Companies are increasingly looking neutralize their carbon footprints as pressure to do so mounts from stakeholders ranging from investors to consumers. One credible strategy, especially to achieve short-term goals or to address emissions that cannot be otherwise reduced, is to purchase carbon offsets. To help corporate leaders understand what’s happening in the market for carbon offsets, we sat down with David Hughes, Commercial Director of Renewables and Cleantech at Schneider Electric Energy & Sustainability Services.
David Hughes, Commercial Director, Renewables & Cleantech
David Hughes has a deep understanding of the common challenges facing corporate professionals and been engaging and advising corporations on their renewable energy and sustainability objectives for over a decade.
What’s happening right now in the global renewable energy and carbon markets?
An increasing number of companies have set ambitious targets to reduce carbon emissions in the past few years – both through independent action and through globally-recognized commitments such as RE100 and the Science-Based Targets Initiative. Many of these companies have strategically entered long-term power purchase agreements (PPAs) or used onsite solar PV to meet their commitments.
But here’s the catch - PPAs can only address a company’s Scope 2 emissions. Crafting an effective strategy to meet broader emission-reduction targets requires a deep understanding of each of all three emission scopes, including how to effectively address and report them. To complement Scope 2 efforts, companies with ambitious targets need to address their direct emissions (Scope 1) and the indirect emissions from their business travel, waste, and value chain (Scope 3). These are a lot harder to reduce. Many companies are combining reduction strategies—like fuel switching and circularity—with the purchase of carbon offsets. As a result, we’ve seen significantly increased demand for offsets in the past six months, causing a constrained market with a subsequent price increase.
What are the underlying macroeconomic trends that are driving these market developments?
The consensus is that climate change is impacting businesses now, and that the resulting extreme weather events, power outages and wildfires can cost companies millions of dollars. Investors are more active than ever on this topic and are now beginning to factor in climate risks and company commitments to renewable energy and sustainability as crucial elements when assessing their future profitability.
These trends are pushing the corporate sector to take action to address their environmental impact and are driving regulatory change. For example, U.S. states are revising their Renewable Portfolio Standards (RPS) to include higher percentage of renewable power in their grid mix, and in December of 2019, the European Union presented its European Green Deal. As countries level up their decarbonization objectives, future regulation may very well require companies to adopt their own aggressive reduction programs. Businesses taking a proactive role now will benefit moving forward by being ahead of the curve.
Why can’t most companies rely on renewable PPAs alone to reach their renewable energy goals?
PPAs are long-term, large-scale, complex contracts that only address Scope 2 emissions—and they aren’t right for every company. Even those companies using PPAs find that they often need multiple projects to reach their goals, or that they need to purchase Energy Attribute Certificates (EACs) in addition. Many are constrained by geography; PPAs are only currently viable (for most companies) in the U.S., Europe, Australia, India, and Mexico. Companies with load in other regions have to rely on either onsite generation, green utility or tariff programs or certificates to meet their goals.
Companies need to complement their initiatives with a portfolio approach that addresses all emissions. They’ve got to focus on reducing load and developing a carbon-free procurement path. But regardless of how comprehensive a company’s procurement strategy is, there are areas of operations where carbon emissions are simply unavoidable. That’s when carbon offsets become most valuable. First, focus on energy efficiency and innovative technologies or process redesign. Then, buy offsets for the remainder. They are a key addition to a strategic, sustained plan to reduce the environmental impact of business operations.
What are the implications for companies that are working toward long-term goals?
For companies that have longer-term decarbonization goals, it does not mean that they are insulated from today's economic forces in the market for renewables and offsets. Companies with mature strategies are initiating environmental commodity solicitations earlier, to start their procurement process before the market availability decreases and prices go up.
Organizations can face internal governance barriers when making the business case for renewable energy or carbon offset procurement. An early start also gives companies time to gain the buy-in of crucial stakeholders.
How should companies navigate this market constriction?
Ultimately, the best way for a company to achieve its carbon reduction and renewable energy goals is to build a strategic, holistic roadmap. Organizations will face a growing need to decarbonize their energy use over time. Even if your company’s end goals for decarbonization are far into the future, it is important to prepare now to mobilize.