by Tim Stumhofer, Program Associate, Greenhouse Gas Management Institute

(This article appears in the June, 2010 issue of The ACUPCC Implementer)

At face value, the question of which environmental commodity to use in support of voluntary climate objectives (e.g., “carbon neutrality”) may read as a simple preference of taste. Tasked with parsing vague marketing claims and often-inaccessible acronym-laden jargon, the average consumer should not be faulted in assuming that choice in these instruments is little more than a matter of “mixing-and-matching” project attributes. Indeed the diversity of project geography, technology, vintage (i.e., year), and ancillary benefits (e.g., local vs. global economic development) on offer can prove alternately dizzying and empowering. While this shopping experience permits consumers the leeway to pair project traits to personal or organizational preferences transcending pure climate goals, the freedom of choice permitted in this open and incompletely defined marketplace does not come without expense.

There are many evaluative steps you should take to make an informed environmental commodity purchase. Yet, in this marketplace it may be very difficult to assess even the most fundamental of these steps: the definition of the very product being sold. By definition, a commodity is an “undifferentiated product,” meaning it should be uniform in quality and quantity in every example. However, in voluntary carbon markets, “environmental commodity” is often used as a blanket term to refer to two very different commodities: greenhouse gas (GHG) offsets (representing emission reductions) and renewable energy certificates (RECs) (which codify renewable energy generation).

To best understand the difference between these often-confused environmental commodities, it is instructive to first consider their origins.

RECs were conceived as a compliance-tracking device to account for mandated renewable energy production. In programs such as “Renewable Portfolio Standards” (RPSs), which require that a certain percentage of electricity be produced by renewable sources, RECs are used as tradable certificate to demonstrate compliance with these policy objectives. By definition, a REC represents a megawatt hour (MWh) of renewable electricity generated under certain criteria (e.g., from specific renewable sources, an eligible start date, a specific geographic location, etc.). RECs can be sold “unbundled” from the sale of actual electricity. Assuming it meets a program’s criteria, the REC is minted as an intangible commodity: a piece of paper (or more accurately a record in a computer registry) that confirms a MWh was produced in a given year.

In contrast, GHG offsets are used as a component of emissions trading. Under “cap-and-trade” programs, the aggregate emissions from facilities in certain regions and sectors are placed under a “cap.” The facilities under the cap can include energy production, but may also include other sectors like agriculture and waste. In such programs, a number of permits (also called “allowances”) corresponding to the cap are distributed — generally by a combination of auctioning and free allocation based on historic emissions. GHG emissions from facilities under the cap are measured and program participants trade amongst themselves to ensure they have enough permits to match their monitored emissions. In tandem to permits, GHG offsets may be traded and used as an alternative to a permit for compliance. Offsets are derived from sectors and/or regions outside the cap. By definition an offset is a project-based activity that reduces emissions or enhances removals (e.g., via carbon sequestration) relative to an agreed baseline.

In sum, both RECs and offsets are environmental commodities. RECs were designed to track the total amount of renewable energy generation for RPS programs, whereas offsets were designed to credit additional emission reductions for use in emissions trading programs.

Why spend so much time outlining these peripheral policy programs? As any good history teacher would tell you: the origin of an idea matters. Here, particularly, is the case of two distinct economic instruments often lumped together as “environmental commodities” in spite of the divergence of their intended use and underlying definitions.

Moving past environmental markets 101, the use of RECs and offsets outside of the realm of their designed compliance origins (e.g., in voluntary programs such as the ACUPCC) is a matter of great ambiguity and often-intense debate. It is valuable to remember that voluntary initiatives are in many cases crafted to meet objectives lacking standardized definitions (e.g., for carbon neutrality).

In the absence of precise criteria for these initiatives, conflicting interpretations have emerged on a range of questions including which environmental commodities should be applied to reduce emissions. Included in the diversity of opinion on this debate are a number of nuanced and seductive arguments that suggest under certain circumstances RECs can be considered or even converted to emission reductions and are thus appropriate to meet voluntary climate objectives. (The technical shortcomings of these contentions have been externally addressed in a level of detail it would disservice to attempt to repeat in limited space; see below resources for further details.) While it is impractical in this article to exhaustively break down the technical scenarios that make up this argument, it is valuable to return to the fundamental high-level questions of definition and applicability.

Using established GHG accounting techniques, a commodity’s applicability to meet climate objectives can be demonstrated through a clear standardized process. GHG offsets are the product of methodical GHG accounting rules singularly designed to prove the resulting commodities represent additional emission reductions. The same cannot be said for RECs. As they are designed for a fundamentally different purpose (i.e., tracking renewable energy production), RECs do not apply standardized GHG accounting and, unlike GHG offsets, do not include criteria to ensure the renewable projects from which they derive result in emission reductions against an accepted baseline.

When shopping for an environmental commodity it is critical to recall that at the most basic level you are purchasing a definition. If you are in the market for emission reductions you should question your assumptions as well as the story you are being sold.

The Greenhouse Gas Management Institute was founded in response to the growing demand for qualified greenhouse gas (GHG) professionals. The Institute has developed a technically rigorous GHG training curriculum authored by leading experts and delivered globally via an online e-learning portal and onsite workshops. The Institute’s mission is to train and develop a global community of experts with the highest standards of professional practice in measuring, accounting, auditing, and managing GHG emissions. This effort is critical to ensuring that market mechanisms and policy responses to climate change are effective and credible, as well as a valuable source of new green jobs. As a nonprofit 501(c)(3) organization, the Institute is training individuals and developing programs to certify professionals to meet the highest standards of expertise and ethical conduct.