Introduction
Renewable energy credits (RECs)1 are tradeable assets that allow a party to claim that it uses electricity produced from renewable resources. Governments and corporations have used RECs as a tool to pursue policies that support decarbonization of the electric grid, an important step in fighting the climate crisis.2 RECs are useful for these goals because it is impossible to trace the flow of electricity — therefore, any claim or framework that requires a party to use renewable electricity also requires an accounting system separate from traditional electricity metering. For example, a wind farm that produces a megawatt-hour (MWh) of renewable energy could sell that energy to one party, then sell a REC to another party. The party owning the REC would now have a claim to that MWh of renewable electricity, even if that electricity did not in fact ever reach its facility. Accordingly, RECs provide an exclusive right for a party to claim a MWh of electricity as their own. Students and scholars of property may recognize this description of RECs as carrying an entitlement that resembles a property right.
In fact, case law and agency guidance often describe RECs as property.3 Even though there is widespread acknowledgment that RECs are property, there is less discussion of what that categorization means.4 Property can be a heady concept without clear boundaries.5 At first blush, the entitlements contained in RECs look quite different than those contained in a fee simple absolute or personal property. Indeed, scholars describe interests like RECs as environmental attributes, a form of regulatory property, because they provide different rights and receive different treatment than traditional property interests.6 This Note draws on property theory to explain how that categorization fits RECs in an effort to explain the often-assumed conclusion that RECs are property. This categorization is not simply academic — effective REC policy empowers states and private actors to better pursue decarbonization of their electricity use, which is essential for limiting the worst effects of the climate crisis.
By providing a theoretical background for how RECs act as property, this Note shows examples of how property theory can enrich debates about RECs and assist policymakers to craft more effective REC policy. First, property principles for initial allocation of resources have proven useful for adjudicating disputes about RECs. Property law has also been the site of debates about public choice and institutional competency that speak to current debates about the propriety of a federal renewable portfolio standard. Of course, property law also has baggage that proponents of RECs may not want. For instance, the Fifth Amendment Takings Clause provides strong protection for property rights against government interference. But takings jurisprudence provides escape valves that mean that a regulatory change that causes certain RECs’ value to plummet is likely not vulnerable to takings challenges. In sum, RECs provide an understudied intersection between property theory and energy and environmental law that, when leveraged appropriately, could empower policymakers to more effectively pursue decarbonization.
I. RECs and Their Place in the Electric Grid
This Part provides a primer on renewable energy credits and the role that they play in state regulatory frameworks. RECs are most often used in state renewable portfolio standards (RPSs), which are programs requiring sellers of electricity to derive a set percentage of their generation portfolio from renewable energy sources.7 But there are also voluntary purchasers of RECs, which may include utilities in states with voluntary RPS programs or private, nonelectricity market entities (for example, Google8) that seek to claim to use renewable electricity.
A. A (Brief) Primer on Electricity Markets
The United States electric grid is sometimes called “the most complex machine ever built.”9 This Note is no occasion to dive into all of the grid’s complexity, but it provides an overview of electricity markets sufficient to illustrate how RECs fit in.
Electricity starts with a generator — for example, a solar farm, a wind farm, or a fossil-fuel-burning power plant — that converts a primary energy source into electricity.10 That electricity then flows to the grid.11 On the grid, electricity travels across high-voltage transmission lines before reaching lower-voltage distribution lines that connect to end users, such as homes and businesses.12 Managing the electric grid is a tall order, requiring a constant balance of supply and demand.13
Under the Federal Power Act,14 both state and federal governments play a role in determining the overall generation mix of the electric grid.15 These kinds of decisions about who generates electricity have significant impacts on the environment. Beyond local pollution, fossil-fuel-fired power plants contribute significantly to the atmospheric CO2 (among other greenhouse gases) that drives the climate crisis.16 States have taken the lead on clean energy policy largely because of political reluctance at the federal level.17 RPSs are a prominent example of state efforts to address the climate crisis.18 RPSs are mandates that the generation portfolio for certain electricity market participants include a certain percentage of renewable energy.19 Because electricity is impossible to trace once it comes onto the grid,20 RPSs require that energy sellers buy RECs in order to subsidize renewable energy generation.21 The next section provides background on RECs as they function in RPS markets as well as private markets.
B. RECs: A Basic Definition
RECs represent the positive environmental attributes associated with renewable electricity generation.22 When a renewable power plant generates a unit of power, it generates a REC as well (often corresponding to one MWh of electricity). However, a REC can be sold separately from the energy that generated it.23 Therefore, renewable electricity generators create (and can sell) two products with each MWh of power generated — one MWh of electricity and one REC. RECs are necessary to track renewable energy use because, once electricity comes on the grid, it is impossible to distinguish one generator’s electricity from another’s.24 Accordingly, when a company25 or municipality26 claims to use 100% renewable energy, it is not claiming that all of the electricity powering its operations is in fact renewable — that claim would be impossible to verify. Instead, the claim is that it has title to the same amount of RECs as its energy use. RECs therefore benefit renewable energy generators by acting as privately funded subsidies for their electric output and benefit buyers by allowing them to claim that their operations are powered by renewable energy.
There are mandatory and voluntary purchasers of RECs. The suppliers in either market are renewable energy generators (or secondary traders that purchased RECs from those generators). In mandatory markets (which are often driven by RPSs), the ultimate buyers are retail sellers of electricity (for example, electric utilities) that are subject to state regulation.27 Under RPSs, states require that a percentage of the total electricity each entity sells comes from renewable energy.28 Sellers meet these requirements by purchasing RECs, or, in some states, by producing their own renewable energy and retaining the associated RECs.29 RPSs therefore create demand for RECs, as utilities will purchase RECs in the amount necessary to comply with state law.30 States also may require utilities to purchase RECs separately from RPS obligations — for example, in 2016, Massachusetts required utilities to finance offshore-wind-power projects (and provided REC purchases as an option for doing so).31
In the absence of state mandates, there are two sources of voluntary demand for RECs. The first are state-administered voluntary programs, which operate in basically the same manner as mandatory markets.32 However, unlike in mandatory markets, utilities may shoot for targets “to the extent it is cost-effective to do so.”33
The second are private, nonutility actors that seek to finance renewable energy generation (for example, to make a “100% green energy” marketing claim or meet an environmental, social, and governance (ESG) investment goal).34 These purchasers do not necessarily need to purchase RECs that meet a state’s RPS definitions, as they have no need to use them in compliance frameworks. However, they remain subject to government enforcement for any misstatements regarding their purchases.35 Depending on the nature of an entity’s renewable energy claim, it might need to purchase RECs meeting or in excess of state requirements, even if it is not subject to a state RPS.36 In some states, retail customers (that is, end users of electricity ranging from factories to residences) can also opt in to receive renewable energy in excess of RPS requirements.37
Regulatory frameworks generally mandate that RECs are rivalrous. Once an entity has purchased RECs, it has the legal right to claim that renewable energy as its own, and anybody else making that claim may be subject to legal sanction. Even the original generator (for example, a solar or wind farm) can no longer describe its energy as “renewable” without drawing regulatory scrutiny.38 Once utilities use RECs towards their RPS obligations, the RECs generally are retired and can no longer be sold.39 Rivalrousness is important for states or private parties to use RECs for their primary purpose — to track claimed usage of renewable energy given the impossibility of tracing electricity on the grid.
Additionally, different states may have different requirements for RECs and may classify them differently.40 For example, Massachusetts divides RECs based on generation type (with specific categorizations for solar and waste energy) and age of generator.41 North Carolina includes carve-outs for REC generation from hog waste.42 State programs often recognize RECs generated out of state as qualifying for a state RPS provided that they are in the relevant interstate electricity market and meet the state’s requirements.43 Even still, commentators often bemoan the lack of standardization of RECs, arguing that it leads to market confusion44 and inconsistency across jurisdictions (especially considering that nearly all electricity markets cross state lines).45
Although RECs are creations of state law, private parties can trade instruments that include more or fewer attributes than a state would require, all depending on the nature of the claim the rightsholder wants to make. When private parties contract for RECs, a seller can warrant that the RECs sold comply with state standards.46 However, it is possible to subdivide RECs into several attributes as opposed to a single attribute that conveys all environmental benefits from the generation of renewable electricity. For instance, the now-defunct Clean Power Plan would have allowed power plants (subject to state authorization) to trade Emissions Reduction Credits, which warrant that electricity was produced without carbon emissions.47 Theoretically, a seller could have conveyed the carbon-free attribute of a MWh of solar electricity through an Emissions Reduction Credit, and then conveyed all other attributes of the solar electricity to another party that, for example, cared only about supporting solar power and not any resultant emissions reductions.48 But of course, once parties have contracted for environmental commodities (whether RECs or REC-like commodities), they will receive the full scope of rights and responsibilities flowing from state contract, property, and consumer protection laws. And even states that do not have RPSs will recognize and broker disputes involving RECs.49
In sum, RECs are rivalrous environmental commodities that are separately conveyable from the energy associated with their generation. Their main benefit is that they allow governments and market participants to subsidize renewable electricity generation, since there is no way to track the flow of electric charge from generator to end user. Their definition varies state by state, but in general, they are generated whenever a renewable energy generator generates a MWh of electricity. The next Part describes how a property framework explains the entitlements that RECs provide.
II. What Is Property?
Case law and agency guidance have described RECs as property, but often without discussion of what that categorization means.50 The moniker of “property” on its own is not particularly useful — this Part’s eponymous question has long vexed scholars.51 Real property, personal property, intellectual property, and “new” property are just a few of the different species of legal rights providing different protections that nevertheless fall under the same umbrella of “property.” In order to clarify how RECs fit into that picture, this Part first provides an overview of property as a concept to examine what facets of property RECs have. It then focuses on regulatory property, which is the bucket of interests into which RECs fit most neatly. This theoretical background sets the stage for analysis of the ways in which property theory can enrich debate about RECs.
A. Property as a Concept
This Note works from the assumption that property is a meaningful and mostly coherent concept, even if its contours are not always clear.52 The Note borrows from property theory, starting with the draft Restatement (Fourth) of Property, to sketch how RECs fit into that picture. The draft Restatement defines the basic requirements of property as thinghood and ownership. This Note builds on those requirements to identify other features that often characterize property regimes, such as mandatory rules, that are especially powerful as explanations for RECs as property. These facets of RECs are likely to be where property theory can most productively contribute to policies involving RECs.
First, property rights grant the rightsholder authority over some discrete “thing.”53 Having property rights in a car means that others cannot, without consent, use the car without fear of legal recourse. But “things” do not have to be physical — intellectual property, securities, and other intangible forms of property (including RECs) are all “things” to which property rights can attach.54 “Things” must also be discrete, meaning they must be a “separate whole” from the entity claiming to own them.55 In practical terms, the separateness requirement means that property rights can be traded.56 RECs are discrete things in part because they are unbundled from the energy underlying them — a generator can sell electricity and RECs to two different parties, and the rights transferred in either sale are mutually exclusive.
Second, property rights can be owned.57 Ownership rights may vary with the exact kind of “thing” at issue. For instance, real property comes with the right to exclude and the right to use and enjoyment.58 Patents come with the exclusive rights to make, use, sell, or offer to sell an invention.59 RECs come with the right to claim the use of a unit of clean energy. The range of rights that come with a property interest gives rise to the metaphor that property is a bundle of sticks.60
Thinghood and ownership provide the basic requirements of property rights, but there are several features that derive from these building blocks that are common to many property regimes. First is that property often carries with it a right to exclude that is enforceable against any infringer. The U.S. Supreme Court has stated that “the right to exclude is ‘universally held to be a fundamental element of the property right,’ and is ‘one of the most essential sticks in the bundle of rights that are commonly characterized as property.’”61 The right to exclude has never been unlimited, giving way to government regulation62 and interest balancing by courts.63 But even if its importance can be overstated,64 the right to exclude is an important facet of ownership. For RECs, the rivalrousness that is common to many REC regimes exemplifies the importance of exclusion.
Additionally, property is often subject to mandatory, not default, rules. Professors Thomas Merrill and Henry Smith describe this principle as numerus clausus.65 They argue that unlike contract rights, which are more or less endlessly customizable, property regimes protect “only those interests that conform to a limited number of standard forms.”66 The complicated system of estates and future interests provides an example of the limited forms that property regimes protect — an interest in Blackacre must fit a standard form, or a court will refuse to recognize it as a property right.67 This principle promotes uniformity and lowers information costs on others, as property rights generally bind large numbers of third parties.68 Given standard, recognizable forms, these third parties can recognize property rights and accordingly avoid trammeling the rightsholder’s interests.69 RECs often follow this standard-form approach. For REC markets to function efficiently, rights must be defined clearly. Purchasers in a mandatory market, for example, would likely not want to purchase rights they are not sure they can use towards their RPS requirements.70 And in fact, requirements for RECs are often set in considerable detail by statute or regulation.71
All of these facets of property rights are interrelated. The right to exclude is part and parcel of ownership and control. It has value because it is enforceable against the world — a rightsholder does not need to secure assent from any possible trespasser to bar them from entering her property. And potential trespassers know not to infringe the rightsholder’s rights because they can recognize those rights as one of the limited standard forms that the law protects. While these features of property rights are generally true across domains, they may manifest differently, and even be weaker, in certain types of property. The next section explores how RECs’ interplay with government programs like RPSs affects their categorization as property rights.
B. Regulatory Property and Environmental Attributes
RECs do not easily fit into the buckets of real, personal, or intellectual property. Instead, they are a species of regulatory property called environmental attributes. But existing frameworks for regulatory property do not fully account for RECs’ position between government programs and private markets.
Regulatory property derives from “new” property, which Professor Charles Reich described as government-provided “money, benefits, services, contracts, franchises, and licenses” that give rise to property interests.72 Regulatory property often takes the form of “credits” that allow rightsholders not to comply with a generally applicable law.73 For instance, local governments may facilitate development through transferable development rights, which allow rightsholders to buy their way out of zoning restrictions.74
The U.S. Supreme Court famously followed Reich’s schema for new property.75 Regulatory property leverages Professor Harold Demsetz’s classical understanding of property rights as solving commons problems76 to address the commons problem that is pollution.77 In a typical framework, governments create credits or allowances that give rightsholders the right to emit a certain quantity of a pollutant.78 Governments make these interests scarce (and therefore valuable) by setting a cap on the total number of interests that the program distributes.79 These frameworks compel polluters to internalize negative externalities like harm from pollution and promote efficiency by incentivizing polluters who can reduce pollution at a cost below the cost of pollution credits on the open market to do so.80 The most prominent federal regulatory property framework came with the 1990 amendments to the Clean Air Act, which established an emissions trading program for sulfur dioxide.81 The program has generally been seen as a success.82 Scholars describe the creation of regulatory property by government fiat as a “top-down” approach to property creation.83
But environmental attributes do not necessarily derive value from government programs. A “bottom-up” approach, in which private markets lead the way, or a “hybrid” approach, in which private markets and governments both contribute to property creation, are both possible.84 For instance, the Clean Water Act85 (not to be outdone by its aerial counterpart) also toys with market-based frameworks through wetlands mitigation banks. The Clean Water Act’s “compensatory mitigation” program allows parties to receive permits to dredge or fill wetlands on the condition that the permittee pay to preserve wetlands elsewhere.86 The EPA and Army Corps of Engineers allow developers to gain “credits” from wetlands preservation activities, which they can bank toward future projects; this policy started a commodities-like market for these credits.87 Wetlands preservation credits are often generated by conservation easements that bar development of wetlands.88 To be sure, wetlands preservation credits likely derive much of their market value from the Clean Water Act’s market-based framework. But conservation easements on wetlands existed before the Clean Water Act, and they do not rely on the Act’s compensatory mitigation program for their existence.
RECs demonstrate how the “hybrid” approach to property creation works in practice. Some states explicitly define RECs as property interests, and state RPS programs resemble top-down regulation by setting requirements for REC purchases.89 But there is also a robust private market for RECs that resembles a bottom-up market.90 Adjudications involving RECs in states without RPS requirements show that the top-down/bottom-up and mandatory/voluntary market dichotomies are not necessarily stable. States without RPSs still need to adjudicate disputes involving RECs, and states need to ensure that RECs used towards their RPS goals are not used in another mandatory or voluntary market.91 Mandatory and voluntary green power purchases are not hermetically sealed markets — both rely on environmental attributes resulting from electric generation across the grid, and a REC can be sold into either market. Entities that wish to purchase RECs for voluntary reasons — for example, municipalities in Massachusetts, or residents thereof92 — may act in the same market as mandatory purchasers. And private parties can contract for environmental attributes that meet state requirements or those that don’t, as well as allocate regulatory risk if programs change.93 Accordingly, even though environmental attributes are often a creation of government programs, they need not be so.
In sum, RECs can be characterized as environmental attributes used as regulatory property. Though all aspects of RECs do not neatly fit into a traditional property framework, many of the classic aspects of property — for example, excludability and mandatory rules — apply to RECs. The next Part explores how the understanding of RECs as property speaks to doctrinal and policy debates surrounding RECs.
III. Implications
Thus far, this Note has shown how property theory explains the legal framework of RECs. RECs have features such as thinghood, ownership, and strong mandatory rules that are typical of property regimes. With that understanding, policymakers can apply theory from property literature to current debates surrounding RECs. In fact, property principles of accession and “first in time, first in right” have already resolved debates about ownership of RECs. Concepts from property theory are also relevant in debates about federal versus state RPS programs. These issues are just some of the ways that property law and theory could lead the way: there may be other issues, such as ways to protect consumers from misleading claims,94 that merit further research as to how property theory could implicate current debates surrounding RECs. And there is no need to sound the alarm bells about the possibility of takings liability for changes in RPS programs. Takings jurisprudence’s treatment of regulatory property interests, as well as the practical realities of RECs, suggests that takings liability is unlikely for RECs in most cases.
A. Property’s Potential
A theoretical understanding of how RECs act as property rights can serve to enrich the doctrine surrounding RECs. In fact, adjudicators have already applied the property principles of accession to resolve disputes implicating RECs. And property theory can provide further guidance to policymakers and advocates working with programs that use RECs to meet environmental goals.
1. Allocation. — Shortly after RPS programs began, many states had to address whether preexisting agreements for the purchase of electricity included the transfer of RECs. While current power purchase agreements will generally specify whether the entities are contracting for power only or for RECs and power,95 that kind of specificity was not likely for agreements entered before states created RECs. Accordingly, adjudicators faced a problem that often arises in property law — how to allocate newly minted resources.
The principle of accession deals with the issues that arise when property creates other property by assigning rights in the new resources to the owner of the original.96 For instance, crops are obviously separately conveyable from land. But do contracts for the sale of land presumptively include any crops planted on the land? (Generally, yes.97) Accession extends beyond physical property to provide a framework for intangible property, including environmental attributes.98 And indeed, disputes about who owned RECs in cases where generative statutes were silent shortly followed the establishment of RPS programs. Purchasers argued that contracts for electricity automatically transferred ownership of RECs to purchasers — in essence, arguing that accession controlled.99 Generators, on the other hand, argued that their sale of electricity did not transfer RECs.100
There were two primary aspects of this debate: first, whether state or federal law governed, and second, the default rule for allocating RECs in contracts formed before RECs existed. On choice of law, a 2003 Federal Energy Regulatory Commission (FERC) order held that state law governed these disputes.101 On the merits, states generally came to the same answer that RECs followed power in these pre-RPS contracts — so the owner of electricity owned the RECs, as in accession.102 But true to property’s heterogeneity, that answer was not uniform — at least one state has set by regulation a default rule that RECs stay with the generator in certain instances, following a “first in time” principle.103 But either way, states have generally followed property-like principles (whether consciously or not) to allocate RECs, demonstrating that property can provide guidance for debates surrounding RECs.
2. Property Theory and a Federal RPS. — There is an ongoing debate about the balance of clean energy policy between states and the federal government. Currently, there is no federal renewable portfolio standard. But the Biden Administration proposed a federal clean electricity standard as part of the Build Back Better Agenda, which eventually became the Bipartisan Infrastructure Law.104 While energy scholars have robustly debated whether the federal government should set a federal renewable portfolio standard, existing property literature speaks to many aspects of that debate.
As stated above, RECs are generally creatures of state law. Although challengers have asserted that the complex web of federal electricity law restricts state control over RECs, these challenges have mostly failed. In 2012, FERC clarified that unbundled REC transactions (that is, conveyances of RECs separate from the underlying electricity) fall outside of FERC’s jurisdiction over wholesale markets, meaning they are squarely within that of the states.105
However, many scholars argue that a federal renewable portfolio standard would be preferable to the current mix of state standards.106 The argument is generally that a federal RPS would be preferable to a mix of state RPSs because it would standardize RECs and facilitate more efficient trading across state lines (among many other reasons).107 In fact, the failed Waxman-Markey climate bill would have included a federal renewable electricity standard that used REC-like instruments.108 And the Clean Power Plan also would have empowered states to use REC-like instruments in an effort to reduce emissions across the power sector.109
RECs’ status as property may bolster the standardization rationale in favor of a federal RPS. Scholars have noted that uniformity is a concern with existing REC markets.110 Clear boundaries of the claims included in RECs are necessary to facilitate functional markets. Per Professors Katrina Wyman and Adalene Minelli, “[P]roperty rights in environmental attributes must be allocated before they can be traded” — efficient markets require clearly defined property rights.111 This observation is in line with Merrill and Smith’s observation that property rights require clearly defined and consistent boundaries.112 For RECs specifically, legislatures and agencies, as opposed to courts, are likely especially suited to demarcate boundaries.113 Taking that argument one step further, it may be that the interest in national uniformity counsels in favor of the federal government taking the lead on RECs.
However, advocates against a federal RPS may argue that states, which are more suited to dealing with property rights, should retain control over RECs. Of course, Congress almost certainly has the power to enact a federal renewable portfolio standard under its Commerce Clause authority as a regulation of the interstate REC or electricity market.114 Further, the federal government has experience creating some regulatory property interests, such as sulfur dioxide emissions credits.115 But the argument would run that states already have experience with RECs and are more familiar with local electricity generation, which would allow states to treat electricity policy with a finer scalpel.
This argument also has a property dimension: it is a standard argument in property federalism literature that state governments are best suited to tailor property regimes to state interests.116 For example, a uniform federal RPS could conceivably not include hog waste, while North Carolina explicitly carves hog waste out as renewable energy.117 Professor Shelly Welton argues that decarbonization is a social project and states should be free to reflect social interests — for example, supporting the hog industry in North Carolina — in their creation of RECs.118 This argument tracks arguments in property theory that more local units of government can better tailor property protections to local interests.
But the hog-waste example may not be a triumph of local interests and state innovation — instead, it may be a story of regulatory capture by the pork industry.119 There is a robust property literature discussing public choice theory — in other words, the processes by which actors leverage legislation and regulation to pursue favorable regimes in a process called “rent-seeking.”120 In the case of hog waste, the “renewable natural gas” rationale for its treatment as renewable energy may be especially weak because the subsidized technology only questionably reduces carbon emissions.121 But even where political capture privileges a technology that does meaningfully limit emissions, such as solar, there may be reason for concern. Decarbonization will likely require a mix of renewable energy sources, given the intermittent nature of many renewable technologies.122 Accordingly, attractive carve-outs for a given green technology could act to the exclusion of other renewable technologies that are also necessary for deep decarbonization, which could be catastrophic if the subsidized technology isn’t particularly green.123 These concerns about legislative control of property rights follow a different strand of scholarly debate in property theory.124
Of course, states and the federal government will face different public choice pathologies. Property theory cannot resolve the empirical question of which level of government is best suited to craft effective policy for RECs — in fact, it demonstrates that there are reasonable property law arguments in favor of either position that can bolster the economic and environmental arguments already being advanced. Further, current examples of federalized property demonstrate that federal authority over RECs need not be exclusive once federalized. With intellectual property, for example, Congress has preempted state law in copyright125 but allowed for further state innovation in trademark law.126 For RECs, the Waxman-Markey bill would have included a savings clause allowing for states to add onto federal requirements.127 The Clean Power Plan would have added onto the Clean Air Act’s system of cooperative federalism (which is the norm in environmental law)128 instead of supplanting state law.129 RECs, which implicate both property law and pollution control, could also provide for an area of further study for cooperative federalism in property regimes.
B. Avoiding Property’s Baggage: Takings Liability
The federal Constitution’s strong protection against government encroachment on property rights through the Fifth Amendment Takings Clause has been critiqued as applied to property interests that derive from (but are not themselves) real property or personal property.130 For regulatory property, takings claims could make it impossible for governments to change regulatory programs without paying just compensation. In fact, regulatory programs often explicitly state that regulatory property is not property in order to avoid takings challenges.131 But if RECs are property, are programs like RPSs vulnerable under the Fifth Amendment Takings Clause? For example, if a state changed a renewable portfolio standard to exclude one type of energy (for example, biomass) that was previously recognized as renewable, could a biomass generator challenge that change as a taking of its RECs without just compensation? That change could render any environmental attributes from the generator’s electricity effectively valueless — if a utility were seeking to comply with a state RPS, it would not buy the generator’s nonqualifying attributes.132 And a party wanting to claim that its energy was “renewable” for a marketing claim would probably avoid attributes that a state says are not “renewable.”
In fact, RECs’ status as property likely does not open states with RPS programs up to takings liability for two reasons. First, the structure of RECs and RPS programs makes it difficult to imagine the set of circumstances that would lead to a “taking.” Second, even if that situation arises, takings jurisprudence shows that many rights that are property cannot necessarily be “taken.”133
Regulatory change likely will not lead to takings liability because states rarely make changes that actually extinguish existing RECs. Because RECs are generated whenever a renewable power plant generates new electricity and are generally retired at the end of a calendar year, it seems unlikely that a state policy that did not render already-existing RECs valueless would constitute a taking. If a state, for example, decided that biomass energy no longer met its standards for renewable energy134 and as a result cut new RECs from biomass generators from its RPS program, no existing property interest would be affected. Provided that a state does not extinguish existing RECs,135 a generator could only complain that RECs that it expected to exist at some point in the future are now valueless. They could perhaps bring a regulatory takings claim under the Penn Central136 framework, but such a claim would have to overcome the low security of expectation in limited-term environmental commodities.137
But even if a situation arises where a regulatory change did plausibly effect a taking, it is also an open question whether the Takings Clause protects RECs. Although the Fifth Amendment proscribes governments from “tak[ing] private property . . . without just compensation,”138 just because something is called “property” does not mean that it can be “taken.”139 “Property” for the purpose of the Takings Clause is a stricter categorization than for the Due Process Clause, and some things styled as property may have no constitutional protection at all.140 The Supreme Court has been clear that it looks to extraconstitutional sources, such as state law, to determine whether an interest qualifies as property.141 At the same time, states may not manipulate their own law to redefine property interests as nonproperty (for instance, to avoid takings liability), or vice versa.142 But that problem raises the question: When should courts reject a state categorization of something as property?143 In his influential account, Merrill argues for “patterning” — that is, courts should look to “general criteria” that give rise to property interests as a matter of federal constitutional law, then should look to state positive law to determine whether such an interest meets that criteria. Merrill argues that the general criteria of constitutional property requires an “irrevocable right on a claimant.”144
Environmental attributes are likely not generally the kind of property that gives rise to takings liability under Merrill’s account. Wyman and Minelli argue that most environmental attributes are probably not subject to takings liability for regulatory changes because most environmental attributes are property between private parties but not between rightsholders and the government.145 In particular, they point to property disclaimers, which are provisions (often found in cap-and-trade programs or other regulatory property frameworks) stating that credits in a program are not property rights.146 The validity of these disclaimers is in question.147 If takings jurisprudence seeks to avoid states manipulating what interests count as “property” to avoid takings liability,148 it seems that a disclaimer standing on its own should not avoid takings liability. But at any rate, RPS programs often do not have property disclaimers, and some states explicitly define RECs as property rights.149
Even still, governments may argue that the Takings Clause does not protect RECs because they do not provide an irrevocable right to claim that energy is “renewable.” They primarily derive value from their utility in a government regulatory program,150 and highly regulated industries, like electric utilities, have low security of expectations in interests that are part and parcel of regulatory frameworks like RPSs.151 And even if RECs no longer qualified for one state’s RPS, they still could qualify for private voluntary REC markets or RPSs in other states, meaning they would not have lost all “economically viable use.”152 On the other hand, industry advocates could argue that the private market for RECs shows that they have value outside of regulatory frameworks and therefore are unlike other forms of regulatory property, such as emissions credits, that are not constitutional property. Given these arguments, it may be that RECs at least merit a regulatory takings analysis for a government action that significantly depresses their value.153
But even if RECs are constitutional property, it may be unlikely that they can be “taken.” Professor James Stern sees constitutional property more broadly than does Merrill but argues that the Takings Clause proscribes only the “taking” of property — that is, transferring an entitlement from one party to another.154 If property was not transferred to another party, or was never owned by the complaining party in the first place, arguably no taking occurred.155 Courts have relied on this kind of analysis (in effect, adjudicating an initial-allocation dispute) to reject takings challenges involving RECs. For instance, the Supreme Court of Connecticut rejected a claim that the Connecticut Department of Public Utility Control had effected an unconstitutional taking in establishing the rule that RECs transferred along with electricity for pre-RPS contracts.156 The court reasoned that, because Connecticut law was that RECs followed electricity, the RECs at issue “were not the plaintiff’s property” in the first place.157 Other states have similarly found no taking involving RECs when an administrative tribunal decides between two competing claims for REC ownership, although sometimes without explanation.158 In sum, takings liability for regulatory change involving RECs is unlikely.
Conclusion
RECs provide a case study of governments and private parties innovating in property rights to pursue the decarbonization of the electric grid that is necessary to avoid the worst effects of the climate crisis. By examining the ways that RECs act as property, stakeholders and policymakers can look to property theory for guidance to more effectively craft REC policy. Although RECs and property theory are not a panacea for the climate crisis,159 a deeper understanding of the property aspects of RECs will empower policymakers to draw on insights from property theory, both in innovating in property regimes and in avoiding pitfalls, to craft more effective climate policy.