Why does the EU Emission Trading Scheme (“ETS”) market work? It is not out of major polluters goodness of heart. If a major polluter forms part of the EU ETS and does not have sufficient EU Allowances (“EUA”) to cover their annual emissions, they will face penalties of 100€/tCO2e. This provides the “stick” to ensure compliance. But there is also a “carrot”: the major polluter can reduce its liability by reducing its own emissions and, if it can overachieve, it can sell any excess EUAs in a secondary market.
A market for green certificates (“GC”) works in a similar manner. First, the authorities define a timeline of renewable generation targets. This can be defined as a fixed energy quantum (TWh) that must be generated or supplied from renewable sources. The target can also be defined as a percentage of generation or demand so that the energy target adjusts to changing macroeconomic conditions.
Except in reality, prices of electricity and the cost of supplying renewable generation can move for all sorts of reasons. The important thing to remember is that the price of GCs in a market environment will adapt to new information in a way that any government cannot if it opts for an auction approach.
To summarise, a mandatory GC market:
- Achieves decarbonisation goals.
- Automatically adjusts to decarbonisation goals when demand changes.
- Adjusts an existing system, that of the EU certificates of origin.
- Incurs no additional cost to the government.
- Works with and not against the market.
- Treats all renewable energy projects equally, that is, it does not discriminate between existing and new, auction and non-auction, one technology or another
- Can use the GC allocation to support strategic sectors or technologies by allocating more than one GC per MWh of generation.