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Renewable Energy Credits: An Emerging Opportunityby: Kyle Teamey
As the world looks for ways to reduce carbon emissions and mitigate global climate change, market-based cap and trade systems are emerging as the approach of choice. One such system aims to encourage the use of renewable energy as a means of reducing carbon emissions. A unique aspect of renewable energy—from wind, solar, hydro, biomass, and other sources—is that it provides a way to prevent future carbon emissions, not just reduce them. For owners of renewable energy systems, this means their clean energy output has a value beyond that of electricity. Under a cap and trade system the “negative emissions” of clean energy can be traded to companies producing too much carbon, creating economic value to carbon emissions reduction. These trading systems have created a carbon market with a tradable unit is known as a Renewable Energy Credit (REC).
As with all new markets, REC trading markets are experiencing growing pains. Currently there is no single REC trading market in the United States. No federal REC program exists, and among the states there are multiple programs which vary in standards and practices. Some states have established programs, some have none, and in a few cases, there is more than one program within the same state. Because of the inconsistency among different REC programs, the markets for carbon and RECs are often geographically isolated and lack both transparency and liquidity. The value of a REC can therefore vary wildly from place to place. These differences present a challenges for the developing carbon market.
Some of the rules governing REC programs, that are important for renewable energy producers to know, are how RECs are measured, as well as who actually owns them. In some states, such as New Jersey, RECs belong to the system owner. In Maryland, the system owner gets 98% of the RECs, while their utility gets 2%. In other places, laws are ambiguous or give ownership directly to utilities. The value of RECs can differ from state to state, depending on the particular program as well as the renewable technology being used. Different renewable technologies are given RECs which differ in value in order to account for the carbon emitted, directly or indirectly, by the renewable technologies themselves, such as biopower and fuel cells.
In spite of the challenges, RECs provide significant economic incentive to use renewable energy and have been a boon to the industry. Europe now has a unified REC trading program for the entire European Union. The unified system has brought about standardization for REC ownership and measurement. In addition, the huge open market for RECs has overcome the problems of regional price differences. In the United States, the Northeastern states and several Mid-Atlantic states are following suit and have begun the work of creating regional markets for carbon trading. This is a promising sign that RECs and carbon trading will grow in acceptance and availability both in the U.S. and abroad.
