Paying for net-zero

February 2, 2022

We break down some of the ways the University of Michigan is planning to foot the bill for wiping out its carbon footprint, including on the Dearborn campus.

Graphic by Violet Dashi
Graphic by Violet Dashi

As we’ve been bringing you coverage of U-M’s plans to make its three campuses carbon neutral, it was always clear there wouldn’t be a shortage of good ideas. Now, with some core emissions reduction commitments to guide us, we're moving into the implementation phase. Of course, there’s no getting around the fact that erasing our carbon footprint is going to be expensive. Over many decades, the investment among the three campuses will be measured in the billions of dollars. But Tom Lyon, UM-Ann Arbor Dow Professor of Sustainable Science, Technology and Commerce and faculty lead for the President's Commission on Carbon Neutrality Energy Consumption Policies Analysis Team, says we can feel confident that the university has a solid set of tools to ensure those investments stretch our dollars and do what they’re supposed to do — namely, cut carbon. 

The Revolving Energy Fund

One of the new financial instruments that’s already being implemented, including at UM-Dearborn, is a new Revolving Energy Fund (REF). Lyon says the REF is designed to solve a common “cash flow problem” faced by many businesses and institutions: “There are a lot of investments that will save money and cut greenhouse gasses, but organizations are often constrained by access to funds,” Lyon explains. “So the result is there are a lot of cash flow-positive investments that don't get made.” The REF fixes this issue by setting up a pool of money to initially fund such projects. Then, over time, as savings from projects materialize, the fund is paid back, refilling the REF for additional work, with the cycle repeating indefinitely. Here at UM-Dearborn, for example, the REF is currently funding LED lighting upgrades in seven campus buildings, starting with the Mardigian Library. For all seven buildings, upgrading the lights will cost about $392,000, according to UM-Dearborn’s Energy Manager Sumit Ray. But once installed, the new lights will annually use $71,000 less in electricity. That means our campus can repay our REF loan in less than six years, and as we do, our payments replenish the REF so it can fund other projects. One cool perk: The current terms of the REF allow campuses to retain a quarter of their savings each year until the REF loan is repaid. After that, of course, campuses reap 100 percent of the savings.

UM-Ann Arbor Professor Tom Lyon
UM-Ann Arbor Professor Tom Lyon

Lyon says REFs are a tried-and-true tool that have been used for everything from small-business loans in lower-income countries to energy-efficiency programs at other universities. But for an REF to work most efficiently, you have to size it adequately. Undersizing it relative to the number of shelf-ready projects or their likely repayment periods could unnecessarily delay worthy carbon-cutting measures. So to determine the appropriate initial size of the fund, Lyon and the analysis team looked at 10 years of data from real energy efficiency projects on the three campuses, revealing what things had already been done and what their typical payback periods were. But their analysis also yielded some notable surprises. “We assumed that the low-hanging fruit had been picked early on, so we thought we’d see that the returns from investments would be declining over time,” Lyon says. “And we were really surprised to see the returns were staying constant over that whole period. It’s like the low-hanging fruit kept regrowing.” Lyon says their theory is that technology was advancing so quickly, it was actually paying to upgrade relatively recent upgrades. For example, a dozen years ago, compact fluorescent lighting (CFL) was a major energy saver compared to incandescent lighting. But today, it already makes business/carbon sense to replace CFLs with LEDs. The new technology is simply that much more efficient.

Lyon says this suggests that an REF might be an even more powerful tool than expected for cutting carbon, as improvements in technology continue to fuel cost-effective solutions that squeeze waste out of the system. But even a well-tuned REF has limits. While energy-efficiency projects shrink our carbon footprint by decreasing the amount of energy we use, we’ll eventually have to directly address the carbon profile of the energy that we can’t live without. On this front, Lyon says there are basically two approaches. We can directly decarbonize our own energy systems. Or we can continue to use carbon-emitting systems, but offset our emissions by paying someone else to eliminate or sequester an equivalent amount of carbon.

Offsets, Renewable Energy Credits — and their limits

There is a solid business and carbon case for both approaches, and in fact, U-M is exploring doing some of each. On the offset side, the university has committed to consult with experts about the use of offsets, and Lyon says there's a strong rationale for their use, especially in the near-term. “Most economists think offsets are a really good idea because it’s all about getting the most bang for your buck,” he says. “In some sense, the planet doesn’t care where we reduce carbon emissions because it’s all one big global problem. So if I can spend $2 billion at the University of Michigan and reduce emissions by ‘X,’ but I could spend those $2 billion and get ‘2X’ the reductions somewhere else, say, by going to Detroit and fixing up buildings with a lot of deferred maintenance, then from a planetary perspective, that’s a much better investment.” There’s also a related market for Renewable Energy Credits, or RECs, which allow people or organizations to invest in new renewable energy projects and claim their emissions reductions. RECs also factor big in U-M’s carbon neutrality plan and are helping to bring new wind power online in rural parts of Michigan.

Lyon says offsets require a couple of key features to make them effective. Chief among them: you have to ensure that the offset work actually happened, you have to be able to accurately measure the work’s impact, and it has to be work that wouldn’t have been done otherwise. The latter, for example, is why investing in energy efficiency projects in a financially challenged city or school district makes sense. But other kinds of offsets, even ones that are popularly seen as effective, can prove trickier to account for. Reforestation projects, for example, are typically viewed as an obvious way to remove a lot of carbon from the atmosphere. But trees take a long time to mature, anywhere from 40 to 80 years, and young trees store a lot less carbon than fully grown ones. Given the urgency of reducing atmospheric carbon, an 80-year timeline for a forest-based offset might not be the best option. Further, Lyon says it’s hard to guarantee that at some time in the future, a forest won’t be logged, cleared for farmland, or burn in a wildfire, which are increasing in frequency and severity due to climate change. “So the concerns around offsets are very legitimate,” Lyon says. “But sometimes there is this moral sense that you can’t buy offsets because you ‘can’t buy your way out of the problem.’ But most economists would say you absolutely have to buy your way out of the problem, especially in the short- and medium-term, and we should buy our way out in the cheapest possible way.”   

Finally, once reductions are maximized from REFs, RECs and possibly offsets, we’ll have to turn our attention to investments in alternative energy systems on our campuses. In fact, the Ann Arbor campus is already moving in this direction with a plan to replace some of its natural gas heating systems with electricity-powered geothermal ones. And Ray says UM-Dearborn is also exploring a geothermal retrofit for its heating system at the Fairlane Center campus, though Executive Director for Facilities Operations Carol Glick notes the simple payback on this project would be around 100 years, demonstrating why carbon offsets may make strategic sense in the near term.  Lyon says investments like this typically carry a much bigger price tag, both in raw dollars and cost per ton of carbon. And unfortunately, clever financial instruments like REFs probably won’t work for big capital projects. Lyon expects universities will have to approach major upgrades like this much the same way they do other big investments, like new buildings, which are usually paid for with general fund dollars, borrowing and philanthropy. “But this is the kind of tough decision that utilities are confronting — and everybody is confronting,” Lyon says. “Do we retire technology still in its useful operating life simply because it emits too much carbon? And to the university’s credit, we stepped up and said that’s just something we have to do because it’s the right thing to do — even if it’s expensive.” 


Story by Lou Blouin