Are We Ready for National Carbon and REC Markets?

On April 9, the Environmental and Energy Study Institute (EESI) held a briefing to discuss sustainability issues and stewardship opportunities arising from the use of woody biomass for energy. In national efforts to halt global climate change and enhance U.S. energy security, bioenergy is widely seen as a cost-effective and scalable solution. Woody biomass from forest management is a renewable, low-carbon resource that can be used as a substitute for fossil fuels in the production of heat, electricity, transportation fuels, and a variety of chemicals and products. Wood also is a locally-produced resource that can help advance the energy independence and economic vitality of the nation overall, as well as states, regions, and communities that rely on imports to meet their energy needs. Realizing these benefits while ensuring the conservation of biological diversity, water quality, and other forest values will require greater attention to sustainable forestry practices and the careful scaling of bioenergy applications based on accurate estimates of the biomass supply that can be sustained by local forests.

On March 30, the Environmental and Energy Study Institute (EESI) and MissionPoint Capital Partners held a lunch briefing to explore environmental market systems. With Congress contemplating creation of a national carbon market and revisiting a national renewable portfolio standard that would establish national trading of renewable energy credits (RECs), it is becoming increasingly important to understand how such market-based systems are actually structured and administered, and what kind of reliability they can offer. Issues of market transparency, integrity, oversight and regulation loom even larger amidst the backdrop of a severe financial crisis. Can environmental “commodities” such as RECs, carbon allowances and offsets be reliably tracked? Are adequate tools available to manage oversight and establish market confidence?

• A national carbon market would drive emissions reductions at minimum cost. Markets have been successful in addressing environmental problems in the past (e.g. acid rain program, which met objectives ahead of schedule at a fraction of the expected cost).
• The global carbon market was worth $118 billion in 2008, an 84 percent increase over 2007.
• Credibility, particularly for monitoring and verification, is crucial to the viability of a carbon market. The majority of U.S. carbon dioxide emissions are already tracked due to mandates on power producers and the oil and gas industries.
• It could be problematic to hold 100 percent auction of carbon permits right away. The carbon market could be "short float", increasing the risk of trading volatility. One possible solution would be the distribution of some free allowances in early years before phasing them out and transitioning to 100 percent auction.
• Central counterparty clearing could eliminate bilateral risks in a national carbon market by keeping those risks contained within the defaulting companies, such as Lehman Brothers was under the London Clearing House.
• Transparency and enforcement play a significant role in creating a strong carbon market. Transparency can be supported through trading on exchanges and real-time, audit-backed, reporting. Enforcement means regulators should be answerable to the public and offenders legally challenged.
• There are currently five renewable energy credit/certificate (REC) markets in North America, covering all but eleven states in the United States. These markets could be pulled together relatively quickly to form a national generator database and central depository for inter-registry transfers.
• In addition to RECs, the Midwest Renewable Energy Tracking System (M-RETS) issues energy efficiency certificates (EECs), known as white tags, and verified emission reductions (VERs). EECs could potentially build a significant market.