Strategies for Avoiding Lower-Quality Offset Credits

Additionality

Although carbon offset programs all have standards designed to exclude non-additional projects, no additionality screen is perfect. Offset credit buyers are advised to evaluate the specific projects from which they choose to buy credits. Recommended due diligence questions include the following:

For any project type…

  • Are data and assumptions used to justify the project’s additionality available and easily accessible? Most major carbon offset programs require transparent reporting of additionality determinations and require that all data and methods used be checked by accredited verification bodies. Buyers conducting due diligence may still want to review and understand what methods were used, especially where a protocol allows for different options to demonstrate additionality – some of which may be more conservative than other options.
  • If the project is not (currently) legally required, is there reason to believe that it is being undertaken in anticipation of future legal requirements (or to avoid triggering such requirements in the future)? Programs may differ in the extent to which they examine prospective legal requirements. For example, a landfill gas flaring project may not be currently required by law, but landfill owners may seek to implement such a project anyway if they anticipate needing to control landfill emissions in the future (e.g., as the landfill grows to where it exceeds a regulatory size threshold). Thus, they could claim that the project is additional today, even though it would be implemented anyway in the (near) future.
  • Is the project applying the most recent version of any relevant protocol or additionality test? If not, would the project still be considered additional under the additionality criteria prescribed by the most recent protocol? If a project would not be considered additional under most current standard, this does not necessarily mean the project was or is not additional. For example, a project involving large upfront investment costs could have been approved at a time when it was not common practice; the fact that this type of project has now become common practice would not affect its additionality determination, which was properly determined when it was implemented. On the other hand, protocols are often updated to close “loopholes” in additionality tests that allow non-additional projects to qualify. Further investigation should be done to understand why the protocol’s additionality criteria were updated, and whether the project in question would be excluded under the revised test.
  • How large is the project’s offset credit revenue stream compared to other revenue streams or cost savings achieved by the project? Claims of additionality are often tenuous if carbon offset revenues constitute a small portion of a project’s total revenues. For example, if 95% of the total revenues for a renewable energy project, for example, derive from electricity sales and only 5% are from offset credit revenue, the project’s additionality should be questioned.
  • Would the project cease reducing emissions if it did not continue to receive carbon offset revenues? Even if offset credit revenue is comparable to (or greater than) other revenues streams, for some projects other revenues are sufficient to cover costs – meaning that a project may continue reducing emissions even if it stopped selling carbon offset credits. While such projects are not necessarily non-additional – e.g., the decision to implement the project may still have been based on the prospect of carbon offset sales – they should come in for greater scrutiny.

For project types where additionality is a particular concern…

  • If a project-specific additionality test was used, is the project’s rationale for additionality compelling? Project-specific additionality tests (see How Carbon Offset Programs Address Additionality) attempt to determine additionality by evaluating legal, financial, and implementation details specific to each project. Conducting due diligence on a project that asserts its additionality based on one of these tests requires examining the information provided by the project and assessing whether its arguments are truly compelling. Key questions to ask here include:
    • How much information & data has the project provided to establish its claim to additionality? A perfunctory analysis should be immediately suspect.
    • Is it clear that the project is not legally required (and will not be required in the near future)?
    • Does the project identify – and describe in detail – credible implementation barriers, and does it make a compelling case that offset credit revenues are needed to overcome these barriers? All projects face implementation barriers of one kind or another. The key questions for a project’s additionality are whether such barriers are significant and whether offset credit revenues could credibly overcome them. If there is no obvious connection between the offset credit revenue and how a barrier would be overcome, then the project’s additionality should be questioned.
    • Is there a clear and believable case that offset credit revenues were a decisive factor in pursuing the project? Notwithstanding the potential for offset credit revenue to address barriers, a crucial question is whether having access to offset credit revenues was a decisive factor in pursuing a project. “Decisive” means that the project would not have been pursued without carbon revenues, even if it has (or had) access to other revenue streams. For example, a project may be designed to capture methane and deliver it to a nearby gas pipeline. Technical and permitting requirements for an interconnection with the pipeline would constitute an implementation barrier. The project developer convincingly shows that carbon revenues could cover the costs to address these requirements. However, a financial analysis shows that the project would receive enough revenue from methane sales alone to both cover these costs and still achieve a competitive return on investment. Because of this, it is highly unlikely that carbon revenues were a decisive factor in pursuing the project.
    • Is there a compelling argument that the project activity is not common practice? Projects involving activities that are common outside of carbon markets (aka “business as usual”) should usually be rejected, unless the project developers can identify essential differences between their project and other similar activities. This determination can be subjective, however. It is important to examine how common practice is defined by a project, and whether inconsequential details are used to make it appear different from similar activities or practices in a country or industry.
  • If a standardized additionality test was used, does the project present a possible exception to the rule? Standardized additionality tests (see How Carbon Offset Programs Address Additionality) are generally designed by considering average project conditions. It is important to understand the assumptions underlying any “performance standard” or other criteria used to screen for additional projects. If the project faces circumstances that diverge significantly from these assumptions (e.g., it has access to a revenue stream significantly above what is typical for similar projects) it may not in fact be additional even though it meets all eligibility criteria.

 

  • For due diligence purposes, buyers should seek to apply a separate “project-specific” additionality assessment to these projects. This would involve requesting more details about the project, and evaluating them against the key questions identified above for project-specific additionality tests. A project that meets all standardized additionality criteria and is able to present a compelling argument for passing a project-specific additionality assessment (e.g., demonstrating that carbon offset credit revenues were a decisive factor in project implementation) is more likely to be additional.