Comparing Carbon Credits vs Renewable Energy Certificates

While there are no legal targets or absolute requirements for businesses around the world to reduce their emissions, there is increasing pressure to do so, and it comes in a few different forms.

Many countries now have mandatory ESG carbon reporting, which businesses have to submit annually.

The EU's Corporate Sustainability Reporting Directive, for example, is currently being phased in and sets out new carbon emissions reporting requirements on roughly 50,000 organisations.

And while the Trump administration rolled back the national requirement to report on greenhouse gas (GHG) emissions, certain states are operating toward their own targets.

California, for example, requires companies operating in the state with at least 1 billion dollars in revenue to report on their GHG emissions. Companies with at least 500 million dollars in revenue have to disclose the risk posed to their profitability from climate change. As this would be a deterrent for investors, it naturally incentivises businesses to limit their exposure to these risks.

Some companies are also grappling with voluntary targets in order to demonstrate credible climate action, like those set out through science-based targets.

In the face of this mounting responsibility, two solutions have emerged to ease the transition towards better emissions strategies: carbon credits and renewable energy certificates (RECs). 

Both carbon credits and RECs are instruments that allow businesses to offset their GHG emissions rather than directly reducing emissions through process change. The difference between the two instruments lies in which GHGs they are tied to and how they offset their climate impact.

RECs are issued when renewable energy is generated, thus encouraging businesses to create and operate using green energy.

A company receives one REC for each megawatt hour (MWh) of electricity it generates through renewable means and supplies to the grid. This can be wind, solar, geothermal, hydroelectric, biomass, tidal, and ocean wave energy.

This means the company generating the renewable power benefits twice. First, from the sale of the electricity, and second, from the receipt of the REC, which they can sell to other electricity companies.

RECs are an attractive commodity because they allow businesses to buy their way to meeting renewable energy targets. It also allows them to claim they utilise renewable energy in their operations and work towards renewable targets even if, in fact, they rely mainly on fossil fuels.

Carbon credits are slightly more complex. One carbon credit represents one metric ton of carbon dioxide equivalent (CO2e) that has been offset as a result of business processes that avoid, reduce, or remove it from the atmosphere.

Reduction Measures

Certain countries, such as the UK and the EU, have their own Emissions Trading Systems. Certain companies operating within the system have an emissions allowance, which they can sell off if unused in the form of credits to companies that might exceed their allowance.

Avoidance and Removal Measures

Avoidance and removal of greenhouse gases, on the other hand, fall to offset schemes. For example, the Woodland Carbon Code in the UK offsets CO2 by planting trees that remove it from the atmosphere. This activity generates credits that companies can buy to offset a portion of their emissions.

Carbon credits and RECs are both key to furthering the goal of reducing emissions and creating a viable renewable energy market. They do this in several ways:

1. They accelerate businesses’ adoption of the renewable market

By offering a way to offset carbon emissions immediately, these initiatives are helping to move businesses towards a change in behaviours, culture, and an acceptance of the need to take meaningful steps towards a sustainable future, even without the infrastructure in place.

2. They complement regulations with a financial incentive

Carbon credits and RECs are key drivers for businesses to move towards renewable energy practices as they offer a financial incentive for either lowering their emissions or generating renewable energy. These kickbacks make the move more economically viable for companies that need to offset the cost of installing lower carbon processes.

3. They create a more competitive market for renewable energy

Emissions allowances and renewable energy requirements create a compliance market where utilities must purchase RECs to meet targets, making carbon credits and RECs an immediate financial asset

4. They address the imbalance in fossil fuel-intensive sectors

Carbon credit systems, such as the UK Emissions Trading Scheme, are particularly helpful for carbon-intensive industries such as aviation and power generation, which need to meet ever-tightening emissions caps.

In 2024, for example, the cap tightened dramatically from 147 million tons of CO2e the year before to 92 million tons of CO2e. Stricter emissions caps are planned, with a goal of 49 million tons of CO2e by 2030. 

For businesses embarking on a new sustainability strategy or developing a comprehensive, long-term approach, both carbon credits and RECs offer significant advantages. 

1. They allow businesses to claim reduced emissions right away

RECs enable businesses to make immediate renewable energy claims without making substantial investments in infrastructure. 

2. They allow for a standardised approach for businesses operating across diverse markets

Companies that operate out of different locations might run on different grids that operate using higher or lower levels of fossil fuels. In order to make the same business claims in different geographical areas - such as being “carbon neutral” - businesses may need to offset their emissions in a certain location. Purchasing RECs allows them the flexibility to do this. 

3. They demonstrate value to investors and future employees

Having a demonstrable climate commitment in place can be an extremely attractive attribute for both employees and investors looking to build their sustainable business portfolio. According to research by Global Tolerance, 42% of UK employees said meaningful work that benefited society was a more important driver than a higher salary.

4. They offer a way for businesses to offset emissions from a variety of sources

Carbon credits are a particularly valuable method of offsetting emissions from a range of business activities that are harder to avoid, such as business travel, allowing businesses to continue making sustainability claims. 

5. They open up financing options linked to sustainability

Carbon credits and RECs are a meaningful way for businesses to demonstrate their sustainability credentials. In doing so, businesses may be able to access loans and other financial incentives associated with sustainability.

There are several systems of these tradeable assets in place around the world, each working alongside regulations in their own market.

In Europe, Guarantees of Origin (GoOs) function in a similar way to RECs in the United States. One certificate is issued for one MWh of renewable energy generated within the European Union, which can be traded across the EU member states.

The UK creates its own Renewable Energy Guarantees of Origin (REGOs), although since Brexit, these are no longer compatible and able to be traded with EU GoOs.

The International REC Standard (I-REC) is a certificate traded outside of Europe and North America. Up until 2024, the list of countries trading this certificate also included China.

Ending trade of the I-REC altogether in early 2025, China now only accepts its national Energy Attribute Certificates (EACs) issued from their Green Electricity Certificate (GEC) scheme for renewable electricity generated in China.

The value of both carbon credits and RECs has fluctuated over the years due to a number of factors, including demand outweighing supply, the difference in compliance criteria between certificates, and changes to national and international policy.

The PJM energy market, which serves 13 US states in the Northeast and Midwest, experienced a dramatic increase in the price of RECs, rising from $6.28 in 2018 to $31.04 in 2023. This resulted from challenges in connecting new renewable energy suppliers to the grid, as the demand for RECs increased.

The price of voluntary RECs, compared with RECs that meet government mandates or specific compliance criteria, is lower and much less volatile. In 2023, for example, the price of voluntary RECs ranged from $3 to $15 per MWh. Naturally, this reflects the greater demand for RECs that meet regulations over individual sustainability commitments.

Brexit is a classic example of how a single policy change can have a massive effect on the REC market. 

When the UK stopped accepting EU GoO certificates, demand among UK businesses for REGOs to meet their renewable energy commitments surged. This saw the price exceed £15 per MWh in 2023. Following this, the UK created many more renewable energy projects to meet the demand for REGOs. However, this created an oversupply, causing the price to crash to less than £1 per MWh by April 2025.

Carbon credit markets show similar volatility. UK Emissions Trading Scheme allowances averaged £79.18 per tonne of CO2 in 2022 but plummeted to £38.86 in 2024, before recovering to £45.43 in early 2025.

Whether or not a company purchases an REC, the renewable energy generated to produce it has already occurred. Naturally, this puts more value on an REC as a method of claiming sustainable attributes rather than taking sustainable action.

Similarly, many carbon offset projects might have proceeded without credit sales, raising questions over whether they’re really helpful in reducing the atmospheric CO2 from industry.

So, while carbon credits and RECs are a valuable tool for corporate sustainability strategies, it’s important that they’re viewed as transitional solutions rather than permanent substitutes for direct action incorporating sustainable practices and infrastructure for the longer term. 

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