Across the globe, governments are setting renewable energy goals for their countries using different combinations of regulations and incentives, including carbon offsets and renewable energy certificates (RECs). Global agreements, such as the Paris Climate Agreement, commit a nation to meet carbon reduction goals, but each nation can follow its own path to reaching its carbon targets.
Let’s explore how these systems work and whether you can participate as a consumer or investor in bringing a new green economy into existence.
The Paris Agreement has set a goal for all nations to reduce carbon emissions in order to prevent atmospheric temperatures from rising more than 1.5 degrees Celsius.
While the government of the United States does not participate in the agreement, many Americans, state and local governments, and U.S. companies are working hard to prevent temperatures from rising more.
Renewable energy goals are being accomplished through state and local actions. The November 2018 gubernatorial elections represent a victory for climate restoration; five new governors (Colorado, Connecticut, Illinois, Nevada, and Maine) have set 100 percent renewable energy goals.
Meanwhile, our neighbors on the planet are setting aggressive carbon emission goals.
Mexico set a goal to reduce emissions by 35 percent in 2024. The country is on track to meet that goal three years early in 2021. India has struggled with their renewable energy policies and development, but after setting an impressive goal of generating 175 gigawatts of solar and wind power by 2022, India has raised that goal by 28 percent. They are aiming to reach 227 gigawatts in renewable energy production.
These renewable energy potentials are accomplished through a renewable portfolio standard, which outlines the carbon and renewable energy goals to be met, the impact they will have, and how they will be achieved.
This is where carbon offsets and renewable energy certificates (RECs) enter the picture. They are financial tools to achieve specific outcomes, such as sequestering carbon or generating wind, solar, or geothermal energy.
Though offsets and RECs both ostensibly motivate higher environmental sustainability, they are very different. Consumers and businesses should understand how they differ because carbon offsets remove CO2 from the atmosphere while RECs represent energy that can be produced without adding CO2 to the atmosphere.
How Do Carbon Offsets & RECs Differ?
Too often in the discussion about renewable energy, the term “offset” is used interchangeably for both carbon offset and renewable energy certificates.
A carbon offset represents an action that sequesters carbon, whether it is buried in the ground, converted to energy, or returned to natural storage, such as in plankton that makes their bodies from carbon. Offsets are usually purchased by volume, such as a ton or carbon that will be pulled from the atmosphere and sequestered.
RECs, on the other hand, are like a property deed representing a part of a renewable energy source, such as a wind farm. Investors buy RECs to profit from the sale of energy produced by the wind farm for the duration of its useful life.
The EPA’s Green Power Partnership explains that the basic differences are:
- Unit of measure: Carbon offsets are measured in metric tons of CO₂, while RECs are measured in megawatt hours (MWh).
- Purpose: Carbon offsets address greenhouse gas (GHG) emissions, while RECs account for and encourage the use, expansion, and maintenance of renewable energy sources.
- Consumer claims: Use of carbon offsets can allow a consumer to claim reduced or avoided GHG emissions. Customers can match their energy usage from the grid with RECs.
- Additionality: Carbon offsets require an additionality test that proves the offset is above and beyond emission reduction that would normally have been achieved. Not only do RECs not require this designation, but consumers are discouraged from using the additionality term when discussing their REC and other renewable energy activities because they do not remove any carbon.
If you want to remove CO2 directly, purchase a carbon offset. If your goal is to support long-term renewable energy, the REC is the appropriate choice. They can be combined by an individual or company to reduce carbon output and increase clean energy adoption.
What Is a Renewable Energy Certificate?
The trusted leader in the global renewable energy certification industry is the Center for Resource Solutions’ Green-e. program The Green-e designation requires that recipients commit to and make progress toward aggressive renewable energy goals. The approved energy sources for a REC are:
- Low-impact hydropower
- Fuel cells using hydrogen derived from renewable resources
REC qualifications also factor in the renewable energy generation facility’s capacity, age, and the quality and efficiency of the equipment used in production.
How Does a REC Work?
Each renewable energy certificate represents a megawatt hour (MWh) of renewable energy produced. One MWh is equal to 1,000 kilowatt hours (kWh), which is roughly equivalent to the monthly power usage of an average home.
When you buy an REC as an investor, you are making a bet that the energy will sell for more than it cost to produce. Because renewable energy is becoming less expensive than traditional fossil fuel-based energy production, it is becoming more competitive. And, as production prices fall, it will be in high demand.
Renewable Energy Certificates provide access to alternative energy sources like wind and solar to areas that do not have the capacity to produce their own renewable energy.
RECs are assigned a unique ID number. When a REC is sold, it is “retired” so that it is only counted once. The unique ID number also keeps RECs from being sold or used by more than one entity. A REC is sold to one owner and must be used by that owner; it cannot be resold to a third party. Consequently, businesses are the biggest users of RECs, using them to acquire sustainable power on a reliable basis. A company, even an individual, can purchase a REC to ensure future access to renewable energy.
When a REC is purchased, the funds go to building infrastructure and delivering the power represented by the certificate. RECs are funding the build-out of a green power generation industry. The U.S. Environmental Protection Agency explains RECs in a short video:
The purchase of RECs allows for new renewable energy projects to be developed, current projects to be maintained, and technologies to be further explored and improved.
Why Are RECs Used?
Many national, state, and local governments have Renewable Portfolio Standards (RPS) that require a percentage of renewable energy use. These renewable power standards also apply to utility companies. These entities purchase RECs to meet compliance. And some may purchase more to go above and beyond the established requirements.
In 2004, Colorado passed the first voter-led Renewable Energy Standard. This standard has been raised three times, and now stands at a goal of 30 percent for 2020. So, for example, if Colorado can generate 20 percent of this renewable energy with state-owned facilities (including renewable power bought back from private residences and businesses), then the remaining 10 percent can be achieved through the purchase of RECs from, say, a private renewable energy facility in Nebraska.
According to the National Renewable Energy Laboratory, there are currently 10 REC tracking systems in the U.S. These systems are used for the creation, tracking, and retirement of renewable energy certificates. The systems are starting to communicate with each other for even more interstate access to RECs.
Many corporations — and even small- and medium-sized businesses, universities, and nonprofits — are adopting self-imposed renewable energy standards. Of course, the ultimate goal is global sustainability and an improved environment.
The level of commitment to these efforts can vary, however, company to company. Some companies choose to offset only the government-mandated portion of their products or services. Other companies do go further with the implementation of RECs and carbon offsets. This comes at an extra cost to the company and serves primarily as an added effort to help the environment. A company can also voluntarily choose to undergo regular auditing to ensure that certain guidelines and standards are maintained to keep the third-party certification.
If you measure the vitality of RECs by their impact, voluntary purchases may be the most powerful of all. They demonstrate a commitment to the planet and the idea of creating a better community. Apple, Google, Microsoft, and others have already moved most or all of their electric generation spending to renewable energy. Using RECs allows them to increase their profitablity.
According to an April 2018 report, Describing Purchaser Impact in U.S. Voluntary Renewable Energy Markets, voluntary RECs achieve much more far-reaching benefits than RECs purchased simply to achieve regulatory compliance. Considering the fact that 62 percent of electric power sales are commercial and industrial consumers, these voluntary REC purchases hold tremendous sway over the renewable energy industry. This same report indicates that the “voluntary demand for renewable electricity is growing at a rate of 20 percent per year.”
The economy is all about supply and demand, and renewable energy potential is no different. As more RECs are purchased, the demand for renewable energy increases. As this demand increases, technologies improve and the costs of construction and production are lowered. The top two occupations predicted to grow the fastest are solar photovoltaic installers and wind turbine service technicians, whose work RECs fund.
Do you want to sent a powerful message to policy makers and companies that you support renewable energy? Purchase RECs to help subsidize the cost of the green energy transition.
Who’s Winning With RECs?
The Environmental Protection Agency’s Green Power Partnership includes more than 1,300 partner organizations. The top two purchasers of Renewable Energy Certificates in 2016 were Microsoft at 4,557,278 MWh and Intel, purchasing 4,152,035 MWh, according to the EPA. Another influential and growing organization is the RE100. These progressive and forward-thinking companies are making the commitment to work toward 100 percent renewable energy sources.
Tech firms are the leaders in the voluntary purchase of RECs and incorporating carbon offsets, but other well-known companies are also big players, including Kohl’s, Starbucks, and IKEA.
You don’t have to be a Fortune 500 company in order to improve your community and the global renewable energy industry through participation in the REC accounting process. Small companies can join together to purchase RECs as a group. And small municipalities can create a co-op to do the same.
In 2016, the voluntary sale of renewable energy certificates grew to approximately 95,450,000 MWh. But despite this seemingly large number, this only accounts for 2.5 percent of total retail electricity sales. Clearly, there is still room for improvement. There is great growth potential in the renewable energy field. And it brings with it more jobs, cleaner water and air, and less reliance on foreign fossil fuels.
Editor’s note: This is the first of a two-part series on renewable energy and carbon sequestration tools for consumers, companies, and investors. Next, we look at the controversies associated with these financial tools.