m trexler additionality why does it matter 201004

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


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

© 2003 Cli Mit Supply Tool

-$40

-$20

$0

$20

$40

$60

$80

$100

$120

$140

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

Million Metric Tons of CO2

$/to

n C

O2

Low Stringency Moderate Stringency Severe Stringency




-$40

-$20

$0

$20

$40

$60

$80

$100

$120

$140

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


$/to

n C

O2


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.


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

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.


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


If Additionality Screening is Inadequate


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

Additional

AdditionalNon-Additional

Potential Offset Supply


©

Credited Reductions

False Negatives

False Positives

False Positives – Undercutting Targets

False Negatives – Lost Mitigation Opportunities

True Positives

The Real Additionality Challenge


©

Credited Reductions

False Negatives

False Positives

False Positives – Undercutting Targets


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.”


©

False Positives – Targets Are Undercut

Credited Reductions


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

The Additionality Balancing Act - 1


©

False Positives – Targets Are Undercut

Credited Reductions


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

The Additionality Balancing Act - 2


What’s the Answer?


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




-$40

-$20

$0

$20

$40

$60

$80

$100

$120

$140

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


$/to

n C

O2


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.


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


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


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?


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?


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?


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?


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?


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

[email protected]

m trexler additionality why does it matter 201004

Education

additionality testing

additionality screens

additionality mean

pictures det norske

capthe additionality

additional ghg reductions

rights reserved25

ghg emissions