Additionality
Understanding and Assessing Additionality in Project Based Emissions Trading
Dr. Mark C. TrexlerDirector, Carbon Markets and Strategies Det Norske Veritas (DNV)
© Det Norske Veritas AS. All rights reserved Slide 225 March 2010
“Additionality: Never has so much been said by so many, over so many years, without agreeing on the meaning of the
term being discussed, and the goals of the conversation.”
Trexler, BCSE Side Event, COP-9
© Det Norske Veritas AS. All rights reserved Slide 325 March 2010
The Logic of Offset Additionality
Offsets Allow Emitters To Negate GHG Emissions In One Place By Creating GHG Reductions Somewhere Else
In A Capped Trading System, Offsets Allow Emissions From Capped Sources To Be Greater Than They Otherwise Would Be, With The Understanding That These Greater Emissions Are “Offset” By Reductions At An Uncapped Source, Leaving Net Emissions Reduced or Unchanged
To Really Offset Emissions Under the Cap, Reductions From Uncapped Sources Must Be A Response To Offset Markets
Credited Reductions Must Therefore Be Additional To Reductions That Would Have Occurred In The Absence Of The Trading System
If They’re Not, Offsets Allow Global Emissions To Rise Beyond What Was Intended Under a Cap
The “Additionality Logic” Applies Equally to Offsets Under Regulatory and Voluntary Crediting Systems. Additionality is Additionality.
© Det Norske Veritas AS. All rights reserved Slide 425 March 2010
Why Additionality Matters
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© Det Norske Veritas AS. All rights reserved Slide 525 March 2010
Why Additionality Matters
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This graphic illustrates the impact of different additionality screens on offset supply curves. The three curves are based on the same underlying data set of mitigation potentials. They vary only in the severity of the additionality screen being applied. It is clear that the additionality screen can have a huge impact on the supply of offsets to the market, the environmental integrity of the trading system, and carbon market prices. That’s why additionality matters.
© Det Norske Veritas AS. All rights reserved Slide 625 March 2010
So What Does Additionality Mean?
“Additional” GHG Reductions Are Reductions That Are Attributable to the Existence of a Market for GHG Reductions
“Additional” Reductions Go Beyond “Business as Usual” (BAU) Reductions, But BAU is Too Amorphous a Concept to Serve as a Useful Additionality Definition
© Det Norske Veritas AS. All rights reserved Slide 725 March 2010
Testing for Additionality
The Thought Experiment of “Would the Reduction Have Otherwise Happened” Is Impossible To Answer Definitively
We’re Forced to Seek a Second-Best Solution by Designing Questions That Are Answerable
These Take the Form Of Additionality “Tests”
All Additionality Tests, Regardless of What They Are Called, Are Trying To Answer The Same Question: Would A Reduction Have Occurred Regardless of the Drivers Created by a Market-Based Trading System?
© Det Norske Veritas AS. All rights reserved Slide 825 March 2010
Additionality Testing – Two Approaches
Project-Specific Assessments (aka the CDM’s Approach)- A project is additional if the developer can demonstrate:
- The project is not required by law- The project faces higher implementation barriers than other options- The project faces lower financial returns than other options- The project can be distinguished from common practice alternatives
Standardized Project Eligibility Criteria - A project is additional if it meets measurable criteria, for example:
- Not required by law- Involves a certain type of technology/practice (e.g. on a “positive list”)- Is not on a “negative list” of common or least-cost technologies- Meets a performance benchmark- Is of a certain size or capacity- Meets other specific characteristics
8
© Det Norske Veritas AS. All rights reserved Slide 925 March 2010
Explaining Additionality in Pictures
© Det Norske Veritas AS. All rights reserved Slide 1025 March 2010
The Context for Additionality
If everything displaces coal
If all efficiency gains count
If all behaviors count
If all nuclear counts
If all forestry counts
Theoretical Mitigation “Supply”
Non-AdditionalAdditional
There are MANY activities “reducing” GHG emissions all the time. They’re not “offsets”because they are “business as usual.” Offsets are reductions that go beyond BAU, and that are attributable to a market for the reductions.
© Det Norske Veritas AS. All rights reserved Slide 1125 March 2010
If We Ignore Additionality . . .
Demand for Reductions
Ignoring Additionality Virtually Guarantees That Zero-Cost Non-Additional Reductions Will Supply That Demand, Undercutting Environmental Integrity
Additional
Non-Additional
Potential Offset Supply
© Det Norske Veritas AS. All rights reserved Slide 1225 March 2010
If Additionality Screening is Inadequate
Demand for Reductions
With Inadequate Additionality Screening, Zero-Cost Non-Additional Reductions Will Still Supply Most of the Demand for Reductions
Additional
AdditionalNon-Additional
Potential Offset Supply
© Det Norske Veritas AS. All rights reserved Slide 1325 March 2010
©
Credited Reductions
False Negatives
False Positives
False Positives – Undercutting Targets
False Negatives – Lost Mitigation Opportunities
True Positives
The Real Additionality Challenge
© Det Norske Veritas AS. All rights reserved Slide 1425 March 2010
©
Credited Reductions
False Negatives
False Positives
False Positives – Undercutting Targets
False Negatives – Lost Mitigation Opportunities
True Positives
The Real Additionality Challenge
There is no such thing as a perfect test for additionality. Any set of additionality rules will result in at least some “false positives”(reductions that are not additional but that are credited) and “false negatives” (reductions that are additionality but are excluding from crediting eligibility. The challenge in establishing additionality rules is to effectively balance these two “errors.”
© Det Norske Veritas AS. All rights reserved Slide 1525 March 2010
©
False Positives – Targets Are Undercut
Credited Reductions
False Negatives – Lost Mitigation Opportunities
Squeeze False Negatives (Liberal Additionality Rules), Increase False Positives
The Additionality Balancing Act - 1
© Det Norske Veritas AS. All rights reserved Slide 1625 March 2010
©
False Positives – Targets Are Undercut
Credited Reductions
False Negatives – Lost Mitigation Opportunities
Squeeze False Positives (Strict Additionality Rules), Increase False Negatives
The Additionality Balancing Act - 2
© Det Norske Veritas AS. All rights reserved Slide 1725 March 2010
What’s the Answer?
Demand for Reductions
Additionality Rules Can Never be Perfect, but They Can Ensure That Policy Objectives Are Advanced
AdditionalAdditional
Additional
Successful Additionality Outcomes Result From Balancing False Positives and False Negatives, and Balancing the Size of Supply and Demand Pools
Constrained Offset Supply
© Det Norske Veritas AS. All rights reserved Slide 1825 March 2010
Why Additionality Matters
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In addition to illustrating the relevance of additionality testing, this graphic also explains why stringency per se is not the answer to additionality policy. More and more stringent additionality rules will help keep “false positives” out of the offset pool, but will inevitably exclude more and more real reductions (“false negatives”) as well. This can quickly lead to higher offset prices as supply is constrained. The balancing of these two forces is the key to project-based emission trading.
© Det Norske Veritas AS. All rights reserved Slide 1925 March 2010
The Morals of the Offset Story
There Are Lots of Good Offsets (and Non-Offsets)
There Are No Perfect Offset Criteria
Some Key Offset Design Decisions Are Policy, Not Technical Issues- What’s the acceptable balance of false positives and negatives?- What’s the acceptable cost for offsets?- What objectives (sectors/benefits) do we want to promote?
Decision Rules Cannot be Static (additionality can vary over time)
We’ve Been Talking Past Each Other About Additionality For 20 Years
Unless We Agree on the Nature of the Additionality Problem, and the Nature of the Balancing Act we Face, We’ll Argue About Offsets Forever. This Could Cost Us a Potentially Key Tool for Cost-Effective Compliance With Emission Reduction Mandates
© Det Norske Veritas AS. All rights reserved Slide 2025 March 2010
Coming at Additionality From a Different Direction
© Det Norske Veritas AS. All rights reserved Slide 2125 March 2010
Qualifying Reductions
Note: The point here is that any set of
offset rules, additionality and
otherwise, creates a pool of eligible
reductions. That simple fact doesn’t
tell you the composition of the pool. It could be a poor quality pool (too many false
positives) or a high quality pool (and
perhaps too many false negatives).
The Impact of Offset Rules
© Det Norske Veritas AS. All rights reserved Slide 2225 March 2010
ForestryMethane
Transportation
Industrial Gases
RE/EE
Note: In a perfect world every potential
offset would count (within the pool),
and every potential offset would be
“additional” (green dots).
Wouldn’t a Perfect World Be Great?
© Det Norske Veritas AS. All rights reserved Slide 2325 March 2010
RE/EE
Forestry
Methane
Transportation
Industrial Gases
Note: In the real world not all offsets are “additional”
(represented here by mix of red and green dots). With lax rules, a lot of
non-additional offsets (red
dots) make it into the offset
pool, potentially unacceptably contaminating
the pool.
What Happens With Lax Rules?
© Det Norske Veritas AS. All rights reserved Slide 2425 March 2010
RE/EE
Forestry
Methane
Transportation
Industrial Gases
Note: With overly tight rules the
eligible pool may be dominated by
additional reductions, but
only a small fraction of truly
additional reductions make it into the pool.
This can significantly
increase market-clearing prices.
What Happens With Overly Tight Rules?
© Det Norske Veritas AS. All rights reserved Slide 2525 March 2010
RE/EE
Forestry
Methane
Transportation
Industrial Gases
Note: It’s not realistic to
expect “perfect”rules and a
perfectly high quality pool.
But with careful attention to
these issues, we can
construct rules that limit the
eligibility of low quality offsets, while keeping offset prices reasonable.
What Can We Strive For?
© Det Norske Veritas AS. All rights reserved Slide 2625 March 2010
RE/EE
ForestryMethane
Transportation
Industrial Gases
Note: One approach is to focus on those sectors where it’s relatively
easy to identify high quality
offsets, while excluding or down-playing
market participation from sectors
where quality is much harder to
judge.
What’s One Approach?
© Det Norske Veritas AS. All rights reserved Slide 2725 March 2010
Additionality Conclusions Additionality Policy is Key to the Price and Environmental Integrity of any
Project-Based Offset Program
Additionality is Not Rocket Science, But It’s Not Easy Either.
Additionality Testing Can Never be Perfect, and Unless We Understand the Nature of the Problem (Balancing Competing Objectives) We’ll Never Get It Right
To Evaluate Additionality Testing, We Have to Evaluate the Makeup of the Resulting Offset Pool, and Determine If We’re Comfortable With How False Positives and False Negatives Were Balanced.
Because We So Rarely do This Evaluation, It’s Not Surprising That Additionality (and Project-Based Emissions Trading) Has Become So Controversial
We Can Do a Lot Better. The Question is Whether We Really Want To
© Det Norske Veritas AS. All rights reserved Slide 2825 March 2010
Dr. Mark C. Trexler
Director, Climate Strategies and Markets
DNV Climate Change Services North America