M Trexler Additionality Why Does It Matter 201004
- 1. Additionality Understanding and Assessing Additionality in Project Based Emissions Trading Dr. Mark C. Trexler Director, Carbon Markets and Strategies Det Norske Veritas (DNV)
- 2. “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
- 3. 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. © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 3
- 4. 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 © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 4
- 5. Why Additionality Matters 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. © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 5
- 6. 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 © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 6
- 7. 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? © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 7
- 8. 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 © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 8 8
- 9. Explaining Additionality in Pictures © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 9
- 10. 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. © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 10
- 11. 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 © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 11
- 12. If Additionality Screening is Inadequate With Inadequate Additionality Screening, Zero-Cost Non-Additional Reductions Will Still Supply Most of the Demand for Reductions Additional Non- Additional Additional Demand for Reductions Potential Offset Supply © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 12
- 13. The Real Additionality Challenge © False Positives – Undercutting Targets True Positives False Positives False Negatives Credited Reductions False Negatives – Lost Mitigation Opportunities © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 13
- 14. 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 False Negatives – Lost Mitigation Opportunities two “errors.” © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 14
- 15. The Additionality Balancing Act - 1 © False Positives – Targets Are Undercut Squeeze False Negatives (Liberal Credited Additionality Reductions Rules), Increase False Positives False Negatives – Lost Mitigation Opportunities © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 15
- 16. The Additionality Balancing Act - 2 © False Positives – Targets Are Undercut Squeeze False Positives (Strict Credited Additionality Reductions Rules), Increase False Negatives False Negatives – Lost Mitigation Opportunities © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 16
- 17. 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 © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 17
- 18. Why Additionality Matters 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. © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 18
- 19. 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 © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 19
- 20. Coming at Additionality From a Different Direction © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 20
- 21. 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). © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 21
- 22. 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 © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 22
- 23. 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. © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 23
- 24. 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. © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 24
- 25. 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. © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 25
- 26. 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. © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 26
- 27. 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 © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 27
- 28. Dr. Mark C. Trexler Director, Climate Strategies and Markets DNV Climate Change Services North America mark.trexler@dnv.com © Det Norske Veritas AS. All rights reserved 25 March 2010 Slide 28