Renewable Energy Certificates and Air Emissions Benefits
Developing an Appropriate Definition for a REC
Patrick Leahy and Alden Hathaway
April 2004
The Renewable Energy Certificate Market
The past few years have witnessed the emergence of the Renewable Energy Certificate
(REC) market as a viable model for the U.S. renewable energy industry. Once
considered an esoteric topic for even the most ardent renewable energy expert, RECs
have grown in popularity and exposure thanks to efforts of the renewable energy
industry as well as several large purchases by high profile corporations and
governmental organizations.
Although still in its infancy, the Renewable Energy
Certificates (RECs) market holds the potential to bring renewable technologies into the
As a result of such dramatic growth, a broad spectrum of market participants are
revisiting some basic questions surrounding the definition of a REC, i.e. �What exactly is
a REC? And what is its impact on air emissions?� As the market continues to mature, it
will become increasingly important to answer these types of questions in a manner that
reflects the broadest set of stakeholders and can lead to integration with capped
Renewable energy (RE) generation results in several valuable benefits.
Among these
� Increased energy diversity and security;
� Reduced price volatility in the energy markets;
� Improved energy reliability from distributed generation;
� U.S. economic development and job creation;
� Environmental benefits from reduced land and water impacts; and
� Improved air quality.
Because the deployment of renewable energy often displaces fossil-fired generation, it
has long been suggested that ownership of the resulting emission reduction benefits
should be assigned to the renewable energy certificate. While this approach may seem
reasonable, unilateral ownership claims on avoided emissions benefits present
significant legal obstacles and ultimately inhibit the development of an actively traded
Environmental Resources Trust, Inc. (ERT)
1612 K Street, NW � Suite 1400 � Washington, DC 20006 � Tel 202.785.8577 � Fax 202.785.2739 �
www.ert.net
This paper will seek to demonstrate that a preferable definition for a Renewable Energy
Certificate is �unique and exclusive proof that one MWh of electricity has been generated
from a renewable resource.�1 Based on this foundation, the paper will then explore a
powerful set of market-based tools designed to spur increased demand for renewable
energy and encourage innovative sources of financing for the renewable energy
industry.
What is a Renewable Energy Certificate?
A REC is a market-based commodity designed to facilitate transactions between buyers
and sellers of renewable energy, free from the constraints of the electricity grid. It allows
renewable energy generators to deliver the benefits of green power (detailed above) to
customers without engaging in the cumbersome exercise of scheduling physical delivery
of the electrons. This has significantly benefited the renewable energy industry by
broadening the market beyond the scope of local utilities with green power programs to
include corporate and residential end-users.
Physically, it is impossible for the �purchaser� of green power from the grid to consume
only the electricity produced by the renewable generator. Once electrons are placed on
the grid, they are irreversibly mixed with electrons from other generators as they flow
along the continuously changing path of least resistance. The green power purchaser
consumes a composite mix of electrons generated from all of the plants interconnected
to the grid. Any premium paid for the green power is effectively financial support for the
inclusion of a renewable resource in the overall generation portfolio.
RECs were developed to broaden the potential customer base by overcoming the
geographic and transactional barriers confronting green power procurement. Often the
best sites for green power generation, such as wind farms, are not located in the territory
of a utility serving a densely populated urban area. By de-linking financial support for
renewable energy from the physical delivery of the electricity, RECs not only reflect the
realities of the transmission grid, but also serve as a vehicle for electricity purchasers to
provide clear, direct financial signals in support of renewable electricity.
There are currently two distinct REC markets in the US: a voluntary market driven by
consumers interested in supporting renewable energy or reducing their environmental
footprint; and a compliance market driven by government regulation. The voluntary
market is segmented by technology. Pricing generally reflects the excess cost of
generation above conventional resources on a technology specific basis.
The compliance market is driven by state legislation and is significantly larger than the
voluntary market. To date, thirteen states have implemented Renewable Portfolio
Standards (RPS), requiring all utilities to purchase a minimum percentage of their power
from renewable resources. Four of these programs, Texas, Massachusetts, Connecticut
and New Jersey, have actively traded REC markets. Within each market, prices reflect
the supply / demand balance for the commodity value of one MWh of renewable energy.
Prices vary across markets due to individual market design characteristics.
1Jansen Jaap, �A Green Jewel Box?�, Environmental Finance, March 2003 pp 27. and
Natsource. Williamson, Matthew, �Estimating Benefits from Renewable Energy�, CEC Technical
Meeting, July 17, 2003
As with any evolving market, several fundamental issues have yet to be resolved. Most
notably, there are at least two competing definitions for RECs in the U.S. market:
� ERT and several other market-oriented organizations define a REC as �unique
and exclusive proof that one MWh has been generated by a renewable
resource.� In other words, a REC guarantees that one MWh of renewable
electricity has been generated in place of conventional electricity.
� The Center for Resource Solutions, which is the largest REC certifier in the US,
defines a REC as �A generic term for a bundle of attributes except the actual
electrical energy associated with the generation of electricity at a renewable
energy facility.�2 The �bundle of attributes� includes environmental attributes
such as emissions offsets or avoidances.3 These differing definitions present a
conflicting view on whether or not ownership of emission offsets is conveyed in a
REC.
This conflict, although subtle, has significant implications for the future of renewable
energy and its ability to maximize financial value while maintaining critical standards of
environmental credibility. Currently, several states are contemplating renewable energy
legislation and efforts are underway to develop carbon trading programs in the U.S.,
most notably, the Northeast Regional Greenhouse Gas Initiative. It is imperative that the
renewable industry reach a consensus on this issue as quickly as possible in order to provide clear and decisive direction to policy makers and market designers.
The principal difference between the two positions concerns the ownership of emission
reductions created when renewable generation displaces electricity from conventional
resources. ERT firmly believes that a definition of renewable energy certificates that
implies ownership of these emissions reductions is ultimately untenable and
counterproductive. The following sections will highlight some of the shortcomings of this
approach, by focusing on legal, environmental and market efficiency implications.
Legal
In the United States, law is the foundation of property rights. Ownership rights exist if
and only to the extent that they are recognized by law.4 In the absence of a legal
framework to assign property rights, ownership claims are subject to legal challenge.
This point is particularly significant when considering the impact of renewable generation
on unregulated greenhouse gas emissions. Property rights concerning air emissions are
just emerging and default ownership rights have not yet been defined. At best,
ownership claims on emission reductions generated by renewable energy are uncertain.
www.green-e.org/what_is/dictionary/dictionary.html.
3 CRS defines environmental attributes in the following way: �Environmental attributes include the
environmental benefits and costs associated with the construction and operation of specific types of power
generation facilities. For renewable facilities, their environmental attributes might include the benefits of
such things as emissions offsets or avoidance, as say from wind-generated electricity.� Reference:
www.green-e.org/what_is/dictionary/dictionary.html.
4 Sprankling, John G. Understanding Property Law, Lexis Publishing, New York, NY 2000 pp 2
5 Barnes, Peter. Who Owns the Sky? Our Common Assets and the Future of Capitalism, Island Press,
Washington DC 2001, pp
4
The only instance in the U.S. in which ownership rights for air emissions have been
established involves regulated �cap and trade� programs established under the Clean Air
Act of 1990 for sulfur dioxide (SO2) and nitrogen oxides (NOx). Emission allowances
represent the legal right to emit a specific amount (usually 1 ton) of a particular pollutant.
Prior to any compliance period, a regulatory body allocates and/or auctions a fixed
quantity of allowances to eligible program participants. Emitters must comply by making
emissions reductions and/or buying allowances in the emissions market. At the end of
the compliance period, all emitters must hold one allowance for every ton of the
regulated pollutant released during the compliance period.
Only to the extent that renewable generators are awarded title to emission allowances
through an allocation program will they be able to monetize the value of their reduced air
emissions.6
Environmental Integrity and Double Counting
In anticipation of an eventual mandatory greenhouse gas trading program, a voluntary
market for CO2 reductions is beginning to emerge among public and private entities
intent on controlling their emissions. Because generation from a renewable resource
often displaces fossil fired generation, RECs are viewed as one option for meeting CO2
targets. Although convenient, this practice overlooks several inconsistencies that would
become apparent in a formalized trading environment.
By nature, RECs create an indirect emissions offset. The World Resources Institute�s
GHG Protocol defines indirect emissions as �emissions that are a consequence of the
activities of the company but occur as sources owned or controlled by another
company.�7 In addition to the uncertainty of ownership addressed in the previous
section, trading in indirect emissions offsets is likely to compromise the environmental
integrity of the market.
To illustrate the concept, consider a hypothetical grid consisting of one brand new wind
plant and one coal generator meeting a fixed demand. In this scenario, each MWh of
wind power displaces one MWh of coal generation and avoids the associated CO2
emissions (approximately one ton). When calculating emissions, the coal plant would
compare year-on-year measurements taken at the smoke stack, conclude that it has
reduced emissions by one ton and sell the reduction into the market. Similarly, the wind
generator would estimate that it backed down one MWh of coal-fired generation,
conclude that it has reduced emissions by one ton and sell the reduction into the market.
When multiple entities claim ownership of the same reduction, it is known as double
counting.8 In reality, the risks of double counting are even greater because one MWh
from a wind plant could impact multiple generators to varying and unknown degrees,
increasing the odds that the reductions will be counted twice.
As policy direction in this area becomes clearer and trading increases, the issue of
indirect reductions may resolve itself. In the event that the current voluntary
6 The most common approaches are the renewable energy allowance set-aside program for NOx established
by six states under the NOx Budget Trading Program and SO2 established by federal legislation.
7 World Resources Institute, The Greenhouse Gas Protocol: A Corporate Accounting and Reporting
Standard, Revised Edition. pp 25
8 Hammerschlag, Roel and Wiley Barbour, Life Cycle Assessment & Indirect Emission Reductions: Issues
Associated with Ownership and Trading, May 2003. pp. 8
5
environment persists, the market should naturally demand a more stringent framework
within which to operate. As purchasers recognize the tenuous claims of indirect
reductions they will discount them appropriately. Likewise, if a mandatory CO2 cap and
trade program is established, the issue of indirect reductions would be eliminated. In a
cap and trade system the only way to reduce emissions is to take ownership of and
retire the emission allowances.
The point of this section is not to imply that the indirect environmental impact does not
exist in an un-capped system. Rather, the intent is to emphasize that the ambiguity of
ownership claims on these indirect benefits may lead to issues of double counting.9
Market Efficiency
The definition of a REC has significant implications for market efficiency. Consider the
example of two identical wind farms located in the same power pool (PJM), but on either
side of the Maryland-Pennsylvania state line. The State of Maryland has a NOx set
aside program that allocates a percentage of emission allowances to renewable energy
generators, whereas Pennsylvania does not. As a result, the Maryland wind generator
receives tradable NOx allowances for each MWh generated.
If a REC is defined to include all associated emissions reductions, the Maryland wind
generator would be forced to incorporate the allowances obtained from the set-aside
pool in any REC sale. This poses a dilemma when comparing RECs from the Maryland
and Pennsylvania wind farms. Under the above definition they would have to be
considered identical and, presumably, be able to make identical environmental claims.
Logically, however, the market would treat the two RECs as distinct products since they
contain unique value propositions.
Furthermore, given that NOx allowances can be worth several thousand dollars per ton,
the market would clearly value the two products differently. Consumers familiar with the
NOx allowance value would place a premium on the RECs with attached emission
allowances. Assuming markets are allowed to function properly, that premium would
equal the value for NOx allowances established by the emissions market.
Re-defining Renewable Energy Certificates
Markets work most efficiently when commodities are valued according to the relative
supply and demand for each specific product. By allowing buyers and sellers to value
individual elements properly, markets are able to provide clear pricing signals for the
underlying commodity.
This principle holds true in the REC market as well. Although there is a relationship
between the green power and emissions markets, the drivers for buying and selling
emission allowances are distinct from those for renewable energy. Attempting to
artificially link the REC and emissions markets hampers the ability for buyers and sellers
to price each commodity appropriately, which results in distortions, as demonstrated
above.
9 Under a legislated emissions cap and trade program, there are several mechanisms through which
regulating bodies can convert indirect emissions offsets into tradable allowances. These are discussed in
the following section.
6
Efficient outcomes can only be achieved when the value of a ton of emissions is
determined by the emissions market and the value of a MWh of renewable energy is
determined by the REC market. Increased market definition and clarity leads to more
accurate pricing signals on the true value of renewable power and enables improved
investment decision-making.
Building upon these fundamental principles, Environmental Resources Trust submits
that the most appropriate and constructive definition for a renewable energy certificate is
�unique and exclusive proof that one MWh of energy was generated from a renewable
resource.�10
WHY IS THIS ISSUE IMPORTANT?
There are three reasons why the renewable energy industry should concern itself with
this issue:
� Accuracy in environmental disclosure
� Product innovation and increased demand
� Enhanced revenue potential through formalized participation in emissions
markets
Environmental Disclosure
The National Association of Attorneys General (NAAG) made the following assertions in
its 1999 ruling on Renewable Energy Credits:
�It is deceptive to misrepresent, directly or by implication, that a product or
company offers a general environmental benefit. Unqualified claims of general
benefit are difficult to interpret, and, depending on their context, may convey a
wide range of meanings to consumers. [�] Every implied representation that the
general assertion conveys to consumers must be substantiated. Unless this
substantiation duty can be met, broad environmental claims should either be
avoided or properly qualified, as necessary, to prevent deception about the
specific nature of the environmental benefit being asserted.� 11
Marketers who define a REC to include ownership of all emissions reductions benefits
are making claims that cannot be substantiated from a legal perspective. Attempts have
been made to exclude claims regarding cap and trade pollutants, but the message that
filters through to the REC purchaser is often vague at best, and misleading at worst.
To comply with the NAAG guidelines, REC marketers must also refrain from ownership
claims regarding non-regulated pollutants. Without a legal framework to assign property
rights, any claims on the emissions benefits associated with renewable energy are
ambiguous. In fact, precedents established for other pollutants suggest that the emitter
has a stronger claim to ownership of emissions reductions.
It is important to emphasize that a measurable environmental benefit generally does
result from the generation of renewable electricity. However, ownership of these
10 Op. cit Jansen and Williamson
11 National Association of Attorneys General, Environmental Marketing Guidelines for Electricity,
Environmental Marketing Subcommittee of the Energy Deregulation Working group, December 1999.
pp.12
7
benefits is unclear and REC marketers must be careful not to make un-substantiated
claims in this regard.
Increased Demand through Product Innovation
The renewable energy industry stands to benefit from increased demand spurred by
improved market clarity and definition. Increased market definition leads to more
innovation as marketers are able to tailor products specifically to the needs of their
customers.
The number of products available is likely to rise as marketers combine the underlying
commodity REC with emissions allowances and derivatives to structure innovative new
products that satisfy customer demand at a competitive price. As has been the case
with other commodities, allowing customers the flexibility to purchase a differentiated
product inevitably leads to increased demand and drives future revenue potential.12
Enhanced Revenue Potential
De-linking the definition of a REC from its impact on emission reductions allows the
renewable energy industry to tap into a potentially significant source of revenue from
emissions markets.
In a cap and trade system, the regulatory cap dictates total emissions of a particular
pollutant from a specific set of facilities. Under current law and regulations, allowances
are primarily allocated on an historic, fuel-input basis, irrespective of the kilowatt-hours
generated. In the previous example (with a single coal plant and single wind plant
meeting a fixed electric demand) the coal plant will generate one less MWh for every
MWh produced by the wind farm. The coal generator will emit less NOx, require fewer
NOx allowances and as a result, will either have excess allowances to sell into the
market or will need to purchase less NOx allowances to meet its target. In either case,
the wind farm effectively creates �breathing room� under the cap for the coal generator
and lowers their control costs.
In an emissions market, this �breathing room� is valuable. NOx allowances for 2004 are
currently trading in the $2,300 per ton range.13 Therefore, each ton of NOx that the wind
farm displaces creates $2,300 of value for the coal generator in the emissions market.14
The conclusion that renewable electricity reduces the control costs for polluters in
emissions markets is powerful for the renewable energy industry.
The United States is trending toward increased emissions regulation through cap and
trade programs. In addition to the existing EPA-administered SO2 and NOx trading
programs, EPA�s recently proposed Interstate Air Quality (addressing transport impacts
on ozone and fine particles) and Utility Mercury Reduction (creating a first-ever market
for a toxin) Rules encourage states to employ new cap and trade programs for SO2
12 Contrary to past consideration of this issue, the ability to add emissions allowances to a commodity REC
is likely to increase (not decrease) the accuracy and credibility of environmental claims in the market.
13 EvoMarkets, Monthly Market Update Feb 2004
14 It is important to point out that renewable energy has no impact on aggregate NOx emissions in a cap and
trade system. The only way to reduce emissions is to acquire a NOx emissions allowance and retire it
without producing a ton of NOx.
8
(tighter), NOx (broader), and hg (for the first time). Lastly, almost a dozen northeast
states are currently working towards the implementation of a mandatory cap on CO2
emissions from the electric power sector in their region (known as the Regional
Greenhouse Gas Initiative) despite the current lack of support for a mandatory cap on
CO2 at the national level.
Under a multi-pollutant trading scenario, one MWh of wind power can create value for
the coal plant in each of the emissions markets. This fact provides justification for
restructuring emissions markets to enable renewable generators to capture the
value they create through set-aside programs or direct output-based allocations.
It is incumbent upon the renewable energy industry to mount an organized campaign
promoting mechanisms that will equitably allocate emission allowances under new cap
and trade programs to renewable generators. A paper prepared by David Wooley for the
Renewable Energy Policy Project in 2002 estimates the revenues generated from a
properly designed multi-pollutant cap-and-trade program could net the renewable energy
industry $1.3 billion per year by 2010.15
Conclusion
The renewable energy industry faces a unique window of opportunity to establish the
foundations upon which future markets will be built. Federal and state governments are
currently considering regulations and legislation that will likely establish precedents
affecting the renewable energy industry for decades to come. By shaping the
understanding upon which these policies are based, the renewable energy industry can
encourage a policy framework that promotes a strong, vibrant and credible renewable
energy market.
We face an opportune moment to reconsider the definition of the basic REC commodity
with the goal of furthering the long-term interests of the renewable industry and the
environment. ERT asserts that the most practical and productive definition of a REC is
�unique and exclusive proof that one MWh has been generated by a renewable
resource.� This definition promotes market efficiency, transparency, and environmental
integrity while facilitating the integration of the REC and emissions markets and
maximizing revenue streams for the renewable energy industry.
15 David Wooley, �A Guide to the Clean Air Act for the Renewable Energy Community� Renewable
Energy Policy Project (REPP) February 2000, pp. 21
Bibliographic Resources
Barkli, Louise. International Emissions Trading Association. Email dialogue, March 11,
2004.
Barnes, Peter. Who Owns the Sky? Our Common Assets and the Future of Capitalism,
Island Press, Washington DC, 2001
Hammerschlag, Roel and Wiley Barbour. Life Cycle Assessment & Indirect Emission
Reductions: Issues Associated with Ownership and Trading, May 2003.
Jacobson, Debra. George Washington University Law School, Professional Lecturer in
Energy Law. Multiple discussions February, 2004.
Jansen, Jaap. �A green jewel box?�, Environmental Finance, March 2003, pp. 27
Sprankling, John G. Understanding Property Law, Lexis Publishing, New York NY 2000
Williamson, Matthew. �Estimating Benefits from Renewable Energy�, Presentation to the
CEC Technical Meeting, July 17, 2003
Wooley. David. �A Guide to the Clean Air Act for the Renewable Energy Community�,
Renewable Energy Policy Project, February 2000.
World Resources Institute and World Business Council for Sustainable Development.
The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard,
Revised Edition March 2004,
Acknowledgements
The author would like to recognize the valuable contributions of Wiley Barbour,
Environmental Resources Trust; Joe Bryson, EPA; Matt Williamson, Natsource; Debra
Jacobson, George Washington University Law School; and the rest of the team at ERT.