Green Tags in a Nutshell
Green tags, also known as renewable energy certificates (RECs), are sold to support the production of renewable energy. Green tags offset higher production costs of generating power from wind, solar, and other renewable sources. They place a financial value on environmental and social benefits, separate from the market value of the kilowatt hours produced. The concept of tradable renewable energy certificates is central to Europe's strategy to comply with the Kyoto Protocol.
June 01, 2005
Green Tags and Renewable Energy Certificates
A special form of credits are created when a renewable energy facility produces electricity. The "green tags," also known as "RECs," are traded, like stocks, through brokers. Buyers of the credits are in effect supporting the production of renewable energy, often without directly using the energy produced.
Green tags offset higher production costs
Even though renewable resources like the wind and sun are free, the technologies to convert them into energy today are expensive. The high capital investment is directly reflected in the per-kilowatt-hour cost of renewable energy, but not in the commodity price of that energy. Green tags are credits earned by producers of renewable energy, and sold to offset the higher costs.
The lower cost of conventional energy from coal or natural gas is a result of more mature technologies and significant government subsidies. The subsidies for renewable energy are small by comparison.
The price paid for green tags is intended to represent the difference between renewable energy cost and commodity energy price, allowing renewables to be priced competitively in the energy market.
Green tags put a price on environmental and social benefits
Think of renewable energy as having two components: the kilowatt hours of renewable energy; and the soft benefits that it produces, such as the pollution avoided from not burning fossil fuels, the economic development that wind power brings to [cross-link usda] rural areas, and the benefit of not consuming finite resources. Green tags formalize these soft benefits.
Large-scale renewable-energy producers enter into long-term contracts to sell megawatt hours to a utility. Then the producers can sell green tags, also denominated in megawatt hours, representing the soft benefits.
The final owner of a green tag is considered to have accrued the environmental and social benefits of renewable energy.
The renewable energy itself is sold to the nearest utility for distribution to customers. If the utility reduces its emissions as a result, then the pollution reduction benefits residents in that region, which is not necessarily a direct benefit to the buyer of the green tags.
Green tags are separate from kilowatt hours
Once it enters the grid, renewable energy is indiscernible from the other electrons on the line. As a result, the renewable energy doesn't necessarily get delivered to the buyer of the green tag.
Regardless, the green tag does not entitle the buyer to the electricity. So a company that buys green tags still must buy electricity, which probably is produced by conventional means.
No matter. The renewable energy is being used somewhere, the soft benefits are being realized, and green tag buyers are supporting the process.
"Consumers may think the electrons going into their light bulbs are actually produced by windmills and usually that's not the case," Tyson Slocum, research director of the energy program at Public Citizen, told UPI. "What's happening is that the company is paying credits to a windmill farm in California, so, you're supporting green energy but it's not actually physically being delivered to your house."
Green tags are traded at market prices, which fluctuate near the cost of electricity. As a rule of thumb, buying green tags effectively doubles the cost of the energy they represent.
Green tags help to comply with the Kyoto Protocol
The model REC trading schemes were developed recently in Europe as EU countries prepared to comply with the Kyoto Protocol. Some U.S. regions have committed to voluntarily comply with Kyoto.
It was Kyoto's signers who agreed to reduce their nations' emissions of greenhouse gases, but the actual reductions must be accomplished by companies. Reductions are easier for some companies than for others.
Those companies who reduce their emissions beyond the requirement can "sell" the excess reduction in the form of certificates denominated in tons of various toxic pollutants. Non-compliant companies can then buy their way to compliance without reducing their own emissions.