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Green Certificate Trading Journal of Energy in Southern Africa 22(1): 42–54 DOI: http://dx.doi.org/10.17159/2413-3051/2011/v22i1a3201 Green certificate trading Kerri Brick Environmental Policy Research Unit, University of Cape Town Martine Visser School of Economics, University of Cape Town Abstract on Climate Change (UNFCCC), which was opened Policies to promote renewable electricity are for signature in 1992. ‘The primary objective of the increasingly seen as a way to reduce the negative UNFCCC is to achieve stabilisation of the concen- environmental impacts associated with electricity trations of GHG in the atmosphere at a level that consumption and meet growing electricity demand. would prevent dangerous anthropogenic interfer- This paper reviews the international experience ence with the climate system’ (UNFCCC, 1992). As with one such policy, namely, renewable energy cer- South Africa ratified the UNFCCC in 1997, the tificates, and considers important design aspects of country is entitled to apply for financial assistance a national green certificate system. Within a South from the Global Environmental Facility for climate African context, a green certificate system would change related activities. provide a mechanism with which to verify compli- The Kyoto Protocol,1 a legal instrument under ance with any future renewable energy obligations, the framework of the Convention, sets binding tar- and would encourage renewable electricity genera- gets under which industrialised (Annex I) countries tion in the current monopoly environment. In terms must reduce greenhouse gas emissions by an aver- of a national green certificate framework, interna- age of five percent against 1990 levels over the peri- tional experience has shown that renewable energy od 2008-2012 (UNFCCC, 1997). The Kyoto certificates must be both accredited and standard- Protocol is the first and only binding international ized, with enforcement of penalties for non-compli- agreement to set targets for the reduction of green- ance with renewable energy quotas. Above all, a house gas emissions (Fakir and Nicol, 2008). long-term and stable policy environment is crucial In March 2002, South Africa acceded to the for developing renewable energy markets. Protocol. While the Protocol does not commit non- Keywords: renewable energy; tradable renewable Annex I (developing) economies such as South energy certificates Africa to quantified emission reduction targets over the period 2008-2012, there is potential for emis- sion reduction through the Clean Development Mechanism (CDM) which promotes emission reductions between non-Annex I countries and 1. Introduction: international and domestic Annex I countries. The CDM facilitates Annex I context investment in emission-reducing projects in non- Strong action is needed to reduce global green- Annex I economies. In this way, Annex I countries house gas (GHG) emissions and reverse the trend are able to obtain carbon credits to enable them to towards higher global temperatures (Stern Review, meet their emissions reduction targets. As such, the 2007). Given the threat to the climate from fossil CDM supports sustainable development with fuels, a focus on clean energy and energy efficiency respect to GHG emissions in developing countries is growing (DEAT, 2008). Increasing the share of while helping Annex I countries to comply with their renewable energy in terms of the national energy Kyoto Protocol commitments and reducing the mix is rising to the top of political agendas world- overall level of GHG emissions (DME, 2003; Fakir wide. and Nicol, 2008). The Intergovernmental Negotiating Committee South Africa is very dependent on fossil fuels as for a Framework Convention on Climate Change a primary energy source. Specifically, around 90 drafted the United Nations Framework Convention percent of energy is derived from low cost coal 42 Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011 (DEAT, 2008) . Furthermore, 93 percent of electrici - environmental degradation, such as air pollution ty generation is based on coal (Winkler, 2005). and climate change. The ‘polluter pays ’ principle South Africa is ranked 19 th in terms of world emis - states that the party responsible for such pollution sions (based on absolute totals for six GHGs 2 in must pay for the negative environmental impacts 2000) contributing 1.1 percent of the global emis - caused. There is an internalisation of external costs sions total, and is ranked 13 th in terms of the carbon if the polluter pays adequately for any environmen - intensity of electricity production (CAIT, 2009). In tal damage caused. When external costs, such as air the 2003 White Paper on Renewable Energy, while pollution, are not internalised, the market mecha - recognizing South Africa’s dependence on fossil nism fails to secure an optimal allocation of fuels to meet energy requirements, the state resources. This is because the prices of goods with acknowledged the growing need for South Africa to large external costs are understated when these become a responsible ‘global neighbour ’, amid external costs are not internalised. As such, these mounting concerns about global climate change goods are over -consumed relative to the optimal (DME, 2003) . level of consumption for the wellbeing of society. In this context, the 2003 White Paper on The internalisation of external costs is therefore a Renewable Energy sets out government’s vision for necessary pre-condition for the optimal allocation promoting renewable energy in South Africa : of resources. When these externalities are inter - nalised, energy production technologies will be allo - Government’s long-term goal is the establish - cated by the market according to their social costs, ment of a renewable energy industry producing and the price of goods (electricity) will reflect their modern energy carriers that will offer in future true cost (Ragwitz et al ., 2006). years a sustainable, fully non-subsidised alterna - The European Commission has evaluated the tive to fossil fuels. The proportion of final ener - external costs of different energy systems. The gy consumption currently provided by renew - Commission’s ExternE project on external costs able energy has come about largely as a result of estimated that the cost of producing electricity from poverty (e.g. fuelwood and animal waste used coal or oil in the European Union would double for cooking and heating). To get started on a and the cost of producing electricity from gas would deliberate path towards this goal, the increase by 30 percent if external costs, in the form Government’s medium-term (10-year) target is: of damage to environment and health, were taken 10 000 GWh renewable energy contribution to into account (Ragwitz et al ., 2006). final energy consumption by 2013, to be pro - Renewable energy sources decrease pollution, duced mainly from biomass, wind, solar and contribute to the achievement of the Kyoto Protocol small-scale hydro… This is approximately 4% climate change mitigation goals, allow countries to (1667 MW) of the projected electricity demand improve security of energy supply by reducing fos - for 2013 (41539 MW) . (DME, 2003: ix) sil fuel dependency and provide numerous socioe - conomic opportunities such as investment, devel - This paper proceeds as follows: Section 2 briefly opment and job creation. Yet, despite these many outlines the policy instruments available for the pro - benefits, renewable energy competes with conven - motion of renewable energy sources, while section tional electricity on an unequal playing field amid a 3 discusses green certificate trading in more detail, failure to internalize the negative externalities asso - including the green certificate market in South ciated with conventional energy production. Public Africa at present . Section 4 describes the interna - support is thus needed to level the playing field and tional implementation of renewable energy support promote the market penetration of renewable ener - mechanisms. The lessons learnt from this experi - gy sources (Gonzalez, 2007) . ence in terms of design suggestions for the devel - In many countries, particularly in Europe, the opment of a South African TREC framework are main policy instrument used to support renewable detailed in Section 5. Also from international expe - electricity 3 deployment is the feed-in tariff. In this rience, Section 6 provides a comparison of a feed- system, a premium price is paid for all qualifying in tariff scheme and a quota obligation system com - renewable electricity delivered to the grid. Utilities bined with tradable green certificates. Finally, the are obliged to purchase this electricity at the set interaction between emission trading schemes and price – which is determined by the state. Given that renewable energy promotion systems are outlined the costs of generation differ across the spectrum of in Section 7 . renewable energy technologies, the feed-in tariff usually differs by technology and is provided for a 2. Policy instruments for the promotion of specified time period. The feed-in tariff may also renewable energy decrease over time in line with reductions in the While energy is critical to all aspects of South cost of renewable energy generation. Theoretically, Africa’s economic and social development, the way by setting the price but not the quantity of electrici - in which it is produced and used can contribute to ty produced, it is not known in advance how much Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011
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