Energy transition: conclusions from 6-months on the road?

The video below contains my top five conclusions on the energy transition, from some eye-opening real world experiences. Specifically, for the better part of the past six months, my wife and I have been working ‘nomadically’, moving to a new location week-after-week. I made it to 44 US States in total, before returning permanently to Europe.

I hope the experiences will make me a better analyst, including some new ideas on energy transition economics, infrastructure, mobility, nature-based solutions and geographic variability…

Below is some actual footage of the trip, illustrating some of those surprisingly tree-filled landscapes in the middle of the country…

Also, as mentioned in the video, here is that Tesla towing a diesel-generator…

A few research reports are also referenced in the video too. Here they are below, on the importance of cost to the transition, the ability to reforest agricultural acreage, and the relative CO2 costs of mobility.. .

Finally, in case your curiosity has been piqued, here is my wife’s take on our US adventures, and our permanent re-location to Estonia, the ‘most digital country in the world’… link here.

CO2 prices: re-thinking the costs?

CO2 prices and CO2 abatement costs are very different numbers. CO2 prices are incurred by emitters. But abatement costs depend on how much CO2 is reduced. These abatement costs can actually be astronomical if CO2 does not fall by very much. Hence we argue CO2 prices are only effective if nature-based offsets are incorporated.

Economy-wide CO2 prices have been suggested as an effective policy tool to drive decarbonization. For example, our research has shown that a CO2 price could create a level playing to allow a broad range of energy technologies to decarbonize the entire US economy. (note below).

But something is missing from this analysis: what is the relationship between CO2 prices and CO2 abatement costs? The chart below aims to answer this question.

Short-run abatement costs from a CO2 price are astronomically high. To see this, consider the yellow dot in the chart above. Let us assume that a $100/ton CO2 price is imposed on all emitters in an economy. As a result, 10% of those emitters spend c$50/ton to eliminate their CO2 (total cost = $5 per ton of total ex-ante emissions). However, the remaining 90% of emitters continue emitting as before, and simply bear the costs of the $100/ton CO2 price, or pass it on to their customers (total cost = $90 per ton of total ex-ante emissions). Now, to calculate the CO2 abatement cost, we must add these costs together ($90 + $5 = $95/ton of ex-ante emissions) and then we must divide this total by the percent of CO2 that has been abated (10%). The result is a $950/ton abatement cost.

Can this be right? It might seem like a paradox, that the CO2 abatement cost associated with a $100/ton CO2 price could be $950/ton. The reason is that CO2 prices and CO2 abatement costs are very different things. As shown on the chart above, the CO2 abatement cost depends on how much CO2 is actually abated. If a CO2 price is imposed, and no one actually abates their CO2, then you have simply imposed a consumption tax.

Is this risk realistic? Different studies show that the price-elasticity of energy demand is relatively low. One good meta-study finds an average price-elasticity of 13% (here). In other words, a 100% increase in energy prices would likely only reduce energy demand by 13%. Using our data-file below, we estimate that a $100/ton CO2 price, if imposed overnight, would increase retail energy prices by around 35%, which in turn would most likely reduce energy demand (and with it CO2) by around 5%. So if anything, our suggestion of a $950/ton CO2 abatement cost from a $100/ton CO2 price is 2x too low.

The objective of a CO2 price, however, is to incentivize deep changes across an economy, in order to reduce emissions. We studied one such scenario for the US last year (link here). This work found that by 2035, a CO2 price gradually rising to above $100/ton could eliminate around half of all US CO2 emissions (chart below). Here, the CO2 abatement cost comes out at c$180/ton. 50% of emitters continue emitting, and pay $100/ton of CO2 prices ($50). The other 50% of emitters incur an average of $80/ton of CO2 abatement costs to eliminate their CO2 ($40). The total cost is $90. This translates into a CO2 cost of $180/ton, because c50% of emissions are abated on this model.

One problem of this model is that many of the technologies that need to be incentivized have a much higher incentive price than $100/ton. As an illustration, some of the direct subsidies currently offered to different transition technologies are shown below, translated into $/ton terms. A $100/ton CO2 price clearly does not incentivize a technology costing $200-700/ton. So complex additional subsidies would also be needed.

A much more effective iteration of the model allows nature-based solutions into the solution set. Specifically, companies that sponsor reliable nature-based offset projects can use the CO2 abatement from these projects as a credit against CO2 price payments. First, allowing these nature-based offsets is the only way that many industries can realistically get to ‘zero’ CO2. Second, the costs are much lower, and our roadmap to net zero finds that the entire global economy could be decarbonized for an average cost of $40/ton, if 25% of the heavy-lifting is done via nature-based methods (note here).

What is interesting about this scenario, returning to the chart below, is that the average CO2 abatement cost in our ‘best case’ comes in at $40/ton. This is to say, 0% of emitters continue emitting and paying the $100/ton CO2 price (why would you, if you could source nature-based carbon offsets for a much lower price, of $3-50/ton). 100% of erstwhile emitters pay an average abatement cost of $40/ton. And this offsets 100% of emissions, hence the total CO2 abatement cost also comes in at $40/ton.

Note the abatement cost is lower than the CO2 price, in this scenario. This also seems counter-intuitive at first glance. It is a function of two variables: the abatement cost is lower than the CO2 price, and a very high portion of CO2 is being abated. As another example, imagine the government declares a $1,000 fine for anyone caught wearing a yellow T-shirt tomorrow. As a result, no-one wears a yellow T-shirt. The total cost of this policy is therefore zero.

Achieving a low cost transition matters, as our recent work finds that inflation could de-rail high-cost transition pathways (note below). We conclude that CO2 prices can be very powerful. But to be cost-effective, they must genuinely drive decarbonization, rather than simply taxing continued emissions. This is best achieved by integrating nature-based carbon offsets into CO2 pricing frameworks, in our view.

Mass extinctions: insights into systemic risk?

We have reviewed 14 mass extinctions over the past 500M years, in order to draw five conclusions on systemic risk amidst the energy transition. Current policies may be short-sighted. Improved technologies and nature-based solutions could likely fare better.

Mass extinctions are the ultimate “systemic risks” as they tend to wipe out an average of 50% of all life on Earth (for perspective, Coronavirus has wiped out about 0.05-0.1% of humanity). In almost all cases in our data-file, they are caused by exogenous shocks, which also change the global climate, either by warming it or cooling it. Eventually life has rebounded, although it can take 30M years, while re-balancing the planet towards a different mix of species than came before. Full details can be downloaded here.

If you were to draw a spectrum of cataclysmically bad things that can happen to the world, mass extinctions would probably lie at the extreme. Hence five conclusions and insights follow below from our data-set…

(1) Mass extinctions happen every 15-30M years. This includes 14 events over the past 500M years, through to 4 events over the past 65M years. The numbers are likely towards the more frequent end of the range, as the rock record turns over every 100-300M years, making it hard to detect smaller extinction events from the distant past. This implies that for every 15M year period, there is approximately a “one-in-a-million” chance of a mass extinction event threatening the majority of all life on Earth. Small but not zero.

(2) Are risks preventable? A good, common-sense principle of risk-management is that you should care just as much about low-probability high-impact risks as you care about high-probability low-impact risks. This is why people buy life insurance. But it is hard to see how you protect against vast outpourings from super-volcanos (5 events), enormous asteroids (2 events) or supernovas stripping the world of its ozone layer (2 events). My intuition here is that there is no way to “eliminate” systemic risks that might make the world unlivable.

(3) Policies are effectively useless at preventing many systemic risks. Try banning a volcano from erupting, a virus from mutating or a war from breaking out. There are two thoughts here that keep me up at night: (a) policies focused at averting climate change are at the top of every policymaker’s list right now, but is this coming at the cost of ignoring and thereby inflating other significant systemic risks? (b) worse, will policies focused at averting climate change actually exacerbate some systemic risks? Some examples from our research are here, here and here.

(4) Improved technologies may be a better focus area, as they lower systemic risks across the board. I say this after receiving my second dose of the Moderna vaccine this week. And recalling that totally realistic scene in Armageddon where Bruce Willis flies a rocket to an asteroid and blows it up using nuclear weapons. The thought that fascinates me is how inextricably human resiliency to systemic risks is bound up with energy technologies. This is a rationale for our renewed focus on energy technologies (below).

(5) Nature based solutions? We are currently undergoing one of the greatest mass extinction events in the history of the planet, destroying over one-third of the world’s forests since pre-industrial times, over half of some blue carbon eco-systems and threatening up to 1M species. Solving this problem is the direct rationale for nature-based solutions to climate change, which do not simply use trees to remove CO2 from the atmosphere, but also tackle the underlying issue of not destroying the planet. We argue nature-based activities will emerge as the single largest focus in the energy transition (note below).

Breakthrough technologies?

We are starting a new strand of research, evaluating the specific energy technologies of specific early-stage companies, to help drive the energy transition. This matters to stress-test our roadmap to net zero, and as increasing numbers of early-stage new energy companies are crossing the screens of decision-makers.

This video lays out our rationale, the key risks for new technologies, and our new methodology, which draws on two years of patent learnings.

Our approach is to read the main patent filings from early-stage technology companies, to glean how their technology works. Then we score the company’s core patent library on the dimensions of problem specificity, solution specificity, intelligibility, focus and manufacturing.

These screens are now available via the ‘Breakthrough Technologies‘ section of the TSE insights page. Please contact us if there are specific companies you would like us to add onto our list to assess.

Forest fires: what climate conclusions?

Global CO2 emissions from wildfires could be c25% as large as anthropogenic CO2 emissions, while burnt areas in the US reached an joint all-time record in 2020. Hence this note reconsiders some nature-based solutions to climate change. Hands-off forest conservation may do more harm than good in fire-prone areas. Sustainable forestry, carbon-negative materials, biochar and biomass energy also look more favorable.

Forest conservation: the advantages?

I took the photo below on New Years Day from the top of a mountain in Vermont, looking East over the forest, which stretches all the way to New Hampshire. If you had asked me then, I would have insisted that forest conservation was a crucial component of the world’s roadmap to Net Zero; and a virtuous source of generating carbon credits, albeit slightly less virtuous than incremental reforestation.

Forests store 200-300 tons of carbon per hectare. Moreover, deforestation contributes 6.5GTpa of emissions, as 10M hectares of the world’s 3.5bn hectares of forests are torn down every year. This is the singles largest anthropogenic emissions source globally (data below).

Viewed from this perspective, stemming the wanton destruction of nature seems like an important climate objective. We have even gone so far as to argue the US could end up placing sanctions on Brazil by the end of 2021, for Bolsonaro’s recent renewed assault on the Amazon.

Forest conservation: the disadvantages?

But there is another side of the coin. This has become more apparent for me, after spending 3-months in Oregon, Utah, Nebraska, California, Colorado, South Dakota and Montana amidst a stint of nomadic working this year. You see a lot of landscapes like this. They are beautiful (especially with a smiling dog in the foreground). But they are bone dry.

Mature forests also stop sequestering CO2 at some point between 50-200 years of age. First the rate of tree growth slows down by 50% (chart below). Moreover, the rate of CO2 release from the decomposition of dead matter eventually catches up to the rate of CO2 fixation via photosynthesis. And other dead matter accumulates on the forest floor and dries out…

This amplifies the risk of forest fires in older forests. One estimate in the technical literature is that 600M hectares of the Earth burns each year, emitting 12GTpa of CO2e. For perspective, this equates to 0.3% of the world’s forests burning every year, and the total toll of wildfires may be as large as 25% of global anthropogenic CO2.

In the United States, 2020 saw 10.1M of acres burning in wildfires, which is the joint-highest of any year on record (chart below). Interestingly, the prevalence of wildfires has actually fallen by 20%. But the average fire is around 3x larger, when fire does break out.

The single largest cause, cited in technical papers that we reviewed, was the accumulation of biomass in unmanaged forests. US forest cover has grown for 70 continuous years. And a second cited cause is climate change.

Seen from this lens, forest conservation policies may need to be re-thought. Is it possible, especially in dry geographies, that forest conservation simply encourages the accumulation of biomass that will later lead to life-threatening conflagrations and carbon releases?

Wildfires in theory?

Three elements are needed for a fire to occur: heat, fuel and oxygen. There is little chance of controlling heat or oxygen in the environment. Hence the only practical option to prevent wildfires is to remove fuel. Note this is totally at odds with the strictest forest conservation practices, which restrict any removal of biomass from a natural ecosystem.

There are also different types of fire, but crown fires are most expansive and most devastating. Specifically, ground fires consume mostly duff layers, produce few visible flames and can even go undetected, smoldering for days or weeks. Surface fires produce small flaming fronts that consume needles, moss, lichen and vegetation. They can kill up to 75% of trees, but can also be fought by ground crews. Full blown crown fires become active when there is enough heat and a “ladder” for the fire to climb up into tree canopies. They can kill 100% of trees and also burn off 10-60% of the carbon in soils beneath forests.

Fire kills trees by killing the cambium layer of living cells inside the tree bark that produces new wood and bark.  Foliage is also scorched, buds are killed off and roots are damaged. Thus what remains is a charred stock of dead biomass (as pictured from the car window below, East of the Cascade mountains, in Oregon). It can take 125-years for a forest to “recover” the carbon stocks burned off in such a conflagration.

Finally, a “Crowning index” is a metric used to quantify fire proneness. It is defined as the minimum wind speed that is necessary to sustain a crown fire in the canopy layer. 25mph translates into high hazard, 25-50mph is moderate and >50mph is low hazard.

How are wildfires prevented?

The only practical way to prevent wildfires is to remove surface fuels. But this can take many different approaches.

One common approach is controlled burning or “underburning” of specific areas, or the gathering and burning off of “slash”. The idea is to remove biomass (fuel). (I witnessed a controlled burn project last week in Oregon, in April-2021, where a dry summer is anticipated). It is justified as a form of ‘carbon insurance’, giving up the carbon in the burned off material, in order to safeguard the remainder. But clearly, burning off forest carbon is not the best option from a CO2 removals perspective.

Thinning is another approach that fells small and vulnerable trees, while leaving behind larger trees with thicker bark (that insulates the cambium). A related approach, thinning from below, removes trees of intermediate height, which could enable a fire to jump from the ground level to the canopy layer. Lower limbs below 10-12′ may also be pruned for similar reasons. Again, this biomass may be burned in a controlled fire, or piled up to decompose. Again, from a CO2 perspective, there should be better options.

Mastication is a mechanical technique for fuels reduction, chopping, mowing and mulching ladder fuels such as brush and smaller trees. The resultant wood chips form a compact layer of material, which can be distributed evenly around a site and may make the area more resistant to fire. An advantage is that the carbon is not burned off. But it does decompose over time. Another drawback is the potential to wound trees if the operator is not skilled. The duration of fires in masticated fuels may also be higher than other fires. 

Species selection may be a practical way to improve fire resistance. For example, Ponderosa pine is noted as a good fire species as it has an open crown, high moisture content in the foliage, and thick bud scales that help it survive fire. Some hardwoods, such as bigleaf maple, red alder, Oregon white oak, have high moisture content, less volatile oils in their foliage and as a result, they burn at low intensities, if they do catch alight.

Digging a fire line down to mineral soil deprives the fire of fuel and will stop its progress. This requires harvesting all of the fuel from a particular area. It can integrate well with sustainable forestry, if a line is cleared through a large forest stand each year, during harvesting, forming a natural break for fires (example below).

Comprehensive forest management is likely to be most effective, based on the studies we reviewed. This encompasses the systematic removal of biomass until tree coverage is only 40-50ft2 per acre, primarily comprising the largest and most fire-resistant trees. One study showed that this strategy increased the crowning index of a high-hazard lands from around 25mph to 82% mph, moving 90% of all treated acres into low-hazard conditions, while 73% of the land would still be classed as low-hazard 30-years afterwards. This was substantially more effective than thinning or fifty percent biomass removals. It also generated a profit of $675/acre, while the other methods cost -$300-700/acre. The disadvantage is that you have lessening the risk of forest fires by lessening the extent of the forest. So this option may need to be reserved for select areas.

What conclusions for forest conservation carbon credits?

Our conclusion from evaluating wildfires is that forest conservation projects have very debatable carbon credentials, especially in fire-prone areas, and as the Earth warms. This adds to our prior fear that they are the least “incremental” for of nature based solution.

Active forestry, with periodic harvesting and re-planting can sequestering around 2x more CO2 over a century than a simple approach of restoring a forest and walking away.

This realization is also what we are seeing, when we assess the nature-based carbon offsets being undertaken by 35 large corporations. Reforestation projects are now 3x more prevalent than forest conservation projects in 2018-20.

We argue corporations will increasingly establish new internal groups to vet and procure the most reliable and cost-effective carbon removals. This will likely de-prioritize forest conservation, and instead prioritize reforestation, and a variety of active forestry initiatives.

Active forestry as an effective tool for climate mitigation?

“Active and responsible forest management is more effective in capturing and storing atmospheric carbon than a policy of hands off management”, according to one technical paper that we reviewed. Hence what are the best options that align with our research?

Comprehensive biomass removals from select, high-risk forest areas is likely to be the most effective fire-prevention method of the options reviewed above. An advantage is that larger trees can be used to make carbon-negative construction materials, such as cross-laminated timber, for use in buildings, or even in novel applications such as wind turbines. Our note below reviews the opportunity, which is among the most favored in our research, and even more so after this review of mitigating forest fire risks.

Forest residues can also be gathered and turned into biochar, a miracle material with uses in agriculture. Our models yield 20% IRRs without any policy support, at biochar prices of $600/ton, while allowing producers to pay $40/ton for biomass feedstocks (including transportation). An advantage is that biochar can be made from offcuts and other forest debris.

We are also growing more constructive on biomass power, in small quantities, where the burned material comes unequivocally from forest debris, which might otherwise exacerbate the risk of fires. But it is still debatable. The chart below shows how CO2 credentials vary: the left-hand of each range assumes all biomass fuel would otherwise have decomposed, while the right-hand assumes all forest carbon would otherwise have remained standing.


Bowyer, J., Bratkovich, S., Frank, M., Fernholz, K., Howe, J. & Stai, S. (2011). Managing Forests for Carbon Mitigation.

Fiedler, C. E., Keegan, C. E., Woodall, C. W. & Morgan, T. A. (2004). A Strategic Assessment of Crown Fire Hazard in Montana: Potential Effectiveness and Costs of Hazard Reduction Treatments. United States  Department of  Agriculture, Forest Service.

Fitzgerald, S. & Bennett, M. (2013). A Land Manager’s Guide for Creating Fire-Resistant Forests. University of Oregon, EM 9087

Loehman, R. A., Reinhardt, E. & Riley, K. L. (2014). Wildland fire emissions, carbon, and climate: Seeing the forest and the trees – A cross-scale assessment of wildfire and carbon dynamics in fire-prone, forested ecosystems. Forest Ecology and Management 317 9–19

Renewables: can oil and gas assets “demand shift”?

Industrial facilities that can shift electricity demand to coincide with excess renewables generation will effectively start printing money as renewables get over-built. They also help more renewables integrate into the grid. Oil and gas assets are generally less able to demand-shift than other industries. But this note outlines the best opportunities we can find, uplifting cash margins by 3-10%.

What is demand shifting and who benefits?

Demand-shifting is one of the most exciting opportunities for companies in the energy transition. Specifically, the idea is that renewables are going to get ‘over-built’ (chart below). In turn, this means that power prices will become increasingly volatile. Around one-third of the time, when the wind is blowing and the sun is shining, power could effectively be free. Another one-third of the time, when these renewable assets are not generating, power prices will likely spike to 15-30c/kWh.

Why does this create an opportunity? If you run an industrial asset where the electricity demand is flexible, you can lower your overall operating costs by timing the demand for when power prices are very low and NOT timing the demand for when power prices are high. This could lower aggregate power prices, and help accomodate another 10pp of renewables in the grid (note below).

The number of industries that can demand shift is much larger than one might expect at first glance. They include electric arc furnaces, industrial gases, internet companies, EV chargers, greenhouse agriculture, water utilities, commercial heating. Generally, the more you look for these opportunities, the more you find. And to re-iterate, these demand shifting opportunities are going to come into the money long before grid-scale batteries or hydrogen come anywhere close.

Not all industries can demand shift. It is not a good idea for life-support machines! It is only going to work where there is minimal operational disruption. Ideally, there may also be an energy saving for electrifying and demand-shifting a process (examples below).

Who is best placed? The ideal demand-shifting opportunity has four criteria, based on our models. (1) Electricity is one of the largest input costs (2) cash margins are low (3) the industry is not highly capital intensive and (4) utilization rates are naturally constrained by some other factor. The reason that (1) and (2) matter is that a reduction in electricity costs will have a disproportionately large impact. The reason that (3) and (4) matter is that demand shifting requires an asset NOT to run at the times when renewables are not generating and power prices are expensive. But amortizing high capex costs over fewer units of output cost can dramatically increase unit costs.

Can the oil and gas industry demand shift?

The purpose of this report is to assess whether the oil and gas industry can generate any incremental income via demand-shifting. We find oil and gas assets are generally less capable of demand-shifting, compared with other industrial assets. This means the over-building of renewables places other industries at a greater relative advantage

Oil and gas assets generally have some of the highest utilization rates of any assets, as quantified in our data-file below. The average manufacturing facility in the US runs at a 78% utilization rate. Refineries and oil and gas processing plants actually lead the screen, with utilization rates sometimes surpassing 90%. It takes days to re-start a refinery or an LNG plant after an outage. This makes them poorly placed for demand shifting.

Oil and gas assets have some of the highest capital costs of any assets. We all know the stories of $50bn+ mega-projects. Once you have built an LNG plant costing $750/Tpa (chart below), you want to run it flat out to recover your capex costs.

Oil and gas assets may be less likely to use electricity, because they naturally have a cheap alternative on site (i.e., oil and gas). For example, in our model below of an ethane cracker, the natural energy source to power the two most energy intensive units (feedstock pre-heater and main ethane cracker unit) is the off-gas coming out of the reactor itself, which would otherwise need to be cleaned up and recirculated, at a cost.

Can some oil and gas processes become demand-flexible?

The best examples we can find around the oil and gas industry are in lifting and in EOR at mature oilfields. These processes actually meet all of the criteria we laid out above for good demand-shifting opportunities.

CO2-EOR operation is the best of the best examples we can find. Across CO2-compression and lifting operations, we estimate there could be as much as 35kWh of electricity used per barrel of oil production. CO2 injection does not need to take place constantly, but compressors may have spare capacity to dial up and dial down their activity over a period of days-weeks, as long as the overall volume of CO2 injection hits a monthly target. Lowering the average electricity price from 7.5c/kWh to 3c/kWh uplifts cash margins by around 10%. Our note on CO2-EOR is below.

Water injection operations have a similar demand flexibility, but the economics are not as compelling. Specifically, a water-flood will aim to inject 0.75-1.25 barrels of water per barrel of fluid that is lifted out of a reservoir, in order to achieve a particular voidage replacement ratio. But again, this is only a monthly basis, allowing the injection rates to vary day-by-day. Only 12kWh/bbl of electricity is assumed in our model below. Hence the margin uplift from flexing demand is a mere 3%.

Similarly, at mature fields, pumps may not operate all of the time lifting oil out of the reservoir. They may periodically turn on and turn off, in order to allow the reservoir near to the wellbore to ‘re-charge’. Or there may be an optimal production rate that is well below the full-time production capacity of the pump. Maybe these pumps use 1.5kWh/bbl on average, and it is possible to save around 5c/bbl.

Finally, pipelines may have spare capacity, and may be able to dial-up or dial-down their power draw depending on grid prices. Generally, we assume pipelines run at high utilization rates, while the energy needed to move each mcf of gas through a 1,000km pipeline is relatively low, at around 0.5kWh per mcf. While the power may not be very material in absolute terms, it could yield a 2-5% uplift, when you think that the average cash margin for a 1,000km pipeline is around $1/mcf.

Co-generation: the best of both worlds?

Despite their high uptime requirements and their usual reliance on on-site oil and gas for the majority of process energy, many industrial facilities in the oil and gas industry also use electricity. Often this electricity is generated on site, using a co-generation facility. This is an excellent opportunity for grid-smoothing.

The idea is to absorb cheap renewable electricity from the grid when it is available in abundance (i.e., whenever the power price is cheaper than your on-site generation costs). And then produce your own power whenever renewables are not available. Our economic model for a gas-fired co-gen facility are here. If your baseline power price is 7c/kWh, you might be able to generate 2c/kWh overall savings by absorbing cheap renewables and running the gas turbines less frequently?

Returning to our ethane cracker example above, we estimate that each ton of ethane requires 24mcf of gas (around 7,000kWh of energy) to provide process heat, but the plant also uses around 1,200kWh of electricity to power compressors and coolers. If we can lower our overall power price from 7c/kWh to 5c/kWh, this is equivalent to uplifting cash margins by around 3%, or around $1/bbl. This is a good opportunity.

If this is correct, then we would expect an expansion of cogen capacity at large industrial assets, as a counter-balance to the overbuilding of renewables. We argue this remains one of the most exciting and direct ways to gain exposure to the theme. Our research note on the topic is linked below. Within it, there is a screen of relevant turbine makers.

Please contact us, if you would like to discuss other demand-shifting opportunities, or if you would be interested in a deeper-dive into the demand-shifting opportunities within your own asset base or portfolio.

Carbon accounting: philosophical investigations?

This short essay argues current carbon accounting frameworks may not be entirely helpful. Metrics like “Scope 1”, “Scope 2” and “Scope 3” only make sense for a small subset of companies, but they lack applicability, comparability, completeness, and reliability across the broad landscape of global emissions. We prefer granular carbon accounting which can be compared to counterfactuals. Our argument is illustrated with examples; and based on the philosophy of language, from Wittgenstein through to the present day.

Philosophy of language: an overview?

Many moons ago, I was awarded a degree in Philosophy and Neuroscience at the University of Oxford. It turns out that the philosophy of language is surprisingly helpful for carbon accounting, as explored in this short research note…

At the turn of the twentieth century came the logical positivists. They sought to codify language into symbols and logical operations. For example, to say that “my car emits CO2” can be analyzed as a proposition (P), and broken down into the words “my car” which specially references a particular hunk of metal sitting in the driveway, the property of “emitting” (which in this case applies to the car) and a type or class called “CO2” which represents all molecules with the chemical structure O=C=O. My car runs on gasoline and so P is true. All language, and all of the problems of philosophy, the logical positivists claimed, could be analyzed as logical statements like this, which will be true or false depending on the state of affairs in the world. Some went so far as to claim that these kinds of logical statements were all there was to language. 

Then came Wittgenstein (1889-1951), still to my mind the greatest philosopher of all time, who shattered logical positivism, and philosophy more broadly. To Wittgenstein, the strict rules proposed by logical positivists have nothing to do with how language is actually spoken and understood by people in the real world. Language is no more than an imprecise set of customs. These customs work because users of the language are generally like-minded, and tend to interpret utterances in similar ways. In a few circumscribed cases, utterances in a language might have a logical structure like “my car emits CO2”. But language is complex, and many other meaningful utterances totally defy this framework, like answering a question with a thumbs up. Other utterances in language appear to make sense, such as “if it’s 6am in New York, what time is it on the sun?”. But on closer inspection, all that is shown by these kinds of philosophical problems is the boundaries of our linguistic customs. No philosophical questions have proper answers.

Then came modern philosophy, reeling, and trying to justify its existence in the aftermath of Wittgenstein. Yes, many questions of philosophy are at risk of being unanswerable. But philosophy can nevertheless provide some useful ways of thinking about things. One of my favorite  writers was David Lewis (1941-2001), famous for “possible world semantics”, where language can be analyzed by considering the world around us, but also other hypothetical worlds. “If I switch my car to an EV, my CO2 emissions will fall” means that in the vast majority of possible worlds where I switch my car to an EV, my CO2 emissions fall. Then we can start considering what these possible worlds look like (including worlds where I am charging my EV from the grid, or from a diesel generator, or even the broader range of possible worlds where I sell my car altogether and take public transport). 

If you have made it this far, thank you for not giving up already. We argue below that traditional carbon accounting frameworks are like logical positivism. They are subject to holes and philosophical muddlings that could bring Wittgenstein back from the grave. But useful carbon accounting can be salvaged, especially via a “possible worlds” approach.

CO2 accounting frameworks: logical positivism revived?

The logical positivism of the CO2 accounting world is the Greenhouse Gas Protocol. It starts with Scope 1 emissions, which covers all of the CO2 emitted directly by a company, such as the fuel combusted at company facilities. It then adds Scope 2 emissions, which cover the CO2 embedded in the heat and electricity purchased by the company. Finally, it adds Scope 3 emissions, which covers all the CO2 indirectly emitted through the use of the company’s products.

CO2 accountants, like logical positivists before them, invariably seem to believe that all of the challenges of CO2 accounting can be solved by strong-arming companies into hiring CO2 accountants; moreover that climate progress can best be achieved in the form of corporate promises to reduce these emissions categories; and most brazenly, that CO2 accounting simply comes down to Scope 1, Scope 2 and Scope 3.

That’s not how companies work, any more than logical positivism is how language works. It is tempting to conceptualize ExxonMobil as a single giant furnace in Texas, and then ask the company why it can’t simply tell us how much CO2 is being emitted out of its furnace. But the reality is a Super-Major with a presence in over 200 countries globally, and many activities in each country. In many of these, it is not the owner or operator of assets, but a minority shareholder, in a joint venture operated by a third-party (which may or may not even relay the requisite data back to other JV partners). In many others, it does not do its own drilling, construction or maintenance, but hires third-party contractors (e.g, oil service companies).

That’s not how financial accounting works either. Back when I was a sell-side analyst, I remember downgrading another Oil Major to a ‘Sell’ because I discovered they had over $15bn of debt “off their balance sheet”, hidden away from their gearing calculations. As the company correctly pointed out, IFRS accounting rules do not require them to consolidate the debt in these entities, as they are minority shareholders. Only their share of income must be consolidated. Obviously, the financials of contractors and service providers are not consolidated either. And so it is with CO2 disclosures that are published by companies today. These disclosures are usually limited to consolidated assets, or even more narrowly, to consolidated AND operated assets.

Limiting CO2 disclosures to a subset of assets, however, limits the comparability of these disclosures. Companies with concentrated portfolios (few assets, large controlling stakes, operations performed in-house) will appear to have more CO2 emissions than otherwise identical companies with sparse portfolios (many assets, non-controlling stakes, operations performed by contractors).

Scope 1 & 2 emissions can also be “gamed” by giving up control of an asset, such as selling a corporate headquarters then leasing it back (it is no longer “our asset”); or by outsourcing activities that used to be performed in house (it is no longer “our maintenance crew”).

Some industries also defy measurement via the Scope 1, 2 and  3 framework. Also back when I was a sell-side analyst, I would be sent on punishing ‘marketing trips’, where over the course of ten days, I would participate in 70 meetings, in 10 different cities, going Coast to Coast in the United States. (By the end, you didn’t know which way was up or down!). But I once tried adding up the CO2 emissions from one of these trips. The calculations became pretty hairy. I would be trying to figure out what model plane or taxi I was travelling on, how to allocate its emissions between myself and my co-passengers, and whether to adjust for nuances such as business class seating. I think these are genuine challenges for carbon accounting, and they were part of my CO2 footprint as an analyst. Whereas the Greenhouse Gas Protocols effectively ignore them. Under their frameworks, these are simply the Scope 1 emissions of transportation companies, from airlines (who report them) to individual Uber drivers (who do not).

As a general rule, the smaller the entity, the less likely they will have the resources to calculate their Scope 1, 2 and 3 emissions. (I may calculate a look-through of all our CO2 emissions on behalf of the West household, but I suspect I am somewhat unusual!). Are we thereby saying that only big corporations need to reduce their emissions, while smaller corporations, and the 8bn people in the world are somehow exempted?

Scope 3 emissions can be a totally meaningless concept. Imagine you are that airline or Uber driver, trying to quantify how your service has indirectly contributed to a customer’s CO2 footprint? You have delivered me to my destination. How are you supposed to know if I am in town to discuss energy stocks in an office building (low carbon) or set fire to the local library (high carbon). If the latter were the case, then the law would not hold you responsible, but the carbon accountants might! For a more real example, consider the Tesla photographed below, towing a diesel generator, which if used to charge the Tesla would result in 30% higher emissions per mile than simply driving an ICE car (data here).

Scope 2 emissions can also be meaningless and hard to measure. For example, renewable energy credits are legal contracts where all parties agree to pretend that gas and coal electrons are wind and solar electrons and vice versa. As per our recent research, these RECs can create some very strange implications for carbon accounting (below).

Scope 1 emissions are also debatable, for example, where Scope 1 emissions sources are only inferred, not measured directly. For example, we estimate that 2% of all methane is leaked across the entire global value chain, from producer to consumer, but if a company genuinely knew whenever it was unintentionally leaking methane, it would be a lot easier to fix the leaks (note below, including some interesting new technologies to help).

Other important emissions categories are not captured at all in this framework. For example, our research also shows that almost two-thirds of CO2 emissions are embodied in materials and products (data below), not in purchased fuel and electricity. But the emissions associated with purchasing raw materials do not appear to be captured by Scope 1, 2 or 3 categories.

The destruction of nature, or CO2 fluxes caused by deforestation or environmental degradation do not seem to be captured either. Nor is there an elegant solution in these carbon accounting frameworks to capture the positive impacts from nature-based solutions that are sponsored by companies (do they offset Scope 1, 2 or 3, or go in their own separate bucket?).

Most pressingly, from our own CO2-accounting models, it is not even particularly helpful to know the absolute number of Scope 1 or 2 emissions, unless you have a “per unit” metric, on which to compare different companies. In some industries, these “units” are inherently apples and oranges (e.g., how do you compare the CO2 per iPhone to the CO2 per hamburger to determine whether Apple is a more sustainable company than McDonalds).

Even when competitors in an industry are producing highly similar products, care is warranted. We have seen this, for example, in our screen of refiners below. Some of the apparent laggards are simply producing cleaner fuels (e.g., to meet California fuel standards), or they are also co-producing petrochemicals, a fundamentally different product. Hence our analysis has been very careful to adjust for these effects, before declaring true “leaders and laggards”.

Is carbon accounting a useless endeavor: homage to Wittgenstein?

To re-iterate, carbon account frameworks seem to make sense, in a very circumscribed set of contexts, especially where a company operates a single, large asset, like a blast furnace, and we can measure the Scope 1, 2 and 3 emissions of this operation. This is a little bit reminiscent of how logical positivism seems to make sense, in a very circumscribed set of contexts, such as very simple propositions in a language.

There are also many examples of companies that seem to defy meaningful measurement via Scope 1, 2 and 3; categories of emissions that are altogether missed; reductions in Scope 1&2 emissions that do not actually have any bearing on CO2 emissions; and on closer inspection, the concepts of Scope 1, 2 and 3 are a little bit fuzzy.

To say that Scope 1, 2 and 3 emissions conceptually capture everything that needs to be captured in carbon accounting is like saying that all of language boils down to logical operations. This might all make carbon accounting questions seem unanswerable.

Our own approach to carbon accounting: homage to Lewis?

Carbon accounting is not useless. It simply needs to be done right. And this involves a mixture of data-crunching and philosophy. Below are a dozen principles we have found helpful, illustrated with examples, where possible. Our conclusion is that companies that want to promote climate progress should publish granular, asset-level emissions data, and strive to reduce the emissions of these underlying processes; rather than focusing on headline data at the corporate level.

(1) Companies do not emit CO2, processes do. To re-iterate, ExxonMobil is not a single giant furnace in the center of Texas.  It is a company that owns interests in various assets. Each asset uses various processes to make various products. It is these processes that cause CO2-equivalent fluxes and need to be decarbonized in the most cost-effective way, regardless of whether the process is undertaken in-house or by a contractor. The same goes for any company. Carbon accounting would be vastly better if numbers were published at the asset- or process-level, not the company level.

(2) CO2-equivalent fluxes should be the primary unit of account, not just emissions. Climate change is caused by the accumulation of greenhouse gases in the atmosphere.  Hence accounting for climate impacts should ideally capture the motion of all greenhouse gases into, and out of, the atmosphere (model below). These fluxes should all be converted into the common currency of CO2-equivalents (1 ton of methane is equivalent to 25 tons of CO2 and 1 ton of N2O is 298 tons of CO2).

(3) Processes can be combined like building blocks. For example, the total CO2 intensity of a gallon of gasoline can be calculated from the CO2 intensity of development, production, transport, refining and marketing (data below). The CO2 intensity of a mile of vehicle travel can then be calculated from the CO2 intensity of a gallon of gasoline, plus the process of manufacturing the vehicle and the process of ultimately scrapping the car. This allows our build-ups to assess entire value chains, and not just the companies in specific portions of the value chain.

(4) CO2 considerations are usually relative. It is tempting to dichotomize the world into “carbon emitting” and “non-carbon emitting” categories. The reality is a spectrum (below).

(5) Relativity requires a baseline. I like to think about the counterfactual to a process as the closest possible world(s) in which that process does not occur. I.e., the world(s) that are as similar as possible to the actual world, but with the one process in question changing. For a simple example, when we talk about the CO2 emissions of driving a mile, we usually mean relative to the counterfactual of not driving that mile. When we talk about the CO2 of Factory A’s product, the counterfactual might be factory B’s product. No process on Planet Earth occurs in a vacuum.

(6) Counterfactuals matter. All of this discussion of counterfactuals might seem academic. Here is an example for why they matter. Planting a biofuel crop has a totally different CO2 flux if the alternatives are (a) leaving that agricultural land fallow (b) tearing down a rainforest. Where these counterfactuals get really useful, is in considering the relative CO2 fluxes that can be achieved with 1MWH of renewables (displacing coal power is best, conversion to hydrogen is materially worse) or 1kg of waste biomass (deep burial or biochar are superior to biofuels, note below).

(7) Some processes are lower-carbon. Specifically, this means that the process results in a smaller flux of CO2 into the atmosphere, relative to the closest possible worlds in which the process is not undertaken. As an example, green plastics are generally lower-carbon than fossil plastic, (but still materially higher-carbon than not using plastic at all).

(8) Some processes are carbon-negative. Specifically, this means that the process results in a net flux of CO2 out of the atmosphere, into some other sink, relative to the closest possible worlds in which the process is not undertaken. For example, an acre of seaweed cultivation project results in 2 net tons of CO2-equivalent being sequestered in the deep ocean every year, relative to the alternative of not undertaking the seaweed cultivation project (note below).

(9) Some processes are carbon-neutral. Specifically, this means that the process results in zero net flux of CO2 into or out of the atmosphere, relative to the closest possible worlds where the process is not undertaken. This definition matters, because honestly, we see many projects claiming to be “carbon neutral” which are nowhere close on our numbers.

(10) If in doubt, build a ledger.  The best way I have found to calculate these carbon fluxes is to put two columns side-by-side in a spreadsheet, one reflecting the process, the other reflecting the counterfactual, and then go line-by-line, sub-process-by-sub-process. For a recent example, please see our data-file into biochar below.

(11) Counterfactuals will sometimes be debatable, but these are good debates to be having. By definition, a counterfactual is a fiction, a scenario that has not happened. Sometimes it is appropriate to consider a range of counterfactuals rather than a single counterfactual.  

(12) Accounting for nature-based solutions is no more complicated than accounting for any other process.  Some commentators criticize that carbon accounting is much more complicated for nature-based solutions. In our experience, it is no more complicated than the carbon accounting for any other carbon-reduction technology.

Please treat TSE data-files as building blocks. We now have over 500 research notes, data-files and models on our website. We have around 35 separate CO2 screens linked here. Often, doing the CO2 accounting for a large project is a function of combining the data from many of these pre-existing data-files. If we can help you with CO2-accounting please let us know.

Conclusions: what should companies do?

If companies want to help decision-makers understand their CO2 intensities, in our view, they should go a long way beyond blanket, company-level disclosures of Scope-1, and Scope-2 emissions. Instead, give us the underlying data: i.e., an asset-by-asset list of each facility, its output, its combustion emissions, methane emissions, electricity purchases, estimated CO2 intensity per unit of electricity, and other relevant data. This would make for vastly more meaningful comparisons.

Wooden wind turbines?

Carbon-negative construction materials derived from wood could be used to deflate the levelized costs of a wind turbine by 2.5 – 10%, while sequestering around 175 tons of CO2-equivalents per turbine. The opportunity is being progressed by Modvion and Vestas, as discussed in this short note below.

Introduction: the quest for lower-cost and lower-carbon wind?

Our roadmap towards net zero requires global wind and solar additions to treble from 160GW per year towards 500GW per year by mid-decade, so that renewables can reach 40-50% ultimate shares of power grids. The vast build-out makes it important to lower the costs and CO2 intensity of constructing renewable assets.

For onshore wind turbines, our model below captures these costs in detail. Our base case is a 6.75c/kWh levelized cost, for a farm of 100 x 3MW turbines costing $1,850/kW. Costs in the model are sub-divided into 30 distinct categories. A 10% reduction in capex confers a 10% reduction in levelized cost of electricity, all else equal.

The tower supporting the blades and nacelle explains c$300/kW of the cost, of which $60/kW is the cost of steel and the remainder is largely in fabrication, transport and installation. Moreover, producing 300 tons of steel likely has a CO2 footprint of 450T (data here). Supporting this heavy structure also requires around 1,300 tons of concrete, explaining another 150T of CO2 (data here).

Overall, we estimate that the embedded CO2 in a wind turbine gives its power generation a CO2 intensity of 0.02kg/kWh (data here). This is low by comparison to the 0.4kg/kWh CO2 intensity of today’s US power grid. Low CO2 intensity of the grid matters in itself, and for electric vehicles which will ultimately be charged from the grid (below).

There are also logistical challenges, which preclude the scaling-up towards larger and more cost-effective wind turbines. A conventional steel tower of 100+ meters will have a 4.5m diameter at its base, which is a size limit for road transportation in the US and Europe. 

Build the towers out of wooden not steel?

An alternative to lower both the costs and CO2 intensity of wind turbines is to use carbon-negative construction materials, such as glulam or cross-laminated timber. We are excited by this opportunity, featured in our recent research note (below), yielding 20-30% IRRs turning sustainably sourced forest products into alternatives for steel and cement, which together comprise 10% of global CO2.

To re-iterate, if mature forests are sustainably harvested, then it is ‘carbon negative’ to lock up their wood in construction materials, then re-plant younger and faster growing forests (chart below).

Modvion is a private company, based in Gothenburg, Sweden, founded in 2015 and with c20 employees. It is aiming to build wind turbines’ towers out of glulam, a material that is stronger than an equivalent weight of steel.

Three patents have been granted, for a fibre composite section (2018), a laminated wood tower and method for assembly (2020) and a wood connection used in a laminated wood tower (2020). An objective in the patents is to improve the strength and inter-connections between modular wooden tower components (below).

Advantages. Because the material is stronger and lighter, it could enable taller and more powerful turbines. Modvion cites that its technology “enables significantly decreased cost… [and] increased cost efficiency in the harvesting of wind turbines”. CO2 emissions in the construction of a wind turbine can be reduced by at least 25%.

Progress. A 30-meter prototype has already been built in Sweden, at Moelven’s glulam factory in Töreboda. Funding included a SEK69 ($8M) investment from the European Innovation Council in June-2020, as one of 72 companies that were granted funding, out of 3,700 applicants. The grant is being used to build a development facility for the first >100m towers. Preliminary contracts are in place to built a 110m tower for Varberg Energi and 10 x 150m towers for Rabbalshede Kraft. A collaboration agreement was also signed with Vattenfall in September-2020. In June-2020, Modvion stated “we are seeing enormous demand for our wooden wind turbine towers”. The first commercial structures could be built in 2022.

Vestas also invested in Modvion in February-2021 to accelerate the adoption of wooden wind turbine towers. Vestas launched a ventures fund in November-2020 to incubate disruptive technologies. This is a strong endorsement, as our patent analysis paints Vestas as the technology leader in onshore wind (below).

Elsewhere, Stora Enso, a large-cap materials company featured in our CLT screen (here) has supplied cross-laminated timber to Timber Tower GMBH, in order to construct the world’s first CLT wind tower, over 100m high, in Hannover, in 2012 (details here).

Disadvantages are that there is little established supply chain or prior experience with wooden towers. Some commentators may question their long-term durability.

Economic impacts: what cost savings?

70% materials cost savings? Ton-for-ton, cross-laminated timber and glulam is likely to cost 2x more than steel, at around $1,200/ton, in order to earn a 20% IRR building a CLT facility (mode below). However, the material is also lighter, and overall, we estimate that 85% fewer tons of CLT are required. This could cut the capex cost of a wind turbine by $40/kW, or around 2%.

Further savings are possible in fabrication and logistics, which are estimated to comprise $220/kW in our wind cost model. Ultimate savings here are less certain, but handling lighter modules might save 5-20%, which would be worth $11/kW, or 0.5-2.0% of total turbine costs.

Higher turbines could also be facilitated. As a rough rule-of-thumb, the power that can be harvested from the wind rises as a linear function of height (data below). Hence 5% taller turbines achieve 5% more power output, albeit incurring some higher costs in the process.

More details here:

Conclusions: 2.5 – 10% cost deflation in carbon negative turbines?

If we add up all of the considerations above, we estimate there is potential to deflate the levellized costs of wind turbines by 2.5 – 10%, from 6.75c/kWh to 6 – 6.5c/kWh. The cost savings will be proportionately higher on challenging wind farms that have very high transport and logistics costs, but this is mainly a base effect. At the same time, around 175T of CO2-equivalents could be sequestered in each turbine.

One hundred years of carbon offsetting?

An acre of land can absorb 40-800 tons of CO2 over the course of a century. Today’s note ranks different options for CO2 sequestration over 100-year timeframes. Active management techniques and blue carbon eco-systems are most effective.

Nature based solutions to climate change are among the largest and lowest cost opportunities in the energy transition, with potential to absorb well over 20GTpa of CO2e for costs around $3-50/ton. We argue they will disrupt the entire new energies industry and will increasingly be adopted in the decarbonization strategies of climate-conscious organizations (research below).

One of the question marks over nature-based solutions is their impact over long time-frames. Another is the CO2 that can be offset per unit of land (note below)

Hence the purpose of this short research note is to quantify how much CO2 is most likely to be removed from the atmosphere and sequestered for different negative-emissions technologies, over the course of a century. Our answers are laid out below and we will run through the options in order.

Peatlands are most likely to absorb around 40 tons of CO2 emissions over the course of a century. This is the lowest volume shown in our chart, as an acre of peatland tends to absorb around 0.4T of CO2 per acre per year. Where peatland stands out, however, is that they continue accumulating CO2 at this rate for millennia. Hence an acre of peatland typically contains over 1,600 tons of CO2-equivalents, which is 4-8x more than a terrestrial forest and more than other blue carbon ecosystems (data below). This means that preserving pre-existing peat bogs is debatably more important than establishing new ones.

Restoring soil carbon in agriculture is next in our chart. It can absorb 75 tons of CO2 emissions over the course of a century. This number remains lower than other CO2-offsetting technologies. But it has the advantage of being compatible with crop-based agriculture and could therefore be implemented across a vast 4bn acres of croplands, where soil carbon has likely fallen from 4% in pre-industrial times to 1% today, due to mechanized agriculture, and explaining 20-30% of all anthropogenic CO2 emissions. We are seeing exciting evidence that CO2 markets could incentivize farmers to change their practices (note below).

Carbon capture and storage technologies, including direct air capture, are next on our list and are expected to sequester around 100 tons of CO2 per acre in our base case. In turn, this is derived from technical papers in our model below. However the range is broad, spanning from 5 tons to 1,000 tons of CO2 per acre, depending on reservoir quality. Injectivity is also expected to follow a decline curve, over a c50-year sequestration project. Total CCS or DAC costs will likely range from $70-200/ton, which is generally higher than nature based solutions.

Simple reforestation comes next, expected to sequester 200 tons of CO2 per acre over the course of a century. This has all been achieved after c40-years, as a typical forest’s growth follows a sigmoidal trajectory. After c40-years, the rate of trees’ growth has approximately halved (data below) while the rate of biomass decomposition will cancel out new carbon uptake. We note our numbers here are on the conservative side, as forest biomass is generally estimated between 200-400 tons of CO2e per acre in technical papers. To be clear, for reforestation projects to absorb CO2, you must start with an area that is not forested (e.g., sourced from the world’s 2.5bn hectares of degraded lands), re-forest them, then the forests must remain in tact.

Active forestry can almost double the net CO2 absorption from forests over a 100-year timeframe. Specifically, our recent research considers the opportunity turning forest products into carbon-negative construction materials, such as cross-laminated timber, locking up the carbon in the wood products for centuries (note below). Our numbers assume that one-third of the forest’s carbon is lost due to harvesting and in processing forest products. Then a new cycle of reforestation can begin immediately. This explains the “saw-tooth” profile for sustainable forestry in our chart above.

Most of the carbon-absorbing systems considered above tend to mature and slow down their rates of CO2 sequestration. But three further examples in our chart continue their rate of CO2 absorption almost unabated.

Seaweed aquaculture has been the focus in our recent research, underpinning a vast carbon sink, forming 20 tons of dry biomass per acre per year, of which c10% tends to detach and sink into the deep ocean, where it is thought to be effectively sequestered for millennia. Seaweed and kelp biomass turns over around 10 times per year. Hence the flywheel of ocean carbon sequestration keeps spinning indefinitely. Over a century, seaweeds should sequester around 230 tons of CO2 per acre of seaweed cultivation per year.

Mangrove forests may absorb 450 tons of CO2-equivalents over the course of a century, helped by two factors. First, they are fast growing plants, absorbing around 9 tons of CO2 per acre per year, compared with our base case of 5 tons of CO2 per acre per year for terrestrial forests. Second, they shed material into swamp-like blue carbon eco-systems that lie among their thick roots. Material continues accumulating in this eco-system, which actually turns shallow waters into swamps, then from swamps into land. Again our numbers may be conservative, as some technical papers estimate that mature mangrove forests contain around 1,000 tons of CO2e per acre. Mangrove restoration costs $3-130/ton, depending on the location and the hurdle rate (note below).

Biomass burial can likely sequester the most CO2 per acre of any option in our chart. This involves fast-growing crops, which absorb 10-20 tons of CO2 per acre per year, then harvesting this biomass, and burying it 10-meters underground, so that the carbon is effectively trapped. We estimate that two-thirds of the fixed CO2 could be buried, the buried material will decompose at a rate of c1% per annum, and with a $15-50/ton CO2 price the practice could sequester around 8x more CO2 than converting the crops into biofuels (note below).

Biochar? While adoption of this biomass burial practice is currently negligible, a similar feat can be accomplished via biochar. This is already a $1-2bn per year market, accelerating at 10-30% per annum. Instead of burying the biomass, it is pyrolysed into an inert material, which in turn can be scattered onto soils, as a one-off, or year after year.

Our conclusion is that vast amounts of carbon can be removed from the atmosphere, in natural ecosystems, over the course of the next century. Each acre of land can absorb 40-800 tons of CO2e. Active management techniques such as biomass burial and sustainable forestry are most effective, while blue carbon eco-systems can also yield rapid and sustained CO2 uptake. Please contact us for any questions on nature-based carbon offsets.

Renewable Energy Certificates?

Renewable Energy Certificates are legal contracts where all parties agree to pretend that gas and coal electrons are wind and solar electrons and vice versa. At best, these RECs incentivize incremental renewables projects to drive the energy transition. At worst, they may crowd out genuine decarbonization. At any rate, this note discusses some strange implications for energy analysts, as RECs have been commercialized over the past 20-years. Our view is that nature-based carbon credits may be superior to RECs.

Introduction: renewable energy credits in corporate decarbonization?

Increasing numbers of companies are embracing nature-based carbon offsets, as a part of their decarbonization strategies. We believe this will emerge as one of the largest and lowest cost opportunities to help the world reach ‘Net Zero’ CO2. Our data-file below, for example, quantifies the approaches of thirty leading companies.

But another strategy seen in companies’ decarbonization strategies has been to purchase “100% renewable energy”, especially for tech companies, where electricity dominates their CO2 emissions. At first glance, this is a strange claim to be making. Wind and solar only comprise c10% of the grid globally, c20% in Europe, and there are vast intermittency challenges in scaling wind and solar past 40-50% of any functioning system (see below).

Claims for 100% renewable electricity revolve around renewable energy certificates. These financial instruments also go by alternate names, such as ‘renewable energy credits’, ‘green tags’, ‘green energy certificates’, ‘tradable renewable certificates’, et al. But for the remainder of this article, we will abbreviate them as RECs.

Renewable Energy Credits (RECs) are the right to claim the environmental attributes of renewable electricity. They are traded in 1 MWH units. And they are sold by wind, solar, hydro and other green electricity producers.

An example for 100% renewable electricity.  Let us assume a small island grid generates 100MWH of electricity in a given year. 10MWH is generated by solar, and 90MWH is generated by diesel. Company X consumes 10MWH of energy from the grid, which statistically comprises 1MWH of solar and 9MWH of diesel. However, Company X then purchases 10MWH of renewable energy credits from the solar plant. In other words, Company X has purchased the legal rights to attribute all 10MWH of solar energy to its own operations, and thus claim that 100% of its electricity purchases are renewable.

Who benefits? The positive interpretation is that purchasing RECs supports renewables and will accelerate their deployment. Indeed, a $1-5/MWH (0.1-0.5c/kWh) premium for a typical wind or solar asset likely increases the base case IRR on a typical project by 0.1-1.5 pp (models below). At best, this may incentivize new renewable projects that otherwise would have been stranded.

Who suffers? The negative interpretation is that the CO2 intensity rises for everyone who does not purchase RECs. Let us assume I am a resident on the island discussed above. All 10MWH of renewable generation on the island has legally been claimed by Company X. The electricity I am buying, therefore is sourced from the remaining 90MWH generated by diesel. Bizarrely, even if I am drawing my electricity directly from the solar panels, I cannot claim to be using clean electricity. The attribution rights for that clean electricity have already been claimed by Company X and must not be double-counted.

Open to interpretation? The interpretation above is actually not ours, but that of the US Federal Trade Commission, i.e. the US’s foremost consumer protection agency. Its guidance document gives the following example: “A toy manufacturer places solar panels on the roof of its plant to generate power, and advertises that its plant is ‘‘100% solar-powered.’’ The manufacturer, however, sells renewable energy certificates based on the renewable attributes of all the power it generates. Even if the manufacturer uses the electricity generated by the solar panels, it has, by selling renewable energy certificates, transferred the right to characterize that electricity as renewable. The manufacturer’s claim is therefore deceptive. It also would be deceptive for this manufacturer to advertise that it ‘‘hosts’’ a renewable power facility because reasonable consumers likely interpret this claim to mean that the manufacturer uses renewable energy”.

Market metrics: how widespread and reliable are RECs?

How widespread? NREL tracks the REC market. It estimates that in 2019, 197,000 customers purchased 69TWH of unbundled RECs. For comparison, US wind and solar generation were around 400TWH in 2019. About 360 corporate offtakers also purchased about 42TWH directly through PPAs, which suggests corporations are buying 1.5x more renewable energy ‘indirectly’ through RECs than directly through using renewables, which would be a somewhat surprising finding.

Average REC pricing was around $1/MWH ($0.1c/kWh) in 2019-20, although some RECs were commercialized for as much as 15-40c/kWh. In our view, paying a mere 0.1c/kWh for a REC makes it challenging to claim that your purchase has been the decisive factor that caused a wind or solar project to go ahead, when the wind or solar power is also selling its power to the grid at 6-8c/kWh. This is different from a nature-based carbon credit, where the $3-50/ton CO2 price comprises the vast majority, or potentially all, of a reforestation project’s revenues (models below).

How reliable? Each REC is given a unique identification code, to ensure it is not double-counted. Ideally, RECs are also certified by independent consumer protection bodies, such as Green-E. And when purchased, you will receive a legal assurance that the RECs have been retired, so they cannot be re-sold multiple times over.

Finally, some of the largest purchasers of RECs (Google, Amazon, the US Department of Defence) have written policies favoring direct renewables purchases, while ensuring that purchased RECs are “additional” (i.e., they support new, incremental projects) and ideally also geographically proximal. Nevertheless, there can be some strange implications to RECs, discussed below.

Strange Implications: accounting for RECs?

Rooftop solar: what implications? Many rooftop solar installations in the US are leased. By law, the solar installer often retains the right to sell RECs originating from that solar panel. To re-iterate, if those RECs are sold to a third-party, then that third party is the legal “user” of the green energy attributes from the solar panel. So even if my electric vehicle is charging directly from the solar panel – even if I am holding the direct cable linking the two; even if I can see that the vehicle’s charging rate falls when a cloud passes overhead — I may no longer be able to claim that my electric vehicle is being charged by solar energy, as I am no longer the owner of that claim.

Electric vehicles: what implications? RECs matter for the greenness of electric vehicles and other electrically powered devices. We estimate that a typical electric vehicle has 50% lower CO2 intensity per mile than an ICE car, if it is charged from the US grid today (model below). But in fact, the EV numbers will be slightly worse than we are showing below. Our estimates assume an overall CO2 intensity of 0.42kg/kWh for the US grid, which blends the share of coal, gas, nuclear, renewables, et al. However, due to the sale of RECs, debatably, I can no longer claim some of those renewables are part of my grid mix, as they have already been claimed by the purchasers of those RECs. Because of RECs, you cannot simply assume that the electricity pulled from a grid with 20% renewables itself comprises 20% renewables.

Green hydrogen: what implications? The blending of RECs with green hydrogen could become a minefield of complexity. For example, imagine a hydrogen electrolyser that is powered by a wind turbine. If you sell RECs against the wind turbine, does this transform the green hydrogen into grey hydrogen?! Conversely, if you power a hydrogen electrolyser around the clock using a coal plant, and then buy enough RECs, could you claim that the hydrogen was green?! My personal intuition is that green hydrogen projects will likely need to be very careful around any REC involvement and should probably avoid them altogether.

Coal power: what implications? Another strange implication is that RECs could be seen to slow the shift away from CO2 intensive coal to lower carbon electricity sources, in the way that is required on our ‘roadmap to net zero‘. For example, if I buy my power from a coal plant, then legally, I can ‘decarbonize’ my power purchases for a cost of $1-6/ton of CO2-equivalents, by buying RECs ($1-5/MWH cost divided by 0.8-1.0 T CO2/MWH CO2 intensity in coal power). This is an order of magnitude cheaper than, say, installing CCS at the coal plant, which is likely to cost well over $75/ton; or improve its thermal efficiency with heat-exchangers ($50/ton); or switch to a 50-60% lower-carbon gas plant ($0-80/ton). Thus one might fear that paying to “have my coal plant legally treated as a solar plant” is actually crowding out genuine decarbonization.

Nature based carbon offsets versus renewable energy credits?

My own personal intuition is that RECs may have a role for some consumers that want to incentivize renewable energy projects, but nature-based carbon offsets feel “more valid” as a means to drive global decarbonization.

For example, the certificate below gives me the legal right to claim I purchased 20MWH of renewable electricity in 2020, which covers 100% of the estimated electricity from Thunder Said Energy’s 2 full time employees, working in heated and air conditioned (home) offices, and sending 1M emails per year (our distribution list is getting quite large). So legally, for the mere cost of $100, I can now claim Thunder Said Energy was fully powered by renewable energy in 2020.

But at some level, I know full well I was sitting in New Haven, Connecticut in 2020, buying electricity that was mostly sourced from natural gas (I used to walk past the generating plant on the way to the swimming pool). And I also doubt that my purchase has incentivized any new renewable projects to go ahead, at a price of 0.5c/kWh (which in turn has been sub-divided between commercial entities, REC traders and renewable projects themselves).

This simply “feels different” from my nature-based carbon offset purchases. Last year I engaged two tree planting charities to plant a set number of incremental trees to offset all of TSE’s CO2 (note below). Nature based solutions can also be used to offset broader CO2 emissions, beyond just electricity purchases.

Nature based solutions do have challenges. It is important to ensure they are additional, reliable, long-lived and biodiverse. But the largest pushback we have tabulated (below) is that they are a distraction from true decarbonization. Some of their most vehement critics of NBSs call them “modern day indulgences”. Puzzlingly, some of the critics making this argument have had no issue advocating for RECs over the past twenty years.

Our own view, to be clear, is that NBSs will comprise c25% of the heavy-lifting on the road to net zero. They must also be combined with efforts to develop 500GW pa of renewables, improve global energy efficiency by c25% and develop 10GTpa of CCUS opportunities. But NBSs may slowly overtake RECs as the most favored carbon offset option globally.