Further Reading on Green Power Claims

March 12, 2014, by Michael Gillenwater


To complement my blog post on voluntary green power markets, I have below outlined some further thoughts on the obvious follow-on question: Is it possible for a grid-connected entity to buy green power?

(Please be forewarned if you don’t have a background in economics or haven’t found the time to read through the preceding blog and its references, this section may be difficult to follow.)

So, is it possible for a grid-connected entity to buy green power?

To answer this question, it’s necessary to dive into economic theory and define what it means to “own” something.

Electricity supplied through a networked grid is a lot like a common pool resource, such as a lake for drinking water. We all dip in to get our supply. With a lake, we can create a system of water rights and thereby privatize the lake’s water resources. But while we can privatize the whole of the lake and divvy it up among private owners, it would be impossible to assign ownership of individual water molecules to specific individuals. Just as important as how we draw from the pool is what happens when we add to it. Any water added just mixes in, no matter what attributes were associated with the new water’s origins.

The dynamics of the electricity supply on the grid operates in much the same manner as our lake analogy.[1] In this way, an input of green power to the common pool of the electric grid is a lot like a classic “public good” in economics. Further, it follows that for consumers of electricity, once added to the grid, any green power in the form of electrical potential is then “non-excludable,” a condition that violates the economic definition of a private good (Gillenwater 2008a).

While the provision of private goods follow laws of supply and demand (i.e., the price signals of demand incentivize increases of supply), economic theory tells us that the same does not occur for public goods. Consequently, non-excludable public goods are usually under-provided. In other words, more renewable energy would be produced if you could somehow “privatize” the benefits of green power. RECs and other green power contractual approaches try to do exactly this—artificially create property rights where naturally there are none.

So, do RECs and other contractual approaches appropriately simulate and establish such property rights?

Well, we know they don’t establish property rights over electricity, because these approaches claim to represent attributes, not electricity. But can we make the leap to treat a market for unbundled “attributes” as a proxy for property rights over a public good in an open system (i.e., where participation is voluntary)?

This is where the economics of public goods gets in the way. Unfortunately, in voluntary markets where only few participate, the process of “privatizing” the environmental benefits of renewable energy (i.e., the existing public good) is not possible. What you end up with is equivalent to contract shuffling that has no effect on the quantity of public good supplied. So, if the environmental benefits of the public good can’t be privatized, what does the voluntary purchase of RECs buy the consumer? In economic terms, contributing to a public good without ownership is better understood as a charitable contribution.

But aren’t we just getting lost in the semantic of economics jargon? Isn’t the point that voluntary REC purchases and green power contracts are supporting renewable energy?

Sure, this dialogue is wonky, but it’s one I’ve been engaged in for years because I think it’s not just the finer points that are worth arguing, but the bigger picture they illustrate that matters.

In addition to the definitional challenges inherent with voluntary REC and green power markets, we now have empirics showing that these charitable contributions have no impact on the supply of renewable energy (Gillenwater et al. 2014, Gillenwater 2013).

But worse than just being ineffective, we are wasting resources that could be truly creating additional environmental benefits. In other words, there are significant opportunity costs to the voluntary green power market. Resources are currently being spent in a way that does not achieve what these consumers have demand for—actual reductions of their carbon footprint.


[1] With the exception that water is made up of matter and electricity is not. See this blog post for an explanation.


References

Note: Please email info@ghginstitute.org to receive a copy of any of the copyrighted journal articles below.

Brander, M. 2014. “The Enron of carbon accounting?Isonomia Blog Post, March 7th, 2014.

Gillenwater, M. 2014. “Further Reading on Green Power Claims,” Greenhouse Gas Management Institute Blog Post, March 12th, 2014.

Gillenwater, M., Lu, X. & Fischlein, M., 2014. “Additionality of wind energy investments in the U.S. voluntary green power market.” Renewable Energy, 63, pp.452–457.

Gillenwater, M., 2013. “Probabilistic decision model of wind power investment and influence of green power market.” Energy Policy, 63, pp.1111–1125.

Gillenwater, M. 2013. “Redefining RECS: Additionality in the Voluntary Renewable Energy Certificate Market“, Doctoral dissertation, Princeton University.

Offset Quality Initiative, 2009. “Maintaining Carbon Market Integrity: Why Renewable Energy Certificates Are Not Offsets”, June.

Gillenwater, M., 2008a. “Taking green power into account,” Environmental Finance, October.

Gillenwater, M., 2008b. “Redefining RECs (Part 1): Untangling attributes and offsets,” Energy Policy, Volume 36, Issue 6, Pages 2109-2119.

Gillenwater, M., 2008c. “Redefining RECs (Part 2): Untangling certificates and emission markets,” Energy Policy, Volume 36, Issue 6, June 2008, Pages 2120-2129.


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