In the absence of a federally mandated cap-and-trade program, many states are taking their own steps to reduce the harmful effects of CO2 emissions from coal-fired power plants (the largest contributor to nationwide CO2 emissions--about 40% of the total). This article talks about New Jersey's use of Solar Renewable Energy certificates as a way to make solar energy more economically feasible and help electricity producers comply with the state's Renewable Portfolio Standards.
This has a lot to do with what I'm working on at RFF, so I thought I'd give my comments on it :) New Jersey is one of the largest and fastest growing solar markets in the US (second to California!). Many states, including Jersey, have statewide Renewable Portfolio Standards (RPS), which require electric power companies to produce a certain amount of energy from renewable sources. This article talks about offsets in the context of Solar RPSs. If an electricity supplier does not comply with the RPS for solar power, they must either pay a large fine or purchase a Renewable Energy Certificate from a solar energy producer (like Rutgers University--the example in the article). This is the classic form of a marketable offset: electricity suppliers conduct their own cost-benefit analysis, weighing the cost of producing their own solar energy to meet the Renewable Portfolio Standards against the cost of purchasing a Renewable Energy Certificate. In many cases, purchasing the certificate is the cheaper option, so electricity suppliers continue to produce most of their power from "conventional" sources (burning fossil fuels), but these emissions are "offset" by firms that independently power their businesses with renewable, clean energy. The creation of the energy certificate market creates an incentive for residents and businesses to harvest solar energy and sell their acquired energy certificates. In the long run, they may profit from the sale of the certificates to energy suppliers. Like cap-and-trade, this is a flexible, market-based approach providing incentives to innovate and discover low-cost ways to produce more environmentally-friendly power. In the absence of an RPS, there would be no market incentive that would make solar power economically feasible at this point in time.
Like I said earlier, offsets are better than no regulation. But in my opinion, they're still not the best option. While the Renewable Portfolio Standard does reduce carbon emissions substantially when compared with a business-as-usual scenario (no regulation), offsets create an inflexible cap--that is, once the RPS is set, there will be a certain amount of CO2 emitted into the atmosphere, and this quantity will not change over time (although the emitting source may vary because of offsets). However, with cap-and-trade that incorporates cost-containment mechanisms (such as a symmetrical safety valve--like a price floor and ceiling for carbon permits), the cap may actually be REDUCED over time, costs will be minimized, and social benefits will be maximized. But in the absence of a federally-mandated emissions-trading scheme, it looks like more prescriptive portfolio standards may be our best bet!