Abstract
This paper explores additionality analyses for offsets, a core theoretical requirement to ensure that emissions trading schemes reduce overall greenhouse gas emissions (GHGs). In the context of offsets, the additionality analysis evaluates whether an emission reduction would have occurred absent the incentive provided by the offset. The purpose is to determine whether reductions are caused by the policy intervention. The paper identifies a tension between adequate additionality analyses and the implementation costs they impose and evaluates these tensions in practice using two emissions trading programs in the United States, California Cap and Trade and the Regional Greenhouse Gas Initiative, as illustrative of the design challenges. The paper concludes that while holistic, project-specific quantifications of offset emissions relative to a counterfactual baseline scenario may not be necessary or practically feasible, evaluating one or two benchmarks may not be an adequate substitute to test such an important concept.
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Notes
- 1.
MIT Climate. June 22, 2021. Why Did the IPCC Choose 2° C as the Goal for Limiting Global Warming?, https://climate.mit.edu/ask-mit/why-did-ipcc-choose-2deg-c-goal-limiting-global-warming. Emissions trading schemes are valued at approximately USD 277 million. Chestney, Nina. January 27, 2021. Global Carbon Markets Value Surged to Record $277 Billion Last Year, Reuters, https://www.reuters.com/article/us-europe-carbon-idUSKBN29W1HR.
- 2.
Many emissions trading programs and “all extant GHG cap-and-trade systems” allow participants to purchase offsets in addition to credits. McNish (2012), p. 388. McNish points to EPA predictions from 2009 that 50% of emission reductions would come through offsetting “rather than inside-the-system reductions”. Id. at 390.
- 3.
- 4.
McNish at 2 (explaining that “[u]nlike allowances, offsets are not created by government fiat, but are new rights created by additional emissions-reducing activities outside the system”).
- 5.
One counter-intuitive outcome of this approach is that it rewards historically bad actors by paying them to change their behaviour. Historically good actors who had already, for example, accepted a cut in profits in order to reduce their emissions are not eligible to benefit because their reductions would have occurred despite the policy incentive. The additionality analysis only makes sense when the neoclassical economics assumption of autonomous, rational, and self-interested actors is embraced. This assumption is not always correct; therefore, it results in unfair outcomes to more responsible actors and arguably perverse long-term incentives for businesses not to act responsibly because the dominant approach to regulation is to pay off bad behavior rather than regulate it directly.
- 6.
In this paper, the author uses the term emission reduction to refer to the resulting overall reductions in emissions under the program as a result of offset eligible reductions but avoided/captured emissions and removal.
- 7.
Offsets are generally required to be “real, permanent, quantifiable, verifiable, and enforceable” in addition to additional. See, e.g., Cal. Health & Safety Code § 38562 (d)(1).
- 8.
Gillenwater, Michael. January 2012b. What is Additionality? Part 2: A Framework for More Precise Definitions and Standardized Approaches, Discussion Paper No. 002 Version 03, 3.
- 9.
Gillenwater, Michael. January 2012a. What is Additionality? Part 1: A Long Standing Problem, Discussion Paper No. 001, Version 02, 5 (“relative to other policies, have the potential to entail greater implementation costs associated with the assessment of additionality of and baselines for proposed activities.”)
- 10.
For example, the additionality determination necessary for offset projects that remove C02 from the atmosphere requires a different kind of calculation than projects that purport to avoid projected future emissions. Even within the category of avoidance and mitigation projects, however, the method of calculation necessarily varies depending on the details of the project and the sector.
- 11.
See, e.g., Roth, Sammy. April 9, 2020. Cow Poop Could Fuel California’s Clean Energy Future. But Not Everyone’s On Board, L. A. Times, https://www.latimes.com/environment/story/2020-04-09/cow-poop-california-clean-energy-future.
- 12.
Gillenwater (2012a) Part 1, 9.
- 13.
Gillenwater (2012b) Part 2, 5.
- 14.
On circular and non-circular definitions of additionality, see Gillenwater (2012) Part 1, 14, Figure.
- 15.
Gillenwater (2012b) Part 2, 5.
- 16.
Removal (as opposed to reduction or avoidance) projects are eliminating existing GHGs, therefore, they do not require this kind of hypothetical projection.
- 17.
A World Bank report proposes that “Data availability whether on financial, technological, or social issues, should guide the choice of additionality testing approach”, but shaping the analysis to available data presents worrisome implications for the soundness of the offsets. World Bank Group Partnership for Market Readiness. May 2016. Carbon Credits and Additionality: Past, Present, and Future, Technical Note 13, https://openknowledge.worldbank.org/bitstream/handle/10986/24295/K8835.pdf?sequence=2.
- 18.
Clean Development Mechanism, United Nations Climate Change, https://unfccc.int/process-and-meetings/the-kyoto-protocol/mechanisms-under-the-kyoto-protocol/the-clean-development-mechanism.
- 19.
There are important environmental justice implications of offset programs’ basic approach to fungibility of emissions, especially as offset projects are often created for developed countries in developing countries. After all, emission reducing projects do not necessarily minimize other environmental harms. Additionally, rapid increases in development due to offset markets can pose serious concerns around sovereignty and land justice. For an example of this critique, see Nyéléni Newsletter. November 2010. No. 1, available at https://nyeleni.org/DOWNLOADS/newsletters/Nyeleni_Newsletter_Num_1_EN.pdf (“[Offsets] allows rich countries to carry on polluting while funding controversial projects in developing countries (e.g. industrial gases projects, construction of big dams for hydroelectric power, or monoculture plantations for the biomass industry). Often these projects endanger local communities and their rights; serving only private businesses’ profit and promoting land-grabbing.”)
- 20.
Gillenwater (2012a) Part 1, 2.
- 21.
Gillenwater (2012a) Part 1, 18–19.
- 22.
Note that financial additionality can include policy incentives as well as revenue from sales: Tax credits, grants, guaranteed loans, or other policy mechanisms fit into the financial additionality category because they provide financial incentives rather than legal mandates to shift behaviour. Note also that financial additionality is distinct from but closely related to the issue of double counting or credit stacking. Double counting occurs when parties claim multiple credits or other financial benefits for the same emission reductions. If double counting has occurred, the reduction is not additional. However, the underlying concern expressed is different in each case. With double counting, the project is the claiming of multiple benefits for the same action, and the concern is primarily fairness. With additionality, it is primarily the integrity of the program as a whole and ensuring that net emissions are reduced.
- 23.
Gillenwater (2012a) Part 1, 17.
- 24.
Gillenwater (2012a) Part 1, 17.
- 25.
There are exceptions, however. An offset project specifically mandated by a judicial decision, for example, to install GHG-reducing technology, would require project-specific research.
- 26.
Cal. Air Resources Board, Direct Environmental Benefits (DEBS), https://ww2.arb.ca.gov/our-work/programs/compliance-offset-program/direct-environmental-benefits.
- 27.
Cal. Air Resources Board, Compliance Offset Program: About, https://ww2.arb.ca.gov/our-work/programs/compliance-offset-program/about.
- 28.
Id.
- 29.
Cal. Code Regs. tit. 17, § 95972 (“Geographic Applicability. A Compliance Offset Protocol must specify where the protocol is applicable. The geographic boundary must be within the United States or United States Territories.”)
- 30.
Cal. Air Resources Board, ARBOCs Issuance Map, https://webmaps.arb.ca.gov/ARBOCIssuanceMap/; Cal. Air Resources Board, Direct Environmental Benefits (DEBS), https://ww2.arb.ca.gov/our-work/programs/compliance-offset-program/direct-environmental-benefits.
- 31.
The Carbon Offset Toolkit, The Livestock Offset Protocol, https://carbonoffsettoolkit.org/the-livestock-protocol/.
- 32.
Cal. Code Regs. tit. 17, § 95970.
- 33.
Cal. Code Regs. tit. 17, § 95973.
- 34.
Cal. Code Regs. tit. 17, § 95802 (a)(43).
- 35.
Id.
- 36.
Note that the qualifier “conservative” presents additional questions. By adding the conservative qualifier to the baseline – a business-as-usual scenario – CARB seems to be signaling a more generous metric to credit-seekers. If the business-as-usual baseline is interpreted more conservatively, a plain reading would suggest that it would be viewed as changing more slowly and therefore, facilities’ emissions could decrease less and still generate larger credits in relationship to the baseline. However, the same regulation defines “conservative” as “in the context of offsets, utilizing project baseline assumptions, emission factors, and methodologies that are more likely than not to understate net GHG reductions or GHG removal enhancements for an offset project to address uncertainties affecting the calculation or measurement of GHG reductions or GHG removal enhancements”. Cal. Code Regs. tit. 17, § 95802 (a)(77). This definition interprets the claimed reductions conservatively but not the baseline. However, the relationship between baseline and reductions is zero-sum. Given that the reduction only exists relative to a baseline, decreasing one value would necessarily decrease the other and vice versa. In an additionality analysis, clarity on whether a conservative scenario describes the set of conditions in the baseline or GHG reductions is essential.
- 37.
The offset protocols are for livestock projects, mine methane capture (MMC) projects, ozone depleting substances (ODS) projects, rice cultivation projects, US forest projects, and urban forest projects. Cal. Air Resources Board, Offset Protocols, https://ww2.arb.ca.gov/our-work/programs/compliance-offset-program/compliance-offset-protocols.
- 38.
Cal. Air Resources Board. November 14, 2014. Compliance Offset Protocol Livestock Projects: Capturing and Destroying Methane from Manure Management Systems at Ch. 3 available at https://ww2.arb.ca.gov/sites/default/files/barcu/regact/2014/capandtrade14/ctlivestockprotocol.pdf.
- 39.
See, e.g., Cal. Air Resources Board. October 7, 2020. Compliance Offsets Protocol Task Force Initial Draft Recommendations at 34, https://ww2.arb.ca.gov/sites/default/files/2020-10/offsets_task_force_draft_report_100720.pdf.
- 40.
Compliance Offset Protocol Livestock Projects at Ch. 3.4.
- 41.
Id. at Ch. 3.4.1.
- 42.
Id.
- 43.
Id. at 3.1(3)(b) (project operators must “quantify GHG emission reductions…”).
- 44.
Id. (Biogas control system refers to anaerobic digester.)
- 45.
Regional Greenhouse Gas Initiative, Elements of RGGI, https://www.rggi.org/program-overview-and-design/elements.
- 46.
Regional Greenhouse Gas Initiative, Offsets, https://www.rggi.org/allowance-tracking/offsets.
- 47.
Regional Greenhouse Gas Initiative, Offset Requirements, https://www.rggi.org/allowance-tracking/offsets/requirements.
- 48.
Regional Greenhouse Gas Initiative, 2017 Model Rules at XX-10.3(c)(1), available at https://www.rggi.org/program-overview-and-design/design-archive/mou-model-rule.
- 49.
Id. at XX-10.3(c)(3)-(4).
- 50.
Id. at XX-10.5(c)(1)(iii)(a). Importantly, the provision requires that the “most recent market data available at the time of submission of the consistency determination” must be used. This is especially important in the case of a technology like biogas where overlapping incentives are quickly changing the market.
- 51.
Id. at XX-10.5(c)(1)(iii)(b).
- 52.
McNish at 393.
References
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Gillenwater M (2012b) What is Additionality? Part 2: A Framework for More Precise Definitions and Standardized Approaches, Discussion Paper No. 002, Version 03
McNish T (2012) Carbon offsets are a bridge too far in the tradable property rights revolution. Harv Environ Law Rev 36
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Wiener JB (1999) Global environmental regulation: instrument choice in legal context. Yale Law J 108
World Bank Group Partnership for Market Readiness, Carbon Credits and Additionality: Past, Present, and Future
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Lazenby, R. (2024). Evaluating Additionality Analyses: California Cap and Trade and the Regional Greenhouse Gas Initiative. In: Saraiva, R., Pardal, P.A. (eds) Sustainable Finances and the Law. Economic Analysis of Law in European Legal Scholarship, vol 16. Springer, Cham. https://doi.org/10.1007/978-3-031-49460-4_5
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