Additionality – Carbon Markets

Additionality and Baseline Methodologies

“Offsets are an imaginary commodity created by deducting what you hope happens from what you guess would have happened.” (Dan Welch quoted in The Guardian, June 16 2007)

The topic of ‘additionality’ is the most fundamental − and contentious − issue in the carbon offset market. In theory, additionality answers a very simple question: Would the activity have occurred, holding all else constant, if the activity were not implemented as an offset project? Or more simply: Would the project have happened anyway? If the answer to that question is yes, the project is not additional.

Additionality makes intuitive sense: If I buy carbon offsets, I make the implicit claim that I forgo reducing my own emissions (i.e. I still drive my car) in exchange for paying someone to reduce their emissions in my stead. If I “neutralize” the emissions I caused while driving my car by buying offsets from someone who would have reduced their emissions anyway, regardless of my payment, I, in effect, have not neutralized my emissions but merely subsidized an activity that would have happened anyway.

Additionality is thus an essential element needed to ensure the integrity of any baseline-and-credit scheme. Yet additionality is very difficult to determine in practice. Many different tools have been developed to maximize the accuracy of additionality testing and to minimize the administrative
burden for the project developer. There are two distinct approaches to additionality testing: Project based additionality testing and performance standards.

Project Based Additionality Testing

Project based additionality testing evaluates each individual project on a case by case basis. The following is a short selection of additionality tests that are commonly used:

Legal and Regulatory Additionality Test (Regulatory Surplus)
If the project is implemented to fulfil official policies, regulations, or industry standards, it cannot be considered additional. If the project goes beyond compliance (“regulatory surplus”), it may be additional, but more tests are required to confirm this. For example, an energy efficiency project might be implemented because of its cost savings and would in this case not be additional.

Investment Test
This test assumes that an offset project is additional if it would have a lower than acceptable rate of return without revenue from the sale of carbon offsets. In other words, the revenue from the carbon offsets must be a decisive reason for implementing a project. The investment test is consistent with a microeconomic view of behaviours, and in theory would be a perfect additionality test. But in reality there may be projects whose finances make them look nonadditional that are still “additional” because of existing non-monetary barriers.

Barriers Test
This test looks at implementation barriers, such as local resistance, lack of know-how, institutional barriers, etc. If the project succeeds in overcoming significant non-financial barriers that the business-as-usual alternative would not have had to face, the project is considered additional.

Common Practice Test
If the project employs technologies that are very commonly used, it might not be additional because it is likely that the carbon offset benefits do not play a decisive role in making the project viable.

Which test is best suited to validate additionality depends on the type of project. An additionality test appropriate for one type of project (e.g., a simple regulatory test for methane flaring, where there is no reason to do the project if not required by law) might not be sufficient for other kinds of projects (e.g., energy efficiency, where there could be plenty of reasons for doing a project besides complying with regulations).

The main issue with project-based additionality testing is that the determination of whether aproject is additional can be quite subjective. A developer can claim that their project’s IRR was too low without a carbon revenue stream, and that the carbon revenues therefore made the project viable. But who can really determine what level of IRR is acceptable to a given company, and thus whether the additionality demonstration is valid? Such additionality claims can only be tested with access to internal company information relating to the financing of the project, yet this informationis in most cases confidential.

Source: WWF Germany, March 2008, Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards, Anja Kollmuss (SEI-US), Helge Zink (Tricorona), Clifford Polycarp (SEI-US), pages 15 and 16.