When does additionality matter? (Part 1)

offshore-turbine.jpg

Sean Casten recently wrote a provocative post on why “additionality” — one of the bedrock principles of carbon markets as they’re presently designed — is an expensive waste of time. Sean is the president of Recycled Energy Development, a company that’s raised jaw-dropping amounts of money to pursue some very cool clean energy projects. Our perspective on additionality as carbon offset retailers differs from Sean’s perspective as an energy producer. It’s worth spending a few posts exploring why.

When we ask whether a greenhouse gas reduction is “additional,” we’re asking if it would happened in the absence of whatever incentive we’ve applied. According to the logic of additionality, if the reduction would have happened anyway, then we’ve wasted our money. Additionality is a fairly horrible piece of jargon, and I’ve only ever heard it used in the context of carbon policy. But in understanding why the concept matters, it’s useful to step back and consider how it applies in other contexts.

In fact, the question of additionality arises every time we try to use an incentive to achieve a certain outcome. Say you own a grocery market, and you run a coupon in the Sunday circular to entice shoppers to your store. Lots of people redeem the coupon in the following week. Was the promotion a success? Well, it depends. Presumably some of the people who redeemed the coupon would have shopped at your store anyway. You wasted your money on those folks. But some of the people who redeemed the coupon are new customers, “additional” to your normal store traffic.

To know whether your promotion was effective, you’d have to measure these two groups to see whether the new shoppers compensate for the free riders. Needless to say, such measurements are difficult and expensive in real life, so most retailers don’t bother. They use some rules of thumb to limit their risk and assume that coupons are on balance a boost to business.

Similar logic applies to just about any arena in which economic incentives are applied. The California Clean Car Discount Act aimed to stimulate the purchase of fuel-efficient cars by refunding money to people who buy hybrids. Of course, people were already buying plenty of hybrids in the absence of this incentive, so some significant portion of the refunds would necessarily be “non-additional,” wasted on people who would have bought hybrids anyway.

Which isn’t to say such refunds are a bad idea, any more than grocery store coupons are a bad idea. Some degree of non-additionality is inherent in any incentive system. That’s the rub. The degree and costs of non-additionality matter a lot in designing an effective incentive program, a point to which I’ll return in a future post.

Photo available under Creative Commons license from Flickr user phault.

Author Bio

adam

Comments Disabled

  1. ids - March 30, 2008

    I don’t put much into what Sean Casten says. He also proposes on Grist to ignore NSR of CAA for his families’ coal-generation project they call co-generation. Sean’s father is the Chairman of RED and advocates spending $350billlion to meet Kyoto by reinforcing the existing pollution stream with a little increased efficiency (in radio interview). Imagine the stupidity of advocating spending $350B that will be obsolete by 2020. The gristwashing from the Casten’s must give Grist cache. It don’t deserve the attention.
    (Casten interview here: Energy Up in Smoke, 2/1/8 http://www.loe.org/shows/segments.htm?programID=08-P13-00005&segmentID=4

  2. Adam Stein - March 30, 2008

    Hi ids,
    I’ve actually read Thomas Casten’s book, and it made a lot of good points about some of the perverse incentives built into the Clean Air Act. I think what he’s specifically referring to in this case is that the CAA focuses on absolute levels of emissions, rather than emissions per unit of energy, thereby penalizing energy efficiency.

  3. ids - March 30, 2008

    Hi Adam,
    Still it ignores the point that “stopping global warming,” as my local enviro’s like to say, is dependent on reducing the overall concentration of ghg, and reducing it to efficiency of burning coal is missing the point, not to mention self-serving for the Castens. As it is self-serving for the Castens to ignore other pollutants from coal in order to install their add-ons to dirty power for their profit, and extend the life of the polluting plant for more decades of dirty air. I’ve read Sean diss IGCC and never mention the IGCC water grab, probably because his coalgeneration business can’t work with igcc and plants whose lifetimes RED would extend grab massive amounts of water. I wouldn’t be surprised that his misinfo about additionality is merely to create the narrative for dirty coalgeneration, a boring greengristwashing.

  4. Sean - March 31, 2008

    Adam: Thanks for the post.
    Ids: I’d encourage you to look through the 250 some odd projects we’ve done over the past 30 years, listed on our website. (Go to Tom’s & my bios and click the “lists of projects” hyperlinks.) The worst of them are twice as efficient as the grid, and all are essentially fuel-agnostic. Yes, there are a couple coal-fired projects in there, but only in places where that was there before. (For instance, UMass Amherst had an old coal boiler providing steam to campus, and we built a 5 MW backpressure steam turbine to capture the pressure differential between their boiler header and campus distribution pressure. Coal-fired? Yes. But the piece we did was capturing energy that would have otherwise been thrown away.) And recovering waste energy is a good idea whether you start with coal, oil, gas, biomass or solar energy – all of which we’ve done.
    We are in no disagreement about the need to lower coal use, or more broadly to reduce GHG emissions as quickly as possible. Our belief which you may not share is simply that the way you maximize GHG reduction is to make it profitable.
    I’d suggest you have a look at our projects before mischaracterizing us as shills for the coal industry though.

  5. D - April 2, 2008

    There’s another problem with additionality that I have, which has to do with the long-term impact of additionality as a criterion: if a developing country knows that the amount of money it can earn from carbon credits depends on additionality, then from the government policymaker’s point of view, there is an incentive to make the baseline case more carbon-intensive (e.g. use coal as the default), instead of enacting cleaner national policies. That way, industries can claim more credits for retrofitting their plants and so on. In the end, you may end up with the same or worse situation from a carbon point of view, but the developing country or project seller gets transfers of money.

  6. Adam Stein - April 2, 2008

    D — yeah, there are some possible perverse incentives here. The rejoinder, of course, is that coal in fact is the default regardless, and developing countries don’t seem particularly inclined to pass climate-friendly policies in any case. Brazil’s rainforests aren’t doing too well, to take one example, and perverse incentives from offsets are clearly not to blame. But you’re right that there is an issue here.

  7. Tom Arnold - April 2, 2008

    D:
    Your point has actually been at least partially addressed in the CDM — project developers can eliminate policies designed to help achieve Kyoto goals (which apply for all countries, not just annex I) from the baseline analysis.
    Practically, I do agree that you always have to watch out for perverse incentives, but that’s not an excuse to let in non-additional projects.