Why is there a market for green certificates and does it help the

environment?

Green certificates market is supposed to be an instrument releasing Governments

from burden to cover additional costs of renewable energy; this obligation is
transferred to electricity consumers (through the green market). The production
subsidy and carbon tax are supposed to be abolished and substituted by the green
certificate market in a long run.

Renewables are too expensive to compete with traditional electricity resources in

commercial terms. Green certificates mechanism brings more renewable electric
energy into the energy market at the expense of traditional one which emits
CO2.Producers of renewable receive number of certificates from local governments
which are proportional to their output. Government forces electricity users to buy a
certain minimum amount of those certificates. These certificates sales become a
subsidy for producers of electric energy, and a tax for users of electricity. But
amount of green electricity produced is volatile, i.e. wind power mills produces
considerably different amount of electricity from year to year (the price of electricity
changes on a spot market every 15 min). If there were produced less electricity
than expected, marginal costs of production of electricity are rising while demand is
stable (when certificates were already sold) – consumers will get cheaper electricity
(compared to the situation if they had to buy it on a spot market) and suppliers of
electricity will have to pay more than the cost of the ‘subsidies’ to the green
producers.

Regardless of whether consumers pay more or less for their electricity, the
introduction of green certificates has three important effects:

- The renewable producer price of electric energy will decline

- Production of traditional energy will decline, unless the supply of such energy is
completely price inelastic.
- Production of renewable energy will increase

If we remove tax on CO2 emissions from oil, while trading with green certificates,
that will lead to increased use of oil, as electricity prices with renewables ‘included’
are higher that traditional electricity prices. Only in a long run, because of high
electricity prices there will be more energy efficient technologies using electricity,
but until than a lot of oil will continue to be used for heating and transportation, to
reduce costs of electricity.

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There is a lot of discussion about the problem of emission quotas setting and green
certificate market: if green certificates will be traded not regionally, but i.e. within
Europe, there might be either success, or failure. Namely, problems in fulfilling the
national quotas may be handled through import of green certificates, while surplus
of certificates may be exported to countries in shortage. In general, it may be
expected that a larger market will make the national quota setting easier. But, why
should citizens of countries with ‘excess’ of certificates subsidize electricity market
of other countries via hidden export subsidy? In addition, if the electricity market of
those countries is regulated by market of CO2 allowances (which is not related to the
renewable energy use improvement), then import of green certificates may lead to
initial reduction in use of emission permits by traditional energy producers in
countries importing certificates. Thereby, the price for emission permits will
decrease and they will be redistributed between emitters, i.e. metallurgy may buy
more than before. That is a zero-sum game. Emission permits market still doesn’t
make renewable technologies and R&D profitable. The initial emission reductions
affect the permit price, not the total emissions. If companies demand less permits,
the price for permits falls, increasing use of permits by other polluters
(‘redistribution’ of emissions). To reduce total CO2 emissions, market of emission
permits has to be tightened continuously, so that the price for them was rising in a
long run, making renewable electricity production profitable.

While the prices for emission permits are low, it is supposed that reducing
emissions is cheap for market participants, but it is not true. And green certificates,
which might lower the price of emission permits work against spending on emission
reductions. Only political decisions can tighten permit market. Thereby, low prices
of permits are bad for climate in a long-run. Only considerably high prices for CO2
emissions can make R&D on new energy technologies viable and profitable. Those
technologies are supposed to make emission reduction cheaper and let poor
countries join the process.

Maybe, for countries with excess of green certificates, it’s better to buy emission
quotas (instead of subsidizing export of green certificates) not using them? That
would tighten permit market.

Owners of renewable production plants will have to compete on both spot-market

and green certificate markets. Prices on those two markets are interrelated with
prices of CO2 emission permits. The whole system is complicated and creates
opportunities for speculators. There should be fixed certificate prices on the green
certificates market in order to protect market against breakdown when the price of

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certificates reaches its minimum of maximum. Government has to subsidize the
difference between fixed price and spot price. Also, Governments have to set
required minimum of green energy use.

Sources:

1. Morthorst P.E. (2000): The development of green certificate market. Energy Policy 28
(2000)

2. OECD report: Economics of Climate Change Mitigation (2012). Chapter 7: Building

Political Support for Global Action, 209-230.