Powered Up—Taking Financial Viability of Solar to Next Level with Carbon Credits

Despite recent economic slowdowns, the global voluntary carbon credit market has nearly quadrupled since 2020, reaching a value of about $2 billion.

COMMENTARY

California, leading the way in the U.S. market, is again pushing for more action to combat climate change by implementing a grant program of $200 million for remote and disadvantaged communities to implement renewable energy systems. With the cost of solar decreasing and the U.S. microgrid market growing at a similarly high pace, companies are taking notice and investing in the increasing profitability of solar projects that generate carbon credits.

Because of their entry into the market at this pivotal time, these companies are reaping the rewards of high returns and are capitalizing on this growing market opportunity while the industry is at the forefront of climate change mitigation.

What Are Carbon Credits?

Carbon credits are a market-based mechanism designed to encourage companies and individuals to reduce their carbon emissions. Essentially, a carbon credit represents a permit to emit a certain amount of greenhouse gases into the atmosphere. In the compliance markets, if a company or individual emits less than their allotted amount, they can sell their unused credits to those who have exceeded their limits. There is also a voluntary market where firms can choose to offset their own emissions with credits. In countries without a mandatory compliance market, like the United States, these voluntary markets present many unique opportunities.

Solar and Credits: Tried and True

As governments around the world introduce more stringent emissions regulations, companies are looking for ways to comply while minimizing their costs. Renewable energy systems are an established way to reduce emissions for compliance and ESG (environmental, social, governance) goals. However, despite decreasing costs of solar and battery storage, there still needs to be a strong case for investing in projects that can cost millions of dollars. Carbon credits can provide extra cost-effectiveness for companies to reduce their emissions through renewable energy. This is particularly attractive for those industries that are particularly difficult to decarbonize, such as heavy industry.

Furthermore, carbon credits can provide a stable revenue stream for renewable energy projects. Unlike traditional energy sources that are subject to fluctuations in fuel prices and energy demand, renewable energy projects generate a consistent amount of clean energy over time due by circumventing the local utility provider. This in turn allows them to reliably generate carbon credits, which can be sold on the market.

Investment Potential

These factors make renewable energy projects more attractive to socially responsible investors, as they provide a stable and predictable return on investment. Credits, particularly those generated by renewable energy projects, offer a clear and measurable way for investors to support sustainable impact.

The market for voluntary emission reduction credits is projected to grow to $50 billion by 2030. However, to reach this milestone and drive growth in this market, there needs to be projects that make financial sense, but also generate quality credits. Microgrids and renewables have already been proven a financially viable investment and therefore present a great opportunity to capitalize on the generation of carbon credits.

How Do Credits Get Created?

This is achieved through the process of submitting project information, documentation, and results of a methodology" showing the scientific calculation of how many credits a project will generate, to a carbon registry organization. This data is referred to as a Project Design Document, and in addition to providing the initial calculation forecasts, must be adjusted every year with actuals. This is a difficult process for an organization to undertake without experience, so there are companies who specialize in documenting and managing carbon credit projects.

Capitalizing the Opportunity

For organizations in the U.S., smaller, specialized firms with less overhead costs and bureaucracy may be more effective in completing these extensive documents than the organization looking to undertake a renewable energy project. In such cases, the company will benefit from being able to focus on the main project implementation while the smaller firm can finish documentation and verification on a similar timeframe, so it is approved by a registry by the time the system is operational.

The global carbon markets are growing at a rapid pace with some of the largest influxes of participants coming from Asia and South America however, countries like the U.S. are getting left behind. Without a country wide mandatory compliance market, companies have been slower to adopt such sustainable initiatives. California's constant initiatives to push resilient renewable energy are helping to spur the market forward and lead by example. For these communities in difficult financial situations, carbon credit monetization makes the appeal to undertake a project even greater.

-Chace H. Bower is vice president of Finance with the California Climate Exchange.

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