Asset characteristics of solar renewable energy certificates: market solution to encourage environmental sustainability

The solar renewable energy certificate (SREC) or green certificate outside the USA is a renewable electricity production subsidy and an environmental financial asset created by governments' policy-makers. They are meant to be a Pigouvian market-based solution to monetize social externalities in electricity use and production investment decisions. The asset pricing characteristics of the SREC market is compared with other traditional financial assets to understand the market for environmental assets. Traders of SRECs are the creators of SRECs, the owners or developers of photovoltaic projects that sell SRECs, or buyers, electric utilities that need SRECs to meet their renewable portfolio standard requirements. This creates a thin market and potential problems for efficient price discovery, liquidity and market manipulation. The contribution of this investigation is to increase the understanding of the asset characteristics of SRECs and potentially lead to a more liquid and efficient market and a more socially beneficial allocation of capital to solar electricity production.