Interaction between Carbon Markets 

and Renewable Energy Markets 

BaCkgRound/ovERvIEw 

A number of states and regions in the United States (such as California and the 

states participating in the Regional Greenhouse Gas Initiative “RGGI” in New 

England) have begun to regulate carbon emissions and are considering cap-andtrade programs. Nearly half of U.S. states are implementing renewable portfolio 

standards (RPS) to increase the use of renewable energy. There is also a robust 

voluntary market for renewable energy. These programs and markets are being 

REnEwaBlE EnERgy MaRkEts and REnEwaBlE 

EnERgy CREdIts “REC” 

Renewable energy credits (RECs) were created to help support renewable energy, 

and represent the benefits associated with renewable energy as compared to 

more conventional fossil fuels. One REC represents the contract right to the 

environmental and other nonelectrical value associated with 1 megawatt hour 

(“MWh”) of electricity generated from renewable energy.The value of a REC can 

include emissions reductions, regulatory compliance value, and the right to claim 

that you’re generating or purchasing renewable energy. RECs are tradable and can 

be sold along with the electricity produced, or as a separate product (see Figure 1.) 

ContaCts 

Ghita Levenstein Carroll and Jana Milford, 

University of Colorado, Boulder; and Lori Bird, NREL 

ghita.carroll@colorado.edu 

milford@colorado.edu 

lori_bird@nrel.gov 

national Renewable Energy Laboratory (nREL) 

1617 Cole Blvd. 

Golden, CO 80401-3393 

EMERgIng CaRBon MaRkEts and 

CaRBon CREdIts “CC” 

Carbon credits (“CCs”) were created as a tool to help reduce anthropogenic-caused 

CO2 and other greenhouse gas (“GHG”) emissions (e.g., methane, nitrous oxide, and 

tropospheric ozone), and therefore reduce the human impact on climate change. 

One carbon credit represents the right to emit, or the reduction of, 1 metric ton of 

CO2 equivalent. CCs are tradable, and governments can allocate or auction them 

off.They can also be generated by emissions reductions projects, e.g., increasing 

efficiency, using more efficient technology, using cleaner technologies, or by 

creating carbon sinks. By allowing trading of these instruments, a country or entity 

can choose the cheapest option for reducing emissions and meeting mandates. 

table 2 compares CCs to RECs. 

defined through separate and evolving policy debates; however, the way 

each is structured directly impacts the others because of overlapping goals 

with respect to reducing carbon dioxide emissions. The goal of this research 

is to understand the interaction of these markets and determine how these 

policies could be implemented to maximize societal benefits. 

EMERgIng CaRBon REgulatIon 

In thE unItEd statEs 

Although there is no federal regulation of greenhouse gases currently 

in the United States, there are mandatory cap-and-trade systems for 

other pollutants, including SO2 at a national level and NOx at a regional 

level. Additionally, the Regional Greenhouse Gas Initiative (“RGGI”) is 

under way in New England to regulate carbon under a cap-and-trade 

system. And California is developing carbon regulation as well. There 

are also voluntary cap-and-trade systems for CO2, such as the Chicago 

Climate Exchange (“CCX”). Participants in the CCX (such as IBM, the 

City of Boulder, and Tufts University), join voluntarily; however, their 

commitments to reducing GHG emissions become legally binding once 

they become CCX members. table 3 compares carbon trading schemes 

in Europe and in the United States. 

Renewable 

Energy 

Generation 

Renewable Energy attributes 

Commodity Electricity 

Figure 1. Products of Renewable Energy Generation 

table 2. Comparison Chart of Renewable Energy Credits and Carbon Credits 

RECs CCs 

Purpose Support Renewable 

Energy 

Reduce anthropogenic 

CO2 emissions 

Market-based yes yes 

Tradable yes yes 

Used in Mandatory and 

Voluntary Markets 

yes yes 

Allocated No (depends how 

you define allocated) 

yes 

table 3. Carbon Emission trading schemes 

European Union 

Emissions Trading 

System (EU-ETS) 

EU-wide 2005 CO2 12,000+ 

installations 

(all exceeding 20MW) 

accounting for 55+% of 

the EU’s overall emissions. 

Fees charged 

to member 

companies, 

auction revenues 

TBD 

Chicago Climate 

Exchange (CCX) 

USA-wide 2003 CO2, CH4, 

N20, HFC’s, 

PFC’s, and 

SF6 

60 members, 

30 industrials 

Initiated with 

grant funding 

- Price discovery 

($1.87/ton as of 11/25/04) 

- Creating processes to monitor 

and reduce CO2 emissions 

Regional 

Greenhouse Gas 

Initiative 

Regional 2003 CO2 

initially 

9 northeast U.S. states 

to design regional 

cap-and-trade system 

TBD TBD 

RELatIonsHIP BEtWEEn REnEWaBLE 

EnERGY anD CaRBon MaRKEts 

The REC and CC programs and markets are being defined 

through separate and evolving policy debates. However, the 

way each is structured directly impacts the others because of 

overlapping goals with respect to reducing carbon dioxide 

emissions (see Figure 2). State-level policy makers are 

defining RECs state by state through the RPS policy processes, 

and there is not yet a consistent approach for defining 

what attributes a REC should include. Simultaneously, the 

international community involved in Kyoto and, in the United 

States, nascent regional policies such as RGGI are defining 

CCs.Without a better understanding of the roles, limitations, 

and interactions of these markets and, specifically, renewable 

energy credits (RECs) and carbon credits (CCs) – the two policy 

tools they employ – the larger environmental and economic 

societal goals that these markets and tools are meant to achieve 

may not be fully realized. 

Renewable 

Energy Credits 

VOCs 

Particulate 

Matter 

Carbon 

Credits 

CO2 

Fuel 

Diversity 

Mercury 

Economic 

Development NOx 

Figure 2. 

The information contained in this poster is 

subject to a government license. 

CU Energy Initiative/NREL Symposium 

University of Colorado, Boulder 

October 3, 2006 

NREL/PO-640-40671 

Exchange Scope Date 

Started 

Focus Participants Funding Results