ArticlePDF Available

Redefining RECs—Part 2: Untangling certificates and emission markets

Authors:
  • Greenhouse Gas Management Institute

Abstract and Figures

Renewable energy and greenhouse gas emissions markets are currently in a state of confusion regarding the treatment of Renewable Energy Certificate (RECs). How should emission-trading schemes treat RECs? How can emission mitigation policies provide real incentives for renewable generation? The objective of REC markets should be to promote additional renewable energy investments. The author asserts that defining RECs in terms of attributes, especially off-site attributes, does not further this goal. Ambiguous language such as “environmental attribute” or “environmental benefit” creates confusion in the marketplace while failing to address the relevant coordination issues with Renewable Portfolio Standard compliance markets, voluntary emission offset markets, or emission cap-and-trade markets. Specifically, defining RECs in terms of off-site attributes creates a number of problems, including that once an emissions cap-and-trade scheme is in place, such definitions of a REC can become indefensible. The author proposes to redefine RECs in terms of on-site attributes, which resolves the aforementioned problems and allows compliance and voluntary renewable energy and emission markets to function without conflicts. Ideally, environmental commodities should be homogeneous, first best measures of the relevant environmental good, as well as easily measured and verified. The author proposes tradable environmental commodities that achieve these characteristics.
Content may be subject to copyright.
This article appeared in a journal published by Elsevier. The attached
copy is furnished to the author for internal non-commercial research
and education use, including for instruction at the authors institution
and sharing with colleagues.
Other uses, including reproduction and distribution, or selling or
licensing copies, or posting to personal, institutional or third party
websites are prohibited.
In most cases authors are permitted to post their version of the
article (e.g. in Word or Tex form) to their personal website or
institutional repository. Authors requiring further information
regarding Elsevier’s archiving and manuscript policies are
encouraged to visit:
http://www.elsevier.com/copyright
Author's personal copy
Energy Policy 36 (2008) 2120–2129
Redefining RECs—Part 2: Untangling certificates and emission markets
Michael Gillenwater
Science, Technology and Environmental Policy Program, Woodrow Wilson School of Public and International Affairs,
Princeton University, Princeton, NJ, USA
Received 22 August 2007; accepted 15 February 2008
Available online 16 April 2008
Abstract
Renewable energy and greenhouse gas emissions markets are currently in a state of confusion regarding the treatment of Renewable
Energy Certificate (RECs). How should emission-trading schemes treat RECs? How can emission mitigation policies provide real
incentives for renewable generation? The objective of REC markets should be to promote additional renewable energy investments. The
author asserts that defining RECs in terms of attributes, especially off-site attributes, does not further this goal. Ambiguous language
such as ‘‘environmental attribute’’ or ‘‘environmental benefit’’ creates confusion in the marketplace while failing to address the relevant
coordination issues with Renewable Portfolio Standard compliance markets, voluntary emission offset markets, or emission cap-and-
trade markets. Specifically, defining RECs in terms of off-site attributes creates a number of problems, including that once an emissions
cap-and-trade scheme is in place, such definitions of a REC can become indefensible. The author proposes to redefine RECs in terms of
on-site attributes, which resolves the aforementioned problems and allows compliance and voluntary renewable energy and emission
markets to function without conflicts. Ideally, environmental commodities should be homogeneous, first best measures of the relevant
environmental good, as well as easily measured and verified. The author proposes tradable environmental commodities that achieve these
characteristics.
r2008 Elsevier Ltd. All rights reserved.
Keywords: Renewable Energy Certificate (REC); Emissions trading; Environmental commodities
1. Introduction
Market-based policy instruments, especially those using
tradable environmental commodities, have been the focus
of much attention in the environmental policy community.
By definition, a commodity is a relatively homogenous
good that trades primarily on price rather than on an
individual product bundle’s specific characteristics or
attributes. Environmental markets that operate with a
clearly defined commodity are more likely to have low
transaction costs and produce public good benefits.
1
Environmental commodities that lack clear definitions will
have higher transaction costs. And when traded in separate
markets, poorly defined commodities will more easily come
into conflict and cause confusion among market partici-
pants.
The generation of electricity with renewable energy
technologies is environmentally preferable to using other
energy sources. Renewable Energy Certificates (RECs) are
a type of environmental commodity that is created when
one (net) MWh of electricity is generated from an eligible
renewable energy resource. RECs are used in both
compliance markets, under government-mandated Renew-
able Portfolio Standards (RPSs), and in voluntary green
power markets.
As discussed in Gillenwater (2007), the conflicts between
REC and emission markets are the result of RECs being
used for multiple applications. These applications entail
conflicting requirements for an environmental commodity.
Carefully addressing these conflicts is essential given the
interactions between renewable and emission markets.
Although viewed by many as a useful environmental
policy instrument, RECs currently fail to meet the
definition of a commodity. For RECs and emission
ARTICLE IN PRESS
www.elsevier.com/locate/enpol
0301-4215/$ - see front matter r2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2008.02.019
E-mail addresses: gillenwater@alum.mit.edu,
mwgillenwater@yahoo.com (M. Gillenwater).
1
Environmental markets that lack a commodity and operate using
custom bilateral trades have not been overly successful. For an example
see King and Kuch (2003).
Author's personal copy
markets to operate without conflicts, it is necessary to rede-
fine what we call a REC. In ‘‘Redefining RECs (Part 1),’’ it
was shown that a wide array of different REC definitions
are in use in both compliance and voluntary markets
(Gillenwater, 2007). Many of these definitions imply
questionable claims regarding the impact of RECs on
electricity markets and pollutant emissions. They also rely
on the use of ambiguous language that refers to unspeci-
fied environmental attributes or benefits. Part 1 showed
that RECs are not equivalent to emission offsets and are
an inappropriate tradable instrument if one’s objective
is to claim emission reductions. Instead, RECs sold in
voluntary green power markets are functionally a produc-
tion subsidy. RECs currently sold in voluntary markets do
not pass credible additionality tests and the overall volun-
tary REC market may or may not have even a marginal
impact on investments in renewable energy generation
capacity.
This paper continues the discussion on RECs and
examines more broadly the interactions between RECs
and emission markets. Specifically, the following questions
regarding renewable energy markets and emissions markets
are addressed:
What are the relationships between voluntary REC
markets, RPSs and emission cap-and-trade schemes?
How should RECs be redefined to best encourage
renewable energy investments without conflicting with
emission markets?
This paper sets out some recommendations for redefin-
ing RECs to eliminate the conflicts between REC and
emission markets, and suggests a policy approach that
allows RECs to be fully integrated with an emissions cap-
and-trade scheme.
2. RECs and emissions allowances
Should RECs be integrated into emissions trading
schemes covering the electric power sector, and if so,
how? Because renewables emit no (or few) pollutants, they
are economically advantaged by any policy that puts a cost
on emitting pollution within the electric power industry. So
this question is better framed as: Should RECs be directly
included in an emissions trading system as a tradable
instrument?
It is important to distinguish the issue of allowance
allocation under an emissions cap-and-trade scheme from
the issue of how a REC is defined. Renewable energy
advocates often argue for renewable generators to be
allocated allowances, typically via an allowance set-aside
2
for renewable energy projects or an allocation of allowan-
ces to generators based on their electricity output, versus
emissions (Bird et al., 2007). Under an emissions cap-
and-trade scheme the pollutant cap, not the allocation,
determines the degree of environmental improvement.
Because most renewable energy generation is produced
from technologies with minimal variable operating costs,
allowance allocations to existing renewable generators will
have no effect on the quantity of electricity they produce.
However, an allocation biased towards new renewable
generation capacity can provide additional incentives for
renewable energy investments, relative to other allocation
approaches. However, for any pollutants from electric
power plants that are capped, emission reductions caused
by additional renewable energy investments will have no
impact on total emissions of these pollutants unless a
corresponding quantity of emission allowances are re-
moved from the market. Allowances unused by one power
plant, for example because its emissions were displaced by
the operation of a new wind turbine, will simply be sold to
other power plants under the cap. The total amount of
pollution will be unchanged. The only way to reduce
emissions of a capped pollutant from entities under the cap
is to lower the cap or retire allowances such that they
cannot be used for compliance. This is the situation with
sulfur dioxide (SO
2
) and oxides of nitrogen (NO
x
)
emissions in the United States (Bluestein et al., 2006) and
carbon dioxide (CO
2
) emissions in Europe.
3
So a scheme
that allocates allowances to renewable generators versus to
other entities will not affect the overall level of pollution.
4
The issue of allocation is a topic for political debate, but it
is not the direct cause of confusion in REC markets.
The major voluntary REC standards in the United
States recognize this issue and marketers are advised
to exclude capped pollutants (i.e., SO
2
and NO
x
) from
their marketing claims. However, the language used by
many REC and green power marketers and in many state
RPS definitions of RECs is inconsistent on this issue
(Gillenwater, 2007).
Once a greenhouse gas (GHG) cap is placed on power
plants in the United States, the purchase of RECs or green
power will not reduce emissions, regardless of whether the
REC or green power sales lead to additional renewable
energy generation. Only retiring GHG allowances so that
they cannot be used for compliance will reduce the overall
emissions from the electric power sector, regardless of how
a REC is defined or what attributes are claimed to be
included in a REC.
5
Recognizing this conflict, REC market advocates, in
addition to advocating for the allocation of allowances to
ARTICLE IN PRESS
2
A set-aside is a reserve of allowances, under the overall cap, that is
dedicated for allocation to a specific category of entities or activities.
3
Renewables are ineligible for Joint Implementation (JI) projects under
European Union’s Emission-Trading Scheme linking directive for this
reason.
4
See Rathmann (2007) for a discussion of how renewable support
policies and greenhouse gas cap-and-trade programs interact to effect
electricity prices.
5
See Electronic Annex 1 in the online version of this article for some
proposals that have been made in an attempt to overcome this conflict
between capped emission markets and the claims of voluntary REC, green
power, and RPS compliance markets.
M. Gillenwater / Energy Policy 36 (2008) 2120–2129 2121
Author's personal copy
renewable generators, have also attempted to define RECs
such that they are required to be bundled with emission
allowances. The objective of defining RECs in this way is
so that when a REC is retired, emission reductions can be
claimed by the retiree because an emission allowance was
also retired. It is this question of bundling that is a major
cause of confusion in REC markets.
The question has been resolved for existing emissions
cap-and-trade markets, such as the US Acid Rain Pro-
gram or the European Union’s Emissions Trading Scheme
(EU-ETS). Regardless of the REC definitions used or
claims made by advocates, RECs and tradable emis-
sion allowances are separate commodities that trade
separately and the retiring of a REC does not reduce
emissions of a capped pollutant. Consumers that wish to
reduce emissions of a capped pollutant can purchase and
retire an emissions allowance without involving a REC in
the transaction.
However, the debate over REC and allowance bundling
is far from resolved with regard to future allocations of
GHG emission allowances where cap-and-trade markets
have yet to be established. Existing definitions of RECs in
both RPS compliance and voluntary green power markets
frequently make claims that RECs include and/or must be
bundled with emission allowances under future cap-and-
trade schemes.
6
Sometimes these claims are explicit, while
others are implicit in the definitions of a REC used
(Gillenwater, 2007).
For example, the language used in the California RPS
requires that RECs include ‘‘any and all credits, benefits,
emissions reductions, offsets, and allowances, howsoever
entitled, attributable to the generation from the Unit(s),
and its displacement of conventional energy generation’’
(see Electronic Annex 1 in the online version of Gillenwater
(2007)). The California definition appears inconsistent with
existing federal law governing the ownership of SO
2
and NO
x
allowances, which clearly are not included or
conveyed with RECs. For GHGs, it is not clear how
holders of RECs, even in California, will acquire ownership
of allowances allocated to fossil generators in a future cap-
and-trade system.
Table 1 summarizes two cases where the process of
purchasing and retiring a REC can result in some amount
of additional emission reductions from off-site fossil
generators. Both of these cases require that the pollutant
in question is uncapped and that the REC market creates a
scarcity. As discussed in Gillenwater (2007), a market
scarcity is more readily created if the business-as-usual
(BAU) supply is eliminated from the market. The BAU
supply is how many RECs are awarded to non-additional
renewable energy projects (i.e., renewable energy genera-
tion capacity that would exist and operate regardless of the
revenue from REC sales).
Both RPS compliance and voluntary REC markets can
be long. However, it is more likely that a RPS compliance
market, with defined participation boundaries, will create a
scarcity due to the ability of governments to set a quota.
A long REC market, however, can exist even with an RPS
if the quota established is below the BAU level of
renewable generation in the jurisdiction. Again, for a
capped pollutant, retiring RECs or increasing the RPS
target will not reduce emissions.
Retiring a REC from a market with a REC scarcity
indicates that emissions have likely been reduced some-
where, however, it does not mean that specific claims over
emission reductions of an uncapped pollutant are justified.
Even under the two cases in Table 1 where emissions have
been reduced, there are still problems with renewable
energy generators obtaining ownership of and quantifying
emission reductions (Gillenwater, 2007).
Although it would not affect the total emissions of a
capped pollutant, an RPS does have the potential to alter
the cost structure of emission allowance markets by
effectively mandating the portion of emissions mitigation
achieved with renewable energy technologies. Given that
renewables have a number of benefits relative to fossil
generation, RPS mandates may be an appropriate policy.
Both an RPS and an emissions cap-and-trade scheme
regulate the electric power industry. Therefore, it is
important that if an RPS mandate is established that the
setting of RPS targets and emission caps be coordinated
where their jurisdictional boundaries overlap (Morthorst,
2003).
If a future federal GHG cap-and-trade scheme in the
United States did allocate emission allowances to renew-
able generators (e.g., through a set-aside or output-based
allocation), does it make sense to require that these
allowances be bundled with RECs? Many of these RECs,
except those sold into the voluntary market, will be
purchased by LSEs and then submitted to government
authorities for compliance with an RPS. If allowances are
inseparable from RECs, then state governments will
ARTICLE IN PRESS
Table 1
Emission reduction outcomes from various actions related to buying and
then retiring a REC
Action Pollutant uncapped Pollutant
capped
Buy from RPS compliance
market (REC market
scarcity)
Emissions reduced, although
quantity and ownership of
reductions is ambiguous
None
Buy from RPS compliance
market (long REC market)
None None
Buy from voluntary REC
market (REC market
scarcity)
Emissions reduced, although
quantity and ownership of
reductions is ambiguous
None
Buy from voluntary REC
market (long REC market)
None None
6
Often legislation is inconsistent in that it does not place the same
requirements on direct purchase of green power under green pricing or
competitive electricity markets (i.e., without RECs).
M. Gillenwater / Energy Policy 36 (2008) 2120–21292122
Author's personal copy
effectively be taking possession of these allowances.
7
Renewable generators will have received no direct financial
benefit from the allocation. It is difficult to see how this
arrangement would benefit renewable energy generators or,
more importantly, lead to additional investments in
renewable energy generation.
Imagine a scenario where a renewable energy generator
has signed a long-term contract for the delivery of RECs,
which have been defined to include any emission allowan-
ces allocated to the generator. Then during the term of the
agreement, this renewable generator is allocated CO
2
allowances under a new emissions cap-and-trade scheme.
Under the pre-existing agreement, these CO
2
allowances
must be transferred, at a previously negotiated price, to the
purchaser of the RECs. If the buyer’s stated purpose for
purchasing RECs was to claim emission reductions then
the buyer would need to retire these allowances to make
such a claim.
8
Under this scenario, the result of allocating
allowances to renewable generators would be that neither
the renewable energy generator nor the REC purchaser
financially benefited.
9
The only clear benefit to requiring that allowances be
bundled with RECs is that it helps advocates of voluntary
REC markets to continue to make claims that RECs are
equivalent to emission offset credits even in the case of a
cap-and-trade scheme covering the electric power industry.
If REC marketers believe that their business is dependent
upon the legitimacy of their emission reduction claims,
then a perverse incentive has been created. By defining
RECs to include or be equivalent to emission offsets, green
power marketers may prefer that pollutants remain
uncapped. Once there is a cap in place for GHG emissions
from electricity generation, REC marketers will have to
purchase and retire allowances in order to continue making
claims.
The solution to all of these problems is to redefine
voluntary and compliance market RECs in a manner that
allows them to function without conflicting with emission
markets. The following sections propose such a solution.
3. Redefining RECs
Should RECs be defined to include ‘‘all attributes?’’
Under such a definition, is there any public good attribute
that a REC does not include?
10
Does it make sense to
define RECs in terms of ‘‘attributes’’ at all? By doing so,
have we created a system that will foster the expansion and
efficiency of environmental markets?
Defining RECs using ambiguous terms such as attributes
or benefits of activities that occur off-site of a renewable
generator’s facility creates a situation in which each REC is
a unique bundle of attributes. Even if it was feasible to
concretely specify each of these off-site attributes, quantity
them, and affirm ownership over them, it is not clear that
such a system or definition would lead to functional
environmental markets. Environmental markets function
most efficiently with unambiguous and homogeneous
tradable commodities that have clear ownership.
11
The
lack of a consistent REC definition across and within
voluntary and compliance REC markets prevent RECs
from functioning as a homogeneous environmental com-
modity (Gillenwater, 2007).
For example, the New Jersey RPS includes a special
requirement for generation that has produced a market
scarcity for solar RECs (SRECs). These SRECs trade at
approximately $200/MW h. A manufacturing company
took advantage of this situation by installing photovoltaics
and selling SRECs into the New Jersey RPS compliance
market. The same company then purchased inexpensive
RECs in the voluntary market, where wholesale REC
prices in the US voluntary market ranged from $0.5 to $10/
MW h in 2006, with a typical price around $2/MW h (Bird
and Swezey, 2006;Hathaway, 2007). The company then
retired these RECs to support its claims that it has reduced
emissions through its investment in renewable energy.
Despite these claims, this substitution of a voluntary
market REC for a RPS compliance market REC negated
the additionality of the environmental benefits. A REC
with clear additionality was sold into an RPS compliance
market and then replaced with a voluntary market REC
that was unlikely to have come from an additional project.
If the company had retired its original SREC instead of
selling it, then another SREC would have been created to
ARTICLE IN PRESS
7
It is not clear what state governments would choose to do with these
allowances. Renewable energy generators could choose to sell RECs into
the voluntary market, instead of the RPS compliance market, in hopes of
capturing the value of both RECs and emission allowances. However,
demand in the voluntary market is likely to be price elastic, while the
demand in the RPS compliance market is inelastic.
8
Renewable generators should be cautious about entering into long-
term REC sales contracts that would inhibit their ability to sell RECs into
a future compliance market (e.g., under federal RPS legislation). This issue
can be addressed with a ‘‘Change in Law Risk’’ clause in a REC sales
contract. Renewable energy generators may also be entering into
agreements that transfer their rights to future emission allowance
allocations. It does not appear that the current REC market is pricing
in the possibility of future allowance allocations to renewable generators.
Renewable generators should realize when they sign long-term or future
REC delivery contracts that they may be signing away their rights to
another valuable environmental commodity.
9
In negotiating the allocation process, if it was obvious that any
allowances allocated to renewable energy generators would be retired and
removed from the compliance market, entities needing allowances for
compliance would likely resist any such allocation to renewable energy
generators. If the retirement of emission allowances from the compliance
market caused wholesale electricity prices to rise, then renewable
generators could benefit, along with all inframarginal generators, from
the higher market-clearing price.
10
As discussed in the previous section, regardless of the definition used,
RECs effectively exclude allowances for capped pollutants.
11
Several organizations have collaborated to develop a ‘‘Power
Scorecard’’ to rate different green power products to address the lack of
standardization in these markets (http://www.powerscorecard.org/
index.cfm). Unfortunately, the solution to the problem in REC markets
is not more ratings or information to consumers but the definition of an
unambiguous and homogeneous commodity that customers can have
confidence in.
M. Gillenwater / Energy Policy 36 (2008) 2120–2129 2123
Author's personal copy
meet the New Jersey RPS requirement. Assuming that
RECs are a homogeneous commodity and fungible with
emission reductions creates opportunities for ‘‘environ-
mental arbitrage.’’ Such problems arise in a confused
marketplace that lacks clear commodity definitions.
The example above is a case where voluntary market
RECs are substituted for compliance market RECs, but
less stark examples also exist within the voluntary REC
market. The ambiguity of REC definitions leads to high
transaction costs and leads to price differentiation between
RECs. For example, RECs from newer facilities and solar
generation tend to sell for higher prices (Holt and Bird,
2005).
As discussed in Gillenwater (2007), RECs sold in
voluntary markets suffer from significant additionality
problems. Additionality is an issue for RECs because they
are often marketed as being equivalent to offset credits.
Most of the attributes claimed as being included in RECs
relate to activities occurring off-site of the renewable
generation facility. These off-site attributes, unlike on-site
attributes, are far more difficult to quantify, verify, and
obtain unambiguous ownership rights to (Table 2).
12
Why are RECs typically defined in terms of off-site
attributes? RECs definitions in both voluntary and RPS
compliance markets were created by those with a business
interest in these markets. These parties have an interest in
defining their product such that they can maximize their
ability to make marketing claims. In the past there was
little to conflict with emission markets and their broad
claims of public good benefits.
13
However, this situation is
changing with the emergence of voluntary GHG emission
offset markets and GHG cap-and-trade markets.
Advocates for voluntary REC markets often assume that
the best way to increase the appeal of their product is to
convince customers that they are purchasing ownership of
something instead of simply making a contribution to a
public good. The concept of attributes was developed with
the intention of transforming RECs from an accounting
tool to be used to meet an RPS quota, into a consumer
product.
Yet, do voluntary REC markets depend on customers
believing they are purchasing ownership over attributes?
Why do customers buy RECs voluntarily, knowing that
they represent a public good? This question is the same as
asking why people give to charity. People are looking to
purchase ‘‘moral satisfaction’’ rather than ownership of
attributes (Kahneman and Knetsch, 1992;Menges, 2003;
Truffer et al., 2000). Most green power customers are not
concerned with the specific environmental benefits of their
green power purchases (Goett and Hudson, 2000), but they
do believe that their purchase is resulting in some
environmental benefits (Bird et al., 2007). In situations
where there is strong government support for renewables,
consumers have not abandoned voluntary green power
markets (Menges, 2003).
Many advocates of voluntary REC markets appear
convinced that if they cannot claim emission reductions,
the demand for their products will disappear. This belief is
contradicted by experience in Europe where there are
strong renewable support policies and a cap-and-trade
scheme for CO
2
emissions from the electric power industry,
yet still active voluntary green power and REC markets.
REC marketers in Europe typically do not claim that they
are transferring ownership or rights to claim emission
reductions or refer to attributes (Niermeijer, 2007).
14
Therefore, it does not appear that it is necessary, at least
in Europe, to define RECs in terms of off-site environ-
mental attributes, such as GHG emission reductions, for
voluntary markets to prosper.
The principal objective of REC markets should be to
promote additional renewable energy investments. Defin-
ing and marketing RECs in terms of unsubstantiated
attributes does not further this goal. More importantly,
rooting the voluntary REC market on claims that they are
equivalent to GHG emission reductions confuses custo-
mers and risks discrediting both green power and emission
markets because of the inaccuracy of these claims.
ARTICLE IN PRESS
Table 2
Summary of factors for REC on-site and off-site attributes
Issue REC on-site attributes
(i.e., MWh generated)
a
REC off-site attributes
(e.g., indirect GHG
emission reductions)
Additionality Ambiguous due to the
weak tests applied.
(e.g., initiation date &
regulatory
additionality)
Only if REC income was
essential to initial
investment decision
Ownership Unambiguous (i.e.,
generator or
contractual designees)
Ambiguous and lacking
legal recognition. Prone
to double counting.
Depends on the legal
requirements or ethical
expectations of displaced
generators.
Quantification Unambiguous (i.e.,
meter readings of
MWh)
Inherently uncertain in
most cases, but can be
assumed.
a
Direct emission reductions, such as those resulting from methane
captured by a generator combusting landfill gas, can occur ‘‘on-site’’.
Although, these direct emission reductions have unambiguous ownership
and quantification properties, they may or may not be determined to be
additional. In addition, because direct emission reductions are relevant to
only a small subset of renewable energy projects, requiring them to be
included in a REC creates a different category of RECs for no obvious
purpose. A more efficient approach would be to allow these projects to sell
separately RECs and GHG offset credits.
12
Holt and Wiser (2007) refer to these as ‘‘primary’’ and ‘‘derived’’
attributes.
13
The primary exception being SO
2
and NO
x
cap-and-trade markets.
14
REC marketers in Europe do state in their marketing materials that
the climate is changing and that generating electricity from renewable
sources is a good way to contribute to combating this problem.
M. Gillenwater / Energy Policy 36 (2008) 2120–21292124
Author's personal copy
Ambiguous language such as ‘‘environmental attribute’’
or ‘‘environmental benefit’’ also does not address the
relevant coordination issues with RPS compliance markets,
voluntary emission offset markets, or emission cap-and-
trade markets.
15
Plus, insisting that emission allowances be
bundled with RECs prevents renewable generators from
maximizing and optimizing the financial gains from the
sale of these two environmental commodities.
16
4. Redefined certificate types
Given the problems discussed above, are RECs an
inherently flawed environmental instrument? They are not.
However, RECs need to be redefined if they are to provide
the advantages of a homogeneous commodity for each
market application and secure consumer confidence. Fail-
ure to appropriately define certificates risks discrediting
environmental markets more broadly.
Table 3 presents four certificate types specifically defined
to function as a homogeneous commodity for a specific
market application.
17
Different definitions are needed, in
part, because of the lack of common boundaries among
markets. All four certificate types could converge into a
single commodity in a scenario with a national strin-
gent RPS (i.e., one that creates a scarcity for RECs)
and load-based emission cap-and-trade scheme (described
below). A national certificate registry for the on-site attri-
butes, similar to that being developed in Europe, of all
electricity generation would facilitate the integration of
markets.
18
4.1. Redefining voluntary market RECs as a production
subsidy
As discussed in Gillenwater (2007), RECs sold into
voluntary markets function as a production subsidy, where
the voluntary market buyers are subsidy providers.
19
This
framing of RECs is accurate because in voluntary REC
markets additionality tests are either not applied or are
weak. The purchase of RECs from voluntary markets is
more than an act of charity, however. By commoditizing
RECs, consumers can function as a subsidy provider
because each unit of generation (i.e., MWh) receives a unit
subsidy and double counting is prevented.
20
The amount of
this subsidy is set by the market price of RECs.
ARTICLE IN PRESS
Table 3
Redefined certificate types, their application, and characteristics
Market application Type of certificate Type of
instrument
Additionality
tests
Ownership Quantification
Voluntary green power
markets
Voluntary Renewable Energy
Certificate (V-REC)
a
Production
subsidy
Unnecessary Generator or
contractual designee
Metered MWh
RPS compliance market RPS compliance Renewable Energy
Certificate (C-REC)
a
Quota Unnecessary Generator or
contractual designee
Metered MWh
Voluntary or RPS
compliance markets
Renewable energy offset credit
(REOC)
Offset credit Similar to CDM
projects
b
Generator or
contractual designee
Metered MWh
Load-based cap and trade
market
Generation Emission Attribute
Certificate (GEAC)
a
Quota Unnecessary Generator or
contractual designee
Metered MWh and on-site
emissions per MWh
a
In cases where the jurisdictions of these markets overlap, each of these certificate types are equivalent. Voluntary market customers can also treat C-
RECs as being equivalent to REOCs if an RPS creates a market scarcity for RECs.
b
Clean development mechanism (CDM) under the United Nation’s Framework Convention on Climate Change.
15
California Public Utilities Commission (CPUC) has begun to grapple
with some of these issues in their January 2007 decision on the state’s
emission performance standard (EPS). The California EPS establishes
minimum greenhouse gas emissions intensity per energy unit of electricity
output for any long-term financial commitment by a LSE to supply
baseload generation by power plants outside of California (see California
Senate Bill 1368). The CPUC decided that the transfer of RECs would not
be factored into determinations of compliance under the EPS. ‘‘yRECs
cannot be used to offset emissions for EPS-compliance purposes’’ (CPUC,
2007) This decision is equivalent to saying that neither the direct emissions
profile of a generator nor any indirect emissions reductions are embodied
in a REC. Renewable generators that sell their RECs are not treated as
‘‘brown power’’ under the EPS, nor are fossil generators that purchase
RECs then considered to be zero emission power. The CPUC’s reasoning
was in part based on the practical difficulties of determining what emission
rate should be assigned to renewable generators that sold their RECs. The
CPUC noted, though, that their decision regarding RECs under the EPS
(phase I) did not prejudice a decision under future regulation, such as a
state cap-and-trade system (phase II).
16
Under some state RPS legislation, RECs have an expiration date. If
allowances are required to bundled with RECs, it is not clear what
happens to allowances if a REC expires.
17
These four types do not suffer from the flaws of the custom defined
RECs in the ACORE/EMA master agreement (Gillenwater, 2007).
18
The European terminology is Guarantee of Origin (GoO).
19
The term subsidy may have a negative connotation with many, but if
the subsidy is provided for the purpose of supporting a under-supplied
public good, it should not. For marketing purposes, many in European
green power markets simply refer to RECs as providing financial support
for renewables.
20
The United Kingdom’s draft best practice guidance addresses the issue
of double counting of emission reductions from renewable generation
when the electric power industry is covered under a cap-and-trade scheme.
The guidance states that offsets should be treated like a ‘‘charitable
M. Gillenwater / Energy Policy 36 (2008) 2120–2129 2125
Author's personal copy
Under this definition, V-RECs do not include off-site
attributes such as emission reductions from displaced fossil
fuel generators. Instead, both V-RECs and C-RECs would
be defined and certified based on a MWh of electricity
generated from a facility using an eligible renewable energy
resource. RECs are then simply a tracking tool, in keeping
with how they were originally intended when proposed for
use under RPS mandates. No determination of addition-
ality is required, which reduces the transaction costs of
monitoring and verification. There are also no ownership
or quantification issues because no claims are made over
emission allowances or emission reductions. Therefore,
renewable generators can sell RECs, emission offset
credits, and allowances separately to maximize their
financial return.
4.2. RECs for RPS compliance
Certificates from eligible renewable facilities under an
RPS scheme should be differentiated from voluntary
market RECs. Ideally, the characteristics of a V-REC
and a C-REC should be identical, except that the juris-
dictional boundaries of a C-REC may be more restrictive
(e.g., from generation within a particular state).
21
Both
types of RECs function as a tracking instrument to prevent
double counting of MWh. However, because the drivers of
demand for V-RECs and C-RECs differ (i.e., voluntary
market demand versus an RPS quota), their prices may
also significantly differ.
Assuming that the RPS scheme creates a market scarcity
for C-RECs (i.e., the RPS quota is set above the BAU
quantity of renewable energy generation), then C-RECs
will likely sell at a higher price than V-RECs. If the
boundaries of both markets coincide, then the prices for
V-RECs and C-RECs will converge because renewable
generators will have the option of selling into either the
RPS compliance or voluntary green power market.
22
4.3. Defining an REC with additionality
4.3.1. Renewable electricity offset credits
Although certificates sold in voluntary markets typically
come from projects that fail to pass tests that adequately
demonstrate additionality (Gillenwater, 2007), there is no
reason that a new renewable electricity offset credit
(REOC) could not be defined in a way that satisfies a
credible additionality determination. Such a determination
should be based on multiple additionality tests and include
at least one strong test (e.g., see the CDM Tool for the
demonstration of additionality (UNFCCC, 2006)). As
discussed above, this determination should be made with
reference to a project developer’s investment decision, and
investors need to be guaranteed a reasonable crediting
period over which they can sell offset credits.
Creating a new offset credit commodity, denoted in
MWh, for renewable energy generation would allow
consumers to credibly claim that they caused an additional
MWh of renewable energy to be generated for every REOC
they purchased and retired. As discussed above, such
claims are not credible for RECs sold in voluntary markets.
For the same reason, REOCs should trade at a higher price
than V-RECs.
23
A REOC could also function as an offset credit instru-
ment for RPS compliance markets, similar to how emission
offset credits are linked to cap-and-trade markets. Load
serving entities (LSEs) could source REOCs from renew-
able projects outside of the RPS boundaries to meet their
quota.
24
For example, Klaus To
¨pfer, former executive
director of the United Nations Environment Program and
Germany’s former environment minister, has suggested
that European countries could meet their renewable energy
targets by investing in renewables in developing countries.
He suggested that the European Union should decide on a
25 percent target for the renewable share in 2020, of which
5 percent could be located in developing countries.
25
A REOC would provide an instrument for customers
to credibly claim they have offset their electricity con-
sumption from non-renewable generation sources (e.g.,
fossil fuel generation). However, does it make sense for
customers to purchase such an instrument? The answer to
this question depends on the objectives of the customer.
One approach for voluntary market customers to ensure
the additionality of their purchases that does not require
the creation of something like a REOC is for them to
purchase C-RECs from an RPS compliance market where
there is a scarce supply of C-RECs.
26
This approach would
alleviate the need for a project-specific additionality
determination. The RPS mandate has created a demand
for C-RECs, so voluntary buyers can be confident that
every REC they purchase and retire will likely cause
another MWh of renewable energy to be generated to meet
the compliance demand of LSEs.
ARTICLE IN PRESS
(footnote continued)
donation’’ and that they may or may not be additional to existing
regulatory mechanisms (see paragraph 4.13) (DEFRA, 2007). By not
defining RECs in terms of off-site attributes, double counting of emissions
is avoided.
21
Renewable generators within the jurisdiction of an RPS have the
option of selling V-RECs into the voluntary market or C-RECs to LSEs
for RPS compliance. A single registry system can easily ensure double
counting between C-RECs and V-RECs is prevented.
22
This assumes that the eligibility requirements for generators are
identical, which would be preferable to creating a homogeneous
commodity that is fungible between markets.
23
REOCs will also face higher transaction costs from the verification of
project additionality.
24
Policy makers may choose to restrict the use of out of region REOCs
for RPS compliance in favor of the local environmental benefits of
renewable energy generation.
25
See also Del Rio (2006) for a discussion of how CDM credits and
RECs can be sold separately from the same project.
26
It is unnecessary to burden an RPS market with additionality tests.
Policy makers can ensure that additional renewable energy investments
result from an RPS simply by setting the quota sufficiently high. A clear
sign that an RPS has created REC market scarcity is if the market price of
RECs is at or near the penalty set for non-compliance (Agnolucci, 2007).
M. Gillenwater / Energy Policy 36 (2008) 2120–21292126
Author's personal copy
4.3.2. REOCs or emission offsets credits?
Although REOCs address the additionality problems
with RECs, they do not address the ownership and
quantification issues associated with claims on off-site
attributes such as emission reductions (see Table 2). Claims
on emission reductions are limited to cases in which
pollutants from the electric power industry are not covered
under a cap-and-trade scheme (see Table 1).
If the objective of consumers or policy makers is to
reduce emissions, such as GHGs, then V-RECs, C-RECs,
and REOCs are all second best instruments. They do not
directly measure or modify the desired behavior (i.e.,
emitting pollution). Second best instruments are appro-
priate when first best instruments are either unavailable or
less cost-effective. However, tradable commodities and
instruments addressing direct emissions from power plants
are available (e.g., GHG emission allowances under the
EU-ETS and offset credits under the Clean Development
Mechanism). If the objective of a customer is to offset
GHG emissions, whether their direct emissions or indirect
from electricity consumption, then it is more appropriate to
purchase emission offset credits and thereby utilize a first
best instrument. REOCs are not measured in terms of a
specific environmental benefit—if they were, they would
not be a homogeneous commodity—instead they are
measured in terms of an activity (i.e., MWh) that is
assumed to be a proxy for environmental benefits.
If the objective of the customer is to increase the relative
amount of renewable energy generation, then REOCs could
be a useful instrument because they directly measure the
desired behavior. Customers purchasing and retiring REOCs
can be confident that they have offset their electricity use
with renewable generation. Specific claims regarding emis-
sion reductions or other environmental benefits, though, are
better addressed with first best instruments. For reducing
GHG emissions, a first best instrument would be a GHG
offset credit or an emission allowance.
4.4. Tradable certificates for a load-based cap-and-trade
scheme
If GHG emissions are capped and RECs are disaggre-
gated from off-site attributes, voluntary REC market
advocates worry how renewable generators will benefit
from their production of zero emission electricity. Again,
any policy that places a cost on emitting GHGs will
economically privilege renewable energy generators. How-
ever, advocates often demand that renewable generators be
able to participate directly in emission commodity markets
to ensure they are advantaged.
27
The design of a policy to
enable such participation is possible.
California is considering the implementation of a load-
based cap-and-trade scheme to regulate GHG emissions. A
generator-based cap-and-trade schemes, such as the US
Acid Rain Program or the EU-ETS, places regulatory
requirements on power plants to obtain and submit
emission allowances for each ton of pollution they emit.
In contrast, a load-based scheme operates similar to an
RPS in that LSEs, rather than generators, are the target of
regulation. Instead of placing a quota on the portion of
renewable electricity LSEs supply, such as under an RPS, a
load-based cap-and-trade scheme places a cap on the total
GHG emissions that can be associated with a LSE’s
electricity purchases (Cowart, 2006a, b). Tradable emission
allowances are allocated to LSEs and the emissions
intensity of each MWh of wholesale electricity purchased
by the LSE is tracked. The benefit of such a system is that it
has the potential to better address emissions leakage
resulting from electricity imports and exports.
One approach to a load-based scheme would be to use
unbundled certificates to track the emissions associated
with an LSE’s electricity purchases (Breidenich and
Gillenwater, 2007;Gillenwater and Breidenich, 2007). An
LSE would be required to purchase Generation Emission
Attribute Certificates (GEACs) from generators equivalent
to its delivered load. Each certificate would provide
information on the emissions intensity of the generator
that sold the certificate. Each LSE’s total emissions for the
purpose of compliance would then be determined by the
sum of the emission rates on its certificates. An LSE would
then have to submit allowances equivalent to that amount
of emissions.
This approach would result in a subsidy for renewable
and low GHG-emitting generators from the additional
revenue they would receive from certificate sales. Demand
by LSEs for electricity generated from coal and other GHG
intensive sources would be reduced because LSEs would
have to submit more allowances for electricity purchases
from these sources. GEACs could also be used by LSEs for
RPS compliance and for public disclosure purposes.
28
In the United States and in Europe, certificate tracking
systems are being developed and implemented that would
support this type of load-based scheme, as well as support
a variety of policies, including RPS compliance, environ-
mental disclosure in LSE billing, and voluntary certificate
markets.
29
These tracking systems function like registries
ARTICLE IN PRESS
27
There are a number of ways that policy makers can provide inventives
for renewable energy investments that do not involve directly integrating
RECs into emission markets, such as guaranteed feed-in-tariffs, exemption
from property taxes, an accelerated depreciation option, tax credits, and
generation quota (i.e., an RPS).
28
Even under this type of emission-trading scheme where on-site
emission attributes are represented by a certificate, consumers who wish
to reduce emissions should still purchase and retire emission allowances
instead of GEACs because it is ambiguous how many tonnes of emissions
are avoided by removing a GEAC with a zero emission rate.
29
Certificate tracking systems in operation in the United States include
the Generation Attribute Tracking System (GATS) in the PJM
Interconnection, the Generation Information System (GIS) for ISO New
England, and a system for the Texas RPS. The Western Renewable Energy
Generation Information System (WREGIS) and the Midwest Renewable
Energy Tracking System (M-RETS) are expected to be operational in
2007. The European Energy Certificate System (EECS) is being developed
under the Association of Issuing Bodies.
M. Gillenwater / Energy Policy 36 (2008) 2120–2129 2127
Author's personal copy
for other environmental commodities. Certificates can be
created not only for renewable generation, but also for
non-renewable generation. A certificate is created for each
MWh generated within the boundaries of the system.
The certificate can include information on a variety of
attributes associated with that generation, such as its GHG
emission intensity (i.e., tonnes of CO
2
equivalent emitted
per MWh). These are on-site attributes (e.g., direct
emissions from the facility) not off-site attributes; there-
fore, their ownership and quantification are unambiguous
(see Table 2).
A full discussion of the use of unbundled certificates
with a load-based cap-and-trade scheme is provided in
Gillenwater and Breidenich (2007). In sum, a load-based
scheme offers the potential to make tradable emission
allowances and RECs fungible within the electric power
industry.
4.5. White tags
A new type of environmental commodity based on
energy efficiency savings is in use, especially in Europe
(Bertoldi and Huld, 2006;Bertoldi et al., 2005;Capozza,
2006;Hamrin et al., 2007). These certificates are referred to
as Energy Efficiency Certificates or as ‘‘white tags’’. They
are a type of offset credit instrument because they require
the application of project-based accounting rules (i.e.,
additionality, baselines, leakage, ownership, quantifica-
tion) to determining the amount of electricity saved by a
particular energy efficiency project relative to some BAU
baseline (Langniss and Praetorius, 2006;Mundaca, 2007).
White tags are denoted in MWh of energy savings and
therefore suffer from ownership and quantification issues
similar to RECs if the objective is to claim emission reduc-
tions and integrate them into emission-trading markets.
In Europe, white tags are not linked to the EU-ETS
(Oikonomou et al., 2007).
Like REOCs, white tags could function as an offset
credit instrument under an RPS or as the commodity under
a separate energy efficiency portfolio standard. Unlike
REOCs, they could be obtained from projects within the
boundaries of the RPS.
30
An RPS that was expanded to
allow the use of white tags for compliance would allow
LSEs to utilize energy efficiency investments as a com-
pliance strategy.
5. Discussion and conclusion
Environmental markets that trade in emissions and
renewable energy commodities are currently in a state of
confusion. How should emission-trading schemes treat
RECs? How can emission reduction policies provide real
incentives for renewable generation?
Experience in renewable energy and emissions markets
has indicated that voluntary markets do not have a
significant effect on the supply of non-localized environ-
mental public goods. Voluntary markets are not a substi-
tute for government policies, but voluntary markets can
co-exist and supplement government policies (Markard
and Truffer, 2006).
In the United States several bills have been introduced in
Congress that would establish a national RPS and a
generator-based GHG cap-and-trade scheme.
31
Recently,
an agreement on an EU-wide renewables target of
20 percent was reached. National and multinational
schemes such as these will necessitate the development
of standardized certificate definitions and registries. Will
these developments eliminate voluntary green power
markets?
By defining renewable energy commodities only in terms
of on-site attributes, voluntary REC and green power
markets can efficiently operate along with emission cap-
and-trade systems. Defining RECs in terms of off-site
attributes, such as emission reductions from fossil fuel fired
plants, presents a number of problems. For example, once
an emissions cap-and-trade scheme is in place, such
definitions of a REC become indefensible.
Requiring RECs to be bundled with emission allowances
allocated to renewable generators is also likely to lead to
inefficient market outcomes and puts RPS policies in
conflict with cap-and-trade policies without providing
additional financial incentives for renewable energy invest-
ments. There is no inherent problem with renewable energy
generators being permitted to sell RECs and allowances.
Environmental markets are powerful tools for policy
makers and voluntary action. However, for these markets
to develop and expand, environmental commodities must
be defined in a way that allows markets to operate as
efficiently as possible and prevents conflicts over property
rights or environmental benefit claims. Environmental
markets are already burdened by complications that most
other market transactions are not (e.g., monitoring and
verification to ensure the value of an intangible good and
regulatory uncertainty). It is unnecessary to further burden
environmental markets by defining tradable environmental
commodities in a way that causes them to be heterogeneous
and second best measures of a public good. Ideally,
environmental commodities should be homogeneous, first
best measures of the relevant environmental good, and
easily measured and verified. RECs currently do not have
ARTICLE IN PRESS
30
The assumption here is that a MWh of electricity saved is at least
equivalent to a MWh of electricity generated from a renewable source in
terms of its environmental benefits.
31
S.309 Global Warming Pollution Reduction Act–Sen. Bernard
Sanders [VT] (introduced 1/16/2007); S.485 Global Warming Reduction
Act of 2007–Sen. John Kerry [MA] (introduced 2/1/2007); H.R.969 To
amend title VI of the Public Utility Regulatory Policies Act of 1978 to
establish a Federal renewable energy portfolio standard for certain retail
electric utilities, and for other purposes-Rep Udall, Tom [NM-3]
(introduced 2/8/2007). H.R. 1590 Safe Climate Act-Rep. Henry Waxman
[CA-30] (introduced 3/20/2007). Sen. Jeff Bingaman [NM] is also expected
to introduce national RPS and greenhouse gas emission legislation.
M. Gillenwater / Energy Policy 36 (2008) 2120–21292128
Author's personal copy
these characteristics if the relevant environmental good is
emissions or emission reductions.
32
This paper offers a proposal for redefining renewable
energy commodities so that both compliance and voluntary
renewable energy and emission markets can function without
confusion or conflicts. The implementation of a load-based
GHG cap-and-trade scheme that utilizes unbundled certifi-
cates could allow RECs and emission commodities to
interact without conflicts in a single marketplace.
Acknowledgments
I would like to acknowledge Tom Kreutz, Clare Breide-
nich, Alden Hathaway, Jasmine Hyman, Michael Oppenhei-
mer, Derik Broekhoff, Randy Udall, V.C. Patel, and several
other anonymous reviewers for their useful comments. The
author is solely responsible for the views expressed.
Appendix A. Supplementary materials
The online version of this article contains additional
supplementary data. Please visit doi:10.1016/j.enpol.
2008.02.019
References
Agnolucci, P., 2007. The effect of financial constraints, technological
progress and long-term contracts on tradable green certificates. Energy
Policy 35, 3347–3359.
Bertoldi, P., Huld, T., 2006. Tradable certificates for renewable electricity
and energy savings. Energy Policy 34, 212–222.
Bertoldi, P., Rezessy, S., Urge-Vorstaz, D., 2005. Tradable certificates for
energy savings: opportunities, challenges, and prospects for integration
with other market instruments in the energy sector. Energy and
Environment 16, 959–992.
Bird, L., Swezey, B., 2006. Green power marketing in the United States:
A Status Report, ninth ed. NREL.
Bird, L., Holt, E., Carroll, G., 2007. Implications of Carbon Regulation
for Green Power Markets. National Renewable Energy Laboratory,
Golden, CO.
Bluestein, J., Salerno, E., Bird, L., Vimmerstedt, L., 2006. Incorporating
Wind Generation in Cap and Trade Programs. National Renewable
Energy Laboratory, Golden Colorado, p. 46.
Breidenich, C., Gillenwater, M., 2007. Guest commentary—tradable
certificates for load-based cap-and-trade. Point Carbon—Carbon
Market North America.
Capozza, A., 2006. Market Mechanisms for White Certificates Trading.
International Energy Agency, Implementing Agreement on Demand-
side Management Technologies and Programmes.
CPUC, 2007. Interim Opinion on Phase 1 Issues: Greenhouse Gas Emissions
Performance Standard, Decision 07-01-039, COM/MP1/MEG/tcg,
Public Utilities Commission of the State of California, California,
25 January.
Cowart, R., 2006a. Addressing Leakage in a Cap-and-Trade System: Treating
Imports as Sources. Regulatory Assistance Project, Montpelier, VT.
Cowart, R., 2006b. Carbon caps and the power industry: Recent state
activity and the design issues for regulators. Regulatory Assistance
Project, p. 5.
DEFRA, 2007. Consultation on establishing a voluntary Code of Best
Practice for the provision of carbon offsetting to UK customers.
Department for Environment, Food and Rural Affairs, January.
Del Rio, P., 2006. Linking renewable energy CDM projects and TGC
schemes: an analysis of different options. Energy Policy 34, 3173–3183.
Gillenwater, M., 2007. Redefining RECs (Part 1): untangling attributes
and offsets. Energy Policy, in press, doi:10.1016/j.enpol.2008.02.036.
Gillenwater, M., Breidenich, C., 2007. Internalizing carbon costs in
electricity markets: using certificates in a load-based emissions trading
scheme. Energy Policy, in review.
Goett, A.A., Hudson, K., 2000. Customers’ choice among retail energy
suppliers: the willingness-to-pay for service attributes. Energy Journal 21, 1.
Hamrin, J., Vine, E., Sharick, A., 2007. The Potential for Energy Savings
Certificates (ESC) as a Major Tool in Greenhouse Gas Reduction
Programs. Center for Resource Solutions, San Francisco, CA.
Hathaway, A., 2007. Personal Communication, Director or EcoPower
Program, Environmental Resources Trust.
Holt, E., Bird, L., 2005. Emerging Markets for RECs: Opportunities and
Challenges. National Renewable Energy Laboratory.
Holt, E., Wiser, R., 2007. The Treatment of Renewable Energy
Certificates, Emissions Allowances and Green Power Programs in
State Renewables Portfolio Standards. Lawrence Berkeley National
Laboratory, Berkeley, CA.
Kahneman, D., Knetsch, J.L., 1992. Valuing public goods: the purchase of
moral satisfaction. Journal of Environmental Economics and Manage-
ment 22, 57–70.
King, D.M., Kuch, P.J., 2003. Will nutrient credit trading ever work? An
assessment of supply problems, demand problems, and institutional
obstacles, The Environmental Law Reporter. Environmental Law
Institute, Washington, DC.
Langniss, O., Praetorius, B., 2006. How much market do market-based
instruments create? An analysis for the case of white certificates.
Energy Policy 34, 200–211.
Markard, J., Truffer, B., 2006. The promotional impacts of green power
products on renewable energy sources: direct and indirect eco-effects.
Energy Policy 34, 306–321.
Menges, R., 2003. Supporting renewable energy on liberalised markets:
green electricity between additionality and consumer sovereignty.
Energy Policy 31, 583–596.
Morthorst, P.E., 2003. National environmental targets and international
emission reduction instruments. Energy Policy 31, 73–83.
Mundaca, L., 2007. Transaction costs of tradable white certificate
schemes: the energy efficiency commitment as case study. Energy
Policy 35, 4340–4354.
Niermeijer, P., 2007. Personal Communication, Secretary General RECS
International.
Oikonomou, V., Rietbergen, M., Patel, M., 2007. An ex-ante evaluation of
a white certificates scheme in the Netherlands: a case study for the
household sector. Energy Policy 35, 1147–1163.
Rathmann, M., 2007. Do support systems for RES-E reduce EU-ETS-
driven electricity prices? Energy Policy 35, 342–349.
Truffer, B., Markard, J., Wustenhagen, R., 2000. Eco-labeling of
electricity—strategies and tradeoffs in teh definition of environmental
standards. Energy Policy 29, 885–897.
UNFCCC, 2006. Tool for the demonstration and assessment of
additionality (ver 3), in: Board, C.D.M.-E. (Ed.). United Nations
Framework Convention on Climate Change (UNFCCC).
ARTICLE IN PRESS
32
Similar characteristics are desirable for other environmental commod-
ities such as white tags, renewable fuel certificates, combined heat and
power certificates, automotive fuel economy certificates, water quality
trading allowances, etc.
M. Gillenwater / Energy Policy 36 (2008) 2120–2129 2129
Electronic Annex 1 – Proposals to integrate RECs with emission
trading markets 2
The Center for Resource Solutions (CRS) has proposed an approach for incorporating
4
the voluntary REC market into the Regional Greenhouse Gas Initiative (RGGI). Their
recommendation was to forecast the quantity of CO
2
emissions from fossil fuel generators
6
that would be avoided as a result of voluntary market sales of RECs and green power. They
then proposed allowances equal to this forecast amount be retired from the total cap on GHG
8
emissions from the electric power industry. The purpose of this pre-allocation “off the top”
retirement of allowances was solely so that participants in the voluntary green power
10
markets could make claims that RECs were equivalent to GHG emission offsets even under
an emission cap-and-trade regime.
12
There are several problems with this proposal. The most critical problem is that the
proposal assumes that voluntary market RECs and green power generation is additional
14
(e.g., renewable facilities without the revenue from REC sales would not have generated
electricity). The proposal does not address whether the voluntary REC market actually
16
creates a scarcity, and if so, the marginal affect the market has on renewable generation.
Assuming that every MWh associated with RECs and/or green power sales results in
18
additional emission reductions from fossil power plants will require retirement of allowances
in significant excess of the actual impact of the voluntary green power market. The excess
20
reduction in the supply of allowances will benefit the environment (i.e., the cap will be
reduced), but it will also increase compliance costs. Recognizing this, stakeholders in the cap
22
setting negotiations will likely fight to raise the cap to account for the lack of additionality in
this “off the top” retirement, thereby making reduction claims by REC and green power
24
market participants equivalent to hot air.
Other problems with the proposal relate to forecasting a business-as-usual level of
26
renewable generation and capacity additions for several years. Multiple unpredictable factors
Michael Gillenwater Page 2
could significantly change the quantity of investment in renewable generation in the future
(e.g., reauthorization of the federal Production Tax Credit , prices of wind turbines and
2
natural gas, likelihood of a national RPS mandate). There is also the problem of predicting
which generation sources will be displaced by future renewable generation generation. The
4
degree to which the forecast is incorrect could have significant implications for the price of
allowances.
6
For a description of the original proposal see: CRS, 9/16/05,
http://www.rggi.org/docs/crs_voluntary_re_9_16_05.pdf
8
Also see CRS, “Recommendations for Including Renewables in a Cap-and-trade System in
California,”:
10
http://www.climatechange.ca.gov/climate_action_team/meetings/public_comments/cap_and
_trade/CRSrecommendationsforCACapandTrade.pdf
12
The Model Rule under RGGI includes an optional provision allowing participating
14
states to create an CO
2
emission allowance set-aside for the voluntary REC and green power
market a portion.
1
Participants in renewable energy markets would then be able to petition
16
the state to receive an allocation from this set-aside based on documentation of renewable
energy purchases.
18
By structuring this provision as a set-aside, it does not change the cap (in comparison to
an offset crediting instrument, which would effectively increase the cap). Therefore, it
20
implicitly assumes that RECs and green power are not offset credit instruments because of
the double counting problem with fossil generators covered under the cap. A set-aside is
22
simply a part of the overall allowance allocation process.
The model rule provision leaves it up to each state how it will process applications to
24
receive allowances under the set-aside. Additionality tests and other eligibility requirements
will be necessary to select recipients from the limited pool of allowances within the set-
26
1
See RGGI Model Rule “Voluntary renewable energy market set-aside allocation” subdivision (d),
page 47.
Michael Gillenwater Page 3
aside. It is also important to note that in order for renewable market participants to claim
emission reductions any allowances they received would have to be retired. It is then the act
2
of retiring the allowances, not the act of purchasing RECs or green power, which is the
ultimate cause of emissions being reduced below the cap.
4
Currently, no RGGI state has indicated that they will utilize this provision.
2
If it was
implemented by a state, it could create interesting opportunities for arbitrage between REC
6
and emission allowance markets.
A copy of the RGGI model rule can be accessed at: http://www.rggi.org/modelrule.htm
8
The U.S. NO
x
Budget Trading Program renewable generators can receive allowances.
10
States have the discretion to decide how NO
x
allowances are allocated within the state.
Renewable generators could obtain allowances under two methods of allocating to
12
renewable generators: a renewable energy set-aside or a output-based allocation(Bluestein et
al., 2006). Because of the variable cost structure of renewable generation, allocating
14
allowances to existing renewable generators does not effect the amount of electricity they
generate. Only an allocation that alters investment decisions will result in additional
16
renewable generation.
Several states have established set-asides for renewable generators. Renewable
18
generators may then petition state regulators to be allocated allowances from a set-aside
upon demonstration that they meet certain eligibility requirements. Currently, these set-aside
20
programs have been under utilized for a variety of bureaucratic and financial reasons
(Bluestein et al., 2006). For example, under the typical allocation formula and at current NO
x
22
allowance prices, one MWh of renewable generation would receive allowances worth about
75 cents.
3
24
2
Most RGGI states have indicated they will auction 100 percent of allowances. The other states have
not yet indicated their intentions.
3
Market price data from http://www.evomarkets.com/emissions/index.php?xp1=sipnox/
Michael Gillenwater Page 4
Jacobson (2007) provides a case study and discussion of how RECs can be used to
obtain allowances from the NO
x
Budget program. The case study also discusses the issues
2
that states and municipalities face in receiving State Implementation Plan credit from EPA
for a renewable energy purchases. The overall process currently faces high transaction costs.
4
Bird et al. (2007) also provides a summary of proposals to include renewable energy
generators into GHG cap-and-trade markets.
6
... Modeling of REC purchases suggests that, in some cases, they are unlikely to increase the amount of renewable energy on the electricity grid, and as such these purchases may lead to little or no actual change in emissions. [23][24][25][26][27][28] Most RECs used by the U.S. HEIs in our data are not bundled (Figure 1). Of the nine schools that purchased RECs to achieve Scope 2 emission-reduction goals, seven purchased only unbundled RECs. ...
Article
Full-text available
Climate action pledges have increasingly taken the form of commitments to net carbon neutrality. Higher education institutions (HEIs) are uniquely positioned to innovate in this area, and over 800 United States (U.S.) colleges and universities have pledged to achieve net carbon neutrality. We examine the approaches of 11 U.S. HEIs that have already announced achieving net carbon neutrality, highlighting risks associated with treating carbon offsets, unbundled renewable energy certificates, and bioenergy (collectively 77% of reductions across institutions) as best practice under current frameworks. While pursuing neutrality has led to important institutional shifts toward sustainability, the initial mix of approaches used by these HEIs appears out of alignment with a broader U.S. decarbonization roadmap; in aggregate, these early neutrality efforts underutilize electrification and new zero-carbon electricity. We conclude by envisioning how HEIs (and others) can refocus climate mitigation efforts toward decarbonization and actions that will help shift policy and markets at larger scales.
... Furthermore, the implementation of RPS may reduce the shadow costs of carbon emissions, which results in a lower reduction of carbon emissions [26]. In fact, RPS has long been suspected of its real performance [3,[27][28][29][30][31], and some scholars thought that it is necessary to clarify the definition of RECs [32][33][34]. However, some scholars refute the existence of a negative impact in the real system [35,36]. ...
Article
Full-text available
China will impose both renewable portfolio standards (RPS) and emissions trading (ET) on the electricity industry, but the product competition in the retail market and the influence of the supply chain network structure has not been investigated. This paper studies policy effects by comparing equilibrium results under different supply chain network structures, and we use the concept of consumer environmental awareness to capture a product’s substitutability. Results indicate that: (1) Both increases in the permit price and the rise of the quota obligation reduces the aggregate profits of the supply chain, but the former rather than the latter increases the profits of the renewable power generating company; (2) the differential pricing improves the retailer’s flexibility in the charged price when confronting increases in the permit price and the quota obligation; (3) higher consumer environmental awareness makes the supply chain less profitable and increases the costs of ET suffered by the consumer; (4) the cooperation between the thermal power generating company and the retailer significantly increases the aggregated profits of the supply chain, although the cooperative profit is sensitive to environmental awareness. Moreover, the consumer suffers the highest costs that the retailer passes on them, and may prefer to feel that the emission cost and compliance cost are less affordable. In contrast, the cooperation between power generating companies removes the influence of environmental awareness, but the aggregated profits of the supply chain are smaller than in the decentralized decision scenario.
... Ergo, green power would simply be redistributed to PEV instead of private customers and the additional demand would have only a marginal impact on green power generation. Gillenwater [30] strongly criticises REC for failing exactly in this regard and proposes major alterations to strengthen additionality and transparency [44]. New market mechanisms are essential for the efficient provision of green power for carbon-neutral mobility. ...
Conference Paper
Full-text available
Life-cycle emissions of electric vehicles depend mainly on the type of electricity charged during the vehicle usage phase. This work characterises and discusses the range of potential green power services that show different levels of environmental quality. Key quality dimensions are additionality, regionality, source technology, balancing period, system flexibility and transparency. To assess the future marketing potential of any specific service, its environmental quality must be contrasted with its economic viability. Furthermore, necessary framework conditions are discussed and two exemplary services are investigated in detail: reactive balancing with strong additionality and transparency, and active balancing by shifting of charging times to accommodate hourly balancing of green power and demand. The arbitrage gains for smart charging are approximated using an illustrative linear program and comprehensive mobility data from Germany.
... That is likely the common perception among participants-that their money is driving new projects. Yet in practice, it is difficult to assert whether a given new project in the United States would not have gone forward but for program premiums (Gillenwater 2008a, Gillenwater 2008b. 27 Complicating the issue further is the difficultly in explaining to the public that they are not physically receiving renewable energy when they buy it. ...
Article
Operated by the Alliance for Sustainable Energy, LLC Contract No. DE-AC36-08-GO28308NOTICE This report was prepared as an account of work sponsored by an agency of the United States government. Neither the United States government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States government or any agency thereof. The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States government or any agency thereof. Available electronically at
Article
Considering the impact of the restriction of the weight of the responsibility of consumption on the promotion of local renewable energy consumption and the cross-provincial transaction of renewable energy, this study examines the multi market clearing decision-making problem. Additionally, it proposes and constructs the intraprovincial and interprovincial bi-level market clearing decision-making model. The objective function of the upper model is to minimize the operation cost of the power market at the intraprovincial level considering the weight constraint of consumption responsibility, and the objective function of the lower model is to minimize the renewable energy purchase cost at the interprovincial level. In the two-level model, the two levels are coupled with each other, and the Karush–Kuhn–Tucker (KKT) condition of the lower level model is used to transform the two-level model into a single-level nonlinear model. The strong duality theory and Big M method are used to transform the nonlinear model into a linear model, and the Gurobi solver is used to solve the problem. The results show that the optimal interprovincial renewable energy purchasing power is achieved at the minimum market operational cost in the province. In addition, the effectiveness and rationality of the model are verified by the example analysis.
Article
China's power industry is facing the issue of reducing carbon emissions, a particularly important matter to address during the industrial development. Based on the emission reduction status of power industries in China, the possibilities and the challenges of dealing with climate change for Chinese power industries are discussed in this paper by employing PEST (political, economic, social, technological)-strengths, weaknesses, opportunities, and threats analysis. The Tradable Green Certificate (TGC) system and the Carbon Emission Trading scheme for power industry development and environmental protection are analyzed as well. The results show that (1) the possibilities of developing power industries and addressing the climate change issue involve internal advantages (three strengths) and external chances (four opportunities); (2) the challenges for the Chinese power industry involve internal disadvantages (three weaknesses) and external unfavorable factors (four threats); and (3) both the TGC planning and the carbon emission scheme, as an efficient market-oriented strategic change, can jointly adjust the structure of power industries.
Article
Renewable portfolio standard (RPS) with tradable green certificate (TGC) scheme has important influences on the market equilibrium outcomes and generation firms’ strategic behaviors. The main objective of this paper is to investigate that under the RPS with TGC scheme, who and how to exercise the market power, and to what extent market powers are exercised in the electricity wholesale and TGC markets. This is achieved by firstly proposing a two-stage joint equilibrium model based on the oligopolistic competition equilibrium theory. The model is then formulated as an equilibrium problem with equilibrium constraints (EPEC) by using the backward induction method, which is further solved by the nonlinear complementarity approach. Finally, simulation results show that renewable firms tend to withhold some of TGCs to raise the TGC prices when the RPS is relatively low, otherwise they choose to cut down their electricity output to reduce the volume of TGC and raise the TGC price. Moreover, facing the increasing TGC price, fossil fuel firms tend to withhold their electricity output to decrease the demand of TGCs and lower the TGC price. This study has meaningful implications for design of the electricity markets with TGC market.
Chapter
Climate change is being exacerbated by the emissions of globe-warming greenhouse gases (GHGs) as a consequence of economic activities associated with energy, industry, transportation, and land use. From an economic viewpoint, the Earth’s climate is a public good, and pollution a negative externality; such change therefore constitutes market failure. Controlling air pollution by utilizing economic mechanisms represents an important change in environmental thinking – literally a paradigm shift away from historical command-and-control engineering systems. Today, this approach is being utilized to mitigate the emissions of GHGs, addressing the pollution externality by putting a price on carbon. The international carbon market, largely developed as a result of the Kyoto Protocol, had a total value of $176 billion in 2011, but it has decreased significantly in recent years. With the addition of China and other national and subnational programs, however, it is expected that it will once again increase, as a larger and larger portion of emitted GHGs come under such regulatory purview. Historically, the largest component of that market has been the European Union’s Emission Trading Scheme (EU ETS), which represents a regional market designed first to assist Europe in achieving compliance with the Protocol’s requirements, and now is a cornerstone of the EU’s policy to combat climate change. It also has links to the Protocol’s project-based mechanisms, the Clean Development Mechanism (CDM), and Joint Implementation (JI), which help minimize compliance costs. China’s nascent market – currently seven pilot schemes, but expected to become a national program in 2016 – should ultimately become twice as large as the EU ETS. Other carbon markets created in numerous countries (e.g., the U.S., Japan, South Korea, etc.) as well as a voluntary market are also expected to make significant contributions. This chapter discusses the structure of these emissions trading carbon markets, the theory behind their development, their historical evolution, ongoing governance challenges, and future prospects.
Chapter
Climate change is being exacerbated by the emissions of globe-warming greenhouse gases (GHGs) as a consequence of economic activities associated with energy, industry, transportation, and land use. From an economic viewpoint, the Earth’s climate is a public good, and pollution a negative externality; such change therefore constitutes market failure. Controlling air pollution by utilizing economic mechanisms represents an important change in environmental thinking – literally a paradigm shift away from historical command-and-control (CAC) engineering systems. Today, this new approach is being utilized to mitigate the emissions of GHGs, addressing the pollution externality by putting a price on carbon. The international carbon market, largely developed as a result of the Kyoto Protocol, had a total value of $144 billion in 2009. The largest component of that market, the European Union’s Emission Trading Scheme (ETS), was worth $118 billion; it represents a regional market designed to assist Europe in achieving compliance with the Protocol’s requirements, and also has links to the Protocol’s project-based mechanisms, the Clean Development Mechanism (CDM) and Joint Implementation (JI) which help minimize compliance costs. These project-based components themselves were valued at $2.7 billion and $354 million, respectively. Further, other carbon markets created in numerous countries (e.g., the Regional Greenhouse Gas Initiative [RGGI] in the USA and the Greenhouse Gas Abatement Scheme in New South Wales, Australia) were worth $2.3 billion, while the global voluntary market was estimated to be in the $350–$400 million range (a significant drop from the previous year’s $700 million figure). This chapter discusses the structure of these emissions trading carbon markets, the theory behind their development, their historical evolution, ongoing governance challenges, and future prospects.
Chapter
Climate change is being exacerbated by the emissions of globe-warming greenhouse gases (GHGs) as a consequence of economic activities associated with energy, industry, transportation, and land use. From an economic viewpoint, the Earth’s climate is a public good, and pollution a negative externality; such change therefore constitutes market failure. Controlling air pollution by utilizing economic mechanisms represents an important change in environmental thinking – literally a paradigm shift away from historical command-and-control engineering systems. Today, this approach is being utilized to mitigate the emissions of GHGs, addressing the pollution externality by putting a price on carbon. The international carbon market, largely developed as a result of the Kyoto Protocol, had a total value of $176 billion in 2011, but it has decreased significantly in recent years. With the addition of China and other national and subnational programs, however, it is expected that it will once again increase, as a larger and larger portion of emitted GHGs come under such regulatory purview. Historically, the largest component of that market has been the European Union’s Emission Trading Scheme (EU ETS), which represents a regional market designed first to assist Europe in achieving compliance with the Protocol’s requirements, and now is a cornerstone of the EU’s policy to combat climate change. It also has links to the Protocol’s project-based mechanisms, the Clean Development Mechanism (CDM), and Joint Implementation (JI), which help minimize compliance costs. China’s nascent market – currently seven pilot schemes, but expected to become a national program in 2016 – should ultimately become twice as large as the EU ETS. Other carbon markets created in numerous countries (e.g., the U.S., Japan, South Korea, etc.) as well as a voluntary market are also expected to make significant contributions. This chapter discusses the structure of these emissions trading carbon markets, the theory behind their development, their historical evolution, ongoing governance challenges, and future prospects
Article
Full-text available
Twenty-one states and the District of Columbia have adopted mandatory renewables portfolio standards (RPS) over the last ten years. Renewable energy attributes-such as the energy source, conversion technology, plant location and vintage, and emissions-are usually required to verify compliance with these policies, sometimes through attributes bundled with electricity, and sometimes with the attributes unbundled from electricity and traded separately as renewable energy certificates (RECs). This report summarizes the treatment of renewable energy attributes in state RPS rules. Its purpose is to provide a source of information for states considering RPS policies, and also to draw attention to certain policy issues that arise when renewable attributes and RECs are used for RPS compliance. Three specific issues are addressed: (1) the degree to which unbundled RECs are allowed under existing state RPS programs and the status of systems to track RECs and renewable energy attributes; (2) definitions of the renewable energy attributes that must be included in order to meet state RPS obligations, including the treatment of available emissions allowances; and (3) state policies on whether renewable energy or RECs sold through voluntary green power transactions may count towards RPS obligations.
Article
Policy portfolios that include tradable green certificates have been introduced in several European countries to foster market-driven penetration of renewable energy sources. Another widely analysed type of market-based instrument in the energy sector is the tradable emission allowance. Recently tradable certificates for energy savings as a tool to stimulate energy efficiency investments and deliver energy savings have attracted the attention of policy makers. While such schemes have been introduced in different forms in Italy and the Great Britain and considered in other European countries, there is an ongoing debate over their effectiveness and applicability. The paper describes the concept and main elements of schemes that involve tradable certificates for energy savings (TCES) and how these have been put into practice in Italy and the Great Britain. It then compares TCES schemes with energy taxation and mandatory demand-side management (DSM) programs using a set of four criteria. Integration with green certificates and CO 2 emissions trading schemes is examined and some possibilities for practical implementation are outlined.
Article
Renewable energy certificates (RECs) represent the attributes of electricity generated from renewable energy sources. These attributes are unbundled from the physical electricity, and the two products-the attributes embodied in the certificates and the commodity electricity-may be sold or traded separately. RECs are quickly becoming the currency of renewable energy markets because of their flexibility and the fact that they are not subject to the geographic and physical limitations of commodity electricity. RECs are currently used by utilities and marketers to supply renewable energy products to end-use customers as well as to demonstrate compliance with regulatory requirements, such as renewable energy mandates. The purpose of this report is to describe and analyze the emerging market for renewable energy certificates. It describes how RECs are marketed, examines RECs markets including scope and prices, and identifies and describes the key challenges facing the growth and success of RECs markets.
Article
Cap and trade programs are increasingly being used to reduce emissions from electricity generation in the United States. Cap and trade programs primarily target emitting generators, but programs have also included renewable generators, such as wind generators. States cite several reasons why they have considered the policy option of including renewable generators in cap and trade programs: to provide an incentive for lower-emitting generation, to achieve emissions reductions in non-capped pollutants, and to gain local economic benefits associated with renewable energy projects. The U.S. Environmental Protection Agency also notes these rationales for considering this policy alternative, and the National Association of Regulatory Commissioners (NARUC) passed a resolution supporting the inclusion of renewable energy in cap and trade programs. This report explores why states consider this policy option, what participation could mean for wind generators, and how wind generation can most effectively be included in state, federal, and regional cap and trade programs.
Article
For the first time in many decades, consumers are being given a choice of who supplies their electric power and how that power is generated. One of these choices is to support electricity generation from more environmentally beneficial energy sources. The term green power generally refers to electricity supplied from renewable energy sources. By some estimates, nearly one-quarter of all U.S. consumers will have the option to purchase green power by the year 2000, either from their regulated utility provider or in competitive markets. As competition spreads in the electric power industry, more consumers will have this choice. The purpose of this brief is to provide electric industry analysts with information on green power market trends. Descriptive information on green power marketing activities in competitive and regulated market settings is included.