What are Carbon Credits and how do they work?

Introduction

Carbon credits are the most exciting part of EV charging. There are so many aspects to explore, but let's start with a high-level overview of the main points. Many people are unaware of carbon credits or how they work. If done properly, they can be a very lucrative revenue stream. As with many things related to the government, they can be complicated and difficult to understand, but this article aims to simplify the concept and provide clarity so you can use them to your advantage.

Here are the top 5 things to know about carbon credits in British Columbia.

1. Definition

First, let's discuss what a Carbon Credit is. In British Columbia, a Carbon Credit is a tradable certificate that represents a reduction of one metric ton of carbon dioxide (CO2) emissions. These credits can be earned by organizations or individuals who take steps to reduce their carbon footprint.

2. Two Types of Carbon Credits

Currently, British Columbia has two different EV charging carbon credit programs: one federal program and one provincial program..

• Federal - Clean Fuel Regulation credit (CFR) refers to a carbon credit that is traded on the nationwide Canadian Federal carbon market, which began trading in July, 2023.

• Provincial - Low Carbon Fuel Standard credit (LCFS) is a type of carbon credit traded exclusively on the Low-Carbon Fuel Standard market in British Columbia, which is currently active.

These programs enable EV charging stations to generate carbon credits, enhancing the return on investment for people installing EV chargers. If you operate a network or host a public EV charging station for electric vehicles, you can receive Canadian CFR credits for these chargers. This is in addition to the existing British Columbia LCFS credits, which you can stack with CFR credits. Collectively, these are referred to as Clean Fuel credits.

A single Clean Fuel Credit is a permit to emit one metric ton of greenhouse gases.

British Columbia Carbon Credits

In British Columbia, the government wanted to provide an incentive to help the environment and reduce the amount of carbon released. As we know, money is the strongest motivator, so why not provide a financial incentive for going green?

Low Carbon Fuel Credit - LCFC (British Columbia)

This is where the Low Carbon Fuel Credits (LCFC) program was introduced. This program incentivizes businesses to contribute to the installation of EV charging infrastructure. These EV chargers have the ability to generate Carbon Credits through the amount of electricity (kWh) that flows through them. Essentially, the amount of power used by the chargers reduces the amount of gas that would have been used instead.

How much are LCFC Credits Worth?

In the LCFC, the carbon credits generated by the charging stations are held by the station owners. Remember, this is where they differ from Federal Carbon Credits. The additional benefit of owning carbon credits provides them an opportunity to increase their income by selling these credits on the market. On average, each credit is valued at approximately $500.

Federal Carbon Credits

The Canadian government also introduced a carbon credit program called the Clean Fuel Regulations (CFR). This program is similar to the provincial system as it awards for EV charging stations. The CFR also introduced a credit trading system which allows environmentally friendly companies that don’t emit much carbon to sell their carbon credits to those who haven't met their targets.

Clean Fuel Regulations - CFR Credits (Federal)

The main difference between these Federal carbon credits and the previously discussed Provincial carbon credits is that the Federal carbon credits generated by the EV Chargers are awarded to the network providers of EV charging stations (not the owners). The revenue from these credits must be reinvested in EV charging infrastructure, supporting electricity distribution, or consumer incentives.

Monopolization Concern

This causes a problem because the more EV chargers a company has operating in the market the more they’re able discount their next project using carbon credit revenues. This has the potential to monopolize the EV charging industry limiting customer choice.

In 2023, each Federal CFR credit was worth about $365 Canadian.

Controversy

One of the key differences to mention is who receives the carbon credits. This has been a point of controversy, and Maxime Cherron wrote a great article outlining the aspects. The scrutiny arises when discussing who receives the carbon credits. In relation to the federal carbon credits, if the host paid for the EV Chargers, shouldn't they receive the carbon credits? Why would these go to the network providers, also known as the EV Charging companies?

Ownership

If I own something, I better receive all the benefits that come from it. This is where the Federal system seems misaligned. That being said, the Federal Carbon Credits (CFR Credits) must be reinvested into EV Charging infrastructure, which the EV charging companies have access to. However, that doesn't mean the owner can't invest it towards more EV Chargers on their property.

3. Eligibility - How to Receive Carbon Credits

Your chargers need to produce a certain number of kilowatts before becoming eligible to apply for carbon credits. If more than 15,000 kWh of electricity has been generated by the charging stations within a calendar year (January - December), then you're eligible. You must submit the "compliance report" no later than March 31 of the following year.

4. Carbon Credit Management

Carbon Credits are new and can be confusing. Now, there are companies that will help "manage" your carbon credits. Carbon Credit Management refers to the process of overseeing and controlling the generation, selling, and trading of carbon credits. Managing carbon credits involves understanding that major buyers of carbon credits, such as large corporations, usually prefer to purchase large quantities of credits at once.

5. Selling Carbon Credits

Below are a couple steps to help get the credits off your hands and turned into money in your bank account.

The Aggregator

Once you've generated enough carbon credits, you may be interested in selling them to make a profit. If so, you'll likely need a broker or "aggregator" to find you a purchaser, such as an oil and gas company.

An aggregator is a third party that can enter into allocation agreements with suppliers. They make deals with clients, like strata corporations, to combine the electricity used by all their clients' charging stations. They then report the total combined electricity to the Ministry of Energy, Mines, and Low Carbon Innovation and receive credits in return.

Finding Buyers

Next, they arrange to sell these combined credits to a buyer, like an oil and gas company. They record the sale with the Ministry, transferring the credits to the buyer. They inform the client about how many credits were issued and their market value on that day. In the end, they distribute the money from the sales to their clients based on each agreement.

Conclusion

With both federal and provincial programs in Canada incentivizing the reduction of greenhouse gas emissions, it's clear that carbon credits are here to stay. It’s smart that the government realized adding a financial incentive will get people moving in the right direction. However, it's crucial that we continue to monitor and discuss the allocation and management of these credits to ensure fairness and transparency. As we navigate this relatively new terrain, we'll likely see positive developments moving forward.

More to come on the exciting world of carbon credits shortly.

Until then,

Strong Energy