People outside the solar energy industry often refer to Renewable Energy Credit compliance markets as “carbon markets”, and solar renewable energy credits (SRECs) as “carbon credits”. This is a common misconception, so we wanted to flesh out the underlying similarities between SREC and carbon markets and then clarify the differences.

Carbon markets and SREC markets both utilize tradable permits, and market incentives, to achieve policy objectives. However, whereas carbon markets are established to reduce a pollutant and correct a market failure, SREC markets are established to incentivize the production of solar energy and create value for individuals investing in solar.

The underlying similarity between SREC and carbon markets is that both markets are based on the use of tradable permits. In markets with tradable permits, a new commodity is created through the passage of a law. The law requires regulated entities to obtain compliance permits, and in so doing creates a price signal which affects behavior and markets. In the case of mandatory carbon markets, like the Regional Greenhouse Gas Initiative in the Northeastern US, a regulating agency is given the authority by a law to regulate emissions of greenhouse gasses.

Hypothetically, the regulating agency tells a utility it can only emit 10 tons of pollution in 2011, and then gives the utility 10 carbon credits (each credit equal to 1 ton). The utility can either (1) emit 10 tons of pollution and surrender back the 10 credits to the regulatory agency, (2) emit less than 10 tons pollution and sell the excess credits to another utility or market actor, or (3) emit more than 10 tons of pollution and purchase credits from another utility or market actor. The decision the hypothetical utility ultimately takes is based on its own marginal costs of abatement (i.e. the cost of not emitting greenhouse gas) versus the market value of the carbon credit.

SREC markets share this market structure with carbon markets, and this is why I think people new to the SREC market often inadvertently confuse SREC markets with carbon markets.

However, SREC markets are entirely different than carbon markets in both intention and function. Whereas carbon markets utilize market forces to identify the most economical manner to reduce greenhouse gas emissions, SREC markets incentivize the creation of a new market and a new source of renewable energy. SRECs can be created by individual homeowners that have invested in solar energy, and these SRECs (paired with tax credits, rebates, and energy savings) can make the solar energy system affordable. Companies like Sol Systems can work with solar energy system owners to monetize the SRECs, and achieve the best value for the sale of their SRECs through long-term contracts. By aggregating customer’s SRECs into a large portfolio, Sol Systems can sell SRECs directly to energy suppliers and utilities through long-term agreements that bring security and value to both the utility, and the customer that has invested in solar.