Carbon offsets should have the same value as PPAs for project finance


Written by Alexis Leroy, CEO ALLCOT


Carbon offsets are just as valid and valuable as renewable power

Anyone involved in developing clean energy projects around the world will be familiar with the demands of securing project finance. Lenders typically want to see a solid revenue stream before they consider financing renewable energy or low-carbon energy projects.

Normally, a Power Purchase Agreement (PPA) fits this requirement: a long-term offtake agreement with a high-quality buyer offers confidence that the project will generate steady cash flow to service its debt.

Occasionally a PPA by itself may not be regarded as a sufficient guarantee of performance, or the off taker’s credit quality may not be sufficiently strong. In such instances additional security can be added in the form of liquid guarantees or performance bonds.

But there is another revenue stream that can play its part: carbon offsets.

Carbon offsets represent the saving in emissions of carbon dioxide and other greenhouse gases (GHGs); they’re measured against a baseline in which the project would use legacy technologies. In this way a wind farm, a solar park or a waste-to-energy plant represents savings in GHG emissions compared to coal or even gas-fired power.

The world is waiting for a new global offsets market to replace the Clean Development Mechanism (CDM) that will end when the Kyoto Protocol is superseded by the Paris Agreement in 2021. But in the meantime, there are plenty of opportunities to develop and sell carbon offsets for some existing markets. The revenues generated should help secure project finance.

South Africa and Colombia are leading the way in creating high-confidence markets for carbon offsets, by allowing them to be used in part payment of their respective national carbon taxes and thereby granting them a monetized value – at least on paper.

Besides, the International Civil Aviation Organisation is preparing the launch a global offsetting market for airlines in January 2021. Demand for offsets from airlines participating in CORSIA is projected to reach as much as 174 million tonnes of CO2 equivalent (tCO2e) tonnes in 2025 and could be nearly 8 billion tCO2e by 2040.

And beyond these formally established, government-backed markets is a wide variety of voluntary carbon offsetting programs operated by large industrial, commercial and retail companies around the world. According to Forest Trends, nearly 49 million offsets were retired by governments, companies, and individuals in 2018.

There are plenty of challenges facing the use of carbon offsets as securities for project finance. Firstly, the revenue stream from offsets would likely form only a fraction of the overall project costs, and for some, it may simply not be worth the effort to incorporate offsets into a finance agreement.

Also, revenue streams from offset sales tend not to be regular, but “lumpy”. Offset projects must submit independent verification and reporting of the volume of emissions reduced before they can apply for the issuance of those credits, and the costs associated with that process usually mean they can only afford annual or even biennial issuance. Such periodic issuance may not be steady or regular enough to satisfy a lender.

Yet at the same time, using carbon revenue to secure financing may yield two significant benefits: the quality and the reliability of the purchaser. In the case of countries with carbon taxes that can be part-paid in offsets, the guarantor of demand is the government, and industrial emitters must abide by the law.

Similarly, in the case of CORSIA, the end-buyers will be international airlines seeking to comply with government-established, UN-approved targets.

Why is the end-use of the offset important? Because lenders are concerned not only with the scale of revenue streams from a project but also the reliability and creditworthiness of the buyers. Higher-quality off-takers will mean more security for the seller and hence for the lender.

Secondly, it’s important to understand that there is a direct link between the security of the supply of renewable electricity and the security of the supply of carbon offsets. It should be the case that any lender that relies on a PPA as security against project finance, should also be able to rely on the flow of offsets through an emissions reduction purchase agreement (ERPA).

Lenders will consider the reliability of the power project – how much power it is expected to deliver across the length of any contract – when estimating the value of the PPA. The PPA, therefore, is a measure of the potential supply of power, and it can, therefore, be a measure of the supply of carbon offsets.

In the case of many reliable renewable energy technologies – waste gas, solar and even wind power – the actual generation of power and the generation of offsets are very closely linked.

A project developer could even use future delivery of offsets as a source of seed capital for a project. This was a common practice under the UN Clean Development Mechanism. By arranging an ERPA with a buyer who is seeking offsets for some compliance or even voluntary purpose, a project developer can then use this ERPA to raise seed capital. To be sure, the volume of offsets may be subject to clipping, but the principle is sound.

So why don’t lenders take ERPAs into account? If we agree that the fight against climate change is paramount, then how can we not support carbon offsets as a valid source of capital, and indeed may be more valuable than megawatt-hours of renewable power generation?

Carbon footprint and Expotural, Feria de la Naturaleza y el Turismo Sostenible


Written by Patricia Piñero, Sustainability Consultant.


Between September 27th and 29th, the EXPOTURAL Nature and Sustainable Tourism Fair opened in Madrid in Hall 1 of IFEMA.

EXPOTURAL has become the national reference for sustainable tourism, where nature and biodiversity protection has the greatest role. It is a space to propose and facilitate the promotion and development of destinations through sustainable rural tourism.

A 6000 m2 venue hosted this celebration, accommodating numerous activities available to attendees. Among them the award for the best initiatives in sustainable tourism, being the winning company Bahía de Santander, and secondly, Casa del Tesoro. Bahía Santander received the award thanks to its ecotourism and environmental education project focused on the recovery of the osprey, through the installation of innkeepers and nests in height. A meeting point was also set up for professionals of Active Tourism business tables so that both exhibitors and attendees could participate in these business rounds.

In addition to all these activities, the II International Forum of Nature Tourism and Sustainable Tourism was held, a series of presentations and round tables developed within the pavilion, and structured in different blocks, which dealt with topics such as Ecotourism, Local Development and Sustainability, rural and active tourism, etc. All under a Responsible Tourism approach, above all, for the climate change mitigation.

Coinciding with the general strike called worldwide to support the fight against climate change, EXPOTURAL actively participated in this cause by dedicating the first day of the II International Forum of Nature Tourism and Sustainable Tourism to Climate Change, the latter being one of the structural axes of the fair’s philosophy.

Another edition in which we had the pleasure of being invited to participate in the forum and of being able to be an active part of EXPOTURAL, not only in the presentation we offered to attendees on the management of the carbon footprint for companies, but also contributing to offsetting the fair’s carbon footprint itself. 

Alfonso Polvorinos, technical director of the Fair and the Forum, contacted us some time ago to explore how we could assess the impact of the fair on climate change and mitigate it in the best possible way.

For the 2018 edition, we calculated the fair’s emission identified them and drew up a reduction strategy as recommendations adapted for it. After this study and conclusions, we offered the possibility of compensating for the emissions resulting from the activity of the fair, to obtain a neutral carbon balance. This was done and we have continued working to make it possible again in this edition.

This emission offsetting consists, in broad terms, of the economic investment in carbon credits, an international decontamination mechanism introduced by the Kyoto Protocol for the reduction of the emissions causing climate change.

Therefore, the fair compensated these emissions generated through its collaboration with the RMDLT project, a forestry project located in the Brazilian Amazon that works to protect this fragile ecosystem from the rampant deforestation of the jungle, while allowing degraded forests to have the opportunity to regenerate.

The project contributes to reaching 12 out of the 17 United Nations’ Sustainable Development Goals, among the most prominent we can mention: the improvement of the quality of life of the families that reside within the area and the land tenure of the people committed to the conservation.

For more information check our website www.allcot.com, or you can contact us directly at the following email ppr@allcot.com

Reforestation of the Amazon as a key climate change solution


Written by Mercedes García, Climate Change and Sustainability Manager


Between January 1st and August 18th, 2019, forest fires have increased 83% compared to the same period of 2018, according to the National Space Research Institute of Brazil (INPE). According to the INPE satellite images, more than 70,000 spotlights were produced, of which more than half were located in the Amazon region. However, fires are not the only elements that are devastating the Amazon rainforest, the country’s deforestation has reached its highest level in the last 10 years.

 According to a new study in the journal Science, “planting billions of trees around the world would be the cheapest and most effective way to tackle the climate crisis”. The same study confirms “a program at this scale could remove about two-thirds of the carbon dioxide (CO2) emissions caused by human activities since the start of the industrial revolution”. Taking into account that up to 20% of annual GHG emissions come from deforestation activities, the impact of properly managing these activities could imply a reduction of more than one million tons of CO2e (study published in Global Change Biology, carried out jointly with scientists from the Global Forest Watch of the World Resources Institute (WRI).

However, for many small landowners in developing countries, it is not profitable to maintain a small tree plantation. Without aid, financing or awareness policies, these small owners will choose to continue cutting down trees to allow livestock to enter their property rather than conserving the forest in its natural state or reforesting the degraded. This is the key point to work on, and that is why REDD projects that generate carbon credits are so beneficial for society and the fight against the climate crisis.

But, what exactly is the REDD mechanism? To understand the mechanism, it is necessary to go back to 2005 when a group of countries, led by Papua New Guinea, managed to talk about avoided deforestation at the Conference of the Parties, held in Montreal (COP 11). From that moment the discussion on the role of forests in the fight against climate change returned to the international debate and it was two years later, in Bali, when the UNFCCC recognized the reduction of emissions from deforestation and forest degradation (REDD) as a valid mechanism in the fight against climate change.

According to the Bali Action Plan signed by the Parties at that conference, REDD + refers to the reduction of emissions from deforestation and forest degradation; in addition to conservation, sustainable management and improvement of the carbon stock of forests in developing countries. It is a more complex mechanism than a GHG emission mitigation project of the CDM type since it is necessary to work on forest governance ensuring the rights of local communities and forest-dependent indigenous peoples.

However, the result is that the REDD mechanism allows conserving forests immediately and profitably. The REDD mechanism is based on calculating (using internationally accepted methodologies) the amount of carbon that is no longer emitted, and converting it into a carbon-offset carbon credit. These credits are sold to large companies that require offsetting GHG emissions from their activities, and part of the income obtained is reinvested in local communities to contribute to local economic development. There are examples of successful initiatives in many countries, and the reinvestment of those benefits has allowed activities as beneficial to society, for example, the creation of cooperatives for local trade, conversion of “illegal loggers” into forest protection agents, infrastructure reinforcement such as schools and hospitals, distribution of water purification systems or efficient kitchens that reduce biomass consumption.

The fight against the climate crisis is not easy or cheap, but it will be more difficult and expensive to face the consequences of not doing so, and the REDD mechanism can be configured as one of the most sustainable, profitable and beneficial engines in the short and medium-term of the fight.

 

ROUND TABLE ON THE CARBON MARKET

 

 

The Ministry of Ecological Transition and Solidarity and the General Delegation of Québec in Paris will hold a seminar called:

QUÉBEC – FRANCE: ROUND TABLE ON THE CARBON MARKET

It will take place on September 30 in Paris, France. It will feature the persistence and participation of Elisabeth Borne, Minister of the Ecological Transition and Solidarity of the French Republic and Benoit Charrette, Minister of Environment and Struggle against Quebec Climate Change.

This event will be a great opportunity to discuss carbon pricing and the fair and equitable transition to a less carbon economy.

Some of the objectives of the seminar are:

  • Present key tools and trends in carbon pricing.
  • Illustrate how carbon prices can contribute to achieving the objectives of the Paris Agreement and support a fair and equitable transition.
  • Highlight the importance of international collaboration for success in the fight against climate change, through carbon pricing.

Delegates of ALLCOT will be present to know in depth the details of this interesting and very nutritious session, giving the company a local and international vision of the Carbon market, which will allow us, to develop new tools and improvements in our services.

You can find more information about the seminar, including its programming by clicking on this link (In French language)