Are Renewable Energy Certificates The Right Way To Go?

Nesjavellir geothermal power plantPhoto: Johann kr
Off Carbon Offsets: Renewable Energy Certificates

Carbon offsets, although created to curb pollution problems, often create an undesirable incentive for companies to increase pollution. Alternative forms of mandatory pollution reduction are necessary. RECs, Renewable Energy Certificates, offer an alternative way to curb the pollution that is created by industry.

Traditionally, the majority of the carbon offset market is a compliance market. This means that corporations are forced to participate in the purchase of carbon offsets to comply with a cap on the total amount of carbon dioxide they are allowed to produce. Simply, companies purchase an offset to compensate for the carbon dioxide they release into the atmosphere. This can be provided in a number of different ways from limiting the burning of natural gases to planting trees.

Nesjavellir geothermal power plantPhoto: Gretar Ívarsson

Carbon offsets are problematic for two reasons. Although, their goal is to reduce the harm that corporations inflict on the environment in a cost effective and administratively efficient way, very often the carbon offset market encourages environmentally precarious practices. First, offsets create misguided incentives. By providing money for the reduction of emissions, companies can create a profit by creating an artificially high initial level of pollution and then reducing their emissions later. This provides environmentally disastrous results, while undermining the integrity of the market. Second, the carbon offset market allows for companies to pay for bad behavior and correspondingly does not lead to an increase in green technology.

RECs are sometimes referred to as a form of carbon offsets and they can be included as a subsection of them. However, Renewable Energy Certificates do not create the negative incentive structures that are problematic for most forms of carbon offsets. This makes the use of Renewable Energy Certificates more advantageous to the environment and the economy.

RECs are tradable energy commodities that represent proof of one megawatt-hour of electricity generated from a legitimate renewable energy resource. RECs thus provide an incentive structure for companies to increase their use of renewable electricity so that they can profit from the REC market. Unlike carbon offsets, there is no incentive in the REC market for companies to create artificially high levels of pollution and then latter decrease them. This limits the negative effects of the market upon itself.

Further, there is a tangible limit to the amount of RECs that can be purchased on the open market. For every REC purchased on the market, the corresponding amount of renewable energy has to be generated. Thus, as the demand for RECs increases across the market, companies will further increase their production of renewable energy because they can sell those megawatt-hour certificates. Simply, RECs increase the drive for green technology by encouraging innovation rather than exploitation.