claim on behalf of a recently constructed building. In other words, the lack of specificity of the rules around RECs (and the insufficiency of existing instruments to allow for more specific rules) lies at the root of the problem, rather than the existence of the instrument in and of itself.

A properly designed EAC allows the bar to be raised on claims to clean energy so that we can enforce not just deliverability, time-matching, and incrementality (the three pillars of the Department of Energy’s Green Hydrogen regulation), but also provide space for strategies that explicitly target emissions impacts, such as by purchasing EACs from the dirtiest grids at the dirtiest times of day.

The WRI’s definition of an EAC also hints another key benefit of this type of instrument: recognizing non-traditional forms of generation. WRI’s Scope 2 guidance points to Massachusetts as an example, where all-generation certificate tracking creates an incentive for demand-side energy resources to be deployed. In addition to a traditional Renewable Portfolio Standard based around wind and solar generation, Massachusetts offers an Alternative Energy Portfolio Standard to provide a way for heat pumps and solar thermal to qualify for EACs, while its Clean Peak Energy Standard allows batteries, EV chargers, and other demand flexibility resources to qualify for EACs. Massachusetts requires its utilities to purchase a certain volume of these resources per year, and sets a dollar value for non-compliance, thereby establishing a price floor for the environmental benefits of these resources in that state.

Outside of Massachusetts and a few other states, demand flexibility resources are generally excluded from clean energy attribute markets, despite their obvious environmental benefits and increasingly integral role in achieving 24/7 clean energy goals. While the Federal Energy Regulatory Commission (FERC) has started to require energy markets to start accepting aggregations of demand flexibility resources, no overarching guidance exists on the federal level (new guidelines for green hydrogen tax credits notwithstanding) for EAC eligibility.

Stepping back from the weediness of current policies, one unambiguous fact is that EACs that come from distributed energy resources materially benefit the communities in which those resources are located. By contrast, the value of the EACs that support industrial scale wind and solar facilities largely accrue to the financial institutions that underwrite those facilities.

Ultimately, being able to raise the bar so that clean energy claims are more credible, and being able to expand the pool of eligible resources so that benefits can flow directly into communities, makes the EAC the right type of instrument to use to capture the environmental benefits of clean energy.

Implications for Carbon Accounting

At the end of the day, what we at WattCarbon are driving toward is the elimination of fossil fuels from our energy system. At its core, a carbon offset is designed to justify continuing to burn fossil fuels. In a way, we want to think like Aldo Leopold, who wrote in A Sand County Almanac, “A thing is right when it tends to preserve the integrity, stability and beauty of the biotic community. It is wrong when it tends otherwise.” Either we are enabling continued reliance on fossil fuels, or we are not.

When it comes to energy, all of us are mostly at the whim of regulated monopoly providers who serve us whatever combination of clean and dirty energy maximizes their return on investment. Some of them offer a flavor of a “green power” program, the credibility of which is often quite difficult to defend. The only other way to mitigate emissions associated with energy use is to participate in an environmental attribute market so that you can own a unique claim to the clean energy provided to the grid. From a decarbonization strategy perspective, it is especially important to provide clean energy to the grid when it is otherwise more cost effective for your utility to opt for fossil fuels.

In this sense, an EAC should actually be thought of as a carbon offset. It is a specific type of offset that addresses emissions associated with energy consumption over which you have very little control of the supply.

Therefore it is the responsibility of certificate providers (like WattCarbon) to provide enough visibility into the entire set of attributes associated with the unit of energy so that explicit emission-eliminating strategies can be followed, whether it be through the three pillars test, a focus on procuring within high emission grids, or an electrification strategy to accelerate the transition from gas to electric water and space heating.

It will be up to regulatory and standards bodies to determine which attributes qualify for which types of programs. For example, New York City’s Local Law 97 allows the purchase of EACs, but only from systems that are directly connected to the city’s electrical grid, and with no time matching required. As noted, the Inflation Reduction Act’s proposed Green Hydrogen standard is much stricter. WRI plans to release updated Scope 2 guidance in the next year that will probably set the bar higher than what exists today. Given the diversity of regulatory and standards guidance, the EAC is the most flexible way to track energy attributes so that buyers (and other stakeholders) can know whether or not any particular EAC meets a given set of standards. We might think of a “national wind REC” as the lowest possible standard while the three pillars test represents the most stringent federal standard to date (exceeded only by a few 24/7 CFE commitments from the likes of Google and Microsoft).

Call it what it is - our best effort at this point

So is the EAC a carbon credit? Probably not in the way most people think about carbon credits. Does it try to connect the dots between clean energy generation and carbon emissions? Absolutely. Is it perfect? Almost certainly not!

We are facing a narrow window for eliminating fossil fuels from our energy system and the road ahead will be bumpy. I hope that my understanding of the nuances of these definitions continues to deepen and alongside that my views continue to evolve. All of us need this flexibility in our thinking to adapt to changing constraints and opportunities on the road to decarbonization.