What Are Environmental Financial Products?

Here at Allinfra, we often talk about environmental financial products (EFPs). But what are these products, exactly?

In this article, we explain what EFPs are and the role they play in climate action. We will also cover what the main types you need to be aware of and why it’s paramount that we transition to digital EFPs to reach our climate goals.

What Are EFPs?

EFPs are essentially financial products designed to fund climate action. They represent the rights to environmental attributes, for instance those embedded in a MWh of renewable energy or a metric ton of CO2 avoided.

They can either be created and retired by the same organisation, or created and sold to another party who will retire it. Whoever retires the EFP has claimed the green benefits of the product, which can then be used to offset their emissions, for example.

Only one party can retire the rights to the same MWh of renewable energy or metric ton of CO2 avoided. Otherwise, this is “double counting” – an issue that has afflicted the industry. Businesses, governments or any other type of entity must have an exclusive claim to an EFP for it to be truly impactful.

What Are the Different Types of EFPs?

Three common EFPs discussed in the market and used by corporates and institutions include:

Renewable Energy Certificates (RECs): Also called Energy Attribute Certificates (EACs). These are certificates that are created when a certain amount of electricity is generated by a renewable source of energy. They represent the green benefits associated with that renewable energy generation. Typically, 1 REC is equivalent to 1 kWh or 1 MWh.

Carbon Credits: Also called carbon offsets. These are EFPs derived from activities that avoid, reduce or remove emissions of carbon dioxide or other greenhouse gases that would otherwise end up in the atmosphere. A carbon credit is fundamentally a body of data evidencing that an emissions reduction has occurred at a particular place and time. One carbon credit is usually equivalent to one metric ton of carbon dioxide equivalent (tCO2e).

Carbon Credit Forwards: These are binding agreements where investors purchase a future supply of carbon credits at an agreed price, and project developers agree to deliver those carbon credits to the investor at a predetermined time in the future. These EFPs basically pre-fund climate action. While carbon credits are sold after an emissions reduction has occurred, carbon credit forwards help green project developers cover costs before the emissions reduction has occurred.

RECs are a great choice for industries where most emissions come directly from the electricity they consume, e.g. data centres. While RECs are very straightforward to calculate, carbon credits have more complex underlying calculations and can be used to offset emissions connected to a variety of sources, rather than electricity alone.

Why Are EFPs Important?

EFPs play an important role in helping organisations meet sustainability targets in ways other than altering their operations.

Without EFPs, it would be difficult for many types of industry that are necessary for modern life (e.g. factories or commercial buildings) to strive for decarbonisation on an accelerated timeline and in a cost-effective manner.

In many sectors, operations may be altered to facilitate a reduction in emissions but it’s likely that there still remains a meaningful carbon footprint that needs to be offset in order to avoid dangerous levels of climate change.

The Challenges of Traditional EFPs

Given the important role EFPs play in allowing organisations to meet sustainability targets, it is critical that the products themselves are trustworthy. Not only do we need to avoid double counting, we also need to ensure that the source of the underlying data is reliable. Otherwise, we would not be able to prove that positive environmental impact has actually been created.

Most traditional approaches for the creation of EFPs involve intermittent, manual procedures around data collection and verification. The end products are often difficult to link to the underlying environmental data in a granular or permanent manner that can be easily traced. This results in EFPs with limited transparency, the possibility of double counting and a process that is often very slow and costly.

Why Allinfra Helps Organisations Create Digital EFPs

Our platform Allinfra Climate allows organisations to create, transfer and retire EFPs that are natively digital. The platform can also be seamlessly integrated into existing processes, allowing for traditional methods to be optimised and supplemented with the latest technology.

By integrating the latest technologies and moving towards a digital end-to-end process for the creation and monitoring EFPs and underlying projects, organisations will see a reduction in cost, accelerated speed to market and an optimised product meeting the needs of all stakeholders and encouraging the development of the green projects needed to meet the world’s climate goals.