Articles by Adam Stein

The carbon offset market needs additionality

This post is the slightly tardy conclusion of a series (see parts one, two, and three).

Let's wrap this up by shifting gears a bit. Additionality is central and essential part of the carbon offset market. Additionality is also, in the long term, probably not relevant to the energy efficiency market. The reason hinges on the difference between carbon offsets and carbon allowances. Both are often lumped together under the term "carbon credits," but they're different in important ways that are sometimes lost in discussions of cap-and-trade systems.

Some basic definitions are in order. Carbon allowances are those things that everyone is eager to auction off these days: pollution permits for greenhouse gas emissions. Under a cap-and-trade system, the government issues a fixed number of these permits, and every year the number drops. That's the cap, and as long as it covers a sufficiently large swath of the economy, it's difficult for polluters to evade. (New Yorkers can't, for example, buy electricity from China.)

Carbon offsets, on the other hand, are pollution permits generated from specific projects that exist outside the cap. For example, no matter how big a chunk of the economy the cap covers, it probably won't cover cow manure on small dairy farms. If you can demonstrate that you took specific measures to reign in a certain number of tons of dairy farm methane, you can use those emissions reductions to satisfy your obligations under a cap.

Almost always, but the reason is more subtle than you think

In two previous posts, I've attempted to establish that additionality is neither some strange concept relevant only to carbon offsets nor an awkward patch used to fix a defect in the design of carbon markets.

Rather, the concept of additionality is applicable to any incentive system, whether subsidy, tax, or whatever. The real question is what degree of additionality is actually necessary or desirable in any given system. Put another way, when should we care enough about additionality to incur the costs of measuring and enforcing it?

Those costs can be quite high, and the benefits sometimes uncertain. Let's return to one of my previous examples: the grocery store owner who offers coupons to lure new customers, even though most coupons will probably fall into the hands of old, non-additional customers. In this case, additionality is difficult to enforce, and the benefits of enforcement are low (because coupon programs don't cost much to run). High cost, low benefit: additionality isn't a concern.

Now let's examine the carbon offset market. Here, the cost of measuring additionality is high, but the need is even higher. There are at least two reasons for this. The first is the obvious one: carbon offsets can be used to satisfy emission limits under a cap-and-trade program. Non-additional offsets undermine the cap. Good offset projects help to reduce the strain of carbon caps on the economy by lowering the cost of reductions. But too many bad offset projects threaten the whole system by allowing emissions to keep growing.

Measuring additionality has clear benefits — and also some obvious costs

The second in a series of posts on additionality.

In his post criticizing the design of carbon markets, Sean correctly notes that additionality is a pain to measure -- an ever more expensive pain, as the industry matures and quality controls become more stringent.

To take an example I know well, at TerraPass, we spend tens of thousands of dollars per project helping dairy farmers validate their methane digesters under the Voluntary Carbon Standard. It's a complex process, requiring a fair amount of domain expertise, outside consultants, site visits, and ongoing monitoring. The process is meant to ensure additionality, but the cost carries some clear downsides. For example, we can't consider any projects that are below a certain size. Even if they're great projects, they won't generate enough carbon reductions to justify the effort.

So Sean and I agree that additionality in the carbon world is expensive and tricky to measure, and that the cost of doing so drives some worthwhile projects out of the system.

The deceptively simple concept at the heart of carbon markets

Sean recently wrote a provocative post on why "additionality" -- one of the bedrock principles of carbon markets as presently designed -- is an expensive waste of time. This is a rich topic, and my perspective as a carbon offset retailer differs from his as an energy producer. It's worth spending a few posts exploring why.