Last week's issue of Business Week included a fascinating article documenting the frustrations of a manager charged with implementing green energy and sustainability strategies within his company. It also includes a scathing critique of the efficacy of Renewable Energy Credits (RECs,) a form of emissions offsets. Anyone thinking that "going green" will be simple and quickly profitable, even after the low-hanging fruit of highly-attractive projects is exhausted, ought to read this article. But they would also be wrong to conclude that emissions offsets do nothing to benefit the environment, because they allow companies purchasing them to continue to emit and pollute. In fact, it is precisely because of the way they shift the burden of those reductions that RECs help to maximize our response to climate change and local pollution, while minimizing its cost.
RECs are not quite the same thing as the greenhouse gas emissions credits officially traded in countries that have ratified the Kyoto Treaty, or on a voluntary basis here. RECs are specific to electricity produced from new renewable sources--wind, solar, small hydro, etc.--and as with many other derivative instruments, they represent the separation and repackaging of an attribute of a project's operations, risks, or cash flows: in this case the "renewable attribute." The key to this practice is that once a REC has been separated from the Megawatt-hour of renewable electricity that gave rise to it and then sold, the underlying power can no longer be sold as "green." In other words, while its REC can be traded or re-sold, the renewable attribute of a given MWh can't be counted more than once.
What seems to worry Mr. Schendler, the ski-resort sustainability manager in the article, is that the current price of a REC is too low to encourage the construction of more renewable power projects. As a result, he may be paying for something that would have been built anyway. This issue, known as "additionality" was a major concern in the design of the Kyoto emissions trading system, in which a project can't generate emissions credits unless it wouldn't have been built otherwise. For example, in the case of Kyoto's Clean Development Mechanism (CDM,) that effectively means that a developed country facing high costs of reducing its emissions can invest to build a project in a developing country that avoids a like quantity of emissions much more cheaply. Such projects generate emissions credits that can be traded. No CDM, no project; no project, no credits.
US RECs are generated in a very different environment, and not just because we didn't ratify Kyoto. First, the federal government and states provide various cash and tax incentives for the production of renewable power. In addition, 23 state governments have established Renewable Portfolio Standards (RPSs) that require utilities to buy a set fraction of their power from renewable sources--with a federal RPS currently percolating through the energy bill negotiations in Congress. Throw in tradable RECs, and it becomes hard to say why a particular green energy project got built, other than that its net financial returns looked attractive to the developer.
When you consider the rapid build-out of renewable energy capacity in the last couple of years, it shouldn't surprise anyone that the supply of such power might exceed its demand in the market, with the result that RECs end up being pretty cheap. It's still a zero-sum game, however. Because Aspen Skiing Co. paid for RECs to render its power consumption green, some other business or cluster of consumers somewhere else in the system can't make the same claim about theirs. True additionality will return with a vengeance, once federal climate change regulations, or the national Renewable Portfolio Standard now under consideration in the Congress, create a tidal wave of demand for offsets. In the meantime, uniqueness ought to be an adequate standard for RECs within US electricity markets, providing an attractive means for businesses to manage emissions they can't afford to reduce directly.