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Carbon Offsets, EACs, and PPAs

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Tools such as carbon offsets, EACs, and PPAs play a growing role in sustainability strategies and are applicable to multiple tools within the Higg Index. 

The Higg FEM, FDM, and Insights Hub support credible climate action while also promoting transparency in offset use. 

Continue reading to learn more about each instrument, how they relate to one another, and how they relate to facility environmental tools within the platform.

 

Carbon Offsets

A carbon offset is a method of compensating for greenhouse gas (GHG) emissions by paying for a project that reduces emissions elsewhere. 

Photo Credit: Pexels

For example, taking a flight for a business trip produces GHG emissions. In order to offset those flight emissions, you can buy carbon offsets that provide funding toward projects that plant trees for carbon sequestration.

  • Examples of carbon offsets include projects focused on renewable energy, removing carbon, improving energy efficiency, capturing methane, and reforestation or forest protection. 

These projects are created by companies, nonprofits, or government agencies that create and operate offset projects. These projects are then submitted to independent standards organizations for verification to ensure the carbon offset project is real, additional, measurable/verifiable, permanent, and not double-counted. 

These organizations review, verify, and approve carbon offset projects. Since it isn’t realistic to expect everyone to plant as many trees as it takes to absorb the GHG emissions produced, it has become common to purchase carbon offsets created by others, also known as carbon credits. For example, one carbon credit may be equivalent to 1 metric ton of GHG reduced or removed. Carbon credits are then issued by the previously mentioned third-party organizations based on how much carbon was reduced or removed in the carbon offset project. 

Photo Credit: Pexels

Companies or individuals can then buy and retire carbon offsets. Retiring a carbon offset means to permanently remove the carbon offset so that it cannot be sold, traded, or claimed again by someone else. This is the final step in using a carbon credit to offset emissions.

Carbon credits are like gift cards. Once you’ve used up the balance, the gift card cannot be sold to someone else afterward. The same logic also applies to carbon offsets. Once an offset is retired, the credit is spent and cannot be sold to someone else.

Carbon offset life cycle:

  1. Companies or individuals produce GHG emissions from activities such as producing a t-shirt or taking a flight.
  2. Developers such as companies, nonprofits, or governmental agencies create and operate carbon offset projects.
  3. Projects are submitted to third-party carbon registries, such as the American Carbon Registry.
  4. Third-party carbon registries review, verify, and approve carbon offset projects before issuing carbon credits.
  5. Companies or individuals buy and retire carbon offsets to ensure the carbon offset is not double counted.

 

Energy Attribute Certificates (EAC)

An Energy Attribute Certificate, or EAC, is a general term that proves electricity came from a renewable energy source. EACs are equal to one MWh of renewable energy, allows companies and consumers to claim the use of renewable energy, and is commonly used to reduce scope 2 emissions.

Some examples of EACs include:

  • United States: Renewable Energy Credits
  • Internationally: I-RECs
  • Europe: Guarantees of Origin

EAC life cycle:

  1. Companies or individuals produce scope 2 emissions.
  2. Renewable energy facilities are certified by official certification bodies such as Western Electricity Coordinating Council (for RECs) or the AIB hub (for GOs).
  3. EACs are created by renewable energy generators such as wind farms, solar parks, hydro plants, or other renewable energy sources.
  4. Each MWh of renewable energy produced is then registered with third-party certification bodies that were previously mentioned.
  5. EACs are then traded or sold to organizations seeking to claim renewable energy use. Much like carbon offsets, EACs must be retired to ensure it is not bought, sold, or claimed again.

 

Renewable Energy Credits (RECs)

RECs are a type of EAC used in the United States that represent proof of purchase for renewable energy. Each REC represents 1 MWh of renewable energy that has been added to the electric power grid. 

RECs allow organizations to claim green power usage, even if the actual power used on-site is not renewable. They can even be purchased in one area of the country and applied to a facility in an entirely different area of the country.

Photo Credit: Pexels

After being generated, RECs are valid within a 21-month eligibility period in order to ensure they count toward appropriate energy goals and encourage efficient utilization within the energy market. 

For example, if you’re claiming to use renewable energy in 2023, the RECs must have been generated during these periods

  • Calendar year 2023
  • The six months before 2023 (July-Dec 2022)
  • The three months immediately following 2023 (Jan-March 2024)

Bundled RECs: RECs bundled with renewable energy generation.

  • Companies acquire bundled RECs throughout the year as the renewable energy project generates and sells electricity.
  • EX: If you enter into a PPA with a renewable energy developer that hasn’t finished building the project yet, the developer can receive financing from the bank. After the project is completed, the developer will receive a REC for every MWh of energy they sell, and pass the REC to you.

Unbundled RECs: RECs from existing projects that are not tied to renewable energy.

  • Unbundled RECs can be purchased in large batches anytime.
  • EX: If you buy 100 MWh of electricity from a non-renewable energy source. Separately, the company you’re purchasing the non-renewable electricity from could buy 100 RECs from a solar farm. Put together, this would enable you to make a 100% renewable energy claim even though the electricity is from the grid.

In order to be 100% renewable, a corporation must acquire and retire one REC for every MWh of energy that is purchased. Click here to read more about RECS in Worldly’s platform.

 

International Renewable Energy Credits (I-RECs)

I-RECs are a type of EAC used in countries where renewable energy markets are not fully linked or standardized. These are used to help create a universal system to buy and claim renewable energy, even if local markets do not have their own certificate system. I-RECs and RECs are both certificates for renewable electricity generation, representing proof that 1 MWh of renewable electricity was generated. Both I-RECs and RECS enable buyers to claim the usage of renewable energy. Click here to read more about I-RECS in Worldly’s platform.

 

Guarantees of Origin (GOs)

GOs are a type of EAC used in Europe, which have a similar function and purpose to RECs. They are a way of proving that electricity was generated from a renewable energy source and represents 1 MWh of renewable energy that has been added to the electric power grid.

 

Power Purchase Agreements (PPAs)

PPAs are long-term contracts that allow organizations to purchase energy at a fixed price directly from a renewable energy producer. A traditional PPA means renewable electricity is actually delivered to your facility. Since PPAs typically also come with EACs (bundled RECs), that means renewable energy usage can be claimed. 

Virtual Power Purchase Agreements (vPPAs) act as a contract for the environmental attributes and financial value of renewable electricity. This means that organizations purchasing vPPAs do not physically receive power. Instead, organizations purchase vPPAs to financially support a renewable energy project, receive EACs, and claim renewable energy use.

Since both contracts are coupled with EACs, PPAs and vPPAs are retired once contractual agreements are terminated and the associated EACs are retired.

Power Purchase Agreements Virtual Power Purchase Agreements
  1. Useful for organizations using a large amount of electricity in one location.
  2. Provides stable electricity pricing.
  1. Useful for organizations with operations scattered across the globe.
  2. Enables organizations to claim climate leadership regardless of energy usage.

While they both enable organizations to claim renewable energy use, PPAs and vPPAs serve different purposes. For example, PPAs may be useful if an organization is using a large amount of electricity in one location and wants stable electricity pricing, while vPPAs may be useful if an organization has operations scattered across the globe and wants to show climate leadership regardless of its energy usage.

 

Reporting PPAs and vPPAs in FEM

If a facility selects “Purchased Renewables” as an energy source, it is required to upload a copy of the Power Purchase Agreement to the REFID enpurchrenewppafile.

Note: The PPA is not directly linked to reported EACs within FEM.

 

Carbon offsets vs. EACs

Carbon offsets and EACs are both tools used to mitigate the environmental impact of GHG emissions, however, they each serve different purposes.

Carbon offsets directly remove or avoid the release of GHG emissions, including scope 2 emissions. EACs are used by organizations to claim the use of renewable energy and specifically reduce just scope 2 emissions. 

  Carbon Offsets Energy Attribute Certificates
Purpose Used to reduce emissions after carbon footprint is calculated Used to reduce scope 2 emissions through renewable wind, solar, or hydro energy
Used to mitigate Scope 1, 2, or 3 emissions Scope 2 emissions
Unit 1 metric ton of CO2e/GHG emissions 1 MWh of renewable energy
Project Examples Reforestation, carbon removal, etc. RECs, I-RECs, GOs
Verified By American Carbon Registry, Verified Carbon Standard (operated by Verra), Gold Standard, or Climate Action Reserve.

RECs: Western Electricity Coordinating Council

GOs: AIB hub
Supports Decarbonization Both tools reduce GHG emissions, directly or indirectly
Enables Environmental Claims Both allow organizations to make specific sustainability claims
Certified and Tracked Both rely on third-party orgs to verify impact and avoid double-counting
Helps to meet net-zero/carbon-neutral goals Both are used by orgs to meet science-based targets or net-zero pledges

 

Carbon Offsets, EACs, RECs and GHG calculations

Carbon offsets are reported under the GHG Protocol (GHGP), however, they are reported separately from the actual emissions inventory (REFID enpurchcoquant). 

Purchased carbon offset quantity is reported in metric tons CO2e and can be found in the Energy Raw Responses export. Click here to learn about FEM Data Exports.

EACs and RECs are not included in the platform’s GHG calculations since the Higg FEM methodology only counts the direct purchase of renewable energy (such as “Purchased Renewables, ex. PPA” or “Onsite Renewables”) as renewable energy for GHG reduction.

Both of these are not considered direct renewable energy use. Therefore, the purchase and retirement of EACs and RECs are reported for transparency but do not reduce the reported Scope 2 emissions in the FEM calculation. 

Furthermore, organizations cannot rely solely on EAC purchases to offset all of their scope 2 emissions. They should strive to increase renewable energy use and reduce overall energy consumption.

This approach makes a distinction between actual renewable energy consumption and the purchase of certificates as offsets.

Although the GHG emissions dashboard does not currently reflect the purchase of EACs in a facility’s overall GHG emissions, it does capture the EACs overall potential in reducing GHG emissions.

Exceptions to EAC Reporting

There are a few scenarios where a facility can choose to retire EACs and not report them in FEM:

  1. The facility purchases renewable electricity through a Power Purchase Agreement (PPA), and the associated EACs for that purchased renewable energy are retired under the facility’s name. In this case, the EAC GHG reduction is accounted for in the reported Purchased Renewables.
     
  2. The facility generates renewable electricity onsite (ex: solar PV), uses it within the facility, and registers/retires the EACs under its name. In this case, the GHG reduction is accounted for in the reported Onsite Renewables.
     
  3. The facility generates and uses onsite renewable electricity, registers EACs for that generation, and then sells part or all of those EACs to another party (who retires them). Even if the facility retains or retires a small portion of the EACs itself, none should be reported in FEM since they are already reflected in the onsite renewable entry.

GHG calculations in FEM and energy analysis from Insights Hub do not directly take into consideration the GHG reductions from EACs reported in the EAC section of FEM. The EAC questions are for documentation purposes, not for direct GHG calculations.

Click here to learn how to report energy use for Purchased Electricity, Purchased Renewables, Onsite Renewables and EACs (ensourcepurcheac).

Users can find the corresponding REFIDs in the quantitative impacts CSV export to understand the total GHG emissions mitigated from purchasing EACs:

  • Self.eac_avoided_ghg
  • Verified.eac_avoided_ghg (for verified assessments)

Facility responses for RECs and EACs can also be found in the Energy Raw Responses export. Click here to learn about FEM Data Exports.

 

Is this in alignment with the GHGP?

Excluding EACs (and RECs) from the platform’s GHG calculations is aligned with the GHGP.

The Greenhouse Gas Protocol, or GHGP, is a globally recognized GHG accounting standard. To briefly summarize, scope 2 emissions are calculated by:

  1. Identifying scope 2 emission sources
  2. Use both the location-based and market-based methods to report scope 2 emissions
  3. Collect activity data and choose emission factors for each method
  4. Activity Data x Emission Factors x GWP values = Scope 2 emissions

Learn more about the basics of scope 2 and how to report scope 2 emissions by enrolling in our Scope 2 Emissions e-learning course.

As previously discussed, EACs are used to mitigate scope 2 emissions. According to the GHGP’s scope 2 guidance, EACs are market-based instruments which are reported separately from an organization’s total GHG emissions. They do not reflect physical energy consumption and are not applied to location-based GHG calculations.

Furthermore, if an organization uses contractual instruments such as EACs and RECs, the guidance explicitly requires the calculation of scope 2 emissions to use both the location-based and market-based methods. EACs and RECs are excluded in order for calculations to stay conservative and accurate.

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