In today's global business landscape, companies are increasingly prioritizing the reduction of their carbon emissions.
Among the many solutions, offset instruments such as environmental commodities play a crucial role, such as Renewable Energy Certificates (RECs) and Carbon Credits.
Although they share some similarities, their functions and purposes differ significantly. This article aims to outline these differences and provide clarity on their respective roles in emission reduction strategies.
Overview of RECs & Carbon Credits
Before we dive into the differences between the two, let's first take a look at the overview of each.
Renewable Energy Certificates (RECs)
RECs are tradable environmental commodities that represent the environmental attributes associated with the generation of renewable energy.
The purpose of RECs is to incentivize and promote the production of renewable energy by providing a financial incentive to renewable energy generators. RECs allow renewable energy producers to sell the environmental benefits of their electricity separately from the electricity itself.
RECs are bought and sold on various renewable energy markets and can be purchased by businesses, governments, and individuals looking to support renewable energy generation and reduce their carbon footprint.
By purchasing RECs, consumers can claim that a portion or all of their electricity consumption is sourced from renewable energy, even if the physical electricity delivered to their homes or businesses comes from traditional fossil fuel sources
Carbon Credits
On the other hand, Carbon credits are a key component of carbon offsetting schemes aimed at reducing greenhouse gas emissions. These credits are generated through projects that either reduce or remove greenhouse gas emissions from the atmosphere.
Such projects can include reforestation initiatives, energy efficiency improvements, and methane capture from landfills or agricultural activities.
Once generated, carbon credits can be bought and sold on carbon markets. Companies or entities with emissions reduction targets can purchase these credits to offset their own emissions.
By purchasing carbon credits, these entities effectively fund emission reduction projects elsewhere, thereby compensating for their own emissions.
Carbon credits play a crucial role in incentivizing emission reduction activities and promoting sustainable development practices. They provide a mechanism for companies to financially support climate-friendly projects while working towards their own emission reduction goals.
Our earlier articles have explained what RECs and Carbon Credits are about. Now, let’s dive straight into the comparisons.
Key Differences Between RECs and Carbon Credits
1. Objective
Electricity generation from fossil fuels, such as coal or natural gas, significantly contributes to global carbon emissions.
In response, RECs play a pivotal role by incentivizing the transition to renewable energy sources.
Specifically, RECs target Scope 2 emissions, which result from purchased electricity consumption sourced from the grid.
By encouraging businesses and organizations to invest in renewable energy, RECs help reduce reliance on fossil fuels for electricity generation and mitigate the environmental impact associated with traditional energy sources.
On the other hand, carbon credits serve the primary objective of reducing residual carbon emissions that remain after internal emission reduction efforts.
These credits enable companies and organizations to offset their remaining carbon footprint by investing in emission reduction projects.
Without carbon credits, costly initiatives such as reforestation or carbon capture, utilization, and storage (CCUS) will not sustain as it would lack the financial viability.
2. Measurement Unit
A REC represents the generation of 1,000 kilowatt-hours (kWh) of renewable energy.
A carbon credit corresponds to the avoidance, reduction, or removal of 1 metric ton of carbon dioxide equivalent (CO2e) emissions.
3. Application
For RECs, let’s consider a scenario where a business is committed to transitioning to 100% renewable energy but lacks the space to install on-site renewable energy systems.
In such cases, they can purchase RECs equivalent to their electricity consumption. This action effectively offsets their grid electricity usage, which is often sourced from fossil fuels, with renewable energy generation.
As a result, they achieve carbon neutrality for their electricity usage.
Now let’s look at Carbon Credits. Suppose a company has residual carbon emissions of 100,000 metric tons of CO2e even after implementing internal emission reduction efforts.
In this scenario, they can purchase 100,000 carbon credits. By investing in emission reduction projects equivalent to their emissions, they effectively offset their carbon footprint and contribute to environmental sustainability.
4. The Registry
In Southeast Asia, there are two popular RECs registry platforms: the International REC Standard (I-REC) and the Tradable Instrument for Global Renewables (TIGR). These platforms serve as centralized databases where information about renewable energy generation, issuance, ownership, and retirement is recorded.
Through I-REC and TIGR, renewable energy generators can register their facilities and certify the production of renewable energy, ensuring transparency and integrity in the renewable energy market. Buyers and sellers can access these platforms to facilitate the purchase and sale of RECs.
While there are numerous registries in the carbon credits market, two of the most popular are Verra (formerly the Verified Carbon Standard) and the Gold Standard. These platforms function as databases to track the creation, issuance, transfer, and retirement of carbon credits.
They record information about emission reduction projects, such as project details, emission reductions achieved, and credits issued. Through Verra and the Gold Standard, emission reduction projects are registered and tracked to ensure transparency, credibility, and compliance with relevant standards and protocols.
In a Nutshell
While RECs concentrate on incentivizing renewable energy generation and market-driven clean energy investments, carbon credits encompass a broader spectrum of emission reduction activities.
While RECs focus on incentivizing renewable energy generation and market-driven clean energy investments, carbon credits encompass a broader spectrum of emission reduction activities.
Both instruments are most effective when a company has already optimized its internal processes and made substantial efforts to reduce emissions.
However, they should not be viewed as the ultimate solution to all environmental challenges.
While they may offer a temporary solution for some companies, a sustained effort to reduce internal emissions through methods like avoidance, reduction, and replacement proves far more effective in both the short and long term.
Saxon Renewables
Rising environmental worries and urgent climate action are driving a greater need for decarbonization. Unlike before, where sustainability was seen as optional, today's businesses face immense external regulatory, social and market pressure.
Saxon Renewables provides tailored sustainable solutions for organizations striving to achieve carbon neutrality goals. Whether you are a corporate buyer or an asset owner, we provide comprehensive solutions guidance at competitive rates.
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