Compensated Fuels: Enabling Energy Transition W/O Breaking The Bank

Not too long ago, the world seemed poised to forge full steam ahead to achieve ambitious emissions reduction goals. ‘Electrify everything’ dominated prominent policy and stakeholder initiatives, with plans to get to net zero through electric mobility and heat powered by offshore wind and solar. Fast-forward to today, and the rise of AI and the expansion of data centers have shifted the narrative. “Energy transition” becomes more like “energy addition” as we strive to meet our rapidly growing energy needs.

In other words, fossil fuels will continue to play a significant role for many decades to come, serving as a critical energy source for powering the grid, providing heating for homes and businesses, and fueling mobility across hard-to-abate industries. Meanwhile, policy shifts and financial uncertainties are prompting organizations to reconsider or pause development plans. As Abraham Lincoln famously remarked, “The best way to predict the future is to create it but be ready to adapt when the unexpected happens.”

Moving toward a lower-impact environment is essential, but flexibility is the key to getting there due to challenges associated with cost and inadequate technology solutions for some sectors, not to mention the Time Value of Carbon. All the above approaches to decarbonization are prudent and necessary. If flexibility is the goal, compensated fuels seem to be a good option for the toolkit. They aren’t well defined, but some organizations refer to them as fossil fuels bundled with environmental attribute certificates such as voluntary carbon offsets (VCOs) or renewable energy credits (RECs). These include liquefied natural gas cargoes, refined products, and retail fuels like gasoline and heating oil bundled with offsets to reduce environmental impact.

In a nutshell, compensated fuels are energy products paired with reductions or avoided GHG emissions that occur elsewhere to mitigate the environmental impact of the fuel.

Environmental stakeholders prioritize insetting, avoiding and reducing emissions within the product value chain. It is not, however, always economically feasible or even possible in some cases to completely revamp supply chains and replace infrastructure. Bloomberg estimates the U.S. needs $800 billion annually by 2030 to prepare the grid for clean power and EVs, not including infrastructure replacement. Practically speaking, this change will not occur fast enough to achieve the shift many stakeholders seek. It will take decades. EIA projects that even by 2050, fossil fuels will still be utilized materially.

This also matters due to the concept of the Time Value of Carbon. Earlier emissions reductions are worth more than later emissions reductions due to the cumulative impact of GHG emissions on the atmosphere over time. Using environmental attribute certificates helps accelerate earlier reductions and thus is a valuable tool that should be incorporated into supply chains.

Other carbon-reduced fuels, such as Sustainable Aviation Fuel (SAF), currently utilize environmental attribute certificates.

This is a result of tradeoffs in the three leading chains of custody options available to clean products:

• Book & Claim (B&C) de-couples environmental attributes from physical energy products. This enables end users to claim environmental benefits, even if they are not directly connected to the supply chain. For example, a batch of SAF is produced in Los Angeles, CA and blended into a local fuel tank as jet fuel. Without access to that tank, an airline in Miami, FL purchased a certificate with the rights to the environmental benefits of that batch to use for their own emissions reporting purposes.

• Mass Balance Accounting (MBA) enables the co-mingling fossil and reduced carbon fuels. In this method, accurate bookkeeping ensures that inputs and outputs align, preventing double counting environmental attributes. For example, a million gallons of renewable diesel is produced in New Orleans, LA and shipped to Savannah, GA. It is then mixed into a tenmillion-gallon diesel fuel tank with nine million gallons. The fuel owner can then sell a million gallons of renewable diesel to various customers even though they may not physically receive 100 percent renewable fuel.

• Physical Segregation (PS) guarantees that a reduced carbon molecule is consumed, but this involves complicated logistics, higher costs, and potentially higher emissions. If scaled, this approach may make more sense as logistics improve. For example, a batch of reduced carbon fuel is produced in Texas and shipped via railcar in neat form to an end user’s destination where it is then utilized by the end user without any co-mingling.

Compensated fuels offer a pragmatic path forward by bundling conventional energy products with environmental attribute certificates like carbon offsets and renewable energy credits to reduce their overall impact

Book & Claim is especially useful in the early stages of product development. It allows producers to scale efficiently and lower costs to end users. When paired with reducedcarbon fuel products, the impact can be highly effective.

The key here is to acknowledge that while these solutions are practical, they are not perfect solutions with limitations. Drawbacks include imprecise baseline emissions estimates, potential timing mismatches with biogenic feedstocks, and variability in offset market quality, which may not always ensure additionality.

Despite these challenges, compensated fuels are worth supporting due to their substantial benefits that enable climate finance. Environmental attribute certificates cannot be the only source, but they are essential to the solution. Carbonreduced fuels within these bundles also help avoid capital outlays that could otherwise be used for renewable energy buildouts such as improvements to the grid, clean energy development, and advanced technology like direct air capture and can ensure that reductions also occur within supply chains. Some of these fuels, such as renewable diesel, can benefit low air quality through reduced NOx and PM emissions. Transparency is critical for stakeholders across the value chain; communicating precisely what these products can and cannot achieve is paramount.

To help navigate this evolving landscape, Global Partners launched GlobalGLO—an initiative that provides tailored solutions for customers aiming to meet sustainability goals. Through GlobalGLO, we work closely with our partners to source low-carbon fuels such as renewable diesel, biodiesel, and traditional refined products, bundling them with verified voluntary carbon offsets.

My take is that doing something is better than nothing. The world struggles to build renewable infrastructure at the necessary pace and scale to meet net-zero goals. Utilizing existing infrastructure and markets is key to driving a successful transition. A continuous improvement mindset— not perfection—is key to achieving energy transition goals. GlobalGLO is one-way Global Partners is working to bridge the gap between today’s needs and tomorrow’s ambitions.