A national laboratory of the U.S. Department of Energy

Office of Energy Efficiency & Renewable Energy

National Renewable Energy Laboratory 

Innovation for Our Energy Future 

Implications of Carbon 

Regulation for Green 

Power Markets 

Lori Bird 

National Renewable Energy Laboratory 

Ed Holt 

Ed Holt & Associates Inc. 

Ghita Carroll, Research Participant 

National Renewable Energy Laboratory 

Technical Report 

NREL/TP-640-41076 

April 2007 

NREL is operated by Midwest Research Institute ● Battelle Contract No. DE-AC36-99-GO10337 
Implications of Carbon 

Regulation for Green 

Power Markets 

Lori Bird 

National Renewable Energy Laboratory 

Ed Holt 

Ed Holt & Associates Inc. 

Ghita Carroll, Research Participant 

National Renewable Energy Laboratory 

Prepared under Task No. ASG6.1005 

Technical Report 

NREL/TP-640-41076 

April 2007 

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Acknowledgments 

This work was funded by the U.S. Department of Energy’s (DOE) Office of Energy 

Efficiency and Renewable Energy (EERE). The authors wish to thank Linda Silverman 

and the EERE renewable energy technology programs for their support of this work. The 

authors also wish to thank the following individuals for providing information and 

valuable perspectives for this report: Mark Draeck, IT Power Ltd.; Matt Freedman, 

TURN; Jan Hamrin and Jennifer Martin, Center for Resource Solutions (CRS); Sonia 

Hamel, Massachusetts Office for Commonwealth Development; Craig Hanson and 

Samantha Putt del Pino, World Resources Institute; Kjell Olav Kristiansen, Point Carbon; 

Michael McCormick, California Climate Action Registry; Joanne Morin, New 

Hampshire Department of Environmental Services; Lainie Motamedi, California Public 

Utilities Commission; Peter Niermeijer, RECS International Secretariat; Hampton 

Newsome, Janice Podoll Frankel, and James Hilger, Federal Trade Commission; Gabe 

Petlin, 3 Phases Energy; Thorsten Schneiders, E.ON Energie AG. The authors also wish 

to thank Jane Pater for research support and Michelle Kubik of the National Renewable 

Energy Laboratory (NREL) for editorial support. Finally, the authors appreciate the 

thoughtful review comments provided by the following individuals: 

Derik Broekhoff, World Resources Institute 

Bob Grace, Sustainable Energy Advantage 

Rob Harmon, Bonneville Environmental Foundation 

Angela Leontis, Chicago Climate Exchange 

Dan Lieberman, CRS 

Rick Morgan, District of Columbia Public Service Commission 

Tom Rawls, THR Associates 

Liz Salerno, American Wind Energy Association 

Blair Swezey and Laura Vimmerstedt, NREL 

Christopher Sherry, New Jersey Department of Environmental Protection 

Ryan Wiser, Lawrence Berkeley National Laboratory 

Additional information on green power markets can be found on DOE’s Green Power 

Network Web site (http://www.eere.energy.gov/greenpower/). 

 iii
Table of Contents

 Page

Executive Summary 1 

Impact of Cap and Trade on Renewable Energy Markets 1 

Emerging Carbon Markets in the United States and Europe 4 

Policy Options for Enabling Renewable Energy Claims 5 

Conclusion 7 

1.0 Introduction 9 

2.0 Relationship Between Voluntary Renewable Energy Markets and Carbon 11 

Climate Change as Motivator for Green Power Purchasers 11 

Marketing Renewable Energy and Climate Change Benefits 16 

What Kinds of Claims Can Be Made About GHG Benefits Currently 19 

3.0 Impact of Carbon Regulation on Renewable Energy Markets 22 

Effect of Cap and Trade on Marketing Claims 22 

Effect on Price and Demand for Renewable Energy in Voluntary 

Markets 27 

Effect on Compliance REC Markets 30 

Effect of Receiving Allowances but Selling Them Separately from 

the REC 31 

4.0 Emerging Carbon Markets in the United States 33 

Regional Greenhouse Gas Initiative (RGGI) 34 

California “Global Warming Solutions Act” and Load-Based 

GHG Cap 38 

Chicago Climate Exchange 41 

 European Union (EU) 44 

 iv
5.0 Policy Design Options 46 

 Set-aside Allocations to Renewable Generators 46 

Output-based Allocations to Renewable Generators 48 

Load-Based Cap 49 

Reduce the Cap to Account for Renewable Energy Demand 51 

Retire Allowances on Behalf of Renewable Energy Sales 52 

6.0 Summary and Conclusions 55 

References 58 

 v
Executive Summary 

Today, voluntary renewable energy markets serve an important role by empowering 

consumers to affect the resources used to meet their electricity needs as well as educating 

consumers about the benefits of renewable energy. In recent years, voluntary purchases 

of renewable energy by residential, business, and institutional consumers have increased 

considerably. For example, in 2005, sales of renewable energy in voluntary markets 

increased nearly 40% following an increase of more than 60% during 2004. Voluntary 

renewable energy markets appear poised to grow substantially, particularly because of 

nonresidential demand; however, the emerging regulation of carbon dioxide (CO2) 

emissions has implications for the future growth and viability of voluntary renewable 

energy markets. 

While there are a variety of reasons why consumers make voluntary purchases of 

renewable energy, greenhouse gas (GHG) benefits provide important motivation, 

particularly for nonresidential consumers who often purchase renewable energy to meet 

GHG emissions-reduction goals or make environmental claims. Carbon regulation, 

particularly via cap and trade, has the potential to affect the types of claims that marketers 

and purchasers can make with respect to the environmental benefits of renewable energy 

purchases, depending on how the policy is implemented. We focus on the implications of 

cap-and-trade programs on renewable energy markets for two reasons: Some states are 

beginning to develop such programs, and there is significant policy precedent for using 

cap and trade at the federal level to control emissions of sulfur dioxide (SO2); oxides of 

nitrogen (NOx); and, most recently, mercury. 

While carbon regulation is likely to affect renewable energy development more broadly, 

this paper focuses primarily on issues pertaining to voluntary renewable energy markets. 

First, the paper examines the extent to which GHG benefits motivate consumers to make 

voluntary renewable energy purchases and the claims that large commercial and 

institutional consumers currently make regarding their purchases. Next, the paper looks at 

the potential impacts of carbon regulation on future claims, as well as on demand for and 

the price of renewable energy certificates (RECs), and the use of RECs in multiple 

markets (disaggregation of attributes). Then, it describes carbon regulation programs 

under development in the Northeast and California, and how these might affect 

renewable energy markets in these regions, as well as the potential interaction between 

voluntary renewable energy markets and voluntary carbon markets, such as the Chicago 

Climate Exchange (CCX). The paper also briefly summarizes the experience in the 

European Union, where carbon is already regulated. Finally, the paper presents policy 

options for policymakers and regulators to consider in designing carbon policies to enable 

carbon markets and voluntary renewable energy markets to work together. 

Impact of Cap and Trade on Renewable Energy Markets 

A carbon cap-and-trade system sets a maximum level (cap) for carbon emissions. To 

achieve compliance with the capped emissions level, allowances to emit carbon (1 ton per 

allowance) are created and distributed, with the total number of allowances summing to 

 1
the level of the cap. The allowances can be bought and sold (traded) in the market. Some 

market participants will need to purchase allowances to cover excess emissions, while 

other market participants will sell or retire allowances if they are not needed for 

compliance. Cap-and-trade programs often are designed to achieve greater reductions 

over time, so the cap may be lowered in subsequent years. 

Traditionally, in the electric power industry, emissions allowances have been allocated 

only to emitting power plants, i.e., those that burn fossil fuels, based on historic 

emissions or on the heat content of the fuels burned. Other possible approaches are to 

allocate allowances in proportion to a generator’s share (output-based) or supplier’s share 

(load-based) of the overall electricity market, regardless of how the electricity is 

generated, or to auction some or all of the allowances to the highest bidders. 

In general, renewable energy does benefit from carbon cap-and-trade programs because 

compliance with the cap will increase the costs of fossil fuel generation, which will 

improve the cost-effectiveness of renewables. In addition, such programs may provide an 

incentive to capped entities to use renewable energy to meet future load growth without 

exceeding the cap. The level of the cap will determine the magnitude of the incentive 

provided for renewables. 

However, cap-and-trade programs can also impact the ability of renewable energy 

generation to affect overall CO2 emissions levels, depending on the design of the 

program. If renewable generation sources are not accounted for under the cap (through 

the retirement of allowances or in setting the level of the cap), then they will not affect 

the overall level of CO2 emissions, and purchasers of renewable energy have no basis for 

claiming overall emission reductions. 

For example, if a new wind energy facility generates electricity at a time that causes a 

fossil fuel facility to back down, the emitting fossil fuel facility will generate less 

electricity and consequently emit less CO2, enabling it to sell any excess allowances it 

has to another facility. The other facility will avoid controlling emissions and emit more 

CO2, bringing total emissions back up to the level of the cap. Similarly, if the wind 

generation facility offsets the need for a new fossil fuel plant, then existing emitters will 

not need to control emissions for the zero-emitting wind plant to come online. In either 

case, i.e., whether the renewable energy plant displaces an existing or new fossil plant, 

the result is the same—the renewable energy facility does not reduce the overall level of 

carbon emissions. Rather, the level of emissions is established by the cap. 

Effect on Renewable Energy Marketing Claims 

If a renewable energy purchase results in the retirement or reduction of carbon emission 

allowances, then, by definition, the generation and use of renewable energy should result 

in real emission reductions and strengthen environmental marketing claims. What 

benefits can marketers and purchasers claim if they don’t retire an allowance or if the cap 

is not adjusted to account for current and future renewable energy generation? If 

renewable energy does not result in a direct carbon reduction, the simplest claim that 

generators or marketers could make is that the renewable energy is “emission-free” or 

 2
“pollution-free.” This is the general approach to marketing renewable energy in Europe, 

because carbon and REC markets operate independently. However, such claims might 

imply to consumers that they are helping to reduce emissions. 

In addition, a marketer might make a claim that a purchase would reduce “your emissions 

footprint.” Such claims might be feasible because a company that buys renewable energy 

would improve the emissions profile of its power purchases even though overall systemwide emissions of carbon would not be reduced. However, companies may resist the idea 

of making such claims, because overall carbon levels would be unaffected, and this could 

be questioned by consumer-protection agencies as deceptive. 

Effect on Renewable Energy Demand 

With the introduction of carbon regulation, renewable energy markets will gain an 

additional layer of complexity, affecting supply and demand. The form of carbon 

regulations will determine the magnitude of the impacts on REC markets. If marketers 

and purchasers cannot make clear claims of environmental benefits as a result of carbon 

regulation, it could reduce the purchasing motivation of nonresidential consumers, in 

particular, which would negatively affect future voluntary market growth. Because the 

lack of GHG emissions from renewable energy sources is generally considered to be the 

most significant environmental benefit of these technologies, the inability to affect 

emissions levels will likely reduce voluntary market demand for renewable energy and 

put downward pressure on the price of RECs. 

Consumers interested in reducing carbon emissions levels and making associated claims 

could purchase and retire carbon allowances in conjunction with their renewable energy 

or REC purchase. However, this would add cost to the renewable energy product or 

reduce the amount of revenue that would go to support renewable energy generation, 

which would reduce the ability of voluntary markets to support new renewable energy 

development. Consumers could also simply purchase and retire allowances and skip the 

renewable energy component altogether, again reducing demand. 

Effect on Compliance Markets 

Carbon regulation also has important implications for renewable energy compliance 

markets. With the development of carbon markets, states will need to determine whether 

RECs used for state renewable portfolio standard (RPS) compliance must include (and 

retire) carbon allowances, if allowances are granted to renewables. States might want to 

consider the objective of the RPS in making this decision. If the objective of the RPS is to 

achieve emission reductions, this can be achieved by retiring allowances with the REC or 

considering the RPS in setting the level of the cap. Some states are explicit about whether 

allowances must be retired with a REC used for RPS compliance; but, as might be 

expected, states have taken different positions. For example, both New York and 

Colorado insist that emissions benefits and allowances, if any, be retired for RPS 

compliance. Delaware does not require retirement of allowances with a REC, and 

Pennsylvania has proposed similar rules. 

 3
Emerging Carbon Markets in the United States and Europe 

Carbon markets are beginning to take form in the United States as a number of states 

have initiated their own policies and programs, and others are considering action. The 

design of these programs will affect voluntary renewable energy markets. In this report, 

we focus on the leading efforts to date and discuss their potential impacts on renewable 

energy markets. We also briefly discuss the experience in Europe, where carbon is 

already regulated. 

Regional Greenhouse Gas Initiative. The Regional Greenhouse Gas Initiative (RGGI) is 

a regional cap-and-trade system for reducing GHG emissions of participating Northeast 

states. To date, nine states have committed to participate, while several others are 

considering joining. Implementation of RGGI will begin in January 2009, at which point 

the states have agreed to cap regional CO2 emissions at current levels through 2015; and, 

thereafter, reduce emissions by 2.5% each year, for a 10% total reduction by the end of 

2018. RGGI will begin by capping CO2 emissions from electricity-generating sources of 

25 MW or larger. 

The structure of the RGGI program raises issues for the ability of renewable energy 

sources to reduce GHG emissions, depending on how states choose to implement it. 

States have significant discretion in determining how to allocate allowances. At the time 

of writing, a number of states are leaning toward using an auction, in which market 

entities would bid to purchase allowances. In this case, renewable energy generators and 

marketers would have to pay for allowances in order to achieve GHG reductions. 

However, the RGGI Model Rule does permit the retirement of allowances on behalf of 

consumers who make voluntary purchases of renewable energy. This is discussed in more 

detail in the RGGI section in Chapter 4. 

California Load-Based Cap and Global Warming Solutions Act. In February 2006, the 

California Public Utilities Commission (CPUC) issued a decision stating its intent to 

establish a load-based cap (a cap placed on load-serving entities rather than individual 

generators) for the state’s three investor-owned utilities and nonutility load-serving 

entities (LSEs). Subsequently, in August 2006, the California State Legislature adopted 

the Global Warming Solutions Act (AB32), which requires a reduction of statewide GHG 

emissions from electricity consumption and other “significant” sources to 1990 levels by 

2020, beginning in 2012. AB32 now acts as the umbrella regulation for the CPUC’s 

effort to create a load-based cap and other efforts to meet the AB32 targets. Because it is 

still early in the design process for California’s GHG regulatory systems, it is difficult to 

determine how much of an influence these programs will have on renewable energy 

markets. The issue of whether renewable energy generators will be able to demonstrably 

and directly reduce GHG emissions will depend on the policy structure. Regulators will 

need to address whether voluntary purchases would be in addition to reductions achieved 

by the cap. If the policy is designed so that a renewable energy source that has sold off its 

RECs in the voluntary market would result in system power that needs an allowance, then 

a voluntary purchase would have the effect of reducing emissions below the cap. 

 4
Chicago Climate Exchange. Created in 2000, the Chicago Climate Exchange (CCX) is a 

voluntary but legally binding GHG emissions registry and trading market. Under CCX, 

participating entities—which include municipalities, states, universities, power providers, 

agricultural organizations, and large corporations—commit to reducing their GHG 

emissions and can buy and sell eligible emission reductions through the exchange. In 

Phase I, each member committed to reducing emissions by 1% annually below an 

established baseline from 2003-2006. In Phase II, all members must reduce emissions 6% 

below their baselines by 2010. 

CCX interacts with renewable energy markets on a number of levels. First, it provides 

another voluntary market for the output of renewable energy generation, because 

renewables are eligible to create offsets under CCX. However, few, if any, renewable 

energy projects have been used for offsets to date, because other voluntary REC markets 

have provided greater revenues. Second, CCX facilitates a certain degree of competition 

for renewable energy from other types of carbon reduction projects. 

European Union. Unlike the United States, the European Union (EU) has signed the 

Kyoto Protocol, committing all of the member countries to national CO2 reduction. In 

Europe, the carbon market is separate from renewable energy markets, and renewable 

energy does not receive allowances for carbon under the Emission Trading Scheme. The 

rationale is that renewables emit no carbon, and, therefore, do not need allowances. In 

addition, there are other policies in effect supporting renewables including feed-in tariffs 

and quota obligation systems (similar to RPS). Renewables are also seen as benefiting 

from increased fossil generation costs. Some countries do use RECs to meet EU or 

individual country renewable energy targets, and for voluntary markets. At this time, 

there is no clear evidence that the carbon-trading market has had an adverse impact on 

the voluntary renewable energy market. However, it is not clear whether consumers 

understand that their purchases of renewable energy do not reduce emissions. 

Policy Options for Enabling Renewable Energy Claims 

On the assumption that the cap-and-trade approach to carbon regulation will expand, we 

discuss a number of policy options that would enable purchasers of renewable energy to 

affect emissions levels and make associated claims. Regardless of the policy option, and 

even without any policy supporting voluntary markets, it should be acknowledged that 

consumers can simply purchase and retire carbon emission allowances independent of a 

renewable energy purchase. In fact, consumers may increasingly do this if it is less 

expensive than achieving emission reductions with renewable energy purchases. 

Set-aside Allocations to Renewable Generators. Allocating allowances to renewable 

energy generators is one way to credit renewable generation with the emissions benefits 

they provide under a cap-and-trade program. One approach for allocating allowances to 

renewables is to specify—or set aside—a certain percentage of total allowances to be 

granted to renewable energy generators. There is precedent for using set-asides for 

renewable energy and efficiency under the SO2 cap-and-trade program and the NOx

budget trading program, and several states have proposed set-asides under the new Clean 

 5
Air Interstate Rule (CAIR) trading program for NOx. Some potential disadvantages of 

this approach are that the set-aside must be defined in advance and might not be big 

enough over time to accommodate all renewables, especially if the amount of renewable 

generation grows. In addition, renewable generators have to apply for the allowances 

rather than obtaining them automatically, which adds transaction costs and uncertainty as 

to whether allowances will actually be obtained. A renewable generator can convey an 

allowance with the sale of renewable energy or RECs, and the retirement of the 

allowance is a clear basis for making an emissions-reduction claim. However, there is no 

guarantee that allowances will remain bundled with RECs for sale in voluntary markets, 

as generators will seek to maximize revenues from all available markets, and may find it 

more profitable to sell an allowance to an emitter. 

Output-based Allocations to Renewable Generators. Output-based allocation is another 

way to allocate allowances to renewables. With output-based allocations, allowances are 

granted to generators based on the quantity of electricity produced by each electric 

generator under the cap. Allocations are made proportionately to a generator’s percentage 

of the total generation times the pool of allowances available for the allocation period. A 

renewable generator could, thus, earn its proportionate share of allowances and sell them 

to emitters who need them, or sell them for retirement with its RECs. There is some 

precedent for output-based allocation: The new CAIR rule includes a partial output-based 

allocation for new sources (fossil fuel only), and both Wisconsin and Pennsylvania have 

proposed a full output-based allocation, including to renewables, for their NOx trading 

programs under CAIR. Overall, output-based allocation has some advantages for 

renewables over a set-aside in that there are fewer transaction costs and the allocation of 

allowances is more reliable. As with a set-aside, retirement of the allowance would result 

in a clear reduction in emissions, although there is no guarantee of retirement, as 

generators could also sell allowances to emitting facilities. 

Load-Based Cap. While load-based caps are being considered by several states, they have 

not yet been implemented. A load-based approach would place an emissions cap on the 

generation portfolio used to serve retail or end-use load, and would allocate allowances to 

the utilities or competitive electricity providers—generically, load-serving entities (LSEs) 

—as opposed to the generators. The LSEs would have to obtain enough allowances to 

cover the emissions of the portfolio of power plants from which they buy. If the cap is set 

low enough, LSEs would be motivated to acquire resources that have zero or low 

emissions. The detailed rules for implementing a load-based cap would determine 

whether emission benefits claims are possible with voluntary purchases. The load-based 

cap approach is untested and many details remain to be worked out to enable an 

emission-reduction claim. 

Reduce the Cap to Account for Renewable Energy Demand. Another approach that 

would enable renewables to make GHG emissions benefits claims is if regulators 

consider demand for renewable electricity when setting the cap, or periodically reduce 

the cap to reflect growing demand for renewable electricity. Periodic reductions in the 

cap could be based on either projected demand or on actual demand after the fact. This 

approach could apply to renewable energy demand from state RPS policies as well as 

 6
projected voluntary demand from retail consumers purchasing differentiated green power 

products. In this manner, renewable generators would not actually receive allowances, 

but they would reduce overall emissions because fewer allowances would be available in 

the allowance pool. 

Retire Allowances on Behalf of Renewable Energy Sales. Another possible approach is 

for regulators to consider demand for renewable electricity and reduce the number of 

allowances allocated to emitters accordingly. This method focuses on retiring allowances 

after the cap is established. Similar to reducing the cap, this approach could apply to 

renewable energy demand from state RPS policies as well as projected voluntary demand 

from retail consumers purchasing differentiated green power products. Adjustments could 

be based on either projected demand or on actual demand after the fact. In this manner, 

renewable generators would not actually receive allowances, but they would reduce 

emissions because some emission allowances would never enter circulation and would be 

retired on their behalf. The final RGGI Model Rule was revised to allow for this approach 

for voluntary demand, but each participating state must affirmatively adopt the option. At 

the time of this writing, it is too early to know whether RGGI states will include this 

approach in their rules. 

Conclusion 

In an era of carbon regulation, voluntary renewable energy markets will continue to play 

an important role because many consumers may be interested in supporting renewable 

energy development beyond what is supported through mandates or other types of policy 

support. Some consumers may not be satisfied that emissions caps or other regulatory 

actions are sufficient to meet their environmental goals. In addition, businesses and 

organizations not subject to carbon regulation may be interested in taking action to 

reduce the impacts of their own emissions footprints. Businesses and consumers may also 

want to help support renewable energy today to help transform the technology to meet 

long-term emissions-reduction goals, or for the other benefits that renewable energy 

technologies provide, such as energy security, economic development, and fuel price 

stability. 

Generally, the implementation of policies to control or reduce carbon emissions is likely 

to provide a market benefit to renewable energy sources by increasing the cost of 

production from carbon-emitting energy sources. However, voluntary renewable markets, 

in which purchases are often based on the ability to make environmental claims, could be 

negatively impacted unless these policies are properly structured. 

Under carbon cap and trade, both the methods for setting the emissions cap and for 

allocating allowances are important for emission-reduction claims. Allocating allowances 

to renewable energy generators is one way to credit renewable generation with the 

emissions benefits they provide. A reduction in carbon emissions below the level of the 

cap can be achieved by retiring an allowance, ensuring that it is not sold to an emitter. A 

renewable energy marketer could convey an allowance with the sale of renewable energy 

or RECs, and the retirement of the allowance is a clear basis for making an emissions-

 7
reduction claim. However, there is no guarantee that the allowances will remain bundled 

with the RECs, as generators will seek to maximize revenues in all available markets. 

Other approaches, such as reducing the cap or automatically retiring allowances to 

account for current and future renewable energy generation would enable consumers to 

affect GHG emissions levels with their renewable energy purchases, but would not 

provide renewable energy generators the option of selling allowances in emissions 

markets. Thus, policy structures that are best suited for voluntary renewable energy 

markets are not necessarily the preferred policy options for renewable energy generators. 

Voluntary renewable energy markets have been growing rapidly. If cap-and-trade 

policies are designed such that voluntary renewable energy purchases do not lead to 

overall carbon emission reductions, this will limit the GHG benefit claims of purchasers 

and pose a challenge for future renewable energy marketing. Going forward, federal and 

state energy and environmental decision makers need to be cognizant of the effects of 

carbon policy designs on voluntary renewable energy markets and work together to 

coordinate policies that will further both the desire to reduce carbon emissions and the 

ability of consumers to benefit from renewable energy purchases. 

 8
1.0 Introduction 

Voluntary markets for renewable energy, or “green power markets,” provide an avenue 

for consumers to support the development of renewable energy sources by enabling them 

to choose cleaner electricity sources for their own energy consumption. This market is 

important in that it empowers consumers to affect the resources used to supply their own 

energy needs. While, initially, most green power products targeted residential consumers, 

recent growth in voluntary markets has been primarily fueled by large purchasers, 

including Fortune 500 companies and other businesses, universities, and government 

agencies. 

As a result of increased interest among the nonresidential sector, voluntary markets are 

growing rapidly. In 2005, sales of renewable energy in voluntary markets increased 

nearly 40% following an increase of more than 60% during 2004. At the end of 2005, 

voluntary markets were supporting a capacity equivalent of about 2,000 MW of new 

renewable energy generation, which represents 22% of renewable energy capacity 

additions since 1997 when these markets began (Bird and Swezey 2006). Thus, voluntary 

markets help to support a significant fraction of new U.S. renewable energy-generating 

capacity. 

While there are a number of benefits of renewable energy sources, many consumers have 

been motivated, at least in part, to purchase renewable energy because of its greenhouse 

gas (GHG) benefits. Currently, purchasing green power is an accessible and relatively 

easy and transparent way in which customers can reduce their carbon footprints. Most 

utilities and independent marketers that offer green power options promote their products 

by touting the GHG benefits and, in fact, some marketers actually sell carbon reductions 

derived from renewable energy generation to enable consumers to “offset” the carbon 

dioxide (CO2) emissions associated with their electricity consumption, car and plane 

travel, and home heating energy use. Likewise, many purchasers point to the GHG 

benefits of their green power purchases in news releases and other promotional materials. 

Emerging carbon regulation in the United States has the potential to substantially affect 

voluntary markets for renewable energy. Carbon regulation is now developing in the 

Northeast under the Regional Greenhouse Gas Initiative (RGGI, pronounced “Reggie”) 

and in California as a result of recently adopted legislation (AB32). There is increasing 

discussion about carbon regulation at the national level as well. To achieve GHG 

reductions, both RGGI and California plan to implement cap-and-trade programs, which 

would enable emitters to trade allowances to meet emissions targets. There is precedent 

for using cap and trade to control emissions, such as the successful national sulfur 

dioxide (SO2) cap-and-trade system developed under the Clean Air Act Amendments of 

1990 to address acid rain. 

In general, renewable energy does benefit from carbon cap-and-trade programs because 

compliance with the cap will increase the costs of fossil fuel generation, which will 

improve the cost-effectiveness of renewables. In addition, such programs may provide an 

 9
incentive to capped entities to use renewable energy to meet future load growth without 

exceeding the cap. The stringency of the cap determines the level of incentive provided. 

However, cap-and-trade programs can also impact the ability of renewable energy 

generation to affect overall CO2 emissions levels, depending on the design of the 

program. If renewable generation sources are not accounted for under the cap (through 

the retirement of allowances or in setting the level of the cap), then they will not affect 

the overall level of CO2 emissions, and purchasers of renewable energy have no basis for 

claiming overall emission reductions. Therefore, the implementation of carbon cap-andtrade programs has important implications for voluntary renewable energy markets. 

These same issues also pertain to other types of cap-and-trade programs, such as those for 

SO2 and NOx, but carbon cap-and-trade programs have more significant implications for 

renewable energy markets. This is true because renewable energy sources offer one of the 

few options for generating electricity without CO2 emissions, whereas emissions control 

technologies can be used to reduce NOx and SO2 emissions. And consumers may be more 

interested in achieving reductions in GHG emissions than emissions of specific air 

pollutants such as NOx and SOx. Furthermore, carbon regulation is beginning to emerge, 

while emissions trading markets have already been established for SO2 and NOx. 

While carbon regulation may affect renewable energy development more broadly, this 

paper focuses primarily on the potential effects that emerging mandatory carbon markets 

will have on voluntary renewable energy markets.1 First, the paper examines the extent to 

which GHG benefits motivate consumers to make voluntary renewable energy purchases, 

and the claims that large commercial and institutional consumers currently make 

regarding their purchases. Next, the paper summarizes key issues emerging as a result of 

these overlapping markets, such as the implications for renewable energy marketing 

claims, the demand for and price of renewable energy certificates (RECs), and the use of 

RECs in multiple markets (disaggregation of attributes). Then, it describes carbon 

regulation programs under development in the Northeast and California, and how these 

might affect renewable energy markets in these regions, as well as the potential 

interaction between voluntary renewable energy markets and voluntary carbon markets, 

such as the Chicago Climate Exchange (CCX). The paper also briefly summarizes the 

experience in the European Union, where carbon is already regulated. Finally, the paper 

presents policy options for policymakers and regulators to consider in designing carbon 

policies to enable carbon markets and voluntary renewable energy markets to work 

together. 

 

1

 The paper also includes limited discussion of impacts on renewable energy compliance markets 

 10
2.0 Relationship between Voluntary Renewable Energy Markets and Carbon 

Climate Change as Motivator for Green Power Purchasers 

There are a number of reasons why consumers buy green power, including environmental 

benefits (air pollutant and GHG emissions), health benefits, fuel diversity, energy 

security, local economic development, encouraging the development of new 

technologies, resource protection for future generations, and energy price stability; and, 

for nonresidential consumers, public relations benefits. (Holt and Wiser 1999; Holt et al. 

2001; Blank et al. 2002; Hanson 2005) 

Residential consumers, in particular, purchase renewable energy for a variety of reasons,2

so it is difficult to discern the relative importance of GHG benefits as a motivator. 

However, most consumers believe that they are creating environmental benefits when 

they purchase green power and consider it to be an important benefit. While some 

marketers do not focus on environmental messaging for residential consumers, many 

have found that it is very important to do so. 

For nonresidential customers there is clear evidence to suggest that GHG benefits are an 

important motivator. For example, nonresidential consumers are often interested in 

purchasing green power because it is a convenient tool for meeting their internal 

environmental goals or for taking credit for GHG reductions under a future regulatory 

regime and, thus, reducing future regulatory risks (Hanson 2005; Blank et al. 2002; Holt 

and Wiser 1999). These and other indicators are discussed in more detail below. 

To illustrate the importance of the nonresidential voluntary market, purchases by 

businesses and institutions represented 65% of the 8.5 million MWh of renewable energy 

sold through voluntary markets during 2005 (Bird and Swezey 2006). And nonresidential 

purchasing has accelerated in recent years. For example, purchases by members of the 

U.S. Environmental Protection Agency (EPA) Green Power Partnership, which 

encourages organizations to purchase renewable energy as a way to reduce the risk of 

climate change and the environmental impacts associated with conventional electricity 

use, doubled during 2005. And growth has remained strong in 2006: As of September 

2006, more than 600 organizations, including Fortune 500 companies; local, state, and 

federal governments; and colleges and universities voluntarily purchased more than 7 

million MWh of renewable energy, up from 4 million MWh at the end of 2005 (Collison 

2006; Amato 2005). Overall, participation among the nonresidential sector has led to 

substantial growth in U.S. voluntary markets, and, therefore, it is important to consider 

what motivates these consumers. 

 

2

 A recent poll of residential customers sponsored by the U.S. Department of Energy found that consumers 

have a variety of reasons for purchasing or wanting to purchase renewable energy. Respondents indicated 

the following reasons: to improve today’s environment (32%), to leave our children and grandchildren a 

cleaner environment (30%), to improve U.S. energy security (24%), to support the development of new 

technology (23%), to create local jobs and improve the economy (21%), to protect against fuel price 

increases (20%), all of these (58%). (Opinion Research Corporation 2006.) 

 11
Participation in GHG registries is evidence that companies and institutions are motivated 

to purchase renewable energy because of concerns over climate change. Under these 

programs, companies and organizations register to protect their early actions as a form of 

risk management. If carbon emissions are regulated in the future, registration with a 

credible and transparent reporting system will help credit these early actions toward 

compliance. In GHG registries, voluntary purchases of renewable energy are generally 

used to adjust the GHG emissions associated with a company’s power purchases, which 

are considered indirect emissions (see Textbox for definition). 

GHG Accounting Definitions

Under greenhouse gas registries, companies must report emission reductions under one of 

several categories: direct emissions, indirect emissions, and offsets (such as carbon 

sequestration). 

Direct emissions (or Scope 1 Emissions) are defined as emissions from greenhouse gas 

sources that are owned or controlled by an organization. For example, emissions from 

electricity generation from an on-site system used to serve a portion of a company’s 

electricity needs are considered direct emissions for that company. These are often referred 

to as Scope 1 emissions for the purposes of corporate GHG accounting. 

Indirect emissions (or Scope 2 Emissions) are emissions that are a consequence of an 

organization’s activities, but are not owned or controlled directly by the organization. For 

example, emissions from electricity purchased from a utility to serve a company’s electricity 

needs are considered indirect emissions. Likewise, energy efficiency measures installed at 

the organization’s facilities reduce indirect emissions for the organization. These are often 

referred to as Scope 2 emissions for the purposes of corporate GHG accounting.

Scope 3 Emissions are other types of indirect emissions resulting from business activities 

that a corporation may choose to include in its GHG inventory. The reporting of these 

emissions is generally optional. Examples include emissions associated with employee 

business travel, waste disposal, contractor-owned vehicles, production of purchased 

materials, product use, or outsourced activities. 

Offsets. Definitions of offsets can vary considerably among GHG registries and programs. 

EIA defines offsets as emission reductions that are achieved through projects that generate 

verifiable emission reductions outside the scope of an organization’s direct or indirect 

emissions. For example, under the federal Voluntary Reporting of Greenhouse Gases 

Program, companies report carbon sequestration projects that fix atmospheric carbon in a 

carbon sink through biological or physical processes, such as tree planting, forest 

preservation, modified forest management, and tillage practices that increase carbon 

storage on croplands. 

WRI defines offsets as “discrete GHG reductions used to compensate for (i.e., offset) GHG 

emissions elsewhere, for example to meet a voluntary or mandatory GHG target or cap. 

Offsets are calculated relative to a baseline that represents a hypothetical scenario for what 

emissions would have been in the absence of the mitigation project that generates the 

offsets. To avoid double-counting, the reduction giving rise to the offset must occur at 

sources or sinks not included in the target or cap for which it is used.” 

Sources: EIA 2006 ; WRI 2004 

 12
At the federal level, the U.S. Department of Energy manages the Voluntary Reporting of 

Greenhouse Gases Program,3 established by Section 1605(b) of the Energy Policy Act of 

1992. Under the program, companies report their voluntary measures to reduce, avoid, or 

sequester GHG emissions. In 2004, the electric power sector accounted for 42% of the 

226 organizations reporting to this registry, while others represented automotive 

products, metals, petroleum, chemicals, aerospace, pharmaceuticals, and electronic 

equipment industries (EIA 2006). Currently, purchasing renewable energy is one method 

of achieving emission reductions under the program, although the program is in the 

process of revising its rules.4

 

The California Climate Action Registry5 is perhaps the best known state effort to record 

voluntary actions to reduce GHG emissions. The 88 current members—not limited to 

organizations located in California—include cities, government agencies, municipal 

utilities, investor-owned utilities, electric power generation, educational institutions, 

health care, manufacturing, and financial services, among others. Under the registry, 

participating organizations can report their renewable energy or REC purchases under 

optional reporting procedures (California Climate Action Registry 2006). 

In addition, the U.S. EPA runs a voluntary program called Climate Leaders6 through 

which partners set corporate-wide GHG reduction goals and inventory their emissions to 

measure progress. As of October 2006, more than 100 companies participated in the 

program, representing about 8% of total annual U.S. GHG emissions (U.S. EPA 2006). A 

number of participating companies purchase renewable energy to meet a portion of their 

GHG reduction goals. 

Other evidence of the importance of climate change as a motivator is that many 

nonresidential green power purchasers point to the GHG benefits of their purchases in 

news releases, on their Web sites, or in other materials that describe their purchases (see 

Textbox). Some organizations discuss the need to address global warming in the context 

of their purchase. For example, according to the Aspen Skiing Company’s president and 

CEO: 

 “The most pressing issue of our time is climate change, and addressing energy use is one 

of the most important actions we can take on that front.” The company says further, “If 

everyone in the world bought renewable energy certificates like we have done, we’d be 

well on our way to solving the climate problem.” (Aspen Skiing Company, 2006) 

http://www.aspensnowmass.com/environment/programs/Wind_Press_Release.pdf

(accessed December 2, 2006)

 

 

3

 For additional information, see the Energy Information Administration’s Web site at 

http://www.eia.doe.gov/oiaf/1605/frntvrgg.html, accessed October 23, 2006. 4

 The issue regarding the treatment of renewable energy and RECs has not yet been resolved under the 

revised reporting forms that are under development. 

5

 For additional information, see http://www.climateregistry.org/Default.aspx?refreshed=true , accessed 

November 30, 2006. 

6

 For additional information, see http://www.epa.gov/climateleaders/, accessed November 30, 2006. 

 13
While other organizations may not issue such strong, clear statements, most large 

purchasers of green power mention the amount of GHG emissions that were prevented 

from entering the atmosphere as a result of the renewable energy that they are 

purchasing. The U.S. EPA provides a tool for companies to calculate the emissions 

benefits to help substantiate these claims. An excerpt from White Wave Food’s Web site 

provides a typical example (see Textbox for additional examples): 

“The amount of wind energy we're purchasing will prevent 16,000 tons of greenhouse 

gasses from entering our atmosphere. Our purchase has the same effect as eliminating the 

emissions of 3,200 cars, or planting more than 4,400 acres of trees.... Wind energy is 

clean. More wind energy means less smog, toxic pollution and greenhouse gas 

emissions.” http://www.whitewave.com/index.php?id=105 (accessed December 3, 2006) 

 14
GHG Claims by Organizations 

State of New Jersey: ”As a testament to its commitment to promoting renewable energy generation, improving air quality, 

and reducing greenhouse gases, the state of New Jersey has emerged as the number one purchaser of green power (as a 

percentage of total load) among all state governments in the country... Benefits include...preventing an estimated 168,948 

metric tons of CO2 emissions, which has helped the state achieve its goal of reducing its greenhouse gas emissions to 3.5 

percent below 1990 levels by 2005.” 

http://www.state.nj.us/dep/dsr/bscit/GreenPower.pdf (accessed December 3, 2006) 

HSBC Bank: ”Recognizing the importance of climate change, last December, HSBC became the world's first major bank to 

commit to carbon neutrality and today its U.S. banking unit announced that it has offset a substantial quantity of its carbon 

emissions by purchasing 45,454 MWh of clean, wind energy certificates.” 

http://www.hsbcusa.com/ourcompany/pressroom/2005/news_042205_hsbc_bank_earth_day.html (accessed December 18, 

2006) 

IBM: ”The purchase of RECs demonstrates IBM's continued commitment to taking action on climate change and support for 

the development of renewable energy. IBM recognizes that global climate change is an important environmental and 

business issue. The company has taken voluntary actions to conserve its energy use and to reduce the emissions of 

greenhouse gases associated with its energy use and operations.” 

http://www.ibm.com/ibm/environment/news/rec_2005.shtml (accessed December 13, 2006) 

Montgomery County (MD): ”The wind energy purchase is a major step towards meeting the region’s air quality goals for the 

reduction of greenhouse gas emissions that contribute to global climate change...The environmental benefits from this 

purchase are equivalent to a yearly reduction of: 42 million pounds of carbon dioxide, 95,000 pounds of nitrous oxides, and 

1.4 pounds of mercury. The carbon dioxide reduction achieved is equivalent to 36 million miles not driven or 2.9 million trees 

planted.” 

http://www.montgomerycountymd.gov/Apps/News/press/DisplayInfo.cfm?ItemID=895 (accessed December 13, 2006) 

Staples: ”We are committed to reducing the effects of our energy use on climate through an integrated approach including 

conservation, the adoption of renewable energy technologies where financially viable and the purchase of certified 

renewable-energy certificates... Through the purchase of certified RECs from landfill gas and wind energy projects, we offset 

the environmental impacts of more than 53 megawatt-hours of conventional electricity with renewably generated electricity, 

resulting in a savings more than 46,000 metric tons of carbon dioxide equivalents (mtCO2e) in 2005. Since 2001, we have 

decreased our net GHG emissions per square foot across all properties by more than 22%.” 

http://www.staples.com/sbd/img/content/soul/pdf/staples_2005_corporate_responsibility_report.pdf (accessed December 

13, 2006) see p. 39 

Johnson & Johnson: ”As indicated in our Next Generation Goals, adopted in 2000, it is the responsibility of each 

Company/Business Unit to meet our greenhouse gas reduction goal of 4% reduction by 2005 and a 7% reduction by 2010, in 

absolute terms with 1990 as a base year. The pathways for a climate friendly energy policy include five elements: energy 

efficiency improvements in all of our operations; cogeneration; on-site renewable energy that produces no CO2 emissions; 

renewable electricity purchases; and carbon trading and sequestration.” 

http://www.jnj.com/community/environment/policies/climate_friendly.htm 

(accessed December 13, 2006) 

The City of Bellingham, Washington: ”The city’s green power purchase represents the elimination of about 13,000 tons of 

carbon dioxide pollution...That’s like not driving 22 million miles. It is pretty clear that this is the single biggest thing that we 

can do to help protect the climate. Protecting the climate needs to be our top priority, and this is a huge step in that 

direction.” (City of Bellingham, 2006) http://www.cob.org/features/2006-07-31-green-power.htm (accessed December 18, 

2006) 

National Ski Area Association: ”Ski resorts across the country are purchasing green power to offset their electrical energy 

use. As part of the industry’s Keep Winter Cool program (www.keepwintercool.org) to combat global warming, the National 

Ski Areas Association (NSAA) has encouraged all of its members to buy green power....The use of green power can help in 

the fight against global warming, help clean up the air and help decrease dependency on foreign energy sources.” 

http://www.nsaa.org/nsaa/press/0607/061009-green-power.asp (accessed December 13, 2006) 

 15
Marketing Renewable Energy and Climate Change Benefits 

The importance of climate change as a motivator for green power purchases is also made 

evident by marketer claims. Most green power marketers and utility green power 

programs make prominent claims on their Web sites and marketing materials that 

consumers can reduce carbon levels with their green power purchases. This is one way of 

communicating the benefits of their products; however, some highlight these benefits 

more than others (see Textbox). 

There are several business models for marketing renewable energy that, to varying 

degrees, connect purchases with GHG emission benefits. Increasingly, a number of 

marketers are positioning products as primarily providing carbon reduction benefits. We 

categorize some of the most common approaches to marketing renewable energy or 

carbon benefits associated with renewable energy below. Some marketers use a blend of 

these approaches. 

• Traditional marketing of renewable energy or RECs. Currently, the most 

common approach to marketing renewable energy is to sell renewable 

electricity or RECs for a consumer’s electricity use. Under this approach, the 

marketers make some claims about carbon emission reductions in marketing 

materials (see previous Textbox), but also describe other benefits of 

renewable energy, such as protecting resources for future generations, fuel 

diversity, economic development benefits, energy security, etc. Most utility 

green power programs fall under this category, as will most REC marketers, 

although some of these companies also use carbon emission calculators 

(described below). 

• Carbon emissions calculators. A number of companies allow consumers to 

calculate the carbon emissions associated with their electricity consumption 

and sometimes other energy consumption, such as car and plane travel and 

home heating energy use, and purchase renewable energy or RECs equivalent 

to their total carbon emissions footprint. This marketing approach focuses 

explicitly on the GHG reduction benefits of green power by tying purchases 

directly to a consumer’s carbon emissions. Carbon calculators are becoming 

increasingly common. Examples of this approach include online calculators 

operated by the Bonneville Environmental Foundation and 3 Phases Energy 

Services.7 

• Selling carbon “offsets.” A growing number of organizations are now selling 

carbon emission reductions sourced from RECs, or a blend of RECs and other 

carbon reduction methods such as carbon sequestration or energy efficiency, 

to help consumers reduce their carbon footprints.8

 Under these types of 

 

7

 See online calculators at https://www.greentagsusa.org/GreenTags/calculator_intro.cfm and 

http://www.3phases.com/certificates/calculator/calc.php, both accessed November 30, 2006. 8

 In fact, some carbon offset products do not rely on renewables, but these are not the focus of the 

discussion here. 

 16
programs, consumers purchase “offsets” equivalent to the carbon emissions 

associated with their electricity use or other energy consumption, such as car 

and plane travel and home heating energy use. These offsets are retired on 

behalf of the purchasing customer. 

While the term carbon “offset” generally has a specific meaning under carbon 

regulation programs, its meaning is the subject of debate in voluntary markets 

(Trexler and Kosloff 2006; Bristow 2006). Generally, however, REC-based 

carbon reduction products are sold under the premise that renewable energy is 

emissions-free and displaces fossil fuel generation, thereby offsetting CO2

emissions. 

These products differ from conventional REC products in that consumers do 

not actually purchase RECs in kWh increments. Instead, purchases are made 

on a CO2 equivalent basis ($/ton CO2), and the money is used to purchase an 

equivalent amount of CO2 reductions through RECs and/or energy efficiency 

or reforestation projects. In some cases, expenditures through these kinds of 

programs are considered tax-deductible contributions. Examples of this 

approach include the Carbon Fund and Terra Pass. Also, Native Energy offers 

a similar product, but it differs in that it is sourced from the expected future 

output of new renewable energy projects. 

Because voluntary carbon reduction products are becoming increasingly 

common, a number of organizations are developing certification programs or 

standards. For example, the Gold Standard9 recently launched a voluntary 

market standard for emission reductions, while the Climate Group and the 

International Emissions Trading Association have a standard under 

development (Bristow 2006).10 In addition, the Green-e program has released 

a proposed GHG product certification standard, which is designed to be an 

umbrella standard.11 

 

9

 For additional information, see http://www.cdmgoldstandard.org/how_does_it_work.php?id=44, accessed 

December 27, 2006. 

10 For additional information, see 

http://www.theclimategroup.org/assets/Voluntary_Carbon_Standard_Version_2_final.pdf, accessed 

January 8, 2006. 

11 For additional information, see http://www.resource-solutions.org/mv/ghgstandard.html, accessed 

December 27, 2006. 

 17
 

GHG Claims by Marketers and Providers 

Bonneville Environmental Foundation “Using clean renewable energy is friendly to the environment and reduces 

emissions of carbon dioxide and other greenhouse gases. Green Tags represent the real savings in carbon dioxide 

and other pollutants that occur when green power replaces burning fossil fuel.” 

https://www.greentagsusa.org/GreenTags/index.cfm (accessed December 13, 2006) 

Native Energy WindBuilders is for people like you who are concerned about global warming and want to do 

something about it. 

sm

WindBuilders is simple, and it gets results. You'll help build a new wind farm and keep global 

warming pollution out of the air. Keep your choice of 6, 8, or 12 tons of carbon dioxide out of the air, or use the 

SafeClimate Carbon Calculator provided by our friends at the World Resources Institute to calculate your own CO

footprint. 

sm

2

http://www.nativeenergy.com/services.html (accessed December 13, 2006) 

TerraPass Although many of our projects have ancillary benefits in reducing other types of emissions, our focus as an 

organization is to reduce the pollution known to cause global warming. Therefore, our only claim is to reduce carbon 

dioxide equivalents as defined by the IPCC. http://www.terrapass.com/about/faq.html (accessed December 13, 2006) 

Community Energy Wind energy is a clean and inexhaustible energy source. Each year one 215-foot-tall wind turbine 

prevents the release of nearly 4 million pounds of CO2 which contribute to global warming. When compared to the 

average electric generation mix, the carbon dioxide benefit is equivalent to planting over 3,800 trees or taking 315 cars 

off the road each year! http://www.communityenergy.biz/adopt/adopt_windmill.html (accessed December 13, 2006) 

Sterling Planet What you pay for when you buy RECs is the benefit of displacing other nonrenewable sources from 

the regional or national electric grid.... To illustrate the environmental benefit, a customer purchasing 1,000 kilowatt 

hours (kWh) per month in the form of RECs annually offsets nearly 17,000 pounds of carbon dioxide emissions from 

conventional power plants. http://www.sterlingplanet.com/questions.php (accessed December 13, 2006) 

CarbonFund Offsetting your carbon (or climate) footprint allows you to become part of the solution to climate change 

by supporting the reduction of carbon dioxide emissions equal to your carbon footprint. 

http://carbonfund.org/site/pages/why_offset_carbon/ (accessed December 13, 2006) 

We Energies Our Energy for Tomorrow renewable energy program makes it easy for you to make a difference in the 

environment by increasing electricity production from energy sources such as wind, water, solar and landfill gas....A 

typical electric customer enrolled at 100 percent can reduce greenhouse gas emissions by 1,355 pounds. 

http://www.we-energies.com/residential/acctoptions/eft.htm (accessed December 13, 2006) 

Conservation Services Group For every unit of renewable energy generated, an equivalent amount of renewable 

certificates are produced. The purchase of these certificates helps offset conventional electricity generation in the 

regions where our renewable generation is located. The purchase provides global environmental benefits including 

reducing global climate change and regional air pollution. 

http://www.climatesave.com/about.html (accessed December 13, 2006) 

Portland General Electric Green Source, allows PGE to purchase pollution-free electricity through renewable energy 

sources such as wind and geothermal technologies on your behalf. Plus, an Oregon household (or business) can 

reduce its share of carbon dioxide (CO2) emissions and offset as much as 8,400 pounds in one year — as much as a 

car would produce when driven more than 9,000 miles. http://www.portlandgeneral.com/renewables.asp?bhcp=1

(accessed December 13, 2006) 

FPL – Sunshine Energy (solar) Choosing Sunshine Energy is one of the most important things you can do to reduce 

air pollution. In just one year as a Sunshine Energy customer, you can avoid over 8,000 pounds of carbon dioxide 

(CO2) emissions nationwide – as much as a car would produce in almost 9,000 miles of driving. 

http://www.fpl.com/residential/electric/sunshine_energy.shtml (accessed December 13, 2006) 

 18
What Kinds of Claims Can Be Made About GHG Benefits Currently? 

While marketers and purchasers of renewable energy are making a variety of claims 

today about the GHG benefits of renewable energy or RECs purchases, there is 

increasing debate about the legitimate scope of these claims. 

The Environmental Marketing Guidelines for Electricity, developed by the National 

Association of Attorneys General (NAAG), provide guidance and general principles for 

marketers to follow to ensure that consumers are not misled by marketing tactics. Three 

relevant principles with respect to GHG benefits are deception, substantiation, and 

overstatement of environmental attributes. According to the NAAG guidelines (NAAG 

1999): 

2 (a) Deception – A claim is deceptive, and therefore unlawful, if it contains an express 

or implied representation or omission of fact that is likely, or has a tendency, to mislead 

consumers. 

2 (b) Substantiation – Any party making an express or implied claim that presents an 

objective assertion about the environmental attributes of an electricity product or 

company must, at the time the claim is made, possess and rely upon a reasonable basis 

substantiating the claim. In substantiating technical claims about electricity products or 

companies, a reasonable basis consists of competent and reliable evidence which supports 

the claims made. 

2 (e) Overstatement of Environmental Attributes – An environmental marketing claim 

should not be presented in a manner that overstates the environmental attribute or benefit, 

expressly or by implication. 

The benefits that renewable energy sources or RECs provide stem from the fact that 

renewable energy sources are emissions-free or have low GHG emissions. Renewable 

energy sources create an emission benefit by displacing emissions from either existing or 

new fossil fuel generation sources that would otherwise have been used to generate 

electricity. 

There appears to be general consensus in the industry that a purchaser of renewable 

energy or RECs can make claims regarding the improved GHG emissions profile of their 

power purchases. Likewise, marketers can make corresponding claims to prospective 

purchasers. In a recent report, WRI has provided guidance on how companies can 

calculate and account for the GHG emissions benefits associated with REC or renewable 

energy purchases (Putt Del Pino 2006). Typically, in GHG accounting systems, 

companies and institutions record the GHG emissions associated with their power 

purchases as indirect emissions (Scope 2), and generally the GHG emissions benefits of a 

renewable energy or REC purchase can be accounted for as an adjustment to these 

indirect emissions (WRI 2004; Putt Del Pino 2006), although treatment can be by 

registry. 

 19
There is considerable debate, however, about using renewable energy or RECs to 

substantiate broader claims of offsetting GHG emissions associated with other emitting 

activities, such as natural gas consumption, employee airplane travel, or automotive 

emissions. Currently, there is no industry consensus with respect to these kinds of claims. 

The debate is largely about what types of projects can qualify as credible “offsets”—or 

GHG reductions that are used to compensate for (i.e., offset) other types of emissions 

(see Textbox for definitions). Under GHG accounting, renewable energy or RECs may 

need to qualify as offsets to be used to offset emissions other than power purchases. Part 

of the problem is that, in the absence of national carbon policy, there is no widely 

accepted definition of what constitutes an “offset” in voluntary markets, although a 

number of organizations are developing standards. 

Most existing standards for offsets specify that offsets must result in emission reductions 

that are real, additional, verifiable, enforceable, and permanent.12 One hurdle that can be 

difficult for renewable energy projects to meet is whether the project is “additional” to 

what would have otherwise occurred. There are two types of tests for whether GHG 

reductions are additional: whether the reductions are additional to what would have 

happened 1) without the project, and 2) without the payment promised in an offset 

transaction (Broekhoff 2007). The second issue, in particular, is difficult for renewables 

because most renewable energy projects are not built for a single purpose. One possible 

approach to addressing concerns over additionality is to ensure that individual MWh from 

a renewable facility are used for only a single purpose, such as compliance with a state 

RPS, voluntary markets, or a carbon offset. This is the approach taken by CCX and the 

current approach to eliminating double-counting in voluntary green power markets. 

Another challenge for renewables is that they displace emissions from fossil fuel 

generation and, thus, the emission reductions occur at a source controlled by someone 

other than the parties to the renewable energy project. Therefore, the ownership of the 

reduction is uncertain and could lead to double-counting in a GHG framework (i.e., the 

reduction could theoretically be claimed by the fossil plant as well as the renewable 

plant) (WRI 2004). However, if renewable energy generation displaces the need for a 

new power plant, there would be no double claim. Some industry stakeholders further 

argue that fossil generators are not making claims regarding emission reductions, except 

perhaps in programs such as the Chicago Climate Exchange (CCX) where they establish 

voluntary, but binding, emission-reduction targets. The Green-e program currently does 

not certify the output of facilities whose owners participate in CCX or other statesanctioned programs to avoid double-counting (Lieberman 2007). 

 

12 In a recent solicitation for CO2 offsets, the Climate Trust specified that purchased offsets must meet the 

following requirements: 1) Additional, meaning offset funding must be essential for the implementation of 

the project, i.e., proof is required that the mitigation measures would not occur in the absence of offset 

project funding. 2) Regulatory surplus, meaning the emissions benefit is over and above what is required by 

law, regulations, or other obligations. 3) Quantifiable, meaning the amount of carbon dioxide offsets can be 

measured, monitored, and evaluated. 4) Future, meaning the project will be implemented subsequent to 

contract execution (The Climate Trust 2005). 

 20
Another perspective is that the important thing to consider is that a zero-emitting 

renewable energy facility creates an overall GHG emission benefit that could be used to 

offset emissions associated with a variety of emitting activities. This perspective focuses 

on the fact that renewables provide an emission reduction compared to fossil fuel 

generation, and this benefit could be applied to other types of emissions such as 

emissions from airline or car travel. A number of organizations currently market products 

based on this rationale, as discussed earlier. 

Because of the current lack of clarity with respect to these issues, it would be useful for 

green power and GHG certification programs, government programs that encourage 

voluntary green power purchases, and perhaps the Attorneys General or Federal Trade 

Commission to provide guidance on the range of acceptable claims and the use of 

renewables as offsets. Going forward, as carbon regulations take effect, there will be an 

additional layer of complexity in the marketplace that may have implications for future 

claims. 

 21
3.0 Impact of Carbon Regulation on Renewable Energy Markets 

In the United States, carbon regulation is beginning to take form as a number of states 

have initiated their own policies and programs, and Congress is debating appropriate 

action at the federal level.13 Several states are also proposing to regulate carbon 

emissions through cap-and-trade programs. While there are other measures under 

discussion for limiting CO2 (e.g., a carbon tax), this report focuses on cap and trade as it 

appears to have the most momentum on the state and federal level, and it is the measure 

that has the most significant implications for voluntary renewable energy markets. 

Interest in cap and trade is a result of the successful implementation of emission cap-andtrade regulation of SO2 under the Clean Air Act Amendments of 1990 and the experience 

under the federal NOx budget program. There is also precedent for using cap and trade in 

the European Union as a means to meet its GHG reduction obligations under the Kyoto 

Protocol. Cap-and-trade systems aim to create reductions at the lowest possible cost by 

enlisting market forces to determine the cheapest means to achieve the cap. 

Before delving into the details and implications of emerging state cap-and-trade 

programs, we focus here on the issues that generally arise for renewable energy markets 

as a result of cap-and-trade programs. For example, if carbon is regulated under a capand-trade program, the claims that can be made by renewable energy generators or 

marketers with respect to carbon-reduction benefits could be affected. Depending on the 

policy design, this could have implications for the price of RECs and for demand for 

renewable energy in voluntary markets. Regulation also raises some policy interaction 

questions for RPS markets. This chapter explores these issues in turn. Chapter 4 

describes emerging state carbon cap-and-trade programs and their potential impacts in 

more detail. 

 

Effect of Cap and Trade on Marketing Claims 

Achieving Carbon Reductions under Cap-and-Trade Systems 

Under a traditional cap-and-trade system, the cap is set at a fixed level to achieve the 

desired reduction in emissions from a baseline year (e.g., 10% reduction in emissions 

from 1990 levels by 2020). Cap-and-trade programs often are designed to achieve greater 

reductions over time, so the cap may be lowered in subsequent years to enable market 

participants to gradually achieve emission reductions. To achieve compliance with the 

capped emission level, market participants are allocated allowances to emit (1 ton per 

allowance), with the total number of allowances summing to the level of the cap. Market 

participants can purchase allowances from other participants to cover excess emissions, 

or sell allowances if they reduce emissions below their allocation. 

 

13 For example, at the federal level, senators John McCain, Jim Jeffords, Jeff Bingaman, and Dianne 

Feinstein have all offered proposals for carbon cap-and-trade programs. These have varied in the details, 

including the level of cap, baseline year vs. intensity, allocation approaches, and what entities would be 

capped. 

 22
Under this type of system, a reduction in carbon emissions below the level of the cap can 

be achieved by retiring an allowance, ensuring that it is not sold to an emitter. Therefore, 

in order for renewable energy generators to be able to affect emissions levels, they will 

have to retire allowances that are allocated to them, purchase and retire them, or have 

allowances retired on their behalf by program administrators. Renewable energy sources 

could also claim to reduce emissions levels if current and future renewable energy 

generation is considered when setting the level of the cap. 

To illustrate, if a new wind energy facility generates electricity at a time that causes a 

fossil fuel facility to back down, the emitting fossil fuel facility will generate less 

electricity and consequently emit less CO2. This creates excess allowances for the fossil 

fuel facility, which can then be sold in the open market, allowing other facilities to avoid 

controlling emissions and emit more CO2, bringing total emissions back up to the level of 

the cap. 

If the wind generation facility offsets the need for a new fossil fuel plant, then existing 

emitters will not need to control emissions for the zero-emitting wind plant to come 

online. Figures 1 and 2 illustrate this point by showing the need for existing facilities to 

reduce emissions to enable a new natural gas plant to come online, while a new zeroemitting wind plant can come online without causing existing plants to reduce their 

emissions (Harmon and Hirschorn 2006; Jacobson 2007). In fact, the result of the new 

wind plant is that there will be less competition among existing emitters for allowances, 

and the price of allowances will be lower than it would if the new fossil-fuel facility had 

come online. Because new renewable energy generation will reduce the cost for emitting 

facilities to meet the cap, it may be more politically feasible to lower the cap in the 

future, but any such future emission reductions are uncertain. 

In either case, i.e., whether the renewable energy plant displaces an existing or new fossil 

plant, the result is the same—the renewable energy facility does not reduce the overall 

level of carbon emissions. 

Another way renewable energy can affect carbon emissions levels is if future renewable 

energy development is taken into account in setting the level of the cap (i.e., the cap is set 

lower to account for current or expected zero- or low-emitting renewable energy 

generation). Under this approach, it can be claimed that the renewable energy or RECs 

reduce emissions levels, because the cap is set at a lower level to account for the zero- or 

low-emitting renewable energy facilities. However, under this approach, the renewable 

energy generators would not have an allowance to sell in emissions markets. 

 23
Add 500 GWH with Natural Gas

(Allowances Remain Capped at 1,000)

1,000 Allowances (Tons)

Sells 250 allowances

Reduces 

emissions by

250 tons

1,000 GWH 500 GWH

Electric

Grid

Result

1,500 GWH

Still 1,000 Tons of Pollution

Government 500 Tons

250 Tons Co

Plant

al

gas plant

250 Tons

Source: Harmon and Hirschorn 2006

Figure 1: Emissions Impacts of Adding New Natural Gas Plant under Cap and Trade

Source: Harmon and Hirschorn 2006 

Add 500 GWH with Wind

(Allowances Remain Capped at 1,000)

1,000 Allowances (Tons)

Makes no 

change 1,000 GWH 500 GWH

Electric

Grid

Result

1,500 GWH

Still 1,000 Tons of Pollution

Government 500 Tons

500 Tons Coal

Plant

Figure 2: Emissions Impacts of Adding New Wind Facility under Cap and Trade 

 24
Allocating Allowances to Renewables 

Traditionally, emissions allowances have been allocated only to emitting power plants, 

i.e., those that burn fossil fuels, based on historic emissions or on the heat content of the 

fuels burned. For example, in the SO2 acid rain program, emission allowances were 

allocated to fossil power plants with a few minor exceptions (Wooley and Morss 2001). 

Other possible approaches are to allocate allowances in proportion to a generator’s share 

(output-based) or supplier’s share (load-based) of the overall electricity market, 

regardless of how the electricity is generated, or to auction some or all of the allowances 

to the highest bidders. 

The primary argument for excluding renewables from receiving allowances or reducing 

the cap is that the emissions cap adds cost to the emitting plants, thereby making 

renewables and other nonemitting plants relatively more cost-competitive. In addition, 

focusing only on emitters reduces administrative complexity and costs. 

Renewables advocates argue that without allocation of allowances to renewable 

generators, renewables will be excluded as a strategy for reducing emissions beyond 

those required by the cap. Because carbon caps may not be set at levels that are necessary 

to address the impacts of global climate change, consumers may want the option to 

voluntarily reduce emissions below the level of the cap. And a loose cap may provide 

little incentive for renewables. Renewable energy developers also argue that they should 

reap financial benefit from the emissions benefits that they provide, although this would 

not necessarily result in a reduction in emissions, if generators sell allowances to 

emitters. Specifically, renewable energy advocates have argued that:14 

• Society needs all commercially viable options for making emission reductions. 

• Renewable generators are emission-free and want to participate in emissions-trading 

programs. 

• Inclusion in emission trading programs will allow renewable energy sellers to “own” 

the environmental benefit of their sources, and this environmental benefit will have 

value to investors, buyers, and other stakeholders. Enabling renewables to retain this 

value may be particularly important in the case of a loose carbon cap, which does 

little to improve the competitive position of renewables. 

• Renewable energy will help society achieve its emission-reduction goals by 

expanding the green power market and achieving emission reductions beyond those 

required by regulation. 

There is policy precedent in the United States for providing allowances to renewable 

energy sources, typically through renewable energy set-asides. For example, a small 

portion of allowances were set aside under the Clean Air Act Title IV SO2 trading program 

for energy conservation and renewables, although few allowances were awarded because of 

restrictions on eligible entities and how they were awarded (Wooley and Morss 2001). 

 

14 Renewable Energy Working Group Steering Committee, “Approaches to Integrating Renewable Energy 

into Greenhouse Gas Trading Programs,” submitted by the Center for Resource Solutions to the Regional 

Greenhouse Gas Initiative, June 2004. http://www.rggi.org/stakeholder_comments.htm. 

 25
In addition, seven states implemented renewable energy set-asides under the federal NOx

Budget Trading Program (U.S. EPA 2005). Several other states have proposed renewable 

energy set-asides under the new Clean Air Interstate Rule, and at least two states 

(Wisconsin and Pennsylvania) have proposed an output-based allocation that would 

include renewable energy sources (Salerno 2006). Chapter 5 provides additional detail 

on allocation options and experience to date. 

Effect on Marketing Claims 

If renewable energy marketers receive and retire carbon emission allowances, then, by 

definition, the generation and use of renewable energy should result in real emission 

reductions and strengthen environmental marketing claims. But if renewables do not 

result in retired allowances or lower emissions caps, then environmental claims for 

renewable energy become problematic. 

What benefits can marketers (or purchasers) claim if they do not retire an allowance or if 

the cap is not adjusted for renewable energy demand? If renewable energy does not 

result in a direct carbon reduction, the simplest claim that generators or marketers might 

make is that the renewable energy is “emission-free” or “pollution-free.” This is the 

general approach to marketing renewable energy in Europe, because carbon and REC 

markets operate independently. However, under the NAAG Guidelines, claims that an 

energy product is “emission-free” or “pollution-free” might imply to consumers that by 

purchasing such energy, they are helping to reduce emissions. 

Some stakeholders have suggested that a company that buys renewable energy might 

claim that it is reducing its own emissions profile because it would lower its indirect 

emissions (i.e., emissions that are outside of its direct control, such as power purchases) 

even though overall system-wide emissions of carbon would not be reduced.15 In this 

case, a marketer might make a claim that a purchase would offset “your emissions 

footprint.” However, companies may resist the idea of making such claims, because 

overall carbon levels would be unaffected. 

Some renewable energy advocates argue that even if allowances are not granted to 

renewables, they will provide environmental benefits in the long run. For example, if a 

significant amount of new renewable energy generation is added to the grid, the added 

zero-emitting generation may make it more cost-effective and politically feasible to 

reduce the level of the cap in future years (although, in the short term, it would simply 

make it easier and less expensive for fossil generators to comply with the cap). This view 

of long-run benefits, based on a common-sense argument, may justify making claims, but 

such claims are weaker and more difficult to substantiate than if allowances were 

allocated directly to renewable generators. Further, this may not prove sufficiently 

compelling to entice consumers to purchase renewable energy and could translate into 

weakness in the voluntary market. 

 

15 Conversation with Craig Hanson, World Resources Institute, October 2006. 

 26
Other industry stakeholders argue that if a buyer of renewable energy really wants to 

make a carbon reduction claim, the market will respond and provide products that meet 

this need. For example, marketers might purchase an allowance and bundle it with a REC 

(some call this a “REC-plus” product), or the REC buyer might simply buy an emission 

allowance separately. However, this approach would likely increase the price for end-use 

consumers, thereby suppressing demand, or reduce the amount of revenue that goes to the 

renewable energy generator (see additional discussion below). 

 

If marketers cannot make clear claims of environmental benefits as a result of carbon 

regulation, this may pose a significant challenge for marketing renewable energy to 

voluntary purchasers. The lack of GHG emissions from renewable energy sources are 

generally considered to be the most significant environmental benefit of these 

technologies. If marketers are restricted from making claims about GHG benefits, they 

may find it difficult to explain the benefits of an already intangible product to consumers. 

And it could reduce the motivation for nonresidential consumers, in particular, which 

could, in turn, stifle voluntary purchases of renewable energy. 

Effect on Price and Demand for Renewable Energy in Voluntary Markets 

Before discussing the influence of carbon markets on the price of RECs, it is helpful to 

review current market prices for both carbon and RECs, and the factors affecting prices 

today. During 2006, carbon traded on the Chicago Climate Exchange (CCX) at prices 

ranging from about $2 to $4.50 per metric ton (MT) of CO2.equivalent.16 Prices in this 

market have remained relatively low, because it is a small voluntary market. In 

comparison, in the European Union where carbon is regulated, prices have been as much 

as an order of magnitude higher, ranging from $8/MT to $40/MT of CO2 equivalent.17

U.S. carbon prices are widely expected to be higher in a regulated market environment 

than the voluntary CCX, but, of course, the stringency of the regulation will determine 

prices. 

RECs sold in large-volume transactions in voluntary markets in the United States have 

ranged from $1/MWh to $5/MWh in 2006, except for solar, which has reached $25/MWh 

or more. Table 1 presents voluntary market REC prices by resource type and location, 

with prices converted to $/CO2 displaced, using regional average CO2 emissions rates. On 

this basis, REC prices range from $2/MT to $14/MT of CO2 displaced. In voluntary 

markets, REC prices are determined by consumer willingness to pay for renewables, 

competitiveness of renewable energy generation, perceived quality of the product offered, 

and other factors such as RPS market demand. 

 

16 Data obtained from CCX http://www.chicagoclimatex.com/trading/stats/monthly/index.htm, accessed 

December 17, 2006. 

17 Data for 2006 from the European Climate Exchange http://www.ecxeurope.com/index_flash.php for 

2006. Prices converted to U.S. dollars assuming an exchange rate of 1.30978 USD/Euro (December 17, 

2006). Prices on the EUETS peaked on April 19, 2006, and then crashed in late April as countries began 

reporting a surplus in allowances (e.g., France, Sweden, and the Czech Republic). For additional 

information, see “Emissions Prices Drop to 13-Month Low After Sweden Shows Surplus,” May 2, 2006 

http://www.ecxeurope.com/pages/page553.php. 

 27
Table 1: Voluntary Market REC Prices (New Renewables), 2006 

Resource Wind Solar Biomass Geothermal LFG 

Region SPP WECC/CA National CA National WECC/CA SERC 

$/MWh 1.30-4.50 3.00-5.00 1.80-5.00 21-25 1.00-1.10 1.80-4.00 1.50 

$/MT CO2e 1.50-5.00 8.20-13.70 2.80-7.90 57-68 1.60-1.80 4.80-10.90 2.40 

Source: Evolution Markets 

Prices converted to $/metric ton assuming average regional CO2 emissions rate from Egrid (U.S. EPA 

2004). 

Impact of Voluntary Carbon Markets on REC Prices 

To date, CCX and other voluntary carbon markets have played little, if any, role in 

influencing REC prices, because the two markets have essentially operated 

independently. Under the CCX, carbon offsets have been derived primarily from 

efficiency and sequestration. While renewables are eligible to provide offsets under CCX, 

they have played a very small role in the CCX market to date, because prices have 

generally been higher in REC markets. 

Outside of CCX, the recent emergence and rapid growth in voluntary “carbon offset” 

products sourced from other carbon reduction measures such as sequestration or energy 

efficiency are creating competition for voluntary market REC products. These products 

are generally sold in direct competition to REC products to consumers who wish to 

reduce their overall CO2 emissions levels. While consumers will likely benefit from 

greater competition and a wider variety of options, the growth in availability of these 

alternative carbon reduction products will likely put downward pressure on REC prices as 

they gain market share. 

Impact of Carbon Regulation on REC Prices and Demand 

With the introduction of carbon regulation, REC markets will gain an additional layer of 

complexity, affecting supply and demand. The form of carbon regulations will determine 

the magnitude of the impacts on REC markets. If carbon is regulated under cap and trade 

in a manner that renewables cannot make clear emission-reductions claims, this will 

likely reduce voluntary demand for renewable energy and put downward pressure on the 

price of RECs. Furthermore, if RECs no longer convey GHG benefits, their value will be 

diminished. 

As mentioned earlier, consumers interested in achieving carbon reductions through their 

green power purchases would need to purchase and retire carbon allowances in 

conjunction with the REC. This would add cost to the product (REC plus carbon 

allowance), likely increasing the price to the end-use consumer, which would suppress 

demand, or lowering the value of the REC. Alternatively, buyers just after the carbon 

claim might simply buy allowances, retire them, and not bother buying renewable energy 

or RECs, again lowering demand. 

 28
An important consequence of falling demand and lower prices for RECs is that renewable 

generators would receive less revenue. This would weaken the financial projections of 

project developers when they seek financing and could reduce investment in new 

renewable energy projects. A number of renewable energy developers have pointed to the 

benefit of having multiple markets for their output to reduce risks in undertaking projects. 

Financiers have only recently begun to value RECs as a source of project revenues, and 

some discount RECs markets as a source of stable, long-term revenues; therefore, any 

further weakening of these markets could reduce their ability to support new project 

development. 

Another implication for REC markets is that it is conceivable that under future carbon 

regulation, carbon allowance prices could exceed voluntary market REC prices, reversing 

the current value relationship. In this case, any product conveying both an allowance and 

a REC would be more expensive than under current market conditions. This would be 

true if the renewable energy generators were to receive allowances or if allowances were 

purchased separately from the REC (REC-plus product). In the case in which generators 

received carbon allowances that they could sell in the emission market, they would be 

unwilling to sell the allowance bundled with a REC for less than they could receive in the 

two markets separately. This would lead to an increase in prices for products conveying 

emissions benefits, which would suppress voluntary market demand. Under high 

allowance prices, generators would have greater incentive to sell allowances in emissions 

markets, separate from the RECs, which could lead to a devaluation in RECs prices, but 

generators would be compensated by revenues from carbon allowances. 

Taking a broader market perspective, renewables generally will benefit from carbon 

regulation because it will increase prices for fossil generators and, thus, improve the costeffectiveness of renewable energy generation. The level of the cap will determine the 

incentive provided for renewables; a tight cap will provide a strong incentive, while a 

loose cap may provide little incentive. A tight carbon cap will also likely encourage more 

direct investment by utilities in renewable energy projects, particularly over time as 

demand for electricity grows. Under a loose cap, the near-term response may be 

dominated by efficiency improvements at fossil fuel plants. 

While renewables will reap benefits from carbon regulation, the role of voluntary markets 

is typically to support investment in renewables beyond what is supported through 

mandates or other types of policy support. Carbon caps may be insufficient to address the 

threat of climate change; therefore, additional action may be necessary to avoid potential 

impacts. If the viability or credibility of voluntary renewable energy markets is 

diminished, one avenue for consumers to affect change above and beyond regulatory 

measures will be lost. Although renewables are one possible long-term strategy for 

addressing climate change, declines in voluntary markets or their ability to stimulate new 

renewable energy development could limit near-term investments in renewable energy 

technologies that are important for improving the technology as a longer-term solution. 

Renewable energy sources may also warrant support in addition to that provided by 

carbon policy, because they provide other societal benefits, such as energy security, 

energy independence, lack of resource depletion, and air quality benefits. 

 29
Effect on Compliance REC Markets

While the primary focus of this paper is on the effects of carbon regulation on voluntary 

renewable markets, carbon regulation also has important implications for renewable 

energy compliance markets, which we discuss briefly here. With the development of 

carbon markets, states will need to determine whether RECs used for RPS compliance 

must include (and retire) carbon allowances if allowances are granted to renewables. 

States will need to consider the objective of the RPS in making this decision. If the 

objective of the RPS is to achieve emission reductions, this can be achieved by retiring 

allowances with the REC or considering the RPS in setting the level of the carbon 

emissions cap. 

A number of states articulate their policy objectives in RPS legislation or rules. Most 

policies mention expected environmental benefits, and about half are explicit in 

enumerating emission reductions among the expected benefits. For example, Colorado 

and Maryland are two states with a general expression of benefits, while California and 

Rhode Island have more specific expectations. 

Colorado’s RPS law, enacted by a vote of the people, reads, in part “to improve the 

natural environment of the state”; and Maryland’s law states the RPS is adopted to 

provide, again, in part, “long-term decreased emissions, a healthier environment.” 

California’s legislation states that “The development of renewable energy resources may 

ameliorate air quality problems throughout the state and improve public health by 

reducing the burning of fossil fuels and the associated environmental impacts.” The 

Rhode Island State Legislature adopted its RPS in expectation that “Increased use of 

renewable energy can reduce air pollution, including carbon dioxide emissions that 

adversely affect public health and contribute to global warming.” If renewable energy 

generation does not lead to a retirement or reduction in emission allowances, these 

expectations will not be met (Holt and Wiser 2007). 

Some states are explicit about whether allowances must be retired with a REC used for 

RPS compliance; and, as might be expected, states have taken different positions (Holt 

and Wiser 2007). New York and Colorado expect that emissions benefits and allowances, 

if any, must be retired for RPS compliance. Arizona’s rules also take this approach, 

stating, “If an Affected Utility acquires, trades, or sells environmental pollution reduction 

credits or any other environmental attributes associated with an Eligible Renewable 

Energy Resource, the Affected Utility may not apply Renewable Energy Credits derived 

from that resource to satisfy the requirements of these rules.”(ACC 2006) 

On the other hand, Delaware and Pennsylvania (proposed rules) state explicitly that they 

do not require emissions benefits or allowances to be retired with the REC. A number of 

other states define a compliance REC as including all renewable and environmental 

attributes, but it is not clear what that could mean with respect to emission allowances. 

 30
Allowing a REC to be used for compliance without emissions allowances would likely 

make it less expensive for entities to comply with the RPS and carbon policies, which 

would ultimately translate to savings for end-use consumers. Some developers and other 

industry participants advocate for this approach, because it would provide multiple 

revenue streams for project developers, if renewables are allocated allowances. However, 

it would mean that RPS policies would not affect overall carbon emission levels. 

If states require emissions allowances to be retired with the REC for RPS compliance, 

they will ensure that the RPS results in emission reductions. This would make 

compliance more expensive, but would enable states to achieve their RPS objectives of 

cleaner air and GHG emission reductions. States could also achieve these RPS objectives 

by setting the emissions cap to account for expected RPS demand for nonemitting 

generation. 

Finally, even if states decide to require any allowances allocated to renewables with the 

REC for RPS compliance, they may still count the allowances retired for RPS compliance 

toward their carbon reduction goal. California, for example, requires RECs used for RPS 

compliance to include any available emissions allowances, but plans to count the RPS 

carbon benefits toward the state’s carbon goal (Wiser 2007). 

Effect of Receiving Allowances but Selling Them Separately from the REC 

If renewables receive allowances under cap-and-trade rules, there is no guarantee that 

they will remain bundled with the REC. Renewable generators may find it advantageous 

to sell the allowance separately from the REC if the two revenue streams combined 

provide more income than selling RECs bundled with allowances. If the introduction of 

carbon regulation increases the value of carbon allowances over those seen so far in 

voluntary carbon markets, reversing the current value relationship, renewable generators 

would have an even stronger motivation to sell the allowance separate from the REC. 

Generators argue that the ability to participate in multiple markets would strengthen the 

financial viability of renewable energy projects and should lead to greater investment in 

new renewables. However, other industry participants argue that the expectation of 

additive revenue streams is illusory, as the value of RECs would drop if carbon benefits 

are stripped out. 

Other stakeholders argue that any allowances granted to renewables should be included 

(and retired) with the REC to create maximum environmental benefit. This would ensure 

that the environmental benefits of voluntary purchases would be in addition to the 

environmental benefits of emission cap-and-trade programs. For example, the Green-e 

product certification program requires that retail REC products include any emissions 

allowances granted to renewables to be eligible for certification.18 In addition, the U.S. 

EPA’s Green Power Partnership requirements state that: “for a purchase to qualify for the 

 

18 See the Green-e National Standard http://www.green-e.org/getcert_re_stan.shtml 

 31
Partnership, Partners must ensure the green power or RECs they purchase convey the 

right to make all associated environmental benefit statements.”19 

In essence, while most renewable energy stakeholders want to see renewable generators 

recognized for their emissions benefits, they share this objective for different reasons—

some for enhancing revenues and supporting new projects, and others for achieving 

immediate environmental benefits and protecting consumers. 

From a voluntary market perspective, the effect on marketing claims of selling emission 

allowances separately from the renewable energy or REC is the same as if renewable 

energy did not receive allowances at all. That is, neither the seller nor the buyer of 

renewable energy could claim a carbon reduction if the allowance has been sold to a third 

party. This returns us to the same question of motivation to buy renewable energy on the 

voluntary market. 

 

19 See Green Power Partnership Program Requirements Document

http://www.epa.gov/greenpower/pdf/gpp_partnership_reqs.pdf. 

 32
4.0 Emerging Carbon Markets in the United States 

This chapter describes several emerging carbon-trading systems and how the design of 

these programs may affect voluntary renewable energy markets. First, we discuss several 

U.S. carbon-trading programs including the Regional Greenhouse Gas Initiative (RGGI) 

in the Northeast; California’s GHG reduction programs, which will likely include trading; 

and the Chicago Climate Exchange (CCX), a voluntary carbon reduction and trading 

program in which commitments become legally binding once a participant joins. Table 2

compares these three programs. Finally, we briefly discuss carbon regulation in Europe 

and the interaction with renewable energy markets there. 

Table 2: Comparison of CA vs. RGGI vs. CCX Carbon-Reduction Strategies 

California RGGI CCX 

Compliance Mandatory Mandatory Voluntary 

Emissions 

covered 

CO2, CH4, N2O, PFCs, 

HFCs, SF6

CO2 

Possibly more in the 

future 

CO2, CH4, N2O, PFCs, 

HFCs, SF6

Phase I members:

Average of annual 

emissions from 1998-

2001 

Baseline 1990 121,253,550 short tons 

Phase II members: 

Same as Phase I, OR 

2000 levels 

Emissions Target 

and Date 

2000 levels by 2010 

1990 levels by 2020 

80% below 1990 levels 

by 2050 

Stabilize at “current 

levels” by 2009-2014 

10% reduction by 2019 

(2.5% each year) 

4% below baseline by 

2006 (Phase I) 

6% below baseline by 

2010 (Phase II) 

Geographic 

Scope 

Statewide Northeast U.S. 

(currently 7 states: CT, 

DE, ME, NH, NJ, NY, VT) 

Primarily N. American 

but open worldwide 

Sectors Covered All significant sources 

of GHG emissions 

(includes electricity 

sector, others TBD) 

Electricity Generators ≥

25 MW 

Any “eligible 

commercial entity”20

who voluntarily opts in 

Allowance 

Distribution 

TBD Up to states Based on baseline 

Offsets from RE 

Allowed? 

TBD No Yes 

Renewable 

Energy Support 

Fund 

TBD 25% for strategic energy 

purposes (includes 

energy efficiency and 

consumer rebates) 

No 

TBD=to be determined. 

 

20 “Eligible commercial entity as defined in Section 1a(11) of the Commodity Exchange Act.” 

(http://www.chicagoclimatex.com/about/faq.html under “who is eligible,” accessed December 13, 2006)

 33
Other states are also eyeing GHG actions, but we do not describe these efforts in detail 

here, because they are still in early stages of development.21 More than half of U.S. states 

have climate action plans, which seek to address climate change—and this number is 

growing quickly.22 Several states are considering a cap on GHG emissions. For example, 

Oregon Governor Ted Kulongoski has formed a Climate Change Integration Group to 

make recommendations for implementing a load-based cap-and-trade program for 

reducing carbon emissions.23 In addition, in 2005, both Arizona and New Mexico set up 

climate change advisory groups tasked with creating plans to reduce state GHG 

emissions. In their current forms, these plans mention investigating a regional cap-andtrade system as one of many policy options for reducing GHG emissions in their 

respective states.24 

Regional Greenhouse Gas Initiative (RGGI)

RGGI was initiated in 2003, when New York Governor George Pataki invited 11 

Northeast and Mid-Atlantic states to participate in discussions about a regional cap-andtrade system for reducing GHG emissions. In response, nine of those states sent 

representatives to initiate the discussions: Connecticut, Delaware, Maine, Massachusetts, 

New Hampshire, New Jersey, New York, Rhode Island, and Vermont. In addition, 

Maryland, Pennsylvania, the Eastern Canadian Provinces Secretariat, and the Province of 

New Brunswick sent observers to the talks (RGGI undated). 

In August 2003, the states drafted and endorsed an action plan that set program goals. 

The objective of RGGI is to create a multistate cap-and-trade program to stabilize and 

then reduce GHG emissions while sustaining affordable and reliable energy, and 

accommodating the diversity of policies and programs in participating states.25 

In December 2005, the governors of seven states (all of the aforementioned participating 

states except Massachusetts and Rhode Island) signed a memorandum of understanding 

(“MOU”) agreeing to implement RGGI. Since then, Massachusetts, Rhode Island and 

Maryland have indicated that they plan to fully participate, while the District of Columbia 

and Pennsylvania are evaluating the possibility of joining (Litz 2007, Morgan 2007). 

Several others continue to observe the process. In August 2006, participating states issued 

 

21 See, for example, the Pew Center on Global Climate Change at 

http://www.pewclimate.org/what_s_being_done/in_the_states/ (accessed December 27, 2006). 22 For a map of states with climate action plans, go to 

http://www.pewclimate.org/what_s_being_done/in_the_states/action_plan_map.cfm, accessed February 15, 

2007. 

23 For additional information, see http://www.oregon.gov/ENERGY/GBLWRM/CCIG.shtml, accessed 

December 13, 2006. 

24 For additional information about Arizona’s Climate Change Advisory Group and Arizona’s Climate 

Action Plan, see http://www.azclimatechange.us/index.cfm; and for New Mexico’s Climate Change 

Advisory Group (CCAG) http://www.nmclimatechange.us/index.cfm and draft plan, see 

http://www.nmclimatechange.us/template.cfm?FrontID=4700, accessed December 13, 2006. 25 Program goals and guiding principles can be found online at http://www.rggi.org/goals.htm, accessed 

December 13, 2006. 

 34
a Model Rule, which will provide the basis for implementation in the individual states.26 

The governors of each of the participating states have agreed to propose legislation based 

on the Model Rule by December 31, 2008. The states will create and maintain a regional 

organization to oversee administration of the program. 

Program details

RGGI will begin by capping CO2 emissions only, from electricity generating sources that 

have a capacity of 25 MW or larger. If successful, RGGI may expand to cover other 

emissions from other sources. It is up to each state to develop specific rules for 

implementation, within the framework of the Model Rule. 

Emissions cap and targets 

Implementation of RGGI will begin in January 2009, at which point the states have 

agreed to stabilize and cap regional CO2 emissions at current levels (121 million short 

tons27) continuing through 2015. Beginning in 2015, the goal is to reduce regional 

emissions by 2.5% each year, for a total of a 10% reduction by the end of 2018. (See 

Figure 3)

28 

0

20

40

60

80

100

120

140

2009

2010

20112012

2013

20142015

2016

20172018

Year

Short tons GHG emissions 

(millions)

 Figure 3: Regional Emissions-Reduction Schedule 

Allowances 

The regional emissions budget will be divided among the participating states (see 

Figure 4).29 The states’ budgets will remain the same through 2014, at which point they 

will ratchet down by 2.5% each year through 2018. Each state has the authority to 

allocate its own emissions allowances (each allowance equals 1 ton of carbon emissions). 

 

26 The MOU and the Model Rule can be found online at http://www.rggi.org/modelrule.htm, accessed 

December 13, 2006. 

27 A short ton is the U.S. measure of tonnage and is equivalent to 2,000 pounds. This is different from the 

metric ton, which is larger and approximately 2,205 pounds. 

28 This regional budget covers the seven states that signed the MOU in 2005. As new states join, it will be 

changed accordingly. 

29 Specific allocations are provided in the Memorandum of Understanding (MOU) on Page 3. The 

allocations for Massachusetts and Rhode Island will be 26.7 million short tons and 2.7 million short tons 

respectively (page 8 of the MOU). The MOU can be found online at 

http://www.rggi.org/docs/mou_12_20_05.pdf, accessed February 18, 2007.

 35
However, each state must use at least 25% of its allocation for consumer benefits or 

strategic energy purposes (e.g., energy efficiency programs, customer rebates, and 

renewables). Methods for allocating the allowances could include any or some 

combination of the following: 

• Directly allocating allowances to generators (using either an input- or outputbased methodology) 

• Auctioning allowances to generators (either statewide or regionally with revenues 

likely used for consumer benefit purposes) 

• Distributing allowances to LSEs, who would then sell them to generators 

(producing revenue which could be used for consumer benefit purposes) 

At the end of each three-year compliance period, entities must have allowances 

equivalent to the amount of CO2 they emitted. They can achieve this by reducing 

emissions, purchasing allowances from the market, or creating credits through an offset 

project (discussed below). Entities with a surplus of allowances may either bank them for 

future use or sell them. 

CT

9%

DE

6%

ME

5%

NH

7%

NJ

19%

NY

53%

VT

1%

CT

DE

ME

NH

NJ

NY

VT

 Figure 4: State Share of Regional Emissions 

Flexibility mechanisms 

RGGI includes three flexibility mechanisms for entities to achieve their emissionsreduction goals: banking, offsets, and a safety valve. RGGI allows entities to bank 

allowances for future use without limitation. 

RGGI also allows entities to use offsets to account for up to 3.3% of their total emissions. 

Offsets can be obtained by investing in GHG emission-reduction projects outside of the 

electricity sector. These projects can take place within or outside of the RGGI regulated 

area, but projects outside of the area must follow certain specifications laid out in the 

 36
amended MOU and the Model Rule.30 While details of the offset program will be refined, 

the following types of projects are eligible for creating offsets: 

• Landfill methane capture and destruction; 

• Reduction in fugitive emissions of sulfur hexafluoride (SF6) from electricity 

transmission and distribution equipment; 

• End-use energy efficiency for natural gas, oil, or propane projects; 

• Afforestation; and 

• Avoided methane from farming operations 

To limit compliance costs, RGGI also includes several “safety valves.” For example, if 

the average annual price of an emissions allowance increases above $7, an entity may 

invest in offsets for 5% of their total emissions. If the price increases above $10, entities 

may use offsets for 10% of their reported emissions (at this point, offsets from 

international projects will also be allowed.) Under these circumstances, the compliance 

period may be extended as well. 

Issues related to renewable energy 

The structure of the RGGI program raises issues for the ability of renewable energy 

sources to affect overall GHG emissions levels, depending on how states choose to 

implement it. States have significant discretion in determining how to allocate allowances 

and, therefore, the effects could vary by state. While states could allocate allowances 

directly to renewable energy sources through an output-based methodology or set-aside, 

at the time of writing, a number of states are leaning toward using an auction. For 

example, New York, Massachusetts, Maine, and Vermont have all proposed auctioning 

off 100% of the allowances (Litz 2007). If an auction or other approach is used in which 

renewable energy sources are not allocated allowances at zero cost, then this will limit 

the GHG benefit claims that renewable energy sources can make (as discussed in 

Chapter 3). 

The RGGI Model Rule also offers an alternative solution to the GHG benefits claims 

issue. States may choose to create what RGGI refers to as a “voluntary renewable energy 

set-aside” in which allowances are retired on behalf of consumers who make voluntary 

purchases of renewable energy. Under this approach, states would estimate voluntary 

market purchases at the beginning of each compliance period, and set aside an equivalent 

number of allowances. Then, at the end of the compliance period, the state would retire 

allowances equivalent to the actual voluntary REC sales, and true-up any difference 

between the actual and projected sales in the next compliance period. According to the 

Model Rule, each MWh of renewable energy purchased should be multiplied by the CO2

emissions rate in the region where the generation occurred. If this is not available, the 

regulatory agency will need to determine an average emissions rate (RGGI Model Rule 

2006). At the time of writing, Maine had included a voluntary renewable energy set-aside 

in proposed legislation (LD 1090) for implementing RGGI. 

 

30 Offset projects from outside the participating states must occur under the regulatory watch of a 

cooperating agency in that state. States or other U.S. jurisdictions not participating in RGGI will need to 

enter into a memorandum of understanding with the RGGI state agencies and agree to incur certain 

administrative obligations to ensure the credibility of the offset projects. 

 37
RGGI includes other provisions that could potentially benefit renewable energy sources. 

Most significantly, states are required to set aside at least 25% of allowances for 

“consumer benefit or strategic energy purposes,” such as energy efficiency, renewable, 

and other clean energy technologies and ratepayer rebates. In fact, some states are 

considering setting aside more than 25% of allowances for these consumer benefit 

purposes. Based on discussions with participating states, it seems unlikely that a state 

would choose to give these allowances directly to renewable energy sources. A number 

of states are considering distributing these allowances through some form of auction, 

where the proceeds are collected and used for consumer benefit purposes. While 

renewable energy may benefit from a portion of these revenues, some states have 

suggested that much of the funding would likely go to energy efficiency. Furthermore, 

while these funds may help provide financial support to renewable energy sources, they 

would not address the issue of enabling renewable energy purchases to reduce emissions 

below the cap. 

California “Global Warming Solutions Act” and Load-Based GHG Cap

In June 2005, California Governor Arnold Schwarzenegger signed an Executive Order31

establishing GHG emission-reduction targets for the state (see Table 3).32 Since then, 

there has been additional legislation and action by the California Public Utilities 

Commission (CPUC) to meet these goals. This section will discuss the details of the two 

most pertinent policies related to potential future carbon cap-and-trade programs—an 

effort to establish a load-based cap and the Global Warming Solutions Act (AB32), 

which is now the umbrella legislation covering the state’s GHG reduction efforts. 

Table 3: State of California’s GHG Reduction Targets 

Target Date Emissions level 

2010 2000 emissions levels 

2020 1990 emissions levels 

2050 80% below 1990 emissions levels 

Load-Based Cap and Emissions Performance Standard

In February 2006, the CPUC issued a decision (D.06-02-032)33 stating its intent to 

establish a load-based cap (a cap placed on load-serving entities rather than individual 

generators) for the states three investor-owned utilities (Pacific Gas and Electric 

Company, San Diego Gas & Electric Company, Southern California Edison Company) 

 

31 Executive Order S-3-05 can be found online at http://www.dot.ca.gov/hq/energy/ExecOrderS-3-05.htm, 

accessed October 17, 2006. 

32 The Executive Order tasks the Secretary of the California Environmental Protection Agency to 

coordinate the efforts to meet the targets. There are seven other responsible parties including the president 

of the Public Utilities Commission and the chairperson of the Air Resources Board (this group is now 

referred to as the “Climate Action Team”). 

33 D.06-02-032 can be found online at http://www.cpuc.ca.gov/PUBLISHED/FINAL_DECISION/53720-

07.htm#P391_110434, accessed October 17, 2006. D.06-02-032 will be referred to as “the CPUC 

decision” in this chapter. 

 38
and nonutility load-serving entities (LSEs) that provide electric power to customers 

within the service territories of the aforementioned companies. The goal of the program is 

to reduce the California electricity sector’s impact on climate change and protect 

ratepayers from elevated prices of electricity caused by costs associated with anticipated 

carbon regulation. The cap is to be consistent with any future carbon cap-and-trade 

regimes in the West, nationally or internationally. This is particularly relevant because 

Governor Schwarzenegger has recently pledged public partnerships with the United 

Kingdom’s Prime Minister Tony Blair and New York’s Governor Pataki to investigate 

linkages between future GHG emissions-trading programs.34 

The load-based cap covers LSEs rather than power producers, minimizing leakage to 

other states. In other words, by regulating the emissions portfolios of LSEs, emissions 

from all of the electric power serving the regulated entities will have to meet the 

requirements, whether the power comes from California or elsewhere. If the CPUC were 

to only regulate in-state generators, California could still obtain a large amount of 

“dirtier” power from outside the state. While the CPUC does not have regulatory control 

outside of the state, by regulating the LSEs, it causes them to consider the emissions from 

all of the generators they use to serve their customers. 

According to the CPUC decision, the load-based cap will ultimately cover all six major 

GHGs (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, 

and sulfur hexafluoride). Although the allocation method has yet to be determined, the 

CPUC will allocate allowances in tons of carbon dioxide equivalents (CO2e), which 

should allow the program to interact with other cap-and-trade programs. The CPUC will 

also establish a historical baseline (with preference for 1990), create provisions for 

lowering the cap over time, and establish reporting protocols for the LSEs. The CPUC 

also plans to investigate “flexible compliance options” such as offsets, trading, banking, 

and borrowing as well as alternative compliance payments. 

Implementation Plan

The CPUC plans to implement its regulatory scheme in two phases to begin controlling 

GHG emissions as soon as possible, while ensuring that the long-term program is 

comprehensive and effective. Phase 1 is the creation of a GHG Emissions Performance 

Standard. After D.06-02-03 was issued by the CPUC, the California Legislature passed 

SB1368,35 which codifies and provides direction for the standard, and applies it to 

utilities statewide, including municipal utilities. This bill requires the establishment of a 

GHG Emissions Performance Standard for all base-load generation of LSEs by February 

2007 and for all base-load generation of local publicly owned electric utilities by June 

 

34 For additional information about the partnership with the UK, see http://gov.ca.gov/index.php/factsheet/united-kingdom-and-california-announcement-on-climate-change-clean-energy-c/ and the 

partnership with New York, see http://gov.ca.gov/index.php?/press-release/4449/, accessed December 13, 

2006. 

35 For SB1368 status and history, see 

http://www.leginfo.ca.gov/cgibin/postquery?bill_number=sb_1368&sess=CUR&house=B&author=perata

(accessed December 13, 2006). SB1368 will be referred to as “the senate bill” or “the bill” in this chapter. 

 39
2007.36,37 Once the standard is in effect, the utilities cannot enter into contracts to 

purchase power from facilities with emissions that exceed the rate of GHG emissions 

from a combined-cycle natural gas plant.38 Phase 1 will not include market-based 

mechanisms such as trading emissions credits. 

Phase 2, which is currently under development, will focus on the design and 

implementation of the load-based cap. The LSEs will be responsible for establishing their 

own baselines and developing a plan for achieving the targeted reductions (which have 

yet to be established). Reduction strategies may include increasing the amount of 

renewable generation in the portfolio or reducing emissions at existing facilities. Phase 2 

may include emissions trading, but this has not yet been established. 

Global Warming Solutions Act – AB32

In August 2006, the California State Legislature passed AB32 (the Global Warming 

Solutions Act),39 which is designed to reduce the state’s impact on global warming. 

AB32 requires a reduction of statewide GHG emissions to 1990 levels by 2020, 

beginning in 2012. It covers emissions from electricity consumed in California as well as 

other “significant” sources of GHG emissions in the state to be determined by the 

California Air Resources Board (CARB). 

AB32 tasks CARB with establishing a statewide GHG monitoring and reporting system, 

and determining 1990 GHG levels by 2008. CARB will also be responsible for 

determining early action measures to reduce emissions in the short term (measures to be 

determined by 2007 and implemented by 2010), and a plan for meeting the target in the 

most cost-effective manner. The act authorizes CARB to use market-based mechanisms, 

which could include trading, a carbon tax, or other mechanisms; however, this has not yet 

been determined. CARB must put regulations in place to meet the target by 2011, and the 

regulations will be effective beginning in 2012 (see Table 4 for a timeline). 

Among other things, the regulations will determine how allowances should be allocated, 

if applicable, and will give credit to those entities that took early action. The regulations 

must be designed to minimize leakage of emissions out of state; not interfere with federal 

and state efforts to reduce other toxic emissions; and ensure GHG reductions are real, 

quantifiable, and verifiable—and that they are new and would not have otherwise 

occurred. CARB must work with the CPUC so that reduction measures for electricity are 

not “duplicative or inconsistent with regulatory requirements.” 

 

36 The CPUC does not regulate municipals, therefore municipals will report to the Energy Commission. 

The requirements are expected to be essentially the same. 

37 The CPUC adopted an interim Emissions Performance Standard (EPS) on January 25, 2007, that enables 

renewable energy sources to meet the EPS even if they do not retain their RECs. 

http://www.cpuc.ca.gov/static/energy/electric/climate+change/060419_ghg_emissionscap.htm (accessed 

February 20, 2007). 

38 The EPS will apply to all new generation and new or renewed contracts with a term of five or more 

years. 

39 The final text for AB32 can be found online at http://www.arb.ca.gov/cc/docs/ab32text.pdf (accessed 

December 13, 2006). 

 40
Table 4: AB32 Deadlines 

Target Date Task 

2007 California Air Resources Board (CARB) must determine early action 

measures 

2008 CARB must establish monitoring and reporting system 

2008 CARB must determine 1990 GHG emissions levels 

2009 CARB must have plan for meeting targets in the most cost-effective 

manner 

2010 Meet deadline for implementing early action measures 

2011 Regulations for meeting targets must be in place 

2012 Affected entities begin to phase in GHG limits 

2020 Reach 1990 emissions levels 

As stated earlier, AB32 now acts as the umbrella regulation for the CPUC’s effort to 

create a load-based cap. The CPUC is working with CARB and began planning in late 

2006 how the utilities will meet AB32 targets. The CPUC has issued a schedule that calls 

for a final decision by the end of 2008. The schedule covers issues such as reporting, 

establishing baselines, allowance allocation options, the design of the cap structure, and 

flexible compliance mechanisms (Tom 2007). 

Issues related to renewable energy

Because it is still early in the design process for California’s GHG regulatory systems, it 

is difficult to determine how much of an influence these programs will have on renewable 

energy markets. The issue of whether renewable energy generators will be able to 

demonstrably and directly reduce GHG emissions will depend on the policy structure.

Regulators will need to address how the voluntary market will interact with the new 

mandatory requirements, and whether voluntary purchases would be in addition to 

reductions achieved by the cap. If the policy is designed so that a renewable energy 

source that has sold off its RECs in the voluntary market would result in system power 

that needs an allowance, then a voluntary purchase would have the effect of reducing 

emissions below the cap. 

Chicago Climate Exchange 

The Chicago Climate Exchange (CCX)40 is North America’s only active voluntary—but 

legally binding—integrated trading system to reduce emissions of all six greenhouse 

gases, with offset projects worldwide. Created in 2000 as a pilot project of Northwestern 

University’s Kellogg Graduate School of Management, with funding from the Joyce 

Foundation, CCX is designed to create a market for trading emissions allowances and 

offsets with price transparency and environmental integrity. CCX also aims to build the 

framework and infrastructure needed to cost-effectively manage GHG emissions through 

the experience and education of participants and the public. Under the program, 

 

40 See http://www.chicagoclimatex.com/. CCX has also formed the New York Climate Exchange and the 

Northeast Climate Exchange in anticipation of the implementation of RGGI; and CCX recently announced 

the establishment of the Montreal Climate Exchange (CCX March 2006; July 2006). The European Climate 

Exchange, a sister organization of CCX, currently handles 80-90% of the exchange-traded volume traded in 

the EU ETS (CCX March 2006). 

 41
members41—which include municipalities, states, universities, power providers, 

agricultural organizations, and large corporations—make commitments to reduce their 

GHG emissions. Those who reduce below the targets have surplus allowances to sell or 

bank; those who emit above the targets comply by purchasing CCX Carbon Financial 

Instrument (CFI) contracts. Trading began in 2003, making CCX the only GHG trading 

market in North America, and currently the only trading market in the world for all six 

GHG emissions and multiple sectors. 

Membership Categories 

New members can join CCX at any time under one of the following four membership 

categories42: 

• CCX Members (Emitting Members) – have direct GHG emissions in the United 

States, Canada, or Mexico 

• CCX Associate Members – have insignificant or no direct GHG emissions, and 

comply with CCX requirements by purchasing emissions allowances to offset all 

indirect emissions associated with a set of business-related activities (e.g., employee 

travel). 

• CCX Exchange Participants – acquire and retire emissions credits 

• CCX Participant Members – include both Offset Providers and Liquidity Providers 

(entities without significant GHG emissions), the latter of which trade or engage in 

market-making activities on the exchange, for purposes other than compliance with 

the CCX reduction schedule. 

Emissions Targets, Trading, and Baseline 

In Phase I, each member committed to reducing emissions by 1% per year below an 

established baseline from 2003-2006, for a total of a 4% reduction by 2006. In Phase II, 

which extends from 2007 to 2010, all members must reduce emissions 6% below their 

baselines by 2010.43 Allowances, or CFI contracts, are the currency of exchange and 

represent 100 metric tons of CO2 equivalent. Members receive allowances based on their 

baseline emissions and their reduction schedule. 

Baseline emissions for Phase I members are the average emissions from their facilities 

from 1998-2001. New Phase II members will establish the same baseline, or may choose 

to use emission levels from 2000. 

Phase I trading concluded in December 2006 and emissions trading for Phase II began in 

April 2006. The following month, CCX experienced record trading volume: Roughly 2.5 

million metric tons of CO2e were traded by the middle of May, accounting for a full onethird of the cumulative trading volume since December 2003 (CCX May 2006). 

 

41 Any entity that qualifies as an “Eligible Commercial Entity,” as defined in Section 1a(11) of the 

Commodity Exchange Act, may access the CCX Trading Platform. For additional information, see 

http://www.chicagoclimatex.com/about/faq.html, accessed December 13, 2006. 42 See http://www.chicagoclimatex.com/about/members.html for examples of companies in the different 

membership categories. 

43 Members joining in Phase II have the same target and, therefore, more aggressive annual goals from 

2007-2010 than members that began their reductions in Phase I. 

 42
Flexibility Mechanisms: Banking and Offsets 

CCX incorporates two flexibility mechanisms: banking and offsets. If members have 

excess allowances in a given year, they may choose to sell them to other members, or 

bank them for future use. Members may use extra allowances from previous years for 

compliance, but they may not use allowances from future years to meet existing-year 

compliance targets (e.g., they cannot use CFIs with a 2006 vintage year in 2005). Net 

sales and banking are limited, subject to the rules outlined in the CCX Rulebook. 

Members may also purchase CFIs from registered offset projects to count toward their 

emission caps. Offsets can be obtained from the following types of projects: forestry, 

agricultural (including soil carbon and methane emissions), landfill methane emissions, 

renewable energy, and clean development mechanism eligible projects.44 

For renewable energy projects to count as an offset under CCX, the RECs and associated 

green attributes must be retired (for the portion of the project output sold into CCX). 

Therefore, the same output of these projects cannot be resold in voluntary markets or 

used for compliance with a state RPS. The amount of emissions offset from renewable 

energy projects are calculated based on the GHG emission rate of a combined-cycle 

natural gas plant, 0.4 metric tons of CO2 per MWh (CCX June 2006 and CCX February 

2006). 

Owners of eligible offset projects may join CCX and sell offsets directly into the market, 

if they meet a certain threshold level; or they may sell the emissions offsets to an offset 

aggregator, who will then package the offsets from several projects for sale on CCX. 

Issues related to renewable energy 

CCX interacts with renewable energy markets on a number of levels. First, it provides 

another voluntary market for the output of renewable energy projects, because 

renewables are eligible to create offsets under CCX. While this is an opportunity for 

renewables, few, if any, renewable energy projects have been used to provide offsets to 

date because REC markets have generally provided greater revenue; although higher 

prices under CCX most recently have made CCX a more attractive option. For example, 

prices for renewables under CCX have ranged from about $1/MWh to $2/MWh most 

recently, as compared to $1/MWh to $5/MWh in the voluntary REC market.45 As 

mentioned above, in order to participate in CCX, renewable sources must include all of 

their environmental attributes (and RECs) and cannot be used for other purposes (e.g. to 

meet an RPS); therefore, renewables have to choose in which market to participate. 

Going forward, price competition from other types of eligible offset projects and prices in 

RPS and voluntary renewable energy markets will determine the role of renewables in the 

CCX. 

 

44 For information about specific types of offset projects, see 

http://www.chicagoclimatex.com/environment/offsets/index.html, accessed December 14, 2006. 45 These calculations are based on the rate used by CCX to calculate displaced CO2 emissions for 

renewable projects (0.4 metric tons of CO2 per MWh) and recent market prices for carbon under CCX and 

voluntary market RECs (excluding solar). See Chapter 3 for more information on market prices. 

 43
On the other hand, CCX facilitates a certain degree of competition for renewable energy 

markets to the extent that emission reductions sourced from projects other than renewable 

energy (i.e., methane capture and destruction, soil carbon sequestration) under CCX are 

used to supply voluntary carbon offset products, which may be marketed in direct 

competition to green power products. For example, a number of organizations—such as 

TerraPass, DriveNeutral, and Carbonfund.org—acquire and retire CFIs from CCX to 

supply carbon-offset products that they market to end-use consumers who want to offset 

the GHG emissions released through their daily activities. These products are marketed in 

direct competition to pure green power products. To the extent that CFIs are derived from 

efficiency and other eligible projects, these create competition for renewable energy as a 

carbon-reduction strategy. However, some carbon-offset marketers include RECs (in 

addition to other carbon reduction projects) in the portfolio of offsets, which supports the 

market for renewables. 

European Union (EU) 

Unlike the United States, the European Union (EU) has signed the Kyoto Protocol, and 

all of the member countries have made national commitments to CO2 reduction. Entities 

trade carbon credits on the European Union Emissions Trading Scheme (ETS), which is 

currently the world’s largest carbon-trading regime. From April 2005 to November 31, 

2006, more than 500 million metric tons of carbon had been traded through the European 

Climate Exchange (ECX) (ECX 2006). The ETS currently only allows trades for CO2, 

with the option to expand to other GHG emissions in the future. The trading scheme only 

covers large emitters in a few industries, including power and heat. Each country has a 

National Allocation Plan that sets targets for individual companies. There are 12,000 

plants currently registered to trade, and companies that fail to meet their targets will be 

fined (Moody 2006). 

In Europe, the carbon market is separate from renewable energy markets, and renewable 

energy does not receive allowances for carbon under the ETS. The rationale is that 

renewables emit no carbon, and therefore do not need allowances. Further, including 

renewables could lead to double-counting of emissions benefits.46 Finally, there are other 

policies in effect supporting renewables such as feed-in tariffs, quota obligation systems 

(similar to an RPS), and disclosure statements. While some countries took into account 

the amount of new renewable energy generation that would result from existing 

renewable energy policies when setting the CO2 target, this is not the case for all of the 

countries participating in Kyoto. In the countries that did, renewable sources could claim 

a reduction in CO2 (Ölz et al. 2006). Renewables are also seen as benefiting in the ETS, 

due to the indirect advantage they could receive as power prices increase for fossil fuel 

generators (Schneiders 2006, Kristiansen 2006, Moody 2006). 

 

46 See Ölz et al. 2006 for further discussion on the issue of double-counting. 

 44
REC markets also exist in Europe where countries use RECs to meet EU or individual 

country renewable energy targets, and for voluntary markets.47 A REC can be used to 

calculate CO2 emission reductions; however, a REC does not include carbon (Moody 

2006, Schneiders 2006). A REC is primarily a tracking tool, or proof that electricity was 

generated from a renewable energy source in a certain origin. A REC can also represent 

other benefits that renewables provide, such as a lack of SO2 and NOx emissions, fuel 

diversity and economic development (Moody 2006, Ölz et al. 2006) 

At this time, there is no clear evidence that the ETS has had an impact on the voluntary 

renewable energy market (Niermeijer 2006). Lack of research and data with respect to 

this question makes it difficult to assess any potential impacts.48 Some market 

participants have suggested that consumers are not concerned about whether their 

purchases include a direct reduction in carbon, but are comfortable with the fact that they 

are supporting the development of emissions-free power production (Moody 2006). In 

other words, consumers want clean energy and the additional benefits that renewables 

and RECs supply (e.g., fuel diversity, energy security, distributed generation, and 

development of the renewables industry) and not necessarily carbon rights. However, at 

least one recent news article suggests that consumers may think their purchases affect 

carbon levels and are confused about the benefits of green power products.49

Even if it is the case that the European voluntary renewable energy market is unaffected 

by the inability of renewable energy purchasers to reduce overall carbon levels, this 

policy design does not provide a good model for the United States voluntary market. 

Many U.S. entities that make voluntary renewable energy purchases do care about the 

climate impact and are purchasing renewables at least, in part, because they want to 

reduce their carbon footprint (as discussed in Chapter 2). 

 

47 The EU Renewable Energy Directive 2001/77/EC established indicative targets for each country; there is 

no sanction if a country misses its target. How each country achieves its target is its own decision, but 

generally includes either feed-in tariffs, quota systems (similar to RPS), or tax incentives. 

48 Recently, the Netherlands reported a significant decline in green power customers, but the losses have 

been attributed to increasing prices rather than lack of carbon benefits—initially, green power was offered 

at prices below conventional power because of the availability of tax incentives. Greenprices, “Dutch 

Green Power Market Decreased by 20% in Two Years,” December 21, 2006. 

http://www.greenprices.com/eu/index.asp, accessed January 8, 2007. 49 “Consumers 'confused' by green energy tariffs,” December 14, 2006, Guardian Unlimited, 

http://money.guardian.co.uk/news_/story/0,,1972369,00.html, accessed January 8, 2007. 

 45
5.0 Policy Design Options 

As discussed in Chapters 3 and 4, cap and trade is emerging as a form of carbon 

regulation at the state and regional levels. The timing, scope, and form of federal action is 

unknown at this time; but the precedent of state cap and trade, combined with precedentsetting federal cap-and-trade regulation of SO2 and NOx, suggests that cap and trade will 

be considered as part of any federal action. 

On the assumption that carbon regulation will incorporate a cap-and-trade approach, our 

focus in this section is on cap-and-trade policy options that would enable voluntary 

renewable energy markets to thrive.50 We recognize that there are broader issues with 

respect to the design of cap-and-trade programs—such as sectors capped, covered 

emissions, the level of the cap and flexibility mechanisms—but here we focus on how 

cap-and-trade regulation can be accomplished while addressing the needs of voluntary 

renewable energy markets.51 

The discussion of policy options in this chapter is not intended to include a 

comprehensive treatment of allowance allocation methods. Indeed, some of the 

approaches discussed here are independent of the method of allocation. 

In the absence of renewable generators being allocated allowances, marketers could 

purchase allowances so that claims can be made with their retirement (as discussed in 

Chapter 3). This is not a general policy solution to the environmental claims issue, 

however; for that, we turn to some other cap-and-trade design and implementation 

concepts that would enable renewable energy sources to affect emissions levels. 

Set-Aside Allocations to Renewable Generators 

Ensuring that renewable energy generators are allocated allowances is the most direct 

way to credit renewable generation with the emissions benefits they provide under a capand-trade program. A renewable generator can convey an allowance with the sale of 

renewable energy or RECs, and the retirement of the allowance is a clear basis for 

making an emissions-reduction claim. 

One approach for allocating allowances to renewable generation is through a set-aside. 

With this approach, regulators specify—or set aside—a certain percentage of total 

allowances to be granted for defined eligible activities, usually renewable energy and 

energy efficiency. Renewables do not compete with emitting fossil plants for the setaside allowances, but they must apply for them and demonstrate that they are eligible and 

meet other criteria. 

 

50 The main alternative approach to emissions reduction that is sometimes mentioned—a carbon tax—does 

not create the same concerns for voluntary markets. 

51 For a broader discussion of cap-and-trade program design issues, see U.S. EPA (2003). 

 46
Set-asides have been established under the SO2 cap-and-trade program and the federal 

NOx budget-trading program.52 Under the latter program, seven states have adopted setasides for renewables and energy efficiency.53 Under the new CAIR trading program for 

NOx, several additional states are likely to include renewables through a set-aside 

approach (Salerno 2006). 

While set-asides have been used to date in conjunction with free allocations to emitting 

facilities, the set-aside approach could also work with an allowance auction.54 In this 

case, the set-aside would be available to eligible activities, such as renewable generation, 

while the remainder of allowances would be auctioned. The revenue from auctioning 

allowances could also be used to support renewable energy development, although an 

auction by itself would not enable claims of emission reductions. 

With respect to renewable energy markets, there are several main advantages to the setaside option. 

• Purchasers of the renewable energy, or RECs, with the allowances can make a strong 

and substantiated claim to have reduced emissions if they then retire the allowances. 

• Renewable generators that acquire allowances through the set-aside can monetize the 

value of the allowances either in a higher-priced REC or by selling the allowance 

separate from the REC. 

• In addition, there is significant experience with implementing set-asides for 

renewable energy and efficiency. 

There are also several potential disadvantages of set-asides for renewable energy 

markets.55 

• Renewable generators have to apply for the allowances rather than obtaining them 

automatically as emitting sources do. The application and approval process adds cost 

and uncertainty to obtaining allowances. 

• Revenue from allowances could attract better terms for renewable project finance, but 

uncertainty about whether a particular project will receive allowances over the long 

term may reduce the allowance value for project finance. 

• The set-aside pool of allowances may not be big enough, especially if renewable 

generation grows. 

• There is no guarantee that the emissions allowances will remain bundled with the 

renewable energy or RECs. Generators could sell them to emitters instead. Therefore, 

buyers will have to be more informed and discriminating about environmental 

 

52 The Title IV SO2 trading program provided a set-aside (the Conservation and Renewable Energy 

Reserve) for renewables but was little-used, for several reasons: The price of allowances was lower than 

anticipated, providing little economic incentive to take advantage of the set-aside; the program did not 

provide a long-term incentive—only renewables that came online before 2000 were eligible; only utilities 

were eligible to get allowance from the set-aside; and the award of one allowance for 500 MWh of 

generation did not reflect the emissions actually avoided. See Wooley and Morss 2001. 

53 These states are Indiana, Maryland, Massachusetts, Missouri, New Jersey, New York, and Ohio. (U.S. 

EPA 2005) 

54 For more on allowance auctions, see EPA (2003) and RAP (2006). 

55 See Bluestein et al. 2006 for additional discussion. 

 47
products because some RECs in the market will have emissions benefits and others 

will not. 

Possible solutions to some of these concerns could include a periodic increase to the setaside amount as demand grows, and a 5- to 10-year commitment of allowances that are 

approved by the set-aside administrators. 

Output-Based Allocations to Renewable Generators 

Output-based allocation is another way to allocate allowances to renewables. With 

output-based allocations, allowances are granted to generators based on the quantity of 

electricity produced by each electric generator under the cap. Allocations are made 

proportionately to a generator’s percentage of the total generation times the pool of 

allowances available for the allocation period. A renewable generator could, thus, earn its 

proportionate share of allowances and sell them to emitters who need them, or sell them 

for retirement with its RECs. 

There is some precedent for output-based allocation. The EPA’s Clean Air Interstate Rule 

(CAIR) includes a partial output-based allocation for new sources (post-2001); however, 

the allocation applies only to fossil-generating units.56 Both Wisconsin and Pennsylvania 

have proposed a full output-based allocation, including to renewables, under CAIR 

(Wisconsin 2006, Pennsylvania 2007). Both of these states would allocate, based on 

output, to new renewables that commenced operation after a specified date. 

As to output-based allocation of allowances under CO2 cap and trade, such programs are 

just emerging. Output-based allocation was discussed in the development of RGGI, but 

the RGGI Model Rule does not specify a particular allocation approach. Instead, states 

can choose their own approach to allocating allowances. However, none of the RGGI 

states has yet proposed an output-based allocation, and several states have indicated an 

interest in auctioning all allowances. 

However, output-based allocation, in general, is not necessarily a solution to emissionreduction claims by renewable generators. For this approach to work for renewable 

generators, the cap-and-trade rules must specify that renewable generators are eligible to 

receive allowances. 

According to the U.S. EPA, there are several generic benefits of output-based allocation 

that go beyond the inclusion of renewable energy. First, output-based allowances 

encourage energy efficiency at the plant level, because generators make more money if 

they can minimize their fuel input while maximizing electricity output. Second, because 

output-based emission regulations promote increased fuel-conversion efficiency and a 

 

56 The Clean Air Interstate Rule (CAIR) caps emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) 

in 28 eastern states and the District of Columbia. For additional information, see http://www.epa.gov/cair, 

accessed December 14, 2006. EPA already allocated emission allowances for SO2 to sources subject to the 

Acid Rain Program; however, for the NOx trading program, the affected states may allocate their allowance 

budget as they see fit. 

 48
corresponding reduction in fuel consumption, they promote pollution prevention and 

reduced multipollutant emissions. Third, output-based approaches provide a transparent 

measure of the emissions impact of generating electricity because they take into account 

the output and efficiency of the production process. This facilitates “apples to apples” 

comparisons of the emissions impacts of different facilities.57 

On the other hand, awarding allowances based on output creates a subsidy for production. 

Encouraging output in this way may result in lower wholesale prices (which is good for 

consumers), but may lead to less energy efficiency at the end-use level if electricity is 

cheaper. 

More specifically to renewable energy markets, advantages of output-based allocation 

include the following. 

• Purchasers of the renewable energy, or RECs, with the allowances can make a strong 

and substantiated claim to have reduced emissions if they then retire the allowances. 

• Renewable generators that acquire allowances through the set-aside can monetize the 

value of the allowances either in a higher-priced REC or by selling the allowance 

separate from the REC. 

• Once the rules are set, this allocation is more reliable and incurs less transaction cost 

than a set-aside approach (Bluestein et al. 2006). 

Output-based allocation, like an allowance set-aside, does not provide an automatic 

solution for emission-reduction claims by voluntary purchasers, if renewable energy 

generators sell allowances in the carbon market and do not include them with the REC. If 

this occurs and some RECs include allowances and others do not, buyers will have to be 

much better-informed and more discriminating. 

Load-Based Cap 

Under traditional cap-and-trade programs, allowances are allocated to the sources of 

emissions, or power generators. Instead of placing an emissions cap on generators, a 

load-based approach focuses on the portfolio of resources used to serve demand. A loadbased approach would place an emissions cap on the generation portfolio used to serve 

retail or end-use load, and would allocate allowances to the utilities or competitive 

electricity providers—generically, load-serving entities (LSEs). The LSEs would have to 

obtain enough allowances to cover the emissions of their portfolio of sources—the power 

plants from which they buy. If the cap is set low enough, LSEs would be motivated to 

acquire resources that have zero or low emissions. 

Some argue that allocating allowances to emitting power plants is appropriate for SO2 or 

NOx because generators have technology options available to reduce emissions (such as 

 

57 For additional information, see http://www.epa.gov/chp/state_resources/output_based_reg.htm, accessed 

December 14, 2006. For more detail, see U.S. EPA, Office of Atmospheric Programs, Climate Protection 

Partnerships Division, Output-Based Regulations: A Handbook for Air Regulators. Draft final report 

prepared by ERG and Energy and Environmental Analysis Inc., August 2004. 

http://www.epa.gov/chp/pdf/OBR_final_9-1-05.pdf , accessed December 14, 2006. 

 49
scrubbers or selective catalytic reduction), but that individual generators have few options 

to reduce CO2 emissions (RGGI 2004). Under a load-based cap, however, LSEs can 

reduce their CO2 emissions by choosing a less-emitting generation portfolio, including 

emissions-free renewable energy. 

There are several differences between a load-based cap and a cap on generator emissions. 

• If a load-based cap is being implemented by a state (or group of states) rather than the 

national government, it can affect generators located out of state that want to sell into 

the regulated state or region.58 With a cap on generator emissions, by contrast, the 

state’s authority would extend only to generators located within their jurisdiction. 

• A consequence of the load-based cap is that it aligns the motivation of the LSEs to 

obtain cleaner resources with support for renewable energy. Because LSEs have to 

meet an emissions cap on their portfolio, they will compete for the zero-emitting 

resources, increasing the value of such resources.59

• Although a load-based cap motivates LSEs to buy renewable energy or RECs, it does 

not provide an additional revenue stream to renewable generators. That may not 

matter if the demand for emission-free energy drives up the value of renewable 

generation, but it is unclear whether this added value would be equivalent to the 

revenue that might be derived if a renewable generator were to receive allowances 

under a generator cap. 

As with any major policy, whether the policy has the intended effects depends on the 

detailed rules. If RECs are used, some convention must be adopted to assign attributes to 

the underlying energy. When RECs are unbundled from electricity, the underlying 

electricity is left with no attributes (sometimes called “null” energy). If this null energy is 

assigned the state or regional system average attributes (including emissions), it would 

ensure that every MWh sold to end-users has an environmental profile.60 If the LSE is 

allowed to use the null energy without assigning any attributes, the one-to-one 

relationship between retail sales of energy and environmental attributes is lost, and it 

creates the functional equivalent of an emissions-free MWh, which would be doublecounting. By assigning system average attributes to null electricity, an LSE using that 

energy would have to acquire the necessary allowances to cover the emissions. 

If regulators use this approach, it would enable environmental claims by voluntary 

purchasers of RECs. If RECs are sold to voluntary purchasers, the resulting null energy 

would be assigned system attributes so that any LSE using that MWh will have to have 

 

58 Even a national load-based cap could affect the desirability of importing energy from generators outside 

the United States. 

59 Contrast this effect with a cap on emitting generators, which increases the cost of fossil generation 

relative to renewable generation. The relative cost is an incentive for LSEs to buy renewable generation. 

Whether one effect is stronger in favor of renewables than the other is not clear. 

60 This is very similar to states with environmental disclosure requirements where energy without attributes 

is assigned system average attributes on the date that electricity labels are created. 

 50
an allowance to cover its emissions. That takes another allowance out of the allowance 

budget (causing a reduction somewhere else in the system), and enables a voluntary 

purchaser to claim to have reduced emissions. 

Depending on how these issues are resolved, the load-based approach offers another 

potential option for supporting claims by voluntary purchases of renewable energy. 

A load-based cap is being considered on the West Coast by both California and Oregon. 

As discussed in Chapter 4, the California Public Utilities Commission (CPUC) proposed 

to regulate CO2 emissions from its three investor-owned utilities in two phases. The first 

phase would be a performance standard for any new power plants or new contracts for 

power, while the second phase anticipates a cap on emissions from the resource portfolios 

of each regulated utility. The recent approval of SB1367 and AB32 in California seems to 

confirm this approach, and extend it to municipal utilities as well. 

A major hurdle for a load-based cap is that it has not been tested and implemented. As a 

result, there are many details yet to be worked out. States considering a load-based cap 

need to decide whether voluntary renewable energy would count toward meeting the cap, 

and what attributes would be assigned null energy if RECs are used to verify the 

portfolio. The resolution to these issues will determine not only what claims voluntary 

purchasers can make, but also whether consumers are motivated to purchase renewable 

energy. 

In summary, the advantages of a load-based cap to renewables include the following. 

• A load-based cap aligns the motivation of the LSEs to obtain cleaner resources with 

support for renewable energy. 

• A load-based cap may support emission-reduction claims, depending on rules. 

On the other hand, there are some disadvantages. 

• The approach is untested and many details remain to be worked out to enable an 

emissions-reduction claim. 

• A load-based cap would not provide renewables with an opportunity to receive 

revenues in emissions markets because they would not receive allowances. 

Reduce the Cap to Account for Renewable Energy Demand 

Another approach that would enable renewables to make GHG emissions benefits claims 

is if regulators consider demand for renewable electricity when setting the cap, or 

periodically reduce the cap to reflect growing demand for renewable electricity. 

Renewable energy demand could include both mandatory demand from state RPS 

policies as well as projected voluntary demand from retail consumers purchasing 

differentiated green power products. 

Periodic reductions in the cap could be based on either projected demand or on actual 

demand after the fact. In setting the RGGI emissions cap, for example, analysts modeled 

the projected renewable energy generation needed to meet state RPS targets. Setting the 

 51
cap, however, was not based directly on this projected demand. As described by one 

participant, modeling this energy demand reduced the economic impacts of various cap 

levels; but, ultimately, the cap was set by a policy and political exercise that balanced 

numerous factors including electricity price impacts, price uncertainty, emission 

reductions, projected emissions leakage, among other things (Sherry 2007). 

This experience suggests that reducing emissions caps based on projected demand for 

renewable energy would be difficult to achieve. 

To the extent that reluctance to reduce the cap is based on uncertainty about future 

demand, the cap could be adjusted based on reported voluntary and/or mandatory demand 

for renewable energy that has already occurred. After-the-fact data on demand would be 

readily available from regional energy certificate tracking systems, or from state RPS 

programs and marketers of differentiated products for which they want to make 

environmental claims. Actual data, being more reliable and credible than projected 

demand, might facilitate a political agreement allowing emissions caps to be periodically 

reduced. 

The advantages of adjusting the cap, from a renewable energy markets perspective, 

include the following. 

• Reducing the cap based on demand for renewable energy would clearly reduce 

emissions. 

• Retrospective claims could be made by renewable generators that came online in the 

years leading up to the cap reduction. 

There are also disadvantages for renewable energy markets. 

• It is uncertain whether ratcheting down the cap would actually occur because it would 

be subject to a political debate each time the cap is reconsidered. 

• Prospective claims would be tenuous based on expected action to reduce the cap. 

• Adjusting the cap does not provide an opportunity for renewable generators to obtain 

revenues in emissions markets because they would not receive allowances. 

Retire Allowances on Behalf of Renewable Energy Sales 

Another possible approach is for regulators to consider demand for renewable electricity 

and reduce the number of allowances allocated to emitters accordingly. This method 

focuses on retiring allowances after the cap is established, which may not be subject to 

the same political debate that might occur when trying to adjust the cap. 

This approach could apply to renewable energy demand from state RPS policies as well 

as projected voluntary demand from retail consumers purchasing differentiated green 

power products. Adjustments could be based on either projected demand or on actual 

demand, after the fact. In this manner, renewable generators would not actually receive 

allowances, but they could still claim to reduce emissions because some emission 

allowances would never enter circulation and would be retired on their behalf. 

 52
This approach was discussed as part of the RGGI planning process. And, in comments on 

the draft Model Rule, the Center for Resource Solutions, the Pace Law School Energy 

Project, and the Union of Concerned Scientists (UCS) all requested that the Model Rule 

retire allowances on behalf of voluntary demand.61 In particular, UCS commented: 

“Therefore, to sustain and encourage these markets, we believe it is critical that the 

CO2 benefits of renewable energy, which derive from displacement of emitting 

sources in the RGGI region, be recognized...[the Model Rule should] forecast 

voluntary demand and subtract the resulting emission reductions from the cap. The 

forecast would be for each three-year period, and would be trued up by examining the 

number of RECs retired for voluntary market purposes. This information is available 

with the cooperation of the regional certificate tracking systems—the NEPOOL 

Generation Information System (GIS), the PJM Generation Attributes Tracking 

System (GATS), and the New York Environmental Disclosure Program (EDP).” (UCS 

2006) 

The final RGGI Model Rule was revised to take voluntary demand into account, but 

leaves it to the discretion of each participating state, as discussed in Chapter 4. Under 

CO2 Allowance Allocations, the Model Rule states, “The following subdivision is an 

optional voluntary renewable energy set-aside provision. It represents one way a state 

could implement such a set-aside.” (RGGI 2006) 

The provision, if adopted by a state, would allow any person to submit data documenting 

purchases of voluntary renewable energy prior to a three-year control period. Based on 

this information, the state agency responsible for regulating the cap-and-trade program 

would then project voluntary demand for the coming three-year control period and hold 

equivalent allowances in a set-aside or reserve account.62 At the close of the control 

period, the regulatory agency would retire allowances from the set-aside based on actual 

voluntary purchases and the relevant emissions factors. If actual purchases are greater 

than projected, the difference will be added to the projection for the new control period; 

and, if less than projected, the difference will be subtracted from the projection for the 

new control period. 

The RGGI approach does not actually lower the cap, but it has a similar effect by taking 

allowances associated with projected voluntary demand off the top of the cap and then 

setting them aside before allocating the remaining allowances. These reserved allowances 

are later retired based on actual purchases, with the desired effect of reducing CO2

emissions. If adopted by the states into their own rules, this could preserve the ability of 

renewable energy marketers to claim that purchases will reduce emissions. 

 

61 All comments on the draft Model Rule may be found at 

http://www.rggi.org/stakeholder_comments_model_rule.htm, accessed December 14, 2006. 62 Although called a set-aside in the Model Rule, this is not the same as the previous description of a setaside, in which a renewable generator may apply for and receive allowances. In that case, the generator 

may sell or retire the allowances; whereas, in this case, the regulatory agency retires the allowances on 

behalf of consumers purchasing the renewable energy. 

 53
At the time of writing, Maine had included this option to retire allowances on behalf of 

voluntary renewable energy demand in proposed legislation (LD 1090) for implementing 

RGGI, but it is too early to know whether other RGGI states will include this approach in 

their rules. 

Retiring allowances on behalf of renewable energy sales has some advantages to 

renewable generators and markets. 

• It provides direct and clear support for emissions-reduction claims for voluntary 

renewable energy demand. 

• Reserving and retiring allowances for renewable energy reduces allowances available 

to emitters in the market, driving up demand for low- or zero-emission generation 

sources. 

• The approach provides flexibility for the number of emissions allowances to grow as 

demand grows, unlike the fixed set-asides used in some state NOx programs. 

The disadvantages of this approach include the following. 

• Transaction costs could discourage marketers or others from estimating demand and 

then later proving the sales. 

• Marketers, in particular, may be hesitant to disclose proprietary sales figures, though 

regulators could require summaries by state. 

• From a renewable generator’s perspective, this approach is less preferred than 

receiving an allowance, because it would deny them the opportunity to earn revenue 

from the sale of allowances. 

 54
6.0 Summary and Conclusions 

Voluntary markets for renewable energy have been growing rapidly in recent years, 

fueled partly by interest among businesses and consumers in reducing GHG emissions. 

Currently, these markets provide a convenient way in which consumers can support the 

development of renewable energy technologies and address the emissions associated with 

their own electricity consumption. While there are a variety of reasons why consumers 

purchase green power, GHG benefits have been an important motivator, particularly for 

nonresidential consumers to date. Going forward, the emerging regulation of CO2 under 

state and regional cap-and-trade programs has important implications for the viability and 

future growth of voluntary renewable energy markets. 

In an era of carbon regulation, voluntary renewable energy markets can continue to play 

an important role because many consumers may be interested in supporting investment in 

renewable energy beyond what is supported through mandates or other types of policy 

support. Some consumers may not be satisfied that emissions caps or other regulatory 

actions are sufficient to address the threats of global warming. In addition, many 

businesses and organizations may not be subject to carbon regulation, but may be 

interested in taking action to reduce the impacts of their own emissions footprints. 

Businesses and consumers may want to help support renewable energy today in order to 

help transform the technology to meet long-term emission-reduction goals. Voluntary 

markets for renewable energy may also be important because renewables provide 

advantages beyond no (or low) emissions, such as energy security and economic 

development benefits. 

The design of carbon regulations will have implications for the ability of consumers to 

affect emissions levels through their green power purchases, however. If cap-and-trade 

programs are designed and implemented so that renewable energy sources do not reduce 

CO2 levels below the level of the cap (i.e., through the retirement of allowances or 

adjusting the level of the cap), then consumer purchases of renewable energy would not 

affect overall emissions levels, unless they purchased and retired an allowance separately. 

For residential consumers, in particular, this may be problematic, because they are 

unlikely to understand these complex market interaction issues and may believe that their 

purchases of green power from zero- or low-emitting renewable energy sources result in 

emission reductions. This could also reduce business and institutional interest in 

purchasing RECs to the extent that they are motivated by GHG benefits. 

If renewable energy purchases do not affect overall emission levels, what kinds of claims 

can be made by large purchasers and marketers? Large corporate or institutional 

purchasers could claim that they are purchasing renewable energy, without making 

specific emissions-reductions claims; but this may be unsatisfactory for organizations 

interested in making public statements about their efforts to address global warming. 

Marketers might claim that renewable energy is “emissions-free” or, perhaps, that 

purchasing renewable energy will reduce “your emissions.” The latter claim might be 

made because a purchaser could improve the emissions profile of its power purchases, 

although it might be considered deceptive because overall carbon levels would not be 

 55
changed. To clarify what types of claims can be made and what type of disclosure is 

adequate to ensure consumer protection, energy regulators may want to consult with state 

attorneys general and the Federal Trade Commission. 

Under carbon cap and trade, both the methods for setting the emissions cap and for 

allocating allowances are important for emission-reduction claims. Allocating allowances 

to renewable energy generators is one way to credit renewable generation with the 

emissions benefits they provide. A reduction in carbon emissions below the level of the 

cap can be achieved by retiring an allowance, ensuring that it is not sold to an emitter. A 

renewable energy marketer could convey an allowance with the sale of renewable energy 

or RECs, and the retirement of the allowance is a clear basis for making an emissionreduction claim. However, there is no guarantee that the allowances will remain bundled 

with the RECs, as generators will seek to maximize revenues in all available markets. 

Other approaches, such as reducing the cap or automatically retiring allowances to 

account for current and future renewable energy generation, would enable consumers to 

affect GHG emissions levels with their renewable energy purchases, but would not 

provide renewable energy generators the option of selling allowances in emissions 

markets. Thus, policy structures that are best suited for voluntary renewable energy 

markets are not necessarily the preferred policy options for renewable energy generators. 

Some specific policy options that would enable purchasers of renewable energy to affect 

overall emission-reduction claims include the following. 

• Renewable Energy Set-Aside of Allowances. Regulators may set aside a certain 

percentage of total allowances to be granted for renewable energy, which could 

then be retired to make claims. 

• Output-based allocation. Allowances may be granted to generators based on the 

quantity of electricity produced by each electric generator under the cap. If 

renewable energy sources are included in the allocation, the allowances could be 

retired to lower GHG emissions levels. 

• A load-based cap, as under consideration in California, could enable voluntary 

purchases to affect emissions levels depending on the design details. If the 

program is designed so that an allowance is required to cover the underlying 

“null” or generic electricity remaining after RECs are sold into voluntary markets, 

then voluntary purchases would affect emissions levels. 

• Reducing the Cap. Regulators can consider demand for renewable electricity 

when setting the cap, or periodically reduce the cap to reflect growing demand for 

renewable electricity. Periodic reductions in the cap could be based on either 

projected demand or on actual demand after the fact. Because emissions would be 

reduced accordingly, this would enable claims. 

• Retiring Allowances on Behalf of Voluntary Market Demand. Regulators could 

consider demand for renewable electricity and reduce the number of allowances 

allocated to emitters accordingly. This method focuses on retiring allowances 

after the cap is established. Under this approach, allowances are retired to reduce 

emissions, enabling claims. 

 56
In the absence of these policies, consumers could still affect emissions levels by 

purchasing a so-called “REC-plus” product in which an allowance would be purchased 

and retired on their behalf and bundled with renewable energy or RECs. Or a consumer 

could simply purchase carbon emission allowances without the renewable energy 

component. Either case would result in a clear, verifiable emission reduction and enable a 

strong claim. However, a REC-plus product would likely either increase the costs 

considerably to the end-use consumer, suppressing demand, or reduce the amount of 

revenue that would go to support renewable energy generation, which would reduce the 

ability of voluntary markets to support new renewable energy development. The latter 

approach of simply retiring an allowance would not necessarily lead to near-term support 

for renewable energy because efficiency improvements at fossil plants may dominate 

near-term compliance actions. 

Because of the substantial overlap in renewable energy and emissions markets, regulators 

and policymakers need to be cognizant of the policy-interaction issues and market 

implications of new and emerging policies. The voluntary renewable energy market is 

growing rapidly and provides a convenient and readily available mechanism for 

consumers to affect the impacts of their electricity consumption today. However, this 

market needs credibility, consistency, and the ability to articulate clear benefits in order 

to continue to provide consumers with a viable option for affecting change. 

 57
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F1146-E(12/2004) 

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4. TITLE AND SUBTITLE

Implications of Carbon Regulation for Green Power Markets 

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NREL/TP-640-41076 

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ASG6.1005 

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Lori Bird, Ed Holt, and Ghita Carroll 

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National Renewable Energy Laboratory 

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14. ABSTRACT (Maximum 200 Words)

This paper examines the potential effects that emerging mandatory carbon markets have for voluntary markets for renewable 

energy, or green power markets. In an era of carbon regulation, green power markets will continue to play an important role 

because many consumers may be interested in supporting renewable energy development beyond what is supported through 

mandates or other types of policy support. The paper examines the extent to which GHG benefits motivate consumers to make 

voluntary renewable energy purchases and summarizes key issues emerging as a result of these overlapping markets, such as 

the implications of carbon regulation for renewable energy marketing claims, the demand for and price of renewable energy 

certificates (RECs), and the use of RECs in multiple markets (disaggregation of attributes). It describes carbon regulation 

programs under development in the Northeast and California, and how these might affect renewable energy markets in these 

regions, as well as the potential interaction between voluntary renewable energy markets and voluntary carbon markets, such as 

the Chicago Climate Exchange (CCX). It also briefly summarizes the experience in the European Union, where carbon is already 

regulated. Finally, the paper presents policy options for policymakers and regulators to consider in designing carbon policies to 

enable carbon markets and voluntary renewable energy markets to work together. 

15. SUBJECT TERMS

carbon regulation; climate change; green power; renewable energy markets; renewable energy certificates; RECs; 

voluntary markets; greenhouse gas emissions; climate policy 

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