Over the past ten years the cost of renewable energy technologies has plunged and today, renewables are outcompeting even the cheapest coal plants, according to the International Renewable Energy Agency. With questions about the need for carbon markets to finance green energy already circling in many places, two of the leading voluntary carbon market standards, Verra’s Verified Carbon Standard (VCS) and the Gold Standard, decided in late 2019 to prohibit most renewable energy projects – exceptions included projects in least-developed countries (LDCs).

A second key exception under the VCS is for those projects registered prior to the end of 2019 where the project owner or developer had opted for three seven-year crediting periods (as opposed to one ten-year period). Such projects could apply for their crediting period to be renewed post 2020 but are subject to a “regulatory surplus” assessment (to prove the project activity and outcomes are not mandated by any regulation or law).

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China wind farm
China made extensive use of the clean Development Mechanism, created under the Kyoto Protocol, to set up green projects such as wind farms, small hydro projects or methanisation units. (Photo by LIU JIN/AFP via Getty Images)

Since 1 January 2020, there has been a steady stream of projects renewing their crediting periods with the VCS, many of them originally developed for the Kyoto Protocol’s Clean Development Mechanism (CDM) but transferred to the voluntary market when compliance demand cratered in the early 2010s. Under VCS rules, these projects can only claim credits until the earliest end date of all applicable project crediting periods under any greenhouse gas reduction programme – so, if a project was registered under the CDM in 2008, the latest year for which emission reductions can be claimed is 2029, subject to crediting period renewals procedures and assessments.

“In 2008, 2009, the CDM was flooded [with projects],” says Pedro Martins Barata, a former member of the CDM executive board, which oversaw the mechanism’s functioning. “The first big wave was wind, and the second big wave was large hydro, mostly from China.

“The question I still have now is, what exactly were we doing right there, in the sense that there was a huge wave because the technology was becoming market-ready,” he continues. “It is very likely that the CDM, given the prices in the carbon market at the time, did give a push to a lot of wind power projects – but there were many questions about the kind of interaction between what we were doing in the carbon market and what the Chinese government was doing with their feed-in tariffs.”

Additionality questions

More than 200 renewable energy projects in China developed under the CDM are now registered with Verra’s VCS. Of those, 43 have crediting periods starting from 2020 onwards, data in the VCS registry shows, and some of these registered projects are claiming carbon credits for emissions reductions made years ago, including one hydro project (the 4×50MW Dayingjiang-3 Hydropower Project Phases 1&2; VCS project ID 191), which last year was issued with credits for reductions spanning 2006–11. (Just over half of these credits have since been retired or cancelled, with two million of the 3.6 million credits issued having been retired to be brought onto a carbon crypto platform).

“Those projects were developed before we came to the conclusion that they were no longer additional,” says Verra’s CEO David Antonioli, referring to one of the key criteria for carbon market offset projects, that the reductions they yield would not have taken place without the revenue from the carbon credits. “So they were legitimate at the time they submitted their original requests for registration.”

“I can appreciate why folks may be questioning the legitimacy, i.e. additionality, of those projects, but it is important to consider that additionality is assessed at the beginning, when a project first submits its request for registration," Antonioli adds. "To open up the additionality question after would be unfair to project developers, and would also totally upend the market; nobody would invest because investors would fear that someone might move the goalposts once an investment has been made.”

However, Antonioli says, the baseline for projects is reassessed with each application to renew a crediting period. “So, if the grid gets cleaner over time, you will get fewer credits over time,” he explains.

Capex concerns

For some investors, the carbon revenue streams were never a given. “The capital expenditure of renewable energy is quite significant and revenue from carbon was always very uncertain,” says Geoff Sinclair, managing director of climate fund manager Camco, which invests in clean energy. “So in some projects it [the carbon market] helped the developer to boost their equity returns, but it was always viewed as a speculative addition.

“If you are spending $200m on, for example, wind or solar, you are fundamentally more interested in what [price] you get for the electricity,” he suggests. Camco started out as a carbon aggregation and offset project developer before moving into clean energy investment.

Sinclair believes carbon finance likely did help marginal projects get over the line, however, such as those in “difficult” locations like Syria and Liberia. “The equity requirements are quite high because of country risk, but if you have this extra commodity, which is issued outside the country and traded outside the country, it can help,” he says.

CDM success story

Despite the historic controversy over approvals of Chinese wind power projects under the CDM, Barata also says the scale of investment in the technology is a success story. “We invested heavily as a world community into lowering the cost of wind in China, because that is a game changer in climate change,” he says. “If the carbon market did anything to contribute to lowering [the cost] – even if it only accounted for 10% of the cost reduction we saw in those years – that 10% is huge, that 10% is forever.”

“It fits with what the voluntary carbon market was there to do,” agrees Hugh Salway, head of environmental markets at the Gold Standard. “You have a success story with governments […] providing subsidies for renewable energy to an extent that […] the technology has become cost-competitive, and that is when the voluntary carbon market should step back because [the] work has been done and you don’t need the additional carbon finance.”

Despite the moves by Verra and the Gold Standard, some still see a role for the voluntary carbon market in the renewable energy sector.

“The world desperately needs renewable energy,” says Andrea Abrahams, managing director of the International Carbon Reduction and Offset Alliance. “The growth of renewable energy to deliver the Paris Agreement […] and displace fossil-based power generation is absolutely critical.” It is imperative that renewables are incentivised, she believes, including via carbon credits.

Barata agrees with the approach taken by VCS and the Gold Standard to restrict support for renewable energy projects to those most in need. “[For] off-grid solar in Africa or in LDCs, or even large-scale wind – anything that involves putting a large amount of capital in places where capital doesn’t tend to migrate to – that is where you could still have a case for additionality,” he says.

MENA opportunities

One programme that is taking a different approach is the Global Carbon Council (GCC), a Doha-based initiative backed by the Gulf Organization for Research and Development, a non-profit organisation driving sustainable development in the Middle East and Northern Africa (MENA). Under its voluntary carbon market standard, the GCC automatically deems additional new renewable energy projects – including both large-scale grid-connected and large-scale off-grid (for example, remote or rural grids) connected – if the technology chosen does not already account for more than 2% of installed capacity in the host country, or installed capacity in the host country is equal to or less than 50MW. These requirements are set out in a 2018 ‘positive technologies’ document for the CDM.

So far, the GCC has officially approved two projects that are publicly viewable, one wind and one hydro power, both of them in Turkey. At least a further 135 are in the pipeline, dominated by India and Turkey.

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“I assume they are selling those credits,” Antonioli says of the GCC programme. “There is a market out there.”

“The [carbon market] standards [bodies] [have] to be [the] arbiters of what is considered additional or not,” Abrahams says in response to the suggestion that buyers may shun renewable energy credits owing to questions about additionality. “If we start doing the job on behalf of the standards [bodies], then we undermine their credibility in the market.”

Funding for the future

Verra sees potential for other aspects of the clean electricity transition to be financed via the voluntary carbon market, including improved transmission, distribution and storage capacity. “One of the reasons we don’t have renewables at scale is we don’t have storage,” Antonioli says, adding that Verra is looking at creating an international methodology to address this gap.

“If you look ahead to 2040, there are some project types which may change,” says Salway. “Governments will start introducing more policies to achieve their [Nationally Determined Contributions (NDCs)] so, in a particular country context, it may be that it is no longer additional to do a certain type of project because it is covered by regulation.”

Barata agrees. “In many parts of the world right now, renewable energy does not need an incentive – and if it does, it is not a financial incentive,” he says. “If the hurdle isn’t financial but regulatory, there is no need for carbon, unless you could prove that having this activity as a carbon project somehow addressed your barrier, which I think most project developers would be hard-pressed to prove.”