Measuring additionality: a step-by-step guide

I’m not done with the background material on additionality, but I do want to start to discuss how additionality is measured in actual practice, as a prelude to focusing more specifically on the Tontitown project review.

One way you don’t measure additionality is by calling up a bunch of people and asking them whether they think a project is additional. The speed-dialing approach does make for sensational magazine quotes, but doesn’t make for sound environmental policy. The speed-dialing approach fails both because additionality claims require a reasonable amount of expertise to evaluate and because such claims need to rest on a credible, objective standard. Otherwise additionality becomes a fruitless mind-reading exercise open to constant dispute.

The basic idea is to establish a series of hurdles, or tests, that a project has to pass if it is to be deemed additional. The exact nature of the tests will vary depending on the project category, but within a category the tests should be explicit and tightly defined.

For example, the Kyoto Protocol’s Clean Development Mechanism (CDM) recognizes roughly 200 types (xls) of carbon reduction projects, ranging from wind farms to “methyl-ester biodiesel from sunflower on unused land.” Each of these project types needs to pass various additionality tests.

The CDM has also defined an overarching additionality framework that it charmingly calls “Tool for the demonstration and assessment of additionality.” Although about as thrilling as you’d expect for a United Nations document, the paper is short, and even has a nifty flowchart.

Boiled down into plain English, the CDM additionality framework consists of four steps. I’ll walk through these with the simplified example of measuring the additionality of a wind farm.

  1. Identification of alternatives. If no credible alternatives to the wind project exist, then it can’t be additional. Of course, there are plenty of alternatives to wind. For example, coal.
  2. Investment analysis. Are the alternatives more financially attractive than the proposed wind farm? If so, then the wind project is more likely to be additional, because, in the absence of offsets, rational developers will choose the more financially attractive option. Note that project profitability alone doesn’t automatically trigger a failing grade on an investment analysis. Rather, a project should be no less profitable than the alternatives.
  3. Barrier analysis (optional). This step is a bit of a catchall that allows other criteria to be brought to bear on the question of additionality. For example, a developing country might lack access to the necessary technical expertise to build a wind farm, a barrier that offsets could help overcome.
  4. Common practice analysis. A final common-sense additionality check looks at what actions industry participants typically take in the absence of offsets. Regardless of whether cheaper alternatives exist, if everyone was choosing wind over coal before offsets came along, there is good reason to suspect that offsets aren’t needed to stimulate the creation of new wind farms.

Not exactly the sexiest stuff in the world, but there you have it: a hands-on guide to additionality. This overview is based on the Kyoto CDM methodology, but the Chicago Climate Exchange protocols are comparable. We’ve posted both the CDM and CCX landfill gas flaring protocols for easy comparison.

Coming up: the specific additionality test we will apply to Tontitown.

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  1. Anonymous - March 20, 2007

    Actually, additionality is a very subjective thing. The question is if one’s subjective analysis is reasonable and defensible. But it extremely difficult to call it objective. Subjectivity does not make it meaningless, just makes it more difficult to have a convincing arguement for.

  2. David Katz - March 21, 2007

    These discussion points completely miss the the key issue, regardless of whether they are included in the Kyoto CDM prototcols or not. The real question is: does the investment by TerraPass in already completed projects actually lead to real, new carbon offsets? The answer is clearly no. Saying stuff like “A final common-sense additionality check looks at what actions industry participants typically take in the absence of offsets” to quote Adam, makes the point: they doing it anyway, so TP’s investment is changing nothing. It is time for TerraPass to clean up its act or leave the market. TP’s continued action to rationalize its activities is damaging the entire carbon offset movement and discrediting true offset work. How many more damaging articles is it going to take for TP to realize that this hurts everyone.

  3. Adam Stein - March 21, 2007

    David —
    does the investment by TerraPass in already completed projects actually lead to real, new carbon offsets?
    That is the key question. However, the answer is not clearly no. Based on what we’ve uncovered in our review so far, the answer appears to be clearly yes, but that’s for the panel to determine, not us.
    More importantly, the BusinessWeek article isn’t about TerraPass. It’s about the “entire carbon offset movement.” We aren’t the project originators in any of these cases, and all of our project pass multiple rounds of review before we even consider them. If the criticisms of the BusinessWeek article prove true, the repercussions extend well beyond our small company.

  4. Matt - March 21, 2007

    OK, Let me think my way through this. To be additional, the project must be “less financially attractive” than alternatives *without* offsets, but more so with them or at least equally attractive (I’m not sure how you account for positive goodwill or the fuzzy feelings that people get with certain “environmentally friendly” projects).
    One question: what if the legislation changes, which changes the economics of a project? (or, for that matter, anything changes, that affects the the economics of the alternatives) IE, the main thing driving most new wind power in the US is the 1.5-2.0 cent tax credit for new production. Every once in a while, though, Congress lets this provision lapse, and new construction grinds to a halt until Congress renews it again. While construction is at a halt, imagine that TerraPass’ offsets would make some projects financially viable. Would that count as an offset, even though a year or so later, when Congress renews the wind power tax credit, the project could be viable without the offsets?
    Matt

  5. Aaron A. - March 21, 2007

    Matt: My thoughts would be that, since offsets are generally tied to a period of time (usually one year), the offset provider could change plans once the law changes. The offset provider (TerraPass) could let its current commitments expire, then reinvest in a program that needs it more.

  6. Adam Stein - March 21, 2007

    Matt —
    A slightly longer answer is that legislative changes don’t typically affect already existing projects, because of the economics of electricity generation. Wind farms enter into long-term power purchasing agreements with utilities, so their rates are fixed once they are running. Also, the value of the RECs is ensuring the wind farm gets built, so downstream changes to pricing aren’t necessarily material.
    But I think you’re really asking a more general question: what if something circumstance changes to make a project no longer additional? For example, what if the U.S. decided to require methane digesters be installed on all dairy farms? What would happen to the offset streams from pre-existing dairy farm methane digesters.
    And the answer, presumably, is that those offsets streams would go away.

  7. Dr David M Bryant - April 2, 2008

    As a scientist I am required to provide citations for all sources of data and for definitions of technical terms. This requirement is most beneficial for terms that may have alternative meanings outside of my discipline. To that end please provide a hypertext link to origins and/or definitions of terms used in your articles. Most recently the term “additionality”for which the OED (Oxford English Dictionary) has no listing.

    Thank you,

    David M Bryant PhD

  8. Adam Stein - April 2, 2008

    Hi David,
    There’s a pretty good definition here.
    As an aside, I’m a huge fan of Google’s define feature. Search for “define: additionality“.
    And you can see some more of our own posts on additionality here.
    Cheers,
    Adam

  9. Adrienne - February 11, 2009

    You wrote, “Rather, a project should be no less profitable than the alternatives.” Does the word “no” not belong in that sentence? Did you mean “a project should be less profitable than the alternatives” in order to be called additional?

  10. Adam Stein - February 11, 2009

    Hm. Yeah, you’re right. I’ve updated.

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