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When does additionality matter? (Part 2)

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Second in a series. First one here.

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 tradeoff exists between the stringency of additionality tests and the cost of applying them. How to balance this tradeoff 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.

Photo available under Creative Commons license from Flickr user Ryan McD.

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