Carbon offsets and the problem of additionality

The Waxman Markey bill (or American Clean Energy and Security Act, as it is more properly known) has plenty of detractors, as battles in the environmental blogosphere show.

There are those who oppose cap-and-trade schemes outright; those attacking the giving away of the initial allocations instead of auctioning them all off; and those who believe that the 25 per cent renewable energy goal will be ineffective.

At the same time, some good defences to all three broad criticisms have been put forward – for example, economist Robert H. Frank wrote about the benefits of putting a market mechanism on emissions, and Robert Stavins at Harvard explained why the allocation giveaways are not necessarily a serious impediment to a cap-and-trade scheme.

But the most compelling of the anti-ACES arguments centre around carbon offsetting and the problem of ‘additionality’. Carbon offsetting essentially gives the companies regulated by a cap and trade scheme a way to pay for investment in a carbon reduction project somewhere in the world, to ‘compensate’ for their own continuing emissions.

The problem is: how can it be proven that this money will fund a scheme that would otherwise not exist? As Scientific American describes it:

To earn credits, a project should owe its existence to the prospective earnings from carbon credits: the emissions reductions from the project should be additional to what would have happened in the absence of the CDM. Hence, the developers of a wind farm in India that replaces a coal-fired power plant could sell the difference in carbon emissions between the two projects as offsets—but not if the wind farm would have been built anyway.

Over on Maverecon, Willem Buiter also takes issue with the additionality problem (among other problems with ACES) calling the bill itself ‘a con and a fraud’.

The problems with additionality are well-known in the carbon-offsetting industry: perverse incentives and difficulties with verification (one large verifier was temporarily suspended by the UN recently).

On the other hand, as Robert H. Frank argues, the point of a market mechanism is to reduce emissions. It is  not necessarily to reward the most virtuous. And, like many of the arguments over the Waxman-Markeky bill, two camps seem to form: those who demand a perfect system, and those who support a system that is flawed, but politically feasible.

Related stories:
Another view on cap and trade give aways
(FT Energy Source)
A guide to good carbon offsetting (FT, 27/04/07)

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