Carbon credits, RECs — a chance to support alternative energy

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With environmental awareness at an all-time high and new sources of alternative energy such as wind, solar, geothermal and biomass coming on line at a growing pace, companies around the world are falling over themselves trying to internally reduce their carbon footprint while externally proving to the world how “green” they are.

The supply-and-demand dynamic between new power sources and companies that want to go green has created a new commodity in the energy market — Renewable Energy Certificates. These certificates, along with similar vehicles such as carbon offsets, can be bought, sold, traded or auctioned as a way to help companies become more green, meet current or future greenhouse gas emission mandates, and support the development of new fuel in the future.

The system for trading these securities, called a cap and trade, is still in its early stages, but most industry insiders believe RECs will soon become a currency-like commodity in the industry. In such a system, any company aiming to track and control its environmental impact, either voluntarily or by mandate, will have to become proficient in the new market.

In a new research study by Salem-based Groom Energy Solutions Inc., which provides alternative energy system design, installation and consulting services, the business of tracking a company’s greenhouse gas emissions — what Groom Energy calls “enterprise carbon accounting” — will quadruple over the next three years. According to the study, 3,000 companies worldwide now engage in enterprise carbon accounting, and that is expected to reach 12,000 by 2012.

According to Groom Energy CEO Jonathan Guerster, commodities like carbon offsets and RECs will become a crucial part of that internal accounting process.

What are RECs and carbon offsets?

While similar in overall principle — to provide a tangible commodity representing a positive step in improving the environment — carbon offsets and RECs differ slightly. Carbon offsets are measured in metric tons of greenhouse gas emissions, while RECs are measured in kilowatt hours. RECs focus solely on power generated from renewable sources of energy, such as solar and wind, while carbon offsets represent the emissions displaced through any number of methods, from renewable energy generation to carbon sequestration.

But the process by which they function as tradable commodities is similar. For example, let’s take a hypothetical wind farm that expects to generate 100 million kilowatt hours of power per year. Each kilowatt hour represents one REC. That wind farm, either on its own or combined with other regional wind farms, offers its RECs through a private broker, such as Worcester-based World Energy Solutions Inc.’s World GreenExchange.

Interested buyers would place bids on the RECs, looking to buy them voluntarily in a quest for a more green company, or to keep their own greenhouse gas emissions under a certain limit if they fall in an industry under mandate to do so. When a company buys an REC, it is essentially buying the energy it would have bought anyway, but paying a premium price to ensure that power is generated from alternative energy sources.

For Lockheed Martin Corp., which last week bought 147,000 RECs through a reverse auction with World Energy, the premium (Lockheed Martin paid about two or three percent over what it would have normally paid) is an attractive position, said Todd Martin, a spokesperson for the company.

“We believe it is worth it,” he said.  “Not just from an environmental point of view, but from a business point of view because the investment goes into the development of new energy sources, and let’s face it, we are a large company and we are always going to use energy.”

Even though Lockheed Martin is buying the credits, they are drawing their energy from the existing grid, while the alternative energy output goes into the same general grid.
According to officials at World Energy, REC auctions are not just for large companies with many facilities or high emissions output. The company has conducted auctions for as few as 1,000 RECs and as large as 1.5 million RECs, for amounts ranging from thousands of dollars to millions.

On the carbon offset side, the Chicago Climate Exchange (CCX) was established in 2003 as a public, voluntary trading exchange for greenhouse gas emissions and has since built an impressive portfolio of participating organizations, including Amtrak, Bank of America, Eastman-Kodak and IBM Corp., as well as local entries such as Tufts University, KLD Research & Analytics of Boston, engineering firm Vanasse Hangen Brustlin Inc. in Watertown and waste resource management firm CommonWealth Resource Management Corp. of Boston.

At the moment, there are no over-arching regulatory entities, such as the U.S. Securities and Exchange Commission, for dealing with financial vehicles when it comes to regulating RECs. The system is in its earliest stages. Other methods of curbing emissions as well as generating revenue for new projects are also being considered, including a straight carbon tax on greenhouse gas emissions.

According to attorney Elise Zoli, chair of the energy practice at Goodwin Procter LLP, both systems have their merits and drawbacks. A carbon tax would be much simpler and less volatile than a cap-and-trade system, yet would not support the community of businesses, including World Energy Solutions and Groom Energy, that is popping up to help companies navigate the cap-and-trade system.

In the end, however, it may not matter.

“At the end of the day, it is probably less about what the system is, exactly, and more about the fact that it gets done,” said Zoli. “Money needs to be funneled into innovation and no matter what system it is, it has to have the end goal of reducing carbon emissions in mind.”