Economic Instruments for Climate Change Mitigation

1. Economic Instruments for Climate Change Mitigation Tradable Renewable Energy Certificates Workshop at the 2009 Climate Change Summit

2. TREC Introduction • Renewable value of electricity produced from renewable energy sources • Simplify the burden of verifying compliance with RE targets • Provide flexibility in meeting the target • Can be sold separately to the underlying physical electricity • Market forces to determine the additional payment to investors in RE technologies • The revenue stream for developers stimulates investment in RE projects and facilitates the expansion of the industry • Under a renewable energy obligation system, green certificates act as an accounting instrument • TREC systems can be voluntary or mandatory

3. TREC Life Cycle • Registration: upon accreditation, the generating device is registered in the TREC system register • Issuing: generator receives certificates for a specified quantity of renewable energy • Certificate is uniquely identifiable; electronic records • Trading: whereabouts of the electronic certificate tracked and monitored from point of issue to redemption – guards against double counting • Redemption: consumed in fulfilment of obligation

4. Elements of TREC system • A system of governance: mandatory versus voluntary policy contexts • Institutional context: 2 groups of institutions: • TREC Issuing Body: responsible for accreditation and registration of RE generators, issuing of TRECs, transferring TRECs, redeeming TRECs and ongoing monitoring, development and evaluation of TREC system • TREC market participants: producers, traders and consumers • Rules by which certificates are traded: TREC system requires clearly defined rules of operation for the creation, issue, transfer and redemption of certificates

5. Int. Implementation • Europe: Quota obligations in conjunction with TRECs in Belgium, Italy, Sweden, the UK; Renewable Energy Certificate System (RECS) • United States: most Renewables Portfolio Standard (RPS) programmes incorporate the use of TRECs to increase flexibility, reduce compliance costs and facilitate compliance tracking • Australia: The Mandatory Renewable Energy Target (MRET) is backed by a TREC system with penalties for non-compliance • The Department of Minerals and Energy (2007): by establishing MRET as a mandatory scheme “backed up by legislation and regulation ... an effective and transparent implementation has been achieved... The experience with the scheme confirms… that by ensuring a solid “paper trail” available through an internet based publicly accessible registry, monitoring and evaluation is significantly facilitated, and data quality and accuracy greatly strengthened.”

6. Design Issues • Renewable electricity should be accredited to foster consumer confidence – particularly in voluntary schemes • Equivalence between TRECs regardless of means of production fundamental to the trading system • National system in accordance with international system to facilitate trade • Design options to reduce price volatility: banking, borrowing, rolling redemption periods... • Banking: market participants store surplus TRECs for use in future obligation periods • Borrowing: actors with a shortfall of TRECs reduce their target by adding to target in future obligation period • Rolling redemption periods: market participants meet target over a prolonged period • Enforcement of penalties for non-compliance must be guaranteed

7. Design Issues • Stakeholder consultation shows that a LT and stable policy environment is crucial for developing renewable electricity markets: Ragwitz et al (2006): “Whether it concerns a FIT based support system, quota obligation scheme or tax incentive, in order to be able to attract investors and project developers, in order to allow sufficient time for project planning, realisation and all necessary steps of the authorisation procedure – a framework with LT stability is highly desirable” • A LT framework facilitates the cost-effective promotion of RE generation – therefore long term renewable energy targets can be important in creating stable investment environment • Application of technology specific support to reduce transfer costs to society: combine quota obligation/TREC system with investment grants or tax incentives • Risk assessment of investors with respect to policy instrument affects transfer costs for consumers – because consumers pay for investor risk • High risk premium under a TREC scheme as income from sale of TRECs uncertain

8. Motivation • Track and verify green energy supply and bridge the transition to a possible future mandatory TREC system • Credible platform from which individuals and organisations can demonstrate a commitment to environmentally sustainable purchases and consumption • Uphold the integrity of the TREC market