Tuesday, March 26, 2013

Emissions Permits and Renewable Energy Credits

Due in large part to my initial confusion about the matter, I figure I will take a moment to attempt to better explain the notions of so-called "tradable emissions permits" and "renewable energy credits," both of which are intended to cap and offset emissions of pollutants, in this short post.  First of all, tradable emission permits are allocated to designated "polluters," such as factories, based on a total amount of allowable emissions of a given "pollutant" from a group of polluters.  Say, for instance, that two firms are allowed to emit a combined maximum of 20 "units" of carbon monoxide.  The EPA will then distribute 20 permits between these "firms," to use the preferred nomenclature; each permit allows the emission of 1 unit of CO from the firm.  So, hypothetically, each firm will get 10 permits, allowing them to each emit 10 units of CO for a combined total of 20 units of CO.  However, just giving each firm 10 permits negates any merit of the "tradable" part of the equation.  So, these permits are allowed to be sold between the firms or even auctioned off by either the firms or, in some cases, by the EPA initially.  What this means is that, according to ecnomic theory and the strange-but-true notion that firms are motivated by money above all else, these permits will be distributed amongst the "polluters" in such a way as to minimize their costs, or, more accurately, to equalize each of their costs to "abate" CO, in this case.  How this works is that each of these polluters has a different cost to reduce their emissions.  If one of them finds it cheaper to buy permits rather than reduce emissions and the other is already reducing more emissions than they have permits for, the first firm will buy surplus permits, at a reasonable price, from the second firm.  As long as 20 units of CO are still being abated (even if one firm carries the responsibility for all of the CO abatement and the other firm just buys permits in order to be legally able to emit 20 units of CO), all regulations are being followed and the EPA is happy.  The tradable permit system is very flexible, and has a lot of potential for helping to clean up pollution.  It also has potential to cause a lot of problems, but that's another story (you can read all about it on Wikipedia).  However, one of the most interesting facets of tradable permits is that they are often auctioned off publicly.  In other words, me and my purely-hypothetical ultra-left-wing neighbor can, at least in theory, join forces to buy up 10 of the things so that 10 units of pollution cannot be emitted by firms.  Even the government can buy up permits if the EPA feels that it allocated too many in the first place.  What this means is that the tradable permits system gives a bit of a voice to environmental groups and other caring citizens.  The reason that I took so long to explain all of this is that it relates to some extent to the practice of buying "renewable energy credits" that has become increasingly prevalent among businesses, local governments, and private citizens.  Rather than paying for the legality to pollute, these people can purchase so-abbreviated "RECs" to "offset" their energy use with renewable energy.  Every REC that is purchased supposedly contributes real electricity to the municipal power grid, which can potentially replace the same amount of coal-generated electricity.  The idea behind these credits is similar to that of the tradable emission permit system, as those who purchase renewable energy credits are basically paying to reduce some pollution caused by the electricity generation that powers their television sets or what-have-you.  In theory, this allows them, at least "ethically" (legality is not a concern in this case as it is in the tradable permit system), to continue watching television, so to speak, just as purchasing emissions permits allows the aforementioned firms to continue emitting pollutants to a certain extent.  So, when people purchase these renewable energy credits, they are indeed offsetting their energy use, only not by directly reducing it, but by encouraging the growth of renewable energy that may eventually become a larger part of their electric power generation.  On that note, I hope that this rather long-winded post can help someone out, or is at least interesting to someone who previously didn't know about these things.

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