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REC vs. Carbon Offset: Do You Know the Difference?

As the U.S. carbon and clean energy markets continue evolving, it’s important for everyone -- from policy makers to your average offset purchaser -- to understand why there's much more to it than building windmills.

As I suspect is true for many people in green business, I often have a tough time responding in just a few sentences to the query: “So, what do you do for work?”

Over the past couple of years, I have refined my explanation -- a bit like an elevator pitch -- to say I work for a company that reduces greenhouse gas emissions through carbon offset projects. If their eyes haven’t completely glazed over by this point, the usual response is something like, “Oh! So you build windmills?”

Explaining to people why we don’t build windmills -- at least not in the U.S. -- gets complicated quite quickly. This is because the question cuts to a fundamental but complex issue facing the burgeoning U.S. climate and clean energy markets: What are the differences between the markets for carbon and clean energy credits?

In the U.S., there are two parallel and related, but distinct, environmental markets -- the market for renewable energy certificates (REC) and the market for voluntary emission reductions (VERs), also known as carbon offsets.

Those looking to mitigate their carbon footprint increasingly use RECs and offsets interchangeably. Unfortunately, this means some core differences between the two distinct commodities are being overlooked.

To understand the difference between offsets and RECs, it’s helpful to first take a step back and understand the three different “scopes” of emissions that exist in a company’s carbon footprint:
•    Scope I emissions come from on-site, direct sources: a boiler or a generator at your office building, for example.
•    Scope II emissions are indirect, energy-based emissions, such as those from the electricity your company buys to keep the lights on.
•    Scope III emissions are all other types of indirect emissions sources, including those associated with company travel, paper use, etc.
Carbon offsets, also known as VERs or CRTs (carbon reduction tons), represent the act of reducing, avoiding, destroying or sequestering the equivalent of a ton of greenhouse gas (GHG) in one place to “offset” an emission taking place somewhere else. Offsets generally represent direct emission reductions or sequestration -- for example, the destruction of methane emitted from decaying manure at a dairy farm. So they can be used to offset direct emissions, like those from Scope I in a company’s footprint.

On the other hand, renewable energy certificates, or RECs, represent one megawatt hour (MWh) of energy generated from a clean, renewable source, such as wind, solar, hydro, or certain types of renewable biomass. Since these renewable energy resources generate little to no carbon as they produce energy, they represent an indirect emission reduction, whereby a “clean” energy source “offsets” the demand for “dirty” fossil-fueled energy.

Any emission reductions that are made occur at the utility where the fossil-fueled energy generation is being displaced, however, which means the ownership rights to the displaced emissions may be disputable or subject to double counting. As such, it makes sense to use RECs to “neutralize” Scope II emissions by matching out each “dirty” megawatt of electricity a company uses with a “clean” megawatt represented by a REC.

Offsets also face strict rules for approval, including the requirement that the emission reduction credited be real, permanent, verifiable, and most importantly, additional to a business-as-usual scenario. This “additionality” requirement is central to ensuring that the ton you use as an “offset” is fully equivalent to the ton you are emitting in its place. If the offset is not additional, or is only partially additional to what would have happened otherwise, then there is the possibility that your emissions will not actually be completely neutralized.

In contrast, RECs are not typically held to additionality standards, and therefore can be supplied from renewable resources that are business as usual, or only partially additional to business as usual. In the U.S., for example, wind farms produce more than 20 million megawatt hours of electricity per year, dwarfing the size of the REC market. So even if the REC market intends to increase the demand for renewable energy over time, we can supply a lot of RECs from largely "business as usual" renewables. Therefore, offsets should be used rather than RECs to neutralize Scope III emissions, to ensure that each ton emitted is wholly counterbalanced by an additional emission reduction.

To be clear, the question of offsets vs. RECs is not a question of better or worse. Offsets and RECs are simply different players in a similar game. Both represent the environmental benefits of certain actions that can help mitigate climate change and reduce our reliance on fossil fuels.  RECs and carbon offsets, however, are fundamentally different commodities, representing different environmental attributes and different criteria for qualification and crediting.

The markets for carbon and clean energy credits are new and still in the process of being defined. As important decisions are made that have the potential to shape these markets, it’s important that everyone -- from policy makers to your average offset purchaser -- understand these fundamental differences.

Aimee Barnes is senior manager of U.S. regulatory affairs at EcoSecurities, a company working to mitigate climate change through projects that reduce greenhouse gas emissions globally.

"Moon Rise behind the San Gorgonio Pass Wind Farm" -- CC licensed by Flickr user Caveman 92223.

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