Major Changes In Store For REC Markets

November 3, 2008

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The latest issue of Carbon Market Analyst North America from Point Carbon addresses what it says is “the significant market confusion regarding the complex relationship between the renewable energy and carbon markets.”

“Renewable energy certificates (RECs) and carbon offset credits are not the same, nor are they interchangeable, but many environmentally-conscious buyers are becoming confused because of the way both types of credits are being marketed,” says Elizabeth Zelljadt, Analyst for Point Carbon. “They must be clearly understood by buyers and sellers to ensure market integrity, renewable energy production and carbon emission reductions.”

Most of the uncertainty comes from the overlap between these credits: since a unit of renewable energy displaces generation from fossil fuels, it can therefore also be called a greenhouse gas reduction. This raises issues of environmental integrity in the form of double-counting, when a REC is sold both as a REC and as a carbon offset. Unless the renewable energy and the carbon displacement are separate parts of a credit, this misrepresents its environmental value. Also, carbon market credits demand additionality, which would be negated in RECs that are created to meet state requirements.

With no current mandatory carbon tax and a mix of states with and without a Renewable Portfolio Standard (RPS), the United States currently has a disparate network of voluntary and mandatory renewable energy and carbon offset projects. From a buyer’s standpoint, they must consider whether REC-derived offsets represent real greenhouse gas reductions. Sellers must consider what type of offset will provide them with the best price.

This situation will likely change with the upcoming Presidential election. While both candidates support a cap-and-trade system, Obama’s platform includes implementation of a national RPS, which could harmonize the REC market across the country. McCain’s plan opposes a national RPS, so the REC market would remain fragmented and possibly increase in complexity as more states adopt the program.

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