The Clean Grid Project, or CGP, is a project that incentivizes the construction of solar farms with the intention of reducing global carbon dioxide emissions. For each metric ton of CO2 emissions that is eliminated, the CGP issues one carbon credit.
The CGP uses modern incentive design and economic theory to filter solar farms, ensuring that funding is only distributed to solar farms that genuinely require extra help to complete construction. This means both that the CGP is focused exclusively on constructing new solar farms, and also that the vast majority of planned solar farms do not qualify for the CGP, as they are already profitable without financial assistance.
The economic filter is combined with a comprehensive audit process that involves multiple on-site visits to the solar farm, specialized monitoring equipment, verification against public satellite and weather data, and deep investigation into local regulations and local energy market conditions to ensure the legitimacy of all solar farms.
When all aspects of the CGP onboarding and verification process are combined, the result is a climate initiative that is capable of producing surprisingly large quantities of high quality carbon credits at a surprisingly low cost.
Solar Farm Intentionality
One key challenge with climate funding is ensuring that any economic incentives are actually causing material change in the world. The CGP classifies climate outcomes as either incidental or intentional to help determine whether an economic incentive contributed meaningfully to changes in the world.
An incidental climate outcome is something that happens by coincidence. For example, if someone puts solar on their house to save money on their power bills, and it also reduces carbon dioxide emissions, that climate outcome is considered to be incidental. It's incidental because the original goal was to save money, not to cause climate impact.
An intentional climate outcome is something that happens because climate was the original purpose. For example, if someone builds solar on their house to reduce their carbon footprint even though it does not save them money, that outcome is considered to be intentional.
The CGP assumes that profitability is both a necessary and sufficient criteria to distinguish between incidental and intentional solar, especially for large scale solar farms. This means that regardless of any claims made by the solar farm owner, the CGP only considers a solar farm to be intentional if it was not independently profitable.
The CGP uses a clever economic trick to determine whether a solar farm is profitable. Based on competitive market rates, the CGP agrees to provide enough subsidy to a solar farm to cover the entire cost of construction. In return, the solar farm must give 100% of its electricity value to the CGP.
For all profitable solar farms, this is a bad trade. Because the solar farm is profitable, the value of the electricity will necessarily exceed the value of the subsidy provided by the CGP, which means that the solar farm will lose money if it participates. As a result, only unprofitable solar farms will ever join the CGP.
Note that this incentive mechanism works even for solar farms that try to cheat with their revenue. This is because the CGP only provides enough subsidy to allow the farm to barely complete construction. If the solar farm had an alternative path to making more money than that, they are losing out by rejecting that path - even if rejecting that path gets them money from the CGP.
Measuring Precise Carbon Impact
One key property of electrical grids is that they need to remain balanced. Therefore, if a power producer such as a solar farm starts pushing energy onto the grid, another power producer elsewhere needs to shut down, otherwise the grid will overload and cause dramatic equipment malfunctions.
If the other power producer was generating more carbon dioxide per unit of power than the solar farm, then the total amount of carbon dioxide emissions from the grid have been reduced. The exact amount of emissions reductions depends on what power plant was displaced.
This means that solar farms in different locations will have different impact on the climate. The CGP uses a data provider called WattTime to determine the emissions reductions that result from putting a solar farm in different locations.
The Competitive Recursive Subsidy
Beyond just filtering out profitable solar farms, the CGP seeks to identify the exact solar farms where a subsidy will result in the greatest total amount of emissions reductions. It does this using a mechanism called a competitive recursive subsidy.
The competitive recursive subsidy offers a fixed amount of GLW tokens that get distributed between all of the solar farms. As more solar farms join the CGP, the GLW tokens get spread thinner and thinner, which reduces the average number of GLW tokens that are available to each solar farm.
Each solar farm is required to give all of their electricity value to the CGP. The number of GLW tokens that a solar farm receives is directly proportional to the amount of electricity value that is given to the CGP. Therefore, solar farms with more total electricity value will receive more GLW tokens.
In most circumstances, the value of the GLW tokens that a solar farm receives is significantly less than the value of the revenue that the solar farm is giving up, which means that profitable solar farms would still prefer to avoid participating in the CGP. At the same time, it means unprofitable solar farms are still incentivized to collect as much value as possible, because each additional dollar of value earns them more GLW tokens.
All of the revenue that is collected from the solar farms is then pooled together and redistributed back to the solar farms based on the number of carbon credits that each solar farm produces. This creates a powerful incentive for each solar farm to produce as many carbon credits as possible.
The overall profitability of a solar farm on the CGP therefore depends on two factors: how much revenue the solar farm brings to the CGP, and how many carbon credits the solar farm produces. Every solar farm on the CGP is trying to optimize for both values in a fierce competition.
A key outcome of this competition is that many unprofitable solar farms are actually unable to reach profitability by joining the CGP. In order for a solar farm to be viable on the CGP, they have to both produce nearly enough revenue to reach profitability - otherwise they don't receive enough GLW tokens - and they also have to produce carbon credits - otherwise they will lose too much of their revenue to other solar farms.
The optimal solar farm for Glow is one that is just barely unprofitable, and at the same time is displacing power plants that produce large amounts of carbon dioxide emissions. As Glow gets more competitive, solar farms have to be closer and closer to optimal for Glow to be able to help them reach profitability.
Why Give Up Revenue?
A common point of confusion around the competitive recursive subsidy is the requirement to give up all of the electricity value, as this means that a solar farm has to pay a significant amount of extra money up-front to join the CGP.
This requirement creates an incentive for the solar farms to produce as many carbon credits as possible, because the solar farm will only earn back their revenue if they are producing enough carbon credits. It is expensive, but it is effective and pushing solar farms to make more effective use of the CGP subsidy.
Though it can seem confusing when applied in the context of a solar farm, it actually matches the investment model of Bitcoin miners. Someone that wants to earn GLW tokens has to pay a large initial capital expense, and then they earn tokens and other revenue over time. As long as the total value of the GLW rewards and cash rewards exceed the initial capital expense and opportunity cost, then the investment is sensible.
There is one other critical element of the competitive recursive subsidy. Because every solar farm that is participating is not profitable, it means the solar farms as a group are also not profitable, at least on a purely cash basis. The group can only become profitable with the help of the GLW tokens.
This also means that the total value of the GLW tokens determines the total number of solar farms that can be supported by the CGP. If the CGP has more GLW tokens or the GLW tokens have a higher value, then the CGP can successfully bring a larger number of solar farms into profitability.
The Source of Value
The main factor that determines how many solar farms can be supported by the CGP is the value of the GLW tokens that the CGP has to distribute to solar farms. And the total number of GLW tokens that the CGP has to distribute depends on how much GLW control is directed towards the CGP.
The CGP therefore wants to incentivize people to mint GLW control and direct it towards the CGP. And, the CGP actually has a valuable resource that it can use as an incentive: the carbon credits.
Though solar farms on the CGP are rewarded based on the number of carbon credits that they produce, the rewards are sourced from the electricity value of other solar farms. The carbon credits themselves belong to the CGP.
This means that the CGP can reward its supporters by giving them all of the carbon credits that get produced. If the CGP is effective at creating high value carbon credits, it can generate a worthwhile yield for its supporters, making it worthwhile for people to mint GLW control and direct it to the CGP.
At a sufficient value of carbon credit, this becomes a positive feedback loop where more GLW control leads to more carbon credit production, which creates value for GLW control holders, which incentivizes even more GLW control to be minted, and so on.
There is one final point to make about the source of value in the CGP. Not all carbon credits are created equal, and the value of a carbon credit depends on factors such as how effectively the corresponding subsidy is able to filter out incidental versus intentional climate outcomes.
The CGP's competitive recursive subsidy produces some of the highest quality carbon credits in the entire solar industry, which means that carbon credits are worth significantly more when they are produced for the CGP than they are when they are produced by independent solar farms. This is the key advantage that allows the CGP to thrive.