In traditional power markets, generation (the production of electricity) has to be matched with the load (consumption of electricity) through a process called load balancing. The load on the grid varies based on the time of day—for example, when everyone comes home after work and switches on their lights and air conditioners, the load goes up. The use of renewables has amplified this since they often work only during the day (i.e, solar), producing what’s been called the duck curve. To compensate for this, power plants increase production, and power is drained from storage (pumped hydro, batteries, etc.), thus balancing the load across time each day.
One way to think about emissions and their reduction is to think of environmental load balancing. Our end goal is to get to net-zero with emissions balanced across all uses and ultimately adding up to zero (or, better yet, negative). Given the cost and scale required to reduce their emissions directly from operational changes, companies will have to use offsets from other sources in the early and middle years of their plan to reach net zero. Those emission reductions may come from different time periods, different geographies, and different means (i.e., pathways).
To properly load-balance their emissions, companies would work to balance their emissions across a couple of categories:
Time: Today many companies purchase offsets that were generated in the past to match their current emissions—i.e., they buy a carbon offset from 2015 to offset their emissions in 2022. While purchasing credits brings money into projects and to developers, buying legacy credits does nothing to decrease emissions today. Mismatched vintages create a time imbalance between production and reduction. The first imbalance a company should look to rectify is the time imbalance by buying credits that match their emissions today.
Geography: In the market today, you can buy a carbon offset from a hydro plant in Turkey, from a cookstove company in Kenya, or from a reforestation project in Mississippi. A proper balance would involve buying credits from a geography closer to where the emissions are produced. While emissions are a global problem, it makes sense for companies to invest in the communities closest to their operations. Markets have begun to price this in with similar credits trading at a premium in North American vs. other markets as demand continues to increase from North American companies. The second imbalance a company could rectify then is geography, choosing to invest where their current emissions are.
Pathway: Lastly, there exists an abundance of ways to get to zero through purchasing renewable power, fueling your vehicles with biofuels, offsetting your carbon with reforestation, or buying carbon from direct-air-capture projects. Each of these pathways comes with pluses and minuses. Ideally, a company would try to match its output to a similar type of credit. For example, if your company had a factory in Ohio that consumed a certain number of megawatts of power and that power was from fossil fuels, ideally you would buy a renewable energy credit (REC) in the Midwest. Doing so would directly match your fossil fuel power consumption with renewable power consumption in your geography. For fuel purchased, you could buy a low-carbon-fuel-standard credit (LCFS) to offset your fuel. In doing so you would be balancing your load as accurately as you can by type.
In this way, companies could be evaluated based on their environmental emissions load and how balanced it would be. Do they balance across time or are they using past credits to offset current emissions? Do they balance across geography? Investing into those communities where they produced those emissions? And lastly, are they offsetting the same types of emissions with the credits closest to the types of production? Looking at their emissions through these lenses allows us to evaluate the sincerity and effectiveness of a company’s commitment and to see how balanced its environmental commitments are. As the market becomes smarter and as companies begin to balance these loads, prices will change to reflect that with high-quality projects, in the same geographies of companies, and with the same vintages ultimately trading at large premiums to legacy offsets.