Features, October 2000 Europe plans trading in 'greenness' A new currency for trading renewable energy - tradeable green certificates (TGCs) - is being explored in several European countries. Chris Crookall-Fallon and Tim Crozier-Cole set out what TGCs could offer. High hopes are riding on COP 6, the UN climate change summit in The Hague in November, with a wide spectrum of politicians, financiers and industrialists eager to see groundrules established for the emerging market in greenhouse gas emissions (GHGs). But interest in tradeable economic instruments as environmental policy tools goes beyond carbon. Tradeable green certificates (TGCs) are attracting increasing interest in Europe as a potential mechanism to help deliver environmental policy goals in a way that is compatible with the demands of an increasingly liberalised European energy market. Market liberalisation vs environmental protection Political interest in renewable energy is strong. The single biggest driver behind renewable energy policy at the level of the European Union (EU) is the commitment to cut GHG emissions embodied in the 1997 Kyoto Protocol. But, while this is the justification for many renewable energy growth targets, it is important to note that renewable energy targets are generally not denominated in carbon. Rather, they are denominated in energy or the capacity to produce energy. This distinction is very important to understanding the relationship between carbon trading and renewable energy, and the role of TGCs. The proposed EU directive on renewables, which is scheduled to be adopted before the end of this year, firms up a long-standing target to double the share of renewables in the EU's primary energy supply from 6% to 12% by 2010, and proposes specific targets for individual member states. At the same time, driven by EU legislation, member states' energy markets are liberalising and Europe is moving inexorably towards a single market for electricity. Policy makers must now reconcile the demands of a liberalised market and the imperative of renewables growth. Splitting energy and 'greenness' The principle of a TGC, otherwise known as a 'renewable energy certificate', is widely accepted in several EU member states. The underlying principle is that a renewable electricity generator produces two outputs - the physical energy and a less well-defined 'renewable benefit' - which may be split and traded separately. While the physical energy (electricity) flows instantaneously to its point of consumption, the renewable (or environmental) benefit may be transferred and consumed quite separately in space and time to the physical energy. The 'renewable benefit' is represented in the form of a TGC, denominated in units of the underlying energy. Thus a 10MWh TGC is proof that 10MWh of renewable electricity has been generated and delivered into an electricity distribution or transmission system. Each TGC would carry additional data, such as the type of technology used (wind, small-scale hydro etc), date of production of the energy, and country of origin. The TGC is evidence of the production of renewable electricity and, as such, should provide satisfactory proof to governments or consumers that what they have demanded or paid for has indeed been delivered, without dilution or double counting. Lying behind this simple concept will need to be an institutional framework allowing the accreditation of generators, the issuing of certificates, the registration of those certificates and their ownership, the final redemption (or consumption) of certificates, and dispute resolution. The robustness of these processes is central to the credibility of the whole concept. Why bother? As energy market liberalisation progresses, governments are finding it increasingly hard to meet renewable energy policy objectives, without impinging on competition law, state-aid rules, consumer protection and other consequences of creating a single European electricity market. Nevertheless, it is clear that increased government intervention is needed to meet the Kyoto commitments. 'Business-as-usual' is not going to deliver the drastic carbon emission reductions required, so the goals of market liberalisation and environmental protection need to be brought closer together. TGC systems have the potential to: Integrate different policy instruments - the inherent flexibility of a certificate system means that it can bring together diverse policy instruments, such as environment or energy tax exemptions, renewable energy obligations on generators, suppliers or consumers, and the voluntary market, which would otherwise have to operate under separate administrations. Simplify the trading of renewable energy benefits - a TGC system enables renewable benefits to be traded separately from energy. By de-linking the two markets, opportunities are increased for renewable energy generators to seek the highest value both for their renewable benefit and for their physical energy output, in separate markets driven by different time constraints. Achieve compliance with policy objectives with maximum economic efficiency - electricity suppliers or others with statutory renewables obligations or targets, or with customers for renewable electricity, should be able to purchase the necessary renewable benefit at least cost. A competitive market in certificates should help to deliver compliance at least cost to energy consumers. Provide robustness and fraud-resistance - providing a TGC system is underpinned by properly designed accreditation and administration, all system users should have confidence that certificates are reliable and trustworthy. Dispute resolution procedures need to form part of the overall system design. Prevent 'double counting' of the same renewable energy - because each certificate is uniquely identified and may be tracked to a single source, and because the process of 'redemption' (or consumption) of a certificate takes it permanently out of the system, it should not be possible for the same renewable energy generation to be consumed more than once. TGCs - a win-win-win solution? A TGC market could also offer considerable flexibility: Technical flexibility - the TGC system integrates different renewable energy technologies, generating at different times, in different places. Market flexibility - the TGC is a tradeable instrument that can service the needs of an increasingly diverse and sophisticated market. Consumers are facing more choices over the energy they buy, and who they buy it from, and will become more knowledgeable about the products on offer. Green certificates will help bring tailored products to the market, such as 'deep green' products from only the cleanest renewable energy sources. Political flexibility - TGCs can help the implementation of a variety of policy instruments and allows economic integration at different scales. Trading systems could work at various geo-political levels - for example individual member states, the whole of the EU, country groups such as Scandinavia or the Mediterranean region, or within technical and trading zones such as the Nord Pool electricity market. Christopher Crookall-Fallon is a director and principal consultant, and Tim Crozier-Cole is a consultant with Energy for Sustainable Development (ESD). The company provides consultancy services and carbon management services to institutional and corporate clients around the world. chris@esd.co.uk / tim@esd.co.uk. 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