Environmental markets

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Environmental markets refers to a set of commodity products that are cash settled and are not physical commodities. Environmental commodities include:

  • Renewable Energy Certificates represent 1 megawatt hour of power generated by a renewable resource, such as a wind turbine or solar power. These are also known as RECs, Green Tags or sometimes called renewable energy credits.
  • Energy Efficiency & Conservation Certificates represent 1 megawatt hour of power conserved or load reduced. These are some times called EE certificates, EE credits, or White TagsTM.
  • Carbon Emission Reduction Credits typically represent a 1 metric ton reduction in CO2 equivalents emitted. The notion of equivalent emissions of CO2 is useful when quantifying emissions that relate to global warming because many different gases contribute to global warming, including methane, nitrous oxide, hydrofluorocarbons, and many others. The environmental impact of these gases can be converted to an equivalent CO2 basis (CO2e) using standard and generally agreed upon formulas. These Credits are some times called simply Carbon Credits, Carbon Offsets, Verified Emission Reductions (VERs), or Certified Emission Reductions (CERs).

US Environmental Markets[edit]

The US today has two broad categories of environmental markets. Both are important and growing:

  • Compliance Markets, also called Mandatory Markets
  • Voluntary Markets

State governments have led the nation in the development of the environmental Compliance Markets which mandate performance, set industry compliance rules, enforcement, and penalties. In contrast, voluntary markets have been driven by corporations that place a high value on social responsibility, a positive environmental brand image, or wish to gain valuable experience and recognition through early action. [1]


For both compliance and voluntary markets, the sellers of the environmental commodity are renewable energy generators or project owners for carbon emission reduction or energy efficiency projects. However, a key difference between markets is in the nature of the buyers:

  • In Compliance Markets, buyers of RECs are load serving entities (typically the companies that sell power to end-use consumers) that serve states with a renewable portfolio standard or other regulatory requirement with which they must comply. In carbon markets, buyers can also be generators or non-power sector companies.
  • In Voluntary Markets, buyers are corporations or individuals seeking to offset their carbon footprint, support renewable energy, and in some cases lower US dependence on foreign oil. Many companies are also taking voluntary action to anticipate or shape future mandatory actions. In the case of carbon, this includes recording emissions reductions to get credit for early action under future regulatory programs.

The Compliance Market price of an environmental commodity is typically higher than the price of an equivalent environmental commodity in a Voluntary Market. This difference is due to the greater demand for environmental commodities in compliance markets, which forces buyers to compete for limited environmental assets. In mandatory carbon markets, for example, prices will be higher because regulators restrict the supply of allowed emissions. The overwhelming majority of trades between buyers and sellers are bilateral transactions – through brokers, marketers or via direct transactions. In all cases, the basis for the transaction is an essential trust in the environmental commodity. [2]