Decarbonizing for Net Zero
Determining progress toward achieving carbon neutrality or "net zero" can be difficult. One complicating factor is existing and proposed carbon accounting metrics that use different "scopes" to count direct and indirect emissions. These overlapping scopes can result in double counting of emissions, a result that is inherent in any approach that includes indirect emissions. Another complicating factor is that there are questions about the validity and use of voluntary offsets to mitigate any remaining emissions after decarbonization efforts.
Over the past decade, decarbonization has principally focused on renewable energy, renewable and low-carbon fuels, and compliance markets in specific locations such as California and/or particular economic sectors such as electricity generation. However, the number of opportunities that are going to present themselves over the coming years will only increase, and companies need to be prepared with a full set of tools to take advantage of them. For example, companies that want to achieve deeper decarbonization results while minimizing expenditures for carbon offsets could consider utilizing the following mechanisms:
- Virtual Power Purchase Agreements. A virtual power purchase agreement is an agreement that allows a user to purchase power from a renewable source when physical delivery is not possible (e.g., allowing a wind farm in Nebraska to "sell" its power to a factory in New York). The pricing mechanisms can be complex.
- Electric Vehicle ("EV") Procurement. In addition to the expanding market for passenger EVs, efforts to procure heavy duty EVs are emerging, especially for fleets that have regular routes with regular daily downtime. Companies engaging in these transactions have to think hard about specifications and warranties. A purchaser also should expect substantial negotiation around the allocation of incentives from the Inflation Reduction Act and other environmental attributes. These negotiations also can raise uniquely thorny issues around more traditional topics like intellectual property and data privacy.
- Carbon Capture and Sequestration ("CCS"). CCS has been used to capture carbon dioxide ("CO2") created as a byproduct of ammonia production for decades, so the technology definitely exists. It just has not been applied to power plants and other carbon emission sources because of the cost. The Inflation Reduction Act offers a tax credit of $85/ton for new CCS projects over the next 10 years. There are a lot of fossil fuel power plants that are looking into carbon capture options at that price. One of the things that was an obstacle to using these tax credits in the past was the need to have tax equity finance structures in place to use the credits, and the Inflation Reduction Act took steps to make the credits more readily transferable.
- Battery Storage. A number of utility scale battery storage projects are on the drawing board. Because of recent issues with grid reliability in California and Texas, battery storage is increasingly being viewed as something that is necessary to accommodate the proliferation of renewable power sources while maintaining reliability. This is an important development because there is a misdirected tendency to think that gas-fired plants aid grid reliability. That is not necessarily the case in winter with limited gas supplies when home heating takes precedence.
- Green and Blue Hydrogen. There is a lot of work happening to commission the production of hydrogen from facilities that do not emit CO2, either because they use CCS (blue hydrogen) or because the process is powered by renewable energy sources (green hydrogen). The interest in hydrogen stems from the potential for it to be distributed and dispensed much like hydrocarbon fuels. It also is relevant for applications and industries—such as steel—that need more energy than they are likely to be able to get from electricity alone.
- Compliance Markets. There are fundamental issues with carbon accounting that need to be addressed. These issues go to the double counting that is inherent in the different GHG emission scopes. While it would be great if a source could find a way to avoid counting someone else's emissions as part of its own GHG emissions, the system is set up to encourage companies to look at all of their inputs and outputs, not just their direct emissions. Compliance markets tend to work significantly better than voluntary markets in this space because of the necessary clarity of the standards, but compliance markets are fragmented and do not show signs of coalescing into something that is more uniform and universal.
Collaborating with experienced counsel can help companies utilize these mechanisms and other options in the most effective way possible.
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