Understanding Carbon Offsets

Renewable energy certificates (RECs)

What is a Renewable Energy Certificate?

A Renewable Energy Certificate (REC) can be issued when one (net)[1] megawatt hour of electricity is generated and supplied to the grid from an eligible renewable energy resource. RECs are a tradable environmental commodity that can be traded separately from wholesale electricity markets. In Europe an analogous environmental instrument is referred to as a Guarantee of Origin (GO).

RECs are described to represent environmental or renewable “attributes” or “benefits” associated with renewable energy generation. Unfortunately, what is meant by “attribute” and “benefits” is typically ambiguous and unspecified. Despite this ambiguity, RECs and GOs are also often treated as if buying them as the same as buying green power (i.e., electricity produced solely by renewable generation resources). Yet, there is no empirical or economic support for such an ownership claim. Unfortunately, some local regulatory language has been crafted that attempt to treat such claims as legitimate.

The original purpose of RECs was for tracking compliance with legislated electric utility renewable generation quotas (i.e., Renewable Portfolio Standards, or RPSs). But, they are now also used in a voluntary context by companies and consumers to claim they have “purchased” renewable electricity. It is important to recognize that there are numerous “flavors” of RECs and REC markets. The two major categories are:

  • RPS Compliance RECs: An example of which is the RECs that are purchased typically as part of a wholesale purchase power agreement, or PPA to comply with an RPS regulation. These RECs can only be issued to renewable energy facilities that meet the eligibility requirements of a state’s or other jurisdictions RPS legislation. Many states have created numerous classes (i.e., “flavors”) of RECs that have different definitions, quotas, and therefore different prices.
  • Voluntary market RECs:. Electricity consumers are typically advised—for example by the USEPA Green Power Program or the World Resources Institute’s GHG Protocol Program—that they can “buy” electricity from renewable energy generators, versus fossil fuel-fired generators, through purchasing voluntary market RECs. These voluntary RECs (and GOs) are supplied by wind farms or hydroelectric generators in jurisdictions where they are not eligible to be sold for RPS compliance because the REC market in that jurisdiction is oversupplied (i.e., the RPS goals set by lawmakers in that region are too weak to drive investment in new capacity). These RECs are typically registered with an NGO program (e.g., Green-e) and may be registered with regional certificate tracking systems.

Location

Compliance RECs can be purchased from jurisdictions with RPS regulations. Voluntary RECs and GOs can be by any entity anywhere, although some encourage purchases to occur from generations more local to the buyer

Cost and Management Burden

Cost per metric ton of CO2e (2019 data):

  • Compliance RECs: prices vary across regulatory jurisdictions due to differing and changing program rules. For example, the emission reduction cost of retiring New England region (MA, CT, NH, & RI) RPS compliance RECs is estimated at roughly US$55 to 110 per metric ton of CO2 Costs are in a similar range from retiring compliance RECs from the U.S. mid-Atlantic region (PA, NJ, MD) under the PJM ISO.[2] Note, that some compliance REC market are over supplied due to weak RPS quotas set by government. Retiring a type of REC that is oversupplied is not a legitimate claim for reducing emissions. Like with allowances, you can identify if a type of REC is oversupplied if its price is low or trading at the same value of a regulatory alternative compliance penalty.
  • Voluntary RECs: The cost per ton of CO2e does not exist for voluntary market RECs because as shown below, the voluntary REC market does not affect renewable energy investment or generation. The voluntary REC market has always been massively oversupplied, and research has concluded that it is highly likely to remain so indefinitely. Voluntary market REC (wholesale) price is roughly $0.8 to 2 per MWh.

RECs that are eligible for RPS compliance can be acquired through environmental commodity brokers. For example, the market price for Massachusetts, Connecticut, New Hampshire, and Rhode Island RPS compliance RECs (Class I 2020 vintage) and PJM (DC, MD, PA, NJ) is around US$10 to 20 per MWh.

Prices for a class of solar energy specific RECs vary by state, with the highest prices currently in DC, MA, and NJ.

Environmental Integrity

Environmental integrity differs dramatically between purchasing voluntary market RECs and purchasing compliance REC:

  • The most common underlying objective in purchasing voluntary market RECs would be to report the indirect emissions associated with its consumption of purchased electricity (i.e., Scope 2 emissions) as zero. The problem with this zero emissions claim is that REC purchases do not reflect, nor do they alter, the emissions physically associated with or caused by a firm’s electricity use. Research has shown that there is no causal relationship between the purchase of voluntary market RECs or the growth of the voluntary REC market overall and the amount of renewable energy generated in the United States. Consequently, the evidence does not justify assigning emission factors or claiming emission reductions based on the purchase of voluntary market RECs. The evidence clearly shows that the voluntary REC market, in its current form, lacks environmental integrity.

In contrast, some compliance REC markets are likely to be causing additional renewable energy investment due to the incrementally increasing RPS goals, as indicated by their far higher price. There is moderate confidence in the additionality of RPS compliance RECs for the U.S. Northeast and Mid-Atlantic states. This confidence would be increased further if a buyer commits to multi-year purchase contract.

So, purchasing and retiring compliance RECs is a credible option to claim emission reductions when these RECs come from a REC market facing some scarcity and the REC is cancelled (retired), thereby removing it for use by a utility for compliance. However, instead of claiming to have purchased “green power” and applying a zero emission factor to a corporate GHG footprint, the purchaser should quantify the GHG reductions associated with the marginal impact of this REC retirement. And, thereby quantify and claim the emission offsetting effect of the REC retirement. The marginal impact can be estimated using a load dispatch analysis of avoided fossil generation using existing electric power industry models. There are also more simplified methods to quantify the effect of avoiding the building and operation of fossil generation. The quantification of the GHG reductions would present some complexity, but is unlikely to present a significant technical barrier.

Theoretically, if a cap-and-trade program overlaps with the jurisdiction of an RPS, then a removal of a compliance REC from the market may not lead to additional emissions reductions. Instead it would simply shift when and where emissions occur, because total emissions are already capped. Additional emissions reductions are only achieved if the purchaser cancels allowances.

However, given that the emission allowance markets for RGGI and the CA ETS are oversupplied, this theoretical problem is not present. In these case, then, retiring compliance RECs is a sufficient and superior alternative to retiring emission allowances. If one wished to avoid any risk or criticism, a buyer could retire both compliance RECs and associated emission allowances in combination given the uncertainty in future ETS and RPS market rules. This option would result in a higher costs.

Social and Environmental Co-Benefits

There is minimal risk of harm, as well as limited opportunity for co-benefits with this option to claiming emission reductions.

Potential Risks

Voluntary market RECs present a significant reputational risk, given their proven lack of environmental integrity. Concerns around the environmental integrity of voluntary RECs have not gone unnoticed by leading companies. For example, in Google’s white paper discussing their approach to renewable energy purchasing they clearly state concerns with unbundled voluntary RECs:

“Our efforts must result in “additional” renewable power generation. We’re not interested in reshuffling the output of existing projects, and where possible, we want to undertake efforts near our data centers and operations” (Google 2013a).

To address their concerns Google has decided to pursue voluntary RECs bundled with long-term PPAs. Though this option is an improvement over voluntary RECs alone, Google should be purchasing RPS compliance RECs to achieve their emission reduction goals. A long-term PPA with a renewable energy project is likely to have more environmental integrity, but it is not yet a proven approach to lead to additional emission reductions because there is no research on this approach. This lack of evidence or guidance on PPAs is a major gap that is in need of correction.

Nevertheless, several major companies (e.g., Intel, Bank of America) purchase voluntary RECs to use them to claim they are meeting their GHG reduction and green power goals. Further, some environmental groups (e.g., Green-e, U.S. EPA Green Power Program, GHG Protocol Program) have been resistant to update their guidance for fear of contradicting past positions, and continue to present information to companies that lacks environmental integrity and leads to misleading corporate reporting.

In contrast, purchasing compliance RECs provides an opportunity to publicly distinguish an organization from common practice of using ineffectual voluntary RECs to misleadingly claim to have reduced their emissions and meet green power targets.

Conclusions

Voluntary market RECs, although currently promoted by many environmental organizations, present overwhelming environmental integrity problems. Too much of the guidance on voluntary green power purchasing and GHG emissions on this topic from organizations like the USEPA Green Power Program, CDP (formerly “Carbon Disclosure Project”), and the Center for Resource Solutions (CRS, the owner of the Green-e label) is, unfortunately, outdated and misleading. Most published guides focus on promoting the purchase of voluntary RECs, and provide little or no substantiation or evidence of environmental integrity. Research shows that voluntary REC purchases are highly unlikely to result in actual environmental benefits.

The purchase of compliance RECs can be a sound option if the RPS creates a scarcity in its associated REC market. It would be equivalent to purchasing emission allowances (where the market is also not over supplied) or credible carbon offset credits. The challenge with compliance RECs involves some extra analysis to quantity the tonnes of CO2 reduced for the number MW-hours of fossil generation avoided. This analysis is not necessary with the retirement of allowances and offsets.


[1] Net refers to net of MWh used by the generation plant itself for its operations. For example, a wind farm uses some of the electricity it generates to run its own systems, hence the “net”.

[2] Price estimates are based on the assumption that the marginal unit displaced by additional Class I renewable generation is natural gas-fired. The cost per metric ton using solar RECs could be higher in some jurisdictions.