OFFSET CREDIT TRADING - WHAT IS IT?

Australia's successful RET emission trading scheme is an Offset Credit Trading Scheme (OCTS) that has been quietly driving investment in utility scale renewable energy since 2001.  Best of all, it has been doing this without causing any dramatic increase in power prices or political pain.  This quiet success  means that few Australian's have heard of the RET scheme let alone understand what offset credit trading is.
The main aim of this post is to explain what offset credit trading is and how it can be used.  In addition, the post compares OCTS with cap and trade schemes, as well as systems based on long term contracts. (Ex: Feed in Tariff (FIT) based schemes.)
All of these schemes can be used to drive a variety of changes. For convenience, most of the examples used are government run schemes aimed at emission reduction.
A: Offset Credit Trading Schemes (OCTS)
OCTS can be used to drive investment in desirable alternatives (Ex: Renewable energy) or to drive changes in the mix of desirable and less desirable products.  (Ex: Reduce the average emissions per km of new cars )
OCTS use market forces to set a levy on an undesirable alternative(s).  The money from the levy is then used to subsidize desirable alternatives.  Market forces drive the levy/subsidy to the point where desirables can compete with undesirables.  Details of offset credit trading schemes may vary.  The key features of a basic offset credit trading scheme are: 

1. OCTS  controls averages.  To do this it needs working targets expressed as averages.  (Ex: "average emissions per kWh").  
2. OCTS cannot be used directly to control things like "total power emissions" because this target is not an average.  However, it will often be possible to convert "primary targets" in an unacceptable form to "working targets" expressed as averages. (Ex: A "total power emissions" primary target could be converted to an "average emissions per kWh" working target by first working out what "average emissions per kWh" would have to be for the total emission target to be met.)
3. Better than target performance is rewarded by the award of free credits by the government.  (Ex: One credit per mWh renewable power.)  These credits can be held for future use, sold to others directly or sold via a credit trading market. 
4. Worse than target performance has to be offset by the surrender of credits to the government by "liable parties".  If necessary, credits will be purchased from others to meet this requirement.  (NOTE: Only credits that have been awarded for better than target performance can be purchased.) 
5. The number of credits that have to be surrendered will depend on the target.  (Ex: If the target is 25% renewable power, one credit would have to be surrendered for very three units of dirty power.)

Key points to note here are:

1. OCTS is not a tax.  The government does not get any money for the credits awarded for better than target performance. 
2. As the target rises from zero to 100% desirable, the average price will ramp up slowly from the price of undesirable (without any levy) to the price of desirable (without subsidy) - When the target is low it only takes a small levy on undesirable to make the price of desirable competitive.
3. The system ensures that the target will at least be met provided there is enough desirable product available.  
4. A single OCTS can be expanded by adding to the number of actions that generate credits or require the surrender of credits.  For example, the original RET scheme awarded credits for both renewable power and rooftop solar.  The risk here is that expansion can cause confusion and make the market for different types of action less predictable.  The RET scheme was split into separate large and small scale schemes because the growth in rooftop solar was disrupting the market for large scale renewables.  

NOTE: The RET OCTS scheme:

 "The  RET scheme was first introduced in Australia in 2001. It imposes legal liability to support electricity generated from renewable sources on retailers and large wholesale purchasers of electricity. These 'liable parties' are required to meet a share of the renewable energy target in proportion to their share of the national wholesale electricity market. Liable parties must prove that they have purchased the relevant proportion of renewable energy by surrendering renewable energy certificates (RECs) or paying the shortfall charge, which is a penalty for non-compliance....."  
The option of paying a shortfall charge protects the scheme from causing blackouts when there isn't enough renewable power available to allow the renewable target to be met. 

COMMENTS ON QCA REPORT ON FEED IN TARIFFS

These are some brief comments on the Qld Competition Authority (QCA) report “Estimating a Fair and Reasonable Solar Feed-in Tariff for Queensland” (March 2013) Table numbers are QCA report table numbers.  Key findings were:

1. The report admits that it was only concerned with being fair to the retailers, not rooftop solar PV (RTS) owners, power generation companies or consumers.  By implication, the QCA was also comitted to defending the payments made to power distributors.
2. When calculating the "fair" FIT the QCA managed to find excuses for not including most of the savings associated with the use of RTS.  This made an enormous difference.  If these savings are included, the FIT would have to be above 100 cents/kWh before RTS stopped reducing the power bills of Qld householders who dont have RTS.  The QCA exclusions reduced this figure to a measly 8 cents/kWh.
3. The difference in estimates highlights the problems associated with having bureaucrats or politicians set the feed in tariff.  It also highlights the problem of determining the FIT on the basis of the effect on household power bills.
4. This post is not advocating that the FIT be raised to $1.00 kWh.  It is suggested that auctions or some other market based system be used to set the FIT.