Product Abstract

This EPRI Technical Update provides senior managers and environmental staff of U.S. electric companies with a comprehensive understanding of the role that greenhouse gas (GHG) emissions offsets can play in their own company's future carbon emissions compliance strategy and how offsets offer a key contribution to meet global GHG emissions reduction targets faster and at comparatively low cost. So-called “project-based mechanisms” use the power of markets to supply cost-efficient GHG emission reductions to entities that need to reduce their emissions.

The report describes emission-trading systems in the European Union and in New South Wales (Australia) conducted under the Kyoto Protocol (KP). It also discusses project-based mechanisms in the United States, in particular in the Northeast Regional Greenhouse Gas Initiative (RGGI), and growing voluntary markets for GHG emissions reductions. The report then details rules and regulations for projects; analyzes volumes, prices, and trends; and outlines the main price drivers and risks of the market.

Two factors are especially critical to the successful development of markets for GHG offsets: first, guaranteeing the environmental integrity and credibility of the credits generated by GHG reduction projects and, second, ensuring that markets are linked globally, thereby enabling reductions to take place where it is most cost-efficient. The markets are currently nascent and fragmented, but they have the potential of growing into a single large commodity market in the next decade.

Objective

A thorough understanding of the GHG emissions offset market will help the U.S. electric sector be in a stronger and more informed position to participate in and inform development of climate-change legislation and regulation and help companies to make strategic decisions to cost effectively acquire and use GHG offset to reduce their future carbon-related financial and operational liabilities. This report provides high-quality, updated financial and technical data on carbon offsets and highlights GHG abatement project types and countries with a high potential. This report also explains the risks of the market and the best strategies for various market actors. Large utilities will benefit from an in-depth introduction to the global market and a discussion of the role global carbon credits could play in a compliance market in the United States. Utilities wishing to invest locally will find useful guidelines and will be able to learn and build upon the experience of projects and actors worldwide.

Approach

The goal of the report is to provide up-to-date, detailed intelligence about project-based mechanisms around the world. The project team relied on information from public and private databases and published research.

Results

Readers will acquire a deeper understanding of the following key issues:

What GHG offsets or credits actually represent and how they are created

How GHG offsets can be used to reduce potential climate change-related compliance cost while satisfying strict requirements to ensure environmental integrity

How the carbon markets are organized and which options are available to U. S. electric companies and others in GHG abatement project development or GHG offset trading

What financial and operational risks are associated with GHG offset investments and how specific risks relate to the expected acquisition cost of offsets

Application, Value and Use

Global carbon markets continue to evolve at a fast pace and climate policy continues to entail significant implications for the future business strategies of the electric sector. Leading companies need to stay updated on key developments to inform policy evolution and quickly adapt business strategies to changing market conditions. An offset strategy is likely to be a key component of the long-term strategic plan of any electric power company and, as such, complement fundamental business decisions on new generation investments and asset replacement.

EPRI Perspective

EPRI member companies have long had an interest in the use of offsets as a cost effective way of mitigating GHG emissions. Over the past decade EPRI members have supported fundamental research and development activities related to evaluating and implementing GHG offsets such as forest carbon sequestration and nitrous oxide (N₂O) emissions reductions associated with altered crop production practices in agriculture. As climate policy continues to evolve at the state, regional and federal levels in the United States, electric companies will be key participants in defining evolving GHG offsets policy. This report is designed to provide EPRI members and others with a comprehensive understanding of the part that GHG emissions offsets may play in reducing global GHG emissions. EPRI hopes this improved understanding will lead to more thoughtful and productive public policy deliberations about the future of climate policy in the United States.