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What is the future-stream model for carbon offsets?

In the future-stream model, the lifetime offset production of a project (its “future stream”) is estimated and sold in advance. For example, a project with an expected lifetime of 20 years would estimate its entire 20-year production of offsets and sell these to a retailer before the project is built.

The future-stream model can be helpful for small renewable energy projects that need offset revenues to be financially viable, but cannot access capital because no investors are willing to take the risk that the project won’t be able to sell its offsets. Selling the offsets to a retailer before the project is actually built eliminates this barrier, allowing the project to access capital.

One expert’s opinion on future offsets

In 2006, Mark Trexler et al. wrote the following in a report for Clean Air-Cool Planet:

Selling Offsets Generated in the Future
Excerpted from A Consumers’ Guide to Retail Carbon Offset Providers, pg. 20. Clean Air-Cool Planet, 2006.
Retail offset providers face several challenges in supplying credible, cost effective offsets to the market. Project developers are often reluctant, for example, to pursue truly “additional” GHG offset projects if they have no guarantee of selling the offsets. Conversely, companies looking to buy offsets would like to know that those offsets are “additional,” but they do not want to wait for new projects to get started and usually cannot fund a project’s entire costs. To understand what the market is up against, consider these two characteristics of the voluntary retail market.
1) Carbon neutrality is usually sold on a year-to-year basis. There is no guarantee that any given offset purchaser will continue to purchase offsets in the future, and few consumers are willing to purchase carbon neutrality for multiple years up front.
2) Offset projects generally result in a stream of emissions reductions over a project’s life (typically five or more years). This multi-year credit stream usually makes an “additional” project’s reductions cost-effective. If a project’s entire cost has to be covered by just the first year of offset revenues, those offsets will usually look very expensive to the consumer.
As a result, finding cost-effective quality offsets on a year-to-year basis is challenging at best. Buyers face a distinct incentive to accept lower quality offsets, particularly with respect to additionality, since non-additional offsets are easy to find at a relatively low cost. This dilemma can be overcome in a way that favors additionality by selling the future expected reductions “up front.” This secures the funding needed by project developers to initiate truly additional offset projects.
Not surprisingly, there are tradeoffs involved. The sale of future reductions creates the risk that the anticipated offsets never actually occur. Projects can fail for many different reasons. To deal with this risk, offset providers may want to either discount these offsets to account for future project and delivery risk, or “self-insure” their portfolios by purchasing more offsets than they are actually committing to deliver.
Notwithstanding these risks, a high-quality offset characterized by the risks of future delivery is still preferable to a low-quality offset, even if it is being offered “real time.”

What is the future-stream model for carbon offsets?

One expert’s opinion on future offsets

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