M Trexler Additionality Why Does It Matter 201004

Additionality

Understanding and Assessing Additionality in
Project Based Emissions Trading

Dr. Mark C. Trexler
Director, Carbon Markets and Strategies
Det Norske Veritas (DNV)

“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 25 March 2010 Slide 2

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.


Why Additionality Matters

$140

$120

$100

$80
$/ton CO2

$60

$40

$20

$0
0 1,125 2,250 3,375 4,500 5,625 6,750 7,875 9,000
-$20

-$40
Million Metric Tons of CO2

Low Stringency Moderate Stringency Severe Stringency

© 2003 Cli Mit Supply Tool


This graphic illustrates the
impact of different
$140
additionality screens on
offset supply curves. The
$120
three curves are based on
$100 the same underlying data
$80 set of mitigation potentials.
They vary only in the
$/ton CO2

$60
severity of the additionality
$40
screen being applied. It is
$20
clear that the additionality
$0 screen can have a huge
0 1,125 2,250 3,375 4,500
-$20 impact on the supply of 9,000
5,625 6,750 7,875

-$40
offsets to the market, the
Million Metric environmental integrity of
Tons of CO2

Low Stringency
the trading system, and
Moderate Stringency Severe Stringency
carbon market prices.
© 2003 Cli Mit Supply Tool That’s why additionality
matters.

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


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?


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

Explaining Additionality in
Pictures


The Context for Additionality

 If everything displaces coal
 If all efficiency gains count
 If all behaviors count
 If all nuclear counts
Non-Additional  If all forestry counts
Additional

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
Theoretical Mitigation “Supply” reductions.


If We Ignore Additionality . . .
Ignoring Additionality
Virtually Guarantees That
Zero-Cost Non-Additional
Reductions Will Supply
That Demand, Undercutting
Environmental Integrity
Non-Additional
Additional

Demand for Reductions
Potential Offset Supply

If Additionality Screening is Inadequate
With Inadequate
Additionality Screening,
Zero-Cost Non-Additional
Reductions Will Still
Supply Most of the
Additional
Non-
Additional
Additional

Potential Offset Supply

The Real Additionality Challenge
©

False Positives – Undercutting Targets

True Positives
False Positives

False Negatives
Credited
Reductions

False Negatives – Lost Mitigation Opportunities


The Real Additionality Challenge
©
There is no such thing as
a perfect test for
additionality. Any set of
False Positives – Undercutting Targets
additionality rules will
result in at least some
True Positives
“false positives”
False Positives
(reductions that are not
additional but that are
False Negatives
credited) and “false
Credited negatives” (reductions
Reductions that are additionality but
are excluding from
crediting eligibility. The
challenge in establishing
additionality rules is to
effectively balance these
two “errors.”


The Additionality Balancing Act - 1
©

False Positives – Targets Are Undercut

Squeeze False
Negatives (Liberal
Credited
Additionality Reductions
Rules), Increase
False Positives



The Additionality Balancing Act - 2
©

False Positives – Targets Are Undercut

Squeeze False
Positives (Strict Credited
Additionality Reductions
Rules), Increase
False Negatives



What’s the Answer?

 Successful Additionality Outcomes Result From
Balancing False Positives and False Negatives, and
Balancing the Size of Supply and Demand Pools

Additionality Rules Can Never
be Perfect, but They Can Ensure
Additional That Policy Objectives Are
Additional Advanced

Additional

Constrained Offset Supply Demand for Reductions


In addition to illustrating the
relevance of additionality
$140
testing, this graphic also
explains why stringency per
$120
se is not the answer to
$100
additionality policy. More
$80 and more stringent
2

additionality rules will help
$/ton CO

$60

$40
keep “false positives” out of
the offset pool, but will
$20
inevitably exclude more and
$0 more real reductions (“false
0 1,125 2,250 3,375 4,500 5,625
-$20 negatives”) as well. 9,000
6,750 7,875
This
-$40
can quickly lead to higher
Million Metric Tons of CO2 prices as supply is
offset
Low Stringency Moderate Stringency
constrained. The balancing
Severe Stringency
of these two forces is the
© 2003 Cli Mit Supply Tool key to project-based
emission trading.

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


Coming at Additionality
From a Different Direction


The Impact of Offset Rules
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
Qualifying Reductions 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).

Wouldn’t a Perfect World Be Great?

RE/EE
Transportation
Note: In a perfect
world every potential
offset would count
Industrial (within the pool),
Gases and every potential
offset would be
“additional” (green
dots).

Methane Forestry


What Happens With Lax Rules?
Note: In the real
world not all
offsets are
“additional”
Transportation RE/EE
(represented
here by mix of
red and green
dots). With lax
Industrial
rules, a lot of
Gases non-additional
offsets (red
dots) make it
into the offset
pool, potentially
unacceptably
Methane contaminating
Forestry the pool.

What Happens With Overly Tight Rules?

Note: With overly
tight rules the
RE/EE eligible pool may
Transportation
be dominated by
additional
reductions, but
only a small
Industrial fraction of truly
Gases additional
reductions make
it into the pool.
This can
Forestry significantly
increase market-
Methane
clearing prices.


What Can We Strive For?
Note: It’s not
realistic to
RE/EE expect “perfect”
rules and a
Transportation
perfectly high
quality pool.
But with careful
attention to
these issues,
Industrial
Gases we can
construct rules
that limit the
eligibility of low
Forestry quality offsets,
while keeping
Methane offset prices
reasonable.

What’s One Approach?
Note: One
approach is to
focus on those
Transportation sectors where
RE/EE
it’s relatively
easy to identify
high quality
offsets, while
Industrial excluding or
Gases down-playing
market
participation
from sectors
Forestry
where quality is
Methane much harder to
judge.


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


Dr. Mark C. Trexler
Director, Climate Strategies and Markets
DNV Climate Change Services North America
mark.trexler@dnv.com


M Trexler Additionality Why Does It Matter 201004

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