Are renewable energy credits (RECs) and carbon offsets exchanged in totally different markets, with little crossover potential f

Are renewable energy credits (RECs) and carbon offsets exchanged in totally different markets, with little crossover potential f

The reader posing this question was curious that the LEED building rating system (Leadership in Energy and Environmental Design, a voluntary program for certifying green buildings) gives credit toward certification for a building purchasing RECs, but not carbon offsets. The reader asked whether RECs and offsets reflect two distinct markets, and if so, what is likely to happen as the markets mature?

One can make the case that RECs and offsets should be exchanged in different markets. RECs basically are simply megawatt hours (MWh) of electricity produced from a qualifying renewable energy technology of a qualifying vintage. In voluntary markets, people buy RECs because they want to help promote renewable energy. The REC may not even include the environmental attributes of that MWh, which some people strip off and sell separately -- although I've always had trouble understanding what you're really buying through a REC if its environmental attributes have been stripped out. Even when environmental attributes are included, you should have realistic expectations as to what you're getting. Is the quantification of CO2 displacement, for example, based on actual system modeling, on the average system mix, or on some other measure? And to the extent that the environmental benefits are indirect (since they occur at the utility where generation is displaced rather than at the point of production), you have to accept that you probably don't have any ownership rights to those displaced emissions and that they’re subject to double counting.

A carbon offset is conceptually different. It represents an action that prevents the emission (or causes the sequestration) of a ton of CO2e (CO2 equivalent, reflecting the existence of several key greenhouse gases and the use of CO2e as a common metric). In voluntary markets, people buy carbon offsets because they want to reduce their global warming footprint. Thus, the carbon offset is the environmental benefit associated with the activity being taken. But this can’t be directly measured; instead, you have to make assumptions about a carbon offset project’s "baseline," and what emissions would have been without the project. Often, the most complicated part of generating a carbon offset is demonstrating the "additionality" of the activity being undertaken. Additionality* refers to whether the activity in question is or is not "business as usual," -- that is, does it result in incremental emissions reductions.

With RECs, the commodity is a physical and measurable unit (electricity) and the environmental attributes come along for the ride. There’s nothing complicated about generating a REC if you have the right technology. In carbon offsets, the commodity is a construct based on divergence from an assumed baseline. It can be very complicated to generate a carbon offset in cases where the baseline is difficult to pin down.

As long as the two commodities are kept separate they can peacefully co-exist. Things get interesting when people try to find ways to cross from one market into the other. This is a relatively new phenomenon as REC prices have fallen dramatically in much of the United States. Several years ago, many RECs sold for $20-30/MWh electricity (the equivalent of $20-30/ton of CO2e); carbon offsets were selling at $5-10/ton. So it didn’t make sense to try to convert RECs into carbon offsets. If you had a choice as to whether to generate RECs or carbon offsets from a project, you would choose RECs.

Today, REC prices can be as low as $1-2/MWh (the equivalent of $1-2/ton of CO2e). REC brokers are happy to try and sell those RECs as carbon offsets at $5-10/ton. Indeed, retail carbon offsets providers are selling RECs along with or instead of more conventional carbon offsets like landfill or coalmine methane recovery.

This market crossover can be a problem primarily because RECs, in marked contrast to carbon offsets, have no additionality requirement. Thus, RECs may not reflect the same incremental environmental benefit generally required of carbon offsets. In the United States, 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. Selling “non-additional” RECs into the carbon offset market undercuts the additionality requirement that is at the heart of carbon offsets, and could devalue the voluntary carbon offset market.

Lower REC and carbon offset prices might seem desirable. But if lower prices reflect the absence of environmental benefit, it’s a high price to pay. That’s a good reason to keep the two commodities separate until and unless they can be put on a level additionality playing field.

* “Additionality” is a key term in this discussion. We’ve just published a paper on the subject that we’re happy to share with climatebiz.com readers. Just send us a note at [email protected].

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Dr. Mark C. Trexler has more than 25 years of energy and environmental experience, and has focused on global climate change since joining the World Resources Institute in 1988. He is now president of Trexler Climate + Energy Services, which provides strategic, market, and project services to clients around the world.

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