Redefining RECs—Part 1: Untangling attributes and offsets

Abstract

Renewable energy and greenhouse gas emissions markets are currently in a state of confusion regarding the treatment of Renewable Energy Certificates (RECs). Should consumers buy RECs or emission offsets? After examining this question, the author concludes that RECs are not equivalent to emission offset credits, and as currently defined, the retiring of a REC may have no impact on emissions from electric power generation. Consumers who purchase RECs in voluntary green power markets are providing financial assistance to renewable generators in the form of a production subsidy. Generators that sell RECs are not transferring emission reductions, since they are unlikely to have ownership or the ability to quantify reductions using a commonly accepted standard. More importantly, RECs currently sold in voluntary markets do not pass credible additionality tests and can, at best, be expected to have a market demand effect, which will be less than the supply of RECs on the market. REC definitions that use the term “environmental attributes” or “environmental benefits” are almost universally ambiguous, providing the mistaken impression that consumers are purchasing a good instead of subsidizing a public good.

Introduction

Tradable environmental commodities are becoming a favored instrument for policy makers. Renewable Energy Certificates (RECs) are one type of environmental commodity intended to provide an economic incentive for electricity generation from renewable energy sources. A REC is created when one (net) megawatt hour of electricity is generated from an eligible renewable energy resource. RECs are unbundled environmental commodity, and therefore may be sold separately, from the underlying electricity generated.

A behind-the-scenes debate has been raging within the environmental markets and renewable energy communities regarding the proper definition of a REC, what a REC represents, and whether RECs should be treated as equivalent to emission offsets.¹ Emission offsets represent the avoided release of a unit mass of a pollutant to the atmosphere. Offsets offer buyers an alternative to reducing their own emissions, which they may be unwilling or unable to reduce at a lower cost.

The root of this debate is the fact that RECs are being used for multiple applications in multiple markets. Each of these applications entails conflicting requirements for an environmental commodity. Carefully addressing these conflicts is essential given the interactions between renewable and emission markets. This paper (Part 1) will focus on the relationship between RECs and emission offset credits. A more general discussion on the relationship between RECs and emission markets, along with recommendations for how to resolve conflicts between REC and emissions trading markets, is provided in a second paper (Part 2) (Gillenwater, 2008).

Both compliance and voluntary environmental markets use RECs. In the United States, compliance markets have been established by state Renewable Portfolio Standards (RPSs). Several states allow or require load-serving entities (LSEs)² to use tradable RECs to meet a quota for the amount of their delivered electrical load that must be met by electricity from renewable generation. Both voluntary “green power” markets—which provide retail customers the choice to pay a premium to electricity generators using renewable resources—and voluntary greenhouse gas (GHG) offset markets trade in RECs.³ No single commodity is an appropriate tradable instrument for all of these applications.

Two fundamental problems exist within many REC markets. First, most REC products are ambiguously defined and are purported to represent attributes indirectly associated with renewable energy generation, resulting in their inability to function as a homogeneous commodity. A typical definition of a REC includes language such as “RECs represent all environmental attributes or benefits from electricity generated by renewable sources,” although there is wide variation in the language and specificity of definitions used in both the compliance and voluntary markets (Holt and Wiser, 2007).

Second, RECs are used for multiple applications, each of which requires an environmental commodity with different characteristics. Many REC definitions imply questionable claims regarding their impact on electricity markets and pollutant emissions from the electric power industry. Specifically, RECs have become popular with marketers, corporations and individuals to offset their GHG emissions (Bird et al., 2007). Their argument is that the generation of electricity by a renewable facility, such as a wind turbine, avoids or displaces generation, and therefore emissions, from a fossil fuel-fired power plant.

This paper examines the following questions regarding renewable energy markets and emissions markets:

• Are RECs equivalent to or fungible with emission offsets?

• What are consumers of RECs buying?

Others have addressed the issue of defining RECs, but few systematic analyses or comprehensive solutions have been proposed (Bird et al., 2007; Holt and Bird, 2005; Jansen, 2003; Leahy and Hathaway, 2004). This paper attempts to answer the above questions by first looking at the history of RECs and existing definitions. It will then analyze RECs and associated emission reduction claims according to three characteristics: additionality, ownership, and quantification.

The concept of additionality—that a project activity is beyond business as usual—is fundamental to emission offset accounting. Both RECs themselves and any associated emission reduction claims can be evaluated against various additionality tests. Ownership issues relate to the ability of REC owners to claim property rights or make marketing claims regarding the impacts of renewable energy generation that occur off-site from the renewable generation facility. And quantification issues relate to the complexity of credibly quantifying the impact of renewable generation on a networked electrical transmission grid. Before further discussing these characteristics, however, it is instructive to examine the historical origins of RECs and current REC definitions used in compliance and voluntary markets.