By Jennifer Weiss, Vice President, Communications and Business Outreach, Climate Action Reserve
(originally posted on CaliforniaCarbon.info)
In order for greenhouse gas (GHG) emissions reductions to earn offset credits, the GHG reductions must be real (have actually occurred), permanent (provide lasting benefits to the environment, often defined as 100-years of sequestration or reduction), verified (reductions are confirmed by an independent, accredited third party), enforceable (reductions are subject to penalties for non-compliance and reversal), and additional (reductions occurred because of the incentives associated with the carbon market and are above business as usual practices).
Additionality is a key tenet of a carbon offset project. Carbon offsets represent GHG reductions that have been achieved through voluntary implementation as a result of the financial incentives provided by the carbon market. By requiring that offsets are not generated for GHG reductions that would have occurred anyway and issued only for activities above business as usual, additionality provides value and credibility to carbon offsets and carbon markets.
So how can additionality be determined?
Performance standard vs individual project financial analysis
The Reserve employs the performance standard threshold to assess project additionality. Under the performance standard approach, research is conducted up front to determine common practice and activities above common practice. GHG reduction activities that fall within the “business as usual” class are presumed to be financially viable without access to GHG credits, meaning they are not additional. GHG reduction activities above and beyond business as usual activities are presumed to be additional. Benefits of employing a performance standard for offset programs include:
More streamlined, objective, and efficient: The development of a performance threshold is a data intensive endeavor, but once the threshold is established it provides a more streamlined, objective, and efficient means for determining project additionality than the financial examination of individual projects. If a project engages in GHG reduction activities pre-determined to be above business as usual, then the project is additional.
Rigorous, transparent, multi-stakeholder approach involving the public: Reserve protocols are developed under a rigorous, transparent, public, regulatory-quality process involving extensive research, multi-stakeholder workgroups, and public comment periods. The Reserve works with stakeholders to identify activities that achieve GHG reductions within a sector, research common practice, conduct field interviews regarding opportunities and obstacles for the GHG reduction activities, engage with scientists and thought-leaders regarding best available technologies and best environmental practices, and analyze existing and anticipated regulatory and legislative requirements to determine the business as usual or baseline conditions.
Project-level financial additionality assessments may seem like a valuable barrier analysis for proving the additionality of projects; in practice, requiring such assessments is counter-productive, for the following reasons:
Sensitive to assumptions: The practice of project level financial additionality assessments is subject to numerous assumptions by the project developer that can lead to different conclusions. Assumptions include variables such as capital costs, operation and maintenance costs, energy costs, inflation rates, targeted rates of return, perceived value of any credits, etc. Financial analysis of any potential project can be extremely sensitive to such assumptions.
Rigorous financial analysis of any potential investment typically involves the development of a wide variety of sensitivity analyses that vary key assumptions to understand the risks underpinning any investment. Deciding which sensitivity analysis to select as one’s primary case is an art, not a science.
Administrative burden without benefits: Carbon offset programs that rely on financial examination of individual projects face a significant administrative burden for no tangible environmental benefit, thereby making participation in carbon markets even more inaccessible for the critical projects that sorely need carbon finance.
Market barriers, including lack of funding: A stark reality of climate mitigation is the fact that there are many market barriers to investing in high-quality projects, even if a project may appear economically viable in its own right. One of these well-documented barriers is lack of access to capital. There are trillions of dollars needed to bring these projects to fruition and international climate goals will not be reached if this significant group of projects is discouraged from climate finance.
Could still have questionable results: Specification of individual project level financial additionality was initially the primary requirement for any projects under the CDM. For a variety of reasons, there was enormous pushback from many quarters regarding the unworkability and unreasonableness of a project-level financial additionality standard. Throughout the CDM’s history there were numerous examples of the individual project level financial additionality requirement leading to questionable results.
The Climate Action Reserve has taken a standardized baseline approach to development of our protocols to address the question of financial additionality and take this aspect of project development out of the hands of project developers, who may have the incentive to select the financial scenario that best supports maximizing the quantity of credits (or receiving any credits at all). Our high quality credits represent the credibility, value, and efficiency of setting a high quality performance standard for GHG reduction activities.
When considering offsets and the processes under which they were developed and issued, it’s critical to look at the level of additionality and the method used to determine the additionality. Offset credits that are not additional are not true offset credits.