Can PV Play in the Carbon Market?

By Shayle Kann, Energy Analyst, GTM Research

These days, speculation about the future of U.S. climate and energy policy abounds. Since the comprehensive American Clean Energy and Security (ACES) bill passed the House of Representatives in June, prospects for national legislation are better than they have ever been. But questions remain: Will the Senate pass corresponding legislation this year? Will the Senate and House bills be reconciled? And, will we develop a regulatory framework for reducing greenhouse gas emissions that can be used as a bargaining chip at the international climate talks in Copenhagen this December?

These questions are critical and their answers will play out over the coming months. But there is another, more direct question for members of the U.S. PV industry: how will cap-and-trade impact the economics of PV projects in the U.S.? While some legislative provisions, such as a national renewable portfolio standard, are familiar and easily comprehended, the implications of cap-and-trade remain misunderstood by many members of the U.S. solar industry.

Much of the confusion surrounds the concept of “carbon credits,” and the role they will play in making solar and other renewable energy technologies more attractive. There is no single definition of a carbon credit, but the most important distinction to make is between the voluntary and compliance carbon markets, which function independently of one another. The voluntary carbon market was brought about by demand from individuals, organizations, and corporations to reduce their carbon footprint beyond their own personal reductions or (in some cases) in lieu of them. The tradable commodity in this market represents the reduction or avoidance of one metric ton of CO2 equivalent (CO2e). This also incorporates non-carbon greenhouse gases. This commodity goes by a number of names - carbon offsets, carbon credits, or Voluntary Emissions Reductions (VERs). If the market is working correctly, the purchase of one VER should reduce global CO2 emissions by exactly one metric ton.

Compliance markets are a function of regulated cap-and-trade programs. The Kyoto Protocol-driven European Emissions Trading System (EU ETS) is the largest of these markets and constitutes the bulk of credit trading today. But The U.S. has its own in the Regional Greenhouse Gas Initiative (RGGI), a regional cap-and-trade program in the Northeastern U.S. that began operation on January 1, 2009. The carbon credits in these markets (also known as Certified Emissions Reductions - CERs – in the EU ETS) form the mechanism to control and reduce emissions within the capped sector. When summed, the emissions credits in a compliance market equal the total cap placed on the system, or the overall limit on emissions. It is important to note that while the unit for a compliance credit (1 metric ton CO2e) is the same as a voluntary credit, a compliance credit does not equal one ton of avoided or reduced emissions but rather one ton of allowed emissions. These credits are allocated or auctioned to liable parties such as electricity generators, petroleum producers, and major industrial emitters. Liable parties have three compliance options:

1. Reduce their own emissions sufficiently such that they do not exceed their allocated credits,

2. Purchase excess credits from other capped entities that have gone above and beyond their requirements, or

3. Purchase avoided emissions credits, or carbon offsets, from outside the capped system.

In the case of the EU ETS, the avoided emissions credits must come from developing countries through a process called the Clean Development Mechanism. In the U.S. likely scenarios include similar offsets from developing countries in conjunction with some domestic offsets from non-capped sectors of the U.S. economy, such as the agricultural sector.

So why does this matter to the U.S. PV industry? The short answer is that it doesn’t - not directly at least. A grid-connected PV facility in the U.S. is part of the capped electricity sector. The onus to reduce emissions will likely be on utilities and large-scale purchasers of power, so adding solar to their portfolio will meet the first compliance mechanism mentioned above, not the third. In other words, liable entities will count their emissions based on all assets in their portfolio, whether through ownership or a PPA.

The true benefit to U.S. solar projects will be the increased cost of fossil fuel-based generators. By adding a carbon price to coal and natural gas generators, PV will become more attractive in comparison. However, it’s crucial to understand that a PV generator will never be in possession of “carbon credits.” These will be allocated and traded among liable parties (utilities), and installing grid-connected PV in the U.S. will not qualify to create new credits in the market. In contrast, practices outside the capped sector, such as soil tilling practices, may be able to create avoided emissions credits (offsets), which can then be sold into the capped system.

In short, cap-and-trade will provide significant, albeit indirect, value for grid-connected PV and other renewable energy generators by making the alternative more expensive. The good news is that American PV developers won’t have to deal with carbon finance structures to build projects.