Great Article on Offsets, RECs

Posted on

"Great Article on Offsets, RECs"

The Washington Post has a terrific front-page story on offsets. I’ve been meaning to post on renewable energy certificates (RECs) as offsets, but this article beat me to it:

Even more head-spinning [than trees as offsets] are the questions about “renewable energy certificates” from wind farms and solar plants, certifying that they made a certain amount of clean energy.

Offset companies buy these pieces of paper. Then, they use them to claim credit for pollution “avoided” — reasoning that they helped produce energy that would otherwise have come from a polluting coal or natural-gas plant.

Some of the money paid for these certificates stays with the offset vendor or with a middleman. The rest usually winds up with the energy project’s builder or the utility that buys its electricity. In some cases, this can amount to something like a donation to a for-profit company: American Electric Power, which sold an undisclosed amount of certificates from wind farms last year, earned more than $1 billion in profit.

Some environmentalists balk at this. If the certificate is bought only after the energy is produced, they wonder, how can an offset vendor know the energy wouldn’t have been produced anyway?

Consider how this plays out for one offset company, Carbonfund.org, whose Executive Director, Eric Carlson, I actually debated earlier this month:

Carbonfund.org bought renewable energy certificates, often from middlemen, that came from a number of wind farms in the western United States. But, at several facilities, officials said the group’s donations had not produced anything new.

“We’ve invested in wind generation” as a way of having a diverse portfolio, said Melissa McHenry of American Electric Power, whose subsidiary buys power from an Oklahoma wind farm that Carbonfund.org says it supports. “It’s not related at all to Carbonfund.”

Carlson responded that, even if a particular utility is not aware of Carbonfund.org’s purchases, buying the certificates is a good thing overall — as it stimulates the building of wind farms.

Carlson struck me as a very thoughtful guy, and I am a big fan of stimulating renewables — I am just not a big fan of selling RECs as offsets, since you can’t know if your money actually resulted in greenhouse gas reductions that wouldn’t otherwise have occurred.

One might also ask, why should the sellers of RECs, which only cover a small portion of a renewable project’s cost, get all the carbon credit for the project? In particular, for windpower, which receives a huge subsidy from the federal government in the form of the production tax credit, why shouldn’t the US taxpayer get some of the carbon credit, if it has real value?

The article also casts doubt on trees as offsets and is well worth a read.

« »

11 Responses to Great Article on Offsets, RECs

  1. Tom Arnold says:

    Joe:

    Will you be submitting comments to the new Green-e standard? It lays out economic analysis and an additionality based approach to claiming GHG reductions.

    http://www.green-e.org/getcert_ghg_re_protocol.shtml

    Would be good to have your voice in the comments there as I think we all agree renewables are a good idea and we all look forward to strong standards in the marketplace.

    Tom

  2. Eric Carlson says:

    Joe,
    It was a pleasure to meet and debate you a couple weeks ago.

    One interesting part of the Post story is how much was left out. While declaring the industry unregulated, they left out the accepted industry standards for green power and carbon offsets, including Green-e, Environmental Resources Trust and the Climate, Community and Biodiversity Alliance that major companies and the US Government support and buy from.

    Nor did they include mention about how RECs are translated into offsets by using the EPAs E-Grid data for average sub-grid utility emissions, though they had this information. This provides critical credibility to the offset market but is literally never mentioned.

    The part I find most troubling is the differing messages utilities and project developers have provided. Consider these two quotes from major developers:

    “REC’s help us justify developing new renewable energy projects, like the Ainsworth Wind Farm,” said David Rich, Renewable Energy Development Manager at NPPD, the owner and operator of the Ainsworth Wind Energy Facility.

    “REC’s make wind competitive with coal or other traditional forms of energy.” (Basin Electric Utility Cooperative)

    Further, Econ 101 tells us when you buy a Coke, Coke is going to ‘build’ more Coke. When you buy an iPod you are telling the market there is more demand for iPod than Zune. And the same goes for renewable energy over coal.

    The story also failed to mention just who is buying these RECs and offsets. Pepsi recently bought 1 billion KWH’s of RECs which was translated to nearly 700,000 tons of CO2. The US Government, Montgomery County, State of Pennsylvania, Safeway, IBM, Starbucks are all buying the EXACT same thing, with the same certification, groups like Carbonfund.org are buying. GE just launched its own carbon offset program, as did Morgan Stanley and Dole. It is unlikely they are all naively getting scammed.

    Offsets and green power are for after you’ve reduced where you can. But just as you never hear someone tell you they buy green power from their utility and thus keep their lights on all night, offsets do not buy off guilt or translate to indulgences.

    And as you mention, offsets stimulate demand for clean technology. In buying the environmental attributes of a project, they are also offsetting, in a verifiable, certifiable and measurable way, CO2 emissions.

    We have not had meaningful environmental legislation in our country in more than a generation. It is difficult to think we’ll have any in the next two years as Bush leaves and a new president gets started.

    A new generation of environmental leaders are choosing to be part of the solution today, by reducing where they can and offsetting where they can not. In doing so, they are stimulating the market for and driving down the price of clean energy. And that is a good thing.

    This is an important debate but should not allow us to lose site of the facts of doing nothing. Every day 52% of our electricity comes from coal. Every day we all cause emissions. The average American is responsible for 140 lbs. of CO2 emissions every day!

    Choosing to do nothing is not an option. Supporting clean energy projects is a great and responsible option.

    Eric Carlson
    Executive Director
    Carbonfund.org

  3. Joe says:

    Eric:

    I agree we should all be taking action. And I am even in favor of buying RECs if it is not practical for you to install renewables on your house or purchase renewable power directly. I am just not thrilled with having RECs be sold as offsets.

    BTW, I couldn’t tell from the article whether you has stopped doing all tree projects, or just certain kinds.

  4. Eric Carlson says:

    Hi Joe,
    The EPA isclear on how you determine the offset (or reduction, displacement or avoidance) from RECs. 1 REC = 1 MWH and 1 MWH = x lbs. of CO2 according to E-Grid.

    While I think you raised a very valid issue about whether a 10-15% portion of the project should get all the environmental attributes of a MWH, the point is that the MWH gets this credit and it can be doled out however the project developer wants to. I guess the US Government could tell developers that if they want the PTC then they get the REC.

    As the standards have improved, we are adopting them. The move made from last year to this year on reforestation is that we changed from over plantng based on reforestation methodologies (say planting 1.6 trees when the methodologies suggest 1 tree shouldbe planted) to developing certified projects.

    We have bought a JI-certified project in Hungary. We have a project underway in Nicaragua designed to the Cimate, Community and Biodiversity certification standards, and we are using Environmental Resources Trust to verify the CO2 from a couple projects we are developing in the US.

    Certification, verification and auditing is the key to quality in this industry as it tells you what third parties are behind your offsets. Both the Nature Conservancy and Conservation International are behind CCB.

    Unfortunately, the Post had all this information and chose not to use it to discuss the standards, certifications and quality steps being developed in the industry.

    Eric

  5. Joe, a couple responses to your post:

    First, you ask, “why should the sellers of RECs, which only cover a small portion of a renewable project’s cost, get all the carbon credit for the project?” As Eric points out, it’s the MWh of renewable energy generation that gets all the credit and the owner of that generation can sell off the carbon credit however they want. They tend to do this by splitting their product into two parts – electricity and a Renewable Energy Credit (REC), which represents the environmental attributes of that generation, including any carbon benefits (if any). If they can find a buyer who wants both products, they sell them bundled together as ‘green power.’ If someone, a utility for example, only cares about the electricity and another, an individual or business for example, is more concerned about the environmental benefits, why shouldn’t the generator be able to sell their products to both customers? This is just efficient markets.

    I’d also like to second Tom’s comment that Green-e, the managers of a nationally-recognized consumer protection and certification standard for high quality RECs, is working on developing a similar standard for carbon offset products as well as a protocol for how to accurately and adequately describe what RECs can be legitimately treated as offsets and how to determine their carbon value.

    The Green-e governance board, on which I sit in my day job, recently adopted the new GHG offset product standard, which includes strict standards on additionality, new standards for biomass/forestry projects that should resolve issues that got CarbonFund and others in trouble, and strong transparency and disclosure requirements for marketers of offsets.

    Green-e is currently soliciting stakeholder comments on their draft GHG Protocol for Renewable Energy through Tuesday, August 21st. The GHG Protocol for RE specifies when RECs can be treated as offsets, including new additionality tests to ensure that these aren’t simply business-as-usual projects that would have happened anyway, and an updated and much more accurate methodology for determining the carbon offset value of renewable energy generation (there are serious problems with the use of the EPA eGrid sub-region emissions figures that Eric mentioned, which are now currently industry ‘best practice’).

    If you have constructive comments for the GHG for RE Protocol, I’d encourage you to weigh in with Greene-e. It is an open stakeholder comment period so you are welcome to add your opinion and expertise to the discussion.

    I hope we can both agree that creating markets that enable individuals and businesses who want to do more to help mitigate their impact on the climate and the environment to help drive forward investment in and deployment of clean, renewable energy technologies is a desirable thing. Focusing criticisms of offsets and RECs in a constructive manner, designed to address these problems and strengthen the markets and ultimately the environment should be our aim.

    The offset and renewable energy community is well aware of the consumer confidence issues plaguing the industry currently. I would venture to say that nearly all of us are committed to solving consumer confidence issues, developing clear, reliable and accurate industry best practices – remember that these are very young markets, only a few years old for the most part, and still going through expected growing pains – and selling environmentally sound products.

    Jesse Jenkins
    Renewable Northwest Project and Watthead – Energy News and Commentary

    p.s. Green-e should be lauded for their willingness to step into this fray and attempt to adjudicate a reasonable response to this mess. Their staff has done excellent work putting together the new GHG standard and GHG for RE protocol.

  6. Ah, one more comment…

    I’d like to point out something that is rarely mentioned when discussing RECs and financial additionality. Unlike many other offset projects, renewable energy projects must actually generate and sell their power into the market in order to create any reduction in carbon emissions – by displacing dirtier forms of generation. In order to sell power, renewable energy projects don’t just need to be profitable, they need to be least cost resources, that is, they’ve got to be cheaper than everything else. The revenue stream from Renewable Energy Credits is often key to both securing financing for wind projects and ensuring that they can generate and sell power at a cost low enough to get into the market and offset other dirty generation sources.

    So when the article talks about American Electric Power (AEP) making money off of wind power and REC sales I have three things to say:

    1) Those REC sales were probably necessary to ensure that AEP could sell the power from those wind farms into the market at a low enough cost to compete with cheap and dirty old coal resources. If it wasn’t for the additional revenue stream for REC sales, electricity from wind resources would be much more expensive and less attractive to utilities.

    2) So what if they made a profit? Don’t we want renewable energy to be profitable, or would we rather that no one could make any money off of clean, homegrown renewable energy? How do we expect wind projects to get financed and built if no one can make money off of them?;

    3) If some amount of wind power is built when wind makes a certain profit margin, won’t more wind get built if wind is even more profitable? Therefore, doesn’t the revenue from RECs contribute to more wind power being built, even if wind is already profitable without RECs? Doesn’t the existence of the REC/offset market and the revenue stream it offers to wind power play a crucial role in attracting additional investment in the wind industry, therefore driving more renewable energy into the ground and offseting more dirty, carbon-intensive generation?

    (I use the wind industry here as just an example; the same can be said for any renewable energy industry, wind is just currently the most profitable).

    Jesse

  7. Eric Carlson says:

    Jesse,
    Great points.

    I use a similar example about the organic industry. When the first organic milk companies were just scraping by, selling milk for $5.00 a gallon against $3.00 regular, and were in just a few co-ops in Seattle, no one paid attention and little environmental benefit accrued.

    Then they got a little bigger, were in more stores, the price dropped some and the companies covered their costs.

    But simetime between these companies turning real profits to making gobs of money (if any actually are), Safeway developed an entire organic brand and Wal-Mart made changes that could change the nature of farming around the world.

    For renewables, the difference between a project covering its costs and serving asa nice pilot wind generator sitting in the corporate headquarters parking lot and causing wind developers to CHOOSE windover coal, is often the REC.

    If wind were so competitive would we see over 100 coal plants on teh drawing boards? We dn’t think so. If wind barely beats out coal we’ll see more wind. But if wind can generate a 15-20% ROI above coal, everyone and their cousin will get involved with wind. And that will be a very good thing.

    This additionality argument perversely tells consmers we can support a technology right up to the point where it might actually take off on its own and then we “must” abandon it. As an environmentalist, that is exactly when I want to blow a whole through the technology and make it more, much more, cost effective than coal.

    The additionality argument also perversely tells us to support small, inefficient projects with poor technoloy, in poor locations with poor business plans over the best technology in the best location with the best business plan.

    A wind mill in a remote area of South Dakota may look and feel nice, but to really fight climate change we need major utilities and energy investors building 100, 200 and 300 MW wind farms to transform the market. WE NEED WIND TO COST LESS THAN COAL. PERIOD.

    It’s like solar energy. I’d love to have solar on my roof, but my money will be better spent supporting a solar array in Nevada than on my roof covred by three trees in my front yard (true story).

    Eric

  8. Eric, I also use the organics industry analogy. It’s an apt one.

    Also another thing to consider when discussing renewable energy projects and RECs as a source of carbon offsets:

    -We should all recognize that we can’t offset our way out of the climate crisis by simply planting trees. In the end, the only real solution to the climate crisis is to do nothing less than transform the way we make and use energy.

    That means a transition from a fossil-fuel reliant energy infrastructure to one reliant on clean, renewable energy sources, like wind, solar, geothermal and ocean energy. It also means using considerably less energy than we use now by tackling all cost-effective energy efficiency opportunities and by designing our buildings, communities and lifestyles to be more energy efficient.

    Therefore, if we truly want our money to accelerate a transition towards a sustainable, low-carbon future, we’re much better off spending our money to accelerate the transition to clean, renewable energy sources and increased efficiency. RECs are the mechanism by which we – individuals and businesses – can do that, the way in which we can bypass the utility monopoly to directly contribute to more renewable energy projects, driving forward the transition to a clean, renewable, low-carbon energy future.

    Rather than be viewed as some less desirable, fringe source of carbon offsets, renewable energy projects and RECs should be viewed as the most desirable form of carbon offsets, as they truly contribute to the necessary transformation to a clean, low-carbon energy future.

    Ensuring that RECs aren’t double counted, create real, verifiable and permanent offsets and are sold through transparent, appropriate marketing methods is still crucial, and that’s exactly what Green-e is striving to do. But once these standards are in place and are adequate, RECs should be seen as not just a viable source of carbon offsets, but a highly desirable source of offsets.

    That’s my 2 cents anyway.

    Jesse Jenkins

  9. Eric Carlson says:

    Jesse,
    I agreethe long term solution is a combination of efficiency and renewables. If the world islooking at a 70% reduction in CO2 and the US’s per capita share a 94% reduction, literally everything will have to come from clean energy, perhaps with the exception of air travel (or the highest cost carbon reductions).

    But consider this: Trees are the only carbon offset that actually reduce CO2 emissions in the atmosphere today and from the last half century or longer. Renewables andefficiency reduce the need for future emissions (also critical) but trees serve important social and environmental needs, reduce CO2 today and BUY us time to get to a clean tech future.

    Also, if deforestation accounts for about 20% of climate change, as many experts agree, reforestation is abslutely a part of the solution. And certified offsets are the same whether they come from wind or trees (which is why certifications are so important).

    Many of our supporters prefer trees and, given their importance, we give them the choice of which type of ofsets they want to support. I absolutely understand people who prefer renewables or efficiency, but I also understand why some people would choose trees and they too are providing an important part of the solution.

    Eric

  10. Good points RE trees and biological sequestration projects. We’ll need everything we can get I suppose, and reforestation/stopping deforestation will certainly be a requisite part of the solution as well. It’s just going to be crucial to ensure very good certification and verification of biological offset projects, as I think they tend to be the most prone to fraud, although we seem to be in agreement on that point.

    Jesse

  11. Shane says:

    Renewing the energy will be always good…it should be based on perfect Energy Site Assessment…That should be noticed…