Today we have a guest post from Tom Boucher of NativeEnergy; NativeEnergy sources renewable energy projects and is the carbon offset supplier for the Brighter Planet Visa. Here, Tom discusses how national legislation on carbon, which he expects to be a cap-and-trade system, will impact the voluntary carbon offset market.

Will the Voluntary Offset Market be Affected by Cap-and-Trade?

A key feature of the U.S. voluntary offset market has always been that it stands alone, unaccompanied by any mandatory Greenhouse Gas (GHG) emissions trading program. The Kyoto Protocol holds sway over most of the world, and the European Union also has its own emissions trading scheme. But with the imminent launch of the Northeast Regional Greenhouse Gas Initiative (RGGI), continued progress on the Western Climate Initiative, and multiple GHG bills in the works in Washington, it seems clear that before long the U.S. too will have a regulated carbon market – most likely a cap-and-trade system. Which prompts the question: how will this affect the voluntary offset market?

The answer depends on whose crystal ball you gaze into.

The most likely outcome is that new cap-and-trade laws will spur greater awareness of effective ways to address greenhouse gas emissions and boost voluntary offset markets to new levels of activity, sales, and most importantly, meaningful carbon reductions.

At the national level, a cap on GHG emissions will likely only apply to some sectors of the economy. That means there will still be a demand for offsets from concerned individuals and businesses not subject to the cap. There will also be demand from capped entities that want to go beyond merely complying with the law by achieving carbon neutrality – a net zero contribution to global warming. The voluntary market can translate these demands into investments in emissions reductions that would not be achieved by cap-and-trade alone.

But if we don’t get the nitty-gritty details of cap-and-trade right, it has the potential to set up roadblocks in the way of domestic renewable energy development.

Today, with no GHG caps in place, the addition of renewable generation to the U.S. electric grid usually displaces fossil-fuel generation and the associated GHG emissions. For this to remain true under a cap-and-trade regime, formal GHG emissions allowances have to be retired on behalf of renewable generation. Otherwise total emissions do not decrease because the amount of pollution allowed under the cap remains unchanged.

Renewable energy will still benefit from cap-and-trade even if allowances are not retired for clean generation. Fossil fuel power plants will need to buy emissions allowances, but clean power generators won’t. This will spur some investment in renewable energy, but it won’t reduce net GHG emissions beyond the level mandated by the cap. It would also eliminate the revenue many renewable energy projects get from REC and offset sales.

Some people – including a number of environmental advocates – think that retiring allowances for clean energy generation would provide renewable energy with an economic “windfall.” But many renewable energy projects, especially small-scale ones, are simply not economical without this added revenue. And if we are to quickly reduce global GHG emissions – 80% by 2050 – then we need rapid massive development of domestic renewable energy.

Fortunately, the ten states participating in the Northeast Regional Greenhouse Gas Initiative (RGGI), a regional cap-and-trade program, appear as though they will retire GHG allowances in proportion to voluntary sales from eligible renewable energy projects. This will allow individuals and businesses to continue to support new renewable energy projects as a way to reduce carbon emissions. Unfortunately, every state has a slightly different way of treating voluntary renewable sales, which creates a regulatory maze.

Other cap-and-trade programs, including a national one, are on the drawing board, but it’s too soon to know for sure how they will work. One thing is certain though: formal regulation of GHG emissions is necessary and good. We just need to get the details right so that voluntary markets complement the programs legislators and regulators put in place.

-Tom Boucher, President and CEO of Native Energy