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.
Sean also notes that other environmental markets function just fine without dragging in burdensome tests of additionality. In particular, the market for renewable energy certificates (RECs) has been thriving for well over a decade. You may be a REC buyer yourself. If you've ever signed up for your utility's "green power" program, then you bought RECs without giving a thought to additionality.
But this isn't the whole story on the REC market. RECs do, in fact, undergo several additionality tests, albeit simpler ones. For example, you can't generate RECs from renewable energy projects that are mandated by state or federal law. The reason for this additionality test is pretty obvious: your REC purchase isn't really funding green power in any meaningful sense if utilities were legally compelled to support the project anyway.
So additionality matters, even in REC markets. The difference is that the cost of the additionality tests is far lower in the REC market than in the carbon market. A clear trade-off exists between the stringency of additionality tests and the cost of applying them. How to balance this trade-off is a policy decision with no single right answer. Simpler, cheaper additionality tests set a lower bar, allowing more projects -- both "good" and "bad" -- to get through. More complex, expensive additionality tests screen out more of the bad projects, but inevitably shut out some of the good ones too.
In my first post, we saw that additionality is a concept that applies to any situation in which you use incentives to try to influence behavior. In this post, we see that additionality isn't an either-or property of a system, but instead a balancing act struck between somewhat conflicting goals. The REC market might choose one point on the additionality spectrum, and the carbon market, another.
How do we determine which is the correct point? It boils down to costs and benefits, the subject of my next post.
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Comments
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Sean Casten Posted 8:36 am
31 Mar 2008
Not sure I follow your logic on RECs. If I build a renewable plant, I might sell the RECs to a utility through a compliance market or through a voluntary market. Which one I choose to sell to is a function of my geography (which affects whether or not there is a mandated utility I can sell to) and the comparative price.
I take your point that one cannot sell the same REC to a compliance market and to a voluntary market, but that's not really an additionality issue - it's simply one of accounting. You need a paper trail to ensure you don't get to sell the same renewable attribute twice, but that's quite different from saying that in some cases you can't sell it at all.
Unless I'm misunderstanding you, this is only a function of voluntary markets that overlap with compliance markets. Can I therefore conclude that you believe that in a compliance market for carbon, we don't need any additionality tests? If so, we are in complete agreement!
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spaceshaper Posted 9:57 pm
31 Mar 2008
The true meaning of life is to plant trees, under whose shade you do not expect to sit.
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Adam Stein Posted 11:39 pm
31 Mar 2008
This might be getting too deeply into semantics, but additionality vs. double-counting are two ways of coming at the same issue: making sure the offset (or REC) purchase is real. The exclusion of RECs that are used to meet RPS requirements is basically an instance of what is known as the regulatory additionality test, a non-financial additionality test. For example, you can't sell offsets from methane flaring in large landfills, because these are covered under the New Source Review provisions of the Clean Air Act. Same kind of deal. There are other additionality tests that also apply to RECs, such as the timing test.
www.terrapass.com/blog
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Russell Simon Posted 11:51 pm
31 Mar 2008
Adam, you mentioned the Voluntary Carbon Standard, which is a great certification. They've got their standards for additionality, just like CCX, Green-e, etc. Most consumers think they know what additionality is - at least they understand it in concept - but when it gets down to the realities of project development, the folks from VCS are the ones testing for it.
Looking forward to the continuing conversation!
- Russell
Carbonfund.org
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Sean Casten Posted 11:54 pm
31 Mar 2008
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charles burton Posted 2:12 am
01 Apr 2008
Addtionality is hypothetical and counterfactual, making assessments difficult, subjective and uncertain. After 5-years of evaluations of additionality by the CDM Executive Board, criticism is growing rather than subsiding. Despite the EB's good intentions in establishing tools and tests of additionality, reviewers (formal and informal) of the CDM process and EB criticize both project approvals and disapprovals. In my experience, passing the addtionality test is a coin flip, influenced by packaging and story telling, not analysis and hard data.
I understand what I'm saying doesn't help entities offering offsets to consumers, which I support. What it indicates to me is that consumer offset providers should purchase and retire allowances from compliance markets, thereby avoiding additionality altogether.
In the US today, the CCX seems to be the best approximation to such a market. While CCX does permit some offsets (about 10% or less of trading volume are offsets) and has a process for determining additionality (although its anything but transparent), CCX members who market offsets to consumers can choose to purchase and retire only allowances and avoid questions of additionality. If a firm wants the flexibility of purchasing and retiring offsets for certain kinds of projects, then perhaps these firms, as members of CCX, could work to improve the transparency of CCX's process for approving offset projects.
If that option doesn't work for some it seems the best choice that remains is to let the market for offsets develop an additionality standard, hopefully before entry of the FTC or similar body. During the sorting out period, however, I certainly hope that firms like Sean Casten's and the projects they engender don't get frustrated over higher transaction costs from uncertanties of additionality and give up. Their current and potential contribution to reducing c-emissions and reforming energy production in this country are enormous compared to the similar contribution made by providers of offsets to consumers.
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Adam Stein Posted 3:39 am
01 Apr 2008
I'm not suggesting anything like this. Offsets will always and ever require additionality testing. Without additionality, you'll see the price of offsets get driven down to something close to zero, which won't be much help to your co-gen projects. The reasons for this are what I'm laying out in posts 1, 2, and (soon) 3.
Allowances, on the other hand, are the tradeable permits that get created under a cap-and-trade system. Offsets are not a necessary part of a cap-and-trade system, whereas allowances are.
Allowances aren't project-based like offsets, and additionality doesn't enter into the picture. As Charles notes, you can retire allowances in the voluntary market without worrying about additionality (although I disagree that the CCX is a good place to do this).
Sean, the complaints you have about RGGI may be perfectly on point, but they don't seem to be related to additionality.
www.terrapass.com/blog
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charles burton Posted 4:16 am
01 Apr 2008
Alternatively, one can go to ECX and pay much more than the CCX price. Or, for an even lower price on average, one can go the offset route and endure the uncertainties of additionality. I just think the notion of additionality confuses the consumer, making her worry and giving the press another argument to add to all the others about disruptive climate change. What other consumer purchase, other than those associated with ponzi scheme, has to confront the notion of whether what was purchased was "real" or not.
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