When does additionality matter? (Part 4)

This post is the slightly tardy conclusion of a series (see parts one, two, and three).

Let’s wrap this up by shifting gears a bit. Additionality is central and essential part of the carbon offset market. Additionality is also, in the long term, probably not relevant to the energy efficiency market. The reason hinges on the difference between carbon offsets and carbon allowances. Both are often lumped together under the term “carbon credits,” but they’re different in important ways that are sometimes lost in discussions of cap-and-trade systems.

Some basic definitions are in order. Carbon allowances are those things that everyone is eager to auction off these days: pollution permits for greenhouse gas emissions. Under a cap-and-trade system, the government issues a fixed number of these permits, and every year the number drops. That’s the cap, and as long as it covers a sufficiently large swath of the economy, it’s difficult for polluters to evade. (New Yorkers can’t, for example, buy electricity from China.)

Carbon offsets, on the other hand, are pollution permits generated from specific projects that exist outside the cap. For example, no matter how big a chunk of the economy the cap covers, it probably won’t cover cow manure on small dairy farms. If you can demonstrate that you took specific measures to reign in a certain number of tons of dairy farm methane, you can use those emissions reductions to satisfy your obligations under a cap.

Additionality isn’t an issue for allowances. The number of allowances is fixed, and that’s that. They might get traded and passed around between polluters, their price might rise or fall, but they still represent a hard limit on the amount of carbon the economy produces. Additionality is a major issue for offsets. If any old project can serve as a source of offsets, polluters can easily sneak out of a cap.

This last point seems to bother a lot people. Indeed, it’s a bit counterintuitive. Isn’t a reduction a reduction? If company X emits 100 tons of CO2 one year and then 90 tons the next, why should we care about their motives? Let’s just reward the reduction.

california-efficiency.gif

 

The problem here is that a massive number of emissions reductions and efficiency gains are happening all over the economy at any point in time, even as aggregate emissions go up. Check out the graph above. The carbon intensity of the California economy has plummeted since 1981, dropping by roughly 4 percent per year. There are, of course, lots of reasons this has happened, but clearly carbon offsets weren’t a driving factor back in 1981. If you try to build a cap on top of this trend that drops total emissions by roughly 2 percent per year, as Lieberman-Warner does, non-additional offsets would let you easily fulfill that cap by cherry-picking all the efficiency gains that were occurring in the economy anyway. (Please note that you can’t compare the 4 percent and the 2 percent figures directly — they measure different things. The point is just that non-additional offsets will easily wash out a cap.)

Allowances to the rescue. Because allowances impose an economy-wide hard cap, no cherry-picking can take place. Additionality concerns go away. The difference between offsets and allowances is critical for energy efficiency measures like Sean Casten’s co-generation projects. Once a cap is in place, allowances will privilege Sean’s low-carbon energy by making it comparatively cheaper than dirty energy. The coal plant down the street has to buy lots of allowances to cover its emissions, a cost which eventually gets passed on to customers. The market tilts toward projects like Sean’s that don’t carry this allowance burden. Best of all, allowances don’t come with any pesky additionality tests. Additionality, in a certain sense, is built into the cap.

Now, Sean has argued persuasively that the “stick-based” incentives provided by allowances aren’t always enough to overcome various sources of inertia in the energy market that prevent — at least in the short term — good projects from moving forward. This is clearly a big problem, and I can imagine a number of policy prescriptions (such as set-asides — freebie allowances for clean energy producers) that might help. But abolishing additionality isn’t one of them, because additionality is, in this case, a red herring. The whole purpose of high-quality, additional offsets is to encourage carbon reductions in sectors of the economy not otherwise covered by a cap. The purpose of allowances is to force carbon reductions in the sectors that are covered. Getting rid of additionality would damage both mechanisms simultaneously.

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  1. Aaron A. - April 16, 2008

    One big problem that still needs to be addressed is the political unpopularity of anything that will raise energy prices. The American public doesn’t care that we still pay less than the average Italian or Brit; today’s gas prices are higher than they used to be, and that means we can’t afford anything and everything like in the good ol’ days.
    If a politician ever does work up the guts to suggest a cap-and-trade system or pollution taxes, there’s always an opponent waiting just off-stage, clutching a picture of Rebecca, a poverty-stricken 10-year-old in eastern Kentucky. They tell a brief story of her modest-but-happy family, and then shamelessly appeal to the audience’s emotions: “Would you like to explain to little Rebecca why you’re putting her coal-miner father out of work, and making it more expensive to heat their humble country home?” People are suckers for that kind of schmaltz; how can you overcome such a touching (if hypothetical) story, and get the public to focus on the common good?
    It kind of comes back to the issue of how we can present clean energy as an untapped opportunity, a chance to demonstrate American Innovation, rather than as a sacrifice.
    – A.

  2. GHG fellow - April 16, 2008

    Adam,
    You write, “Additionality isn

  3. Adam Stein - April 16, 2008

    Some answers:
    If I purchase potentially non-additional allowances as an offset consumer, not personally covered under the cap, aren’t I effectively reducing the amount of available permits by the same amount as my personal footprint?
    I’ll ignore the word “non-additional” there, because the whole point of this post is that the concept doesn’t pertain to allowances. So the answer to your question of whether purchases of allowances reduces carbon emissions is –
    Yes, IF:

    1. The cap is tight. In the early days of Kyoto, you may recall, allowances were over-allocated. The cap was therefore ineffective, and there was no way you could retire a large enough volume of allowances to change the situation. Allowances under a loose cap are worthless.
    2. The cap is broad enough to cover entire sectors of the economy. Otherwise it’s too easy for emissions to leak out to other sectors.
    3. The cap can’t be increased after the fact through arbitrary rule changes.

    It’s worth noting that neither items 2 nor 3 are true of the CCX, and 1 is questionable. CCX allowances are not a good vehicle for individuals who want to go carbon neutral.
    Furthermore, as a concerned citizen, why should I be more inclined to support cow manure projects than coal plant projects?
    Er…who said you should? As long as a project is high-quality — that is, additional — go for it.
    Seems clear to me that my money goes further when it’s used to encourage the big industrial emitters to reduce emissions and produce allowances.
    Seems clear you don’t understand allowances or offsets very well. A ton is a ton, assuming the reductions are real. So, no, your money doesn’t go farther based on project type, if quality is held equal.
    Additionality is a non-factor in my selection of offsets because creating real change in the nation’s largest emitters is my goal, not supporting small projects that look good in photos and help buy time while we consider building new coal plants and more nuclear facilities.
    Um…we fund several types of projects. Landfills and manure digesters hardly look good in photos, and I’m pretty sure wind farms are actually a useful way to reduce our dependence on coal.
    However, if you really want donate money to DuPont by buying blind allowances on the CCX, I know several low-quality vendors who would be happy to take your money. Send me an email and I’ll pass along the names.

  4. GHG fellow - April 18, 2008

    Adam,
    It’s your blog, so I understand your need to get in the last word here. Fine. I’ll try to keep my last post on the topic civil but I must say that I do purchase allowances as offsets for my driving, flying, and my home emissions, and the provider I choose is in no way low-quality based on my educated assessment. In fact, as I’ve stated, I think I am doing more good through this choice than I could through other available options. That said, I don’t feel that Terrapass is offering low-quality offsets either. Just low-quality arguments in this particular thread.
    Starting from the top, you say:
    “So the answer to your question of whether purchases of allowances reduces carbon emissions is

  5. Adam Stein - April 21, 2008

    Yeah, I guess we’ll have to agree to disagree here. Your argument essentially boils down to: quality doesn’t matter. “The end,” you keep saying. Leakage doesn’t matter: the end. Additionality doesn’t matter: the end. Expanding caps don’t matter: the end.
    We can all agree that retiring allowances theoretically restricts a cap. The more interesting issue is under what circumstances theory matches reality. It’s not a trivial matter. Experience has made clear that it’s possible to design carbon markets that don’t work very well.
    I think the way we each approach the central matter is telling. The question I find interesting is: Does purchasing carbon allowances reduce carbon emissions?
    The question you find interesting is: Aren’t I effectively reducing the amount of available permits by my personal carbon footprint?
    There’s a stark difference here. Your question is technical and trivially true. It’s also much less interesting (to me) than the question of whether such an action does, in fact, lead to carbon reductions. So I guess our mileage does vary.

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