Understanding carbon credit additionality criteria in the voluntary carbon market
What is additionality in the voluntary carbon market?
Definition of additionality
Additionality is one of the main criteria to assess the quality of carbon credits. According to the Integrity Council for the Voluntary Carbon Market who frames the Core Carbon Principles for the whole sector, additionality has the following definition: Additionality is the fact that greenhouse gas (GHG) emission reductions or removals from the mitigation activity would not have occurred in the absence of the incentive created by carbon credit revenues.
For instance, a forest that is not at risk of deforestation, or a renewable project that is already approved and financed should not be able to issue carbon credits under this rule: the carbon savings they represent would exist with or without funding from the carbon market.
Why is additionality important to the carbon credit certification mechanism?
Additionality is essential to the carbon credit market as it ensures that tangible and verifiable climate impact is conducted thanks to carbon offsetting.
For the carbon credit buyer, it ensures that emissions are truly reduced through the beneficial impact of projects financed by carbon credits.
For the project developper, additionality is a paramount mechanism that allows for them to expand and develop their activity, furthering their positive impact. A lot of virtuous projects are not necessarily profitable and financially viable, and the sale of carbon credits allows them to carry on the development of their activity.
Therefore, the Additionality principle allows to identify the projects who would struggle to compete with existing systems, or that would not be able to scale their solution without additional funding from the VCM.
The big pictures about additionality
Fundamentally, additionality is a key criterion to ensure two elements:
- Projects that don’t need additional funding to scale should not be eligible in order to focus the carbon credit investments on projects that really need them
- Ensure the funding brought by carbon credits are effectively used to increase the impact on the fight against climate change.
More globally, the main problem of the fight against climate change is the lack of fundings of the transition.
- According to BCG, 3,5Tn€ per year are missing to meet Paris Agreement targets of 2°C.
- Just in France according to Ademe, 20 to 40Bns€ are lacking every year for these objectives.
- In its 6h report, the IPCC pointed out that the adoption success of PV and wind electricity projects were largely due to big financing and subsidies of such projects
It means that when a decarbonization solution is massively financed to enable its scaling, it is widely adopted and has huge impact on the fight against climate change.
Finally, as projects or GreenTech scales (and can more easily compete) or are required by laws, mature projects may no longer meet the additionality requirement, and will not receive any more carbon credits funding. This means we're always making sure funds are going to the places where they'll make a real impact.
Therefore, the role of the carbon credit standard is to define what the best solutions against climate changes are, and to define the right measurability and additionality validation.
The 8 differents types of additionality
According to BeZero, a carbon credit independent rating agency, there are different ways to check and validated additionality. BeZero built an additionality risk matrix, based on an in-depth analysis of 240 rated project.
Common-practice analysis additionality
This method examines the pervasiveness of the methodology or technology applied by the project within the region or the sector.
- Where it works: For the carpooling Verra methodology, additionality is validating by proving that carpooling is still a very minor activity. Then, the project developer explains how the additional funds brought by carbon credits are going to help the adoption and the scaling of carpooling within a zone.
- Where it does not work: solar panels projects in Europe, as it is already a spread solutions in the electricity sector
- 155 projects out of 240 used the Common-practice analysis additionality, by far the more used out of the 8, and 8 times more than the investment barrier additionality which is most of the time top-of-mind when talking about financial additionality.
- 90% of the common-practice analysis tests realized by BeZero received a rate on this criterion above AA-, and 15% above AAA-
Identification of alternatives to the proposed project additionality
This method evaluates whether a proposed activity can be substituted by any other feasible or credible activities. In addition to identifying alternatives, proponents may justify why these activities are not viable alternatives for the proposed project (such as financial and technical barriers).
- Where it works: VM0016 Recovery and Destruction of Ozone-Depleting Substances (ODS) from Products - Alternatives are all very nocive for the environment, by letting these substances outside. However, there is no other alternative than recovering and destructing these substances, even if it is not profitable in any case.
- Where it does not work: Regular compost in France, as other alternatives like methanization are also feasible and more efficient.
Investment analysis additionality
This step determines why the project is not economically or financially feasible without access to carbon credits. It applies either a simple cost analysis, investment comparison analysis or benchmark analysis. If either of the last two options to evaluate finances are applied, the proponents usually also complete a sensitivity analysis to confirm that their financial evaluations were robust.
- Where it works: VCS 1241: a small-scale hydropower project in India - Investment analysis to gauge additionality against a benchmark internal rate of return of 11.75% (without inflation), therefore project could not be developed without additional financing from carbon credits.
- Where it does not work: Hydropower or nuclear project in Europe, already financed by investors, and with a proven rentability
Barrier analysis additionality
Similar to the investment analysis, this step is undertaken to determine whether the project faces any significant barriers that prevent its implementation. In addition, this type of analysis also evaluates whether these barriers do not limit the activity of alternatives.
Evidence to demonstrate that barriers are significant and/or do not hinder alternative activities can be substantiated by relevant legislation, industry norms, market data, etc. Examples of technical barriers examined could be the lack of skilled activity locally or adequate infrastructure to carry out the project whilst examples of ecological barriers (relevant for forestry or land use projects) may include soil quality and the probability of unfavorable meteorological conditions.
- Where it works: VVM0019 Fuel Switch from Gasoline to Ethanol in Flex-Fuel Vehicle Fleets. Prove that Ethanol switches present numerous cost and process barriers that carbon credits can help overcome. Also the case of some bioH2 projects, new technologies with uncertainty on ROI face difficulties to find funding.
- Where it does not work: windmill project in Europe. If the project finds difficulties to be developed, it is not because of implementation barriers but classic ROI elements.
Regulatory surplus additionality
This test investigates the policy backdrop to a project's activities. It requires project developers to assess whether any existing law, regulation, statute, legal ruling or other regulatory framework directly or indirectly requires GHG emission reductions or removals.
- Where it works: VM0043 Methodology for CO2 utilization in Concrete Production. Prove that the process is above regulation and not common-based. Electronic devices or battery refurbishment fit also in this category as the law is at most about collect but not at all about the way to treat them.
- Where it does not work: some waste collecting in France as is becoming compulsory based on Loi AGEC.
This type of analysis sometimes falls under barrier analysis and determines whether the prevalence of prevailing practices hinders a project's success. This has predefined limits in spatial scale or capacity.
- Where it works: A project with a very low market share and an innovative approach, that have to list the barriers currently limiting the project deployment. Bio-hydrogen or plasma-hydrogen production fits in this category.
- Where it does not work: solar panel, classic recycling, electrolyzer-based H2 production
Performance standard additionality
Methodologies can have simplified requirements that grant additionality based on location (eg. Least Developed Countries - LDC) or qualitative demonstration of GHG-emitting baseline scenarios.
- Where it works: VMR0006 Methodology for Installation of High-Efficiency Firewood Cookstoves in some specific LDC.
- Where it does not work: the same methodology in countries which are not LDCs
This type of additionality test is new to Verra methodologies and requires project proponents to first demonstrate 'regulatory surplus' (see above). Following this, the project activities must be on the positive list where infrastructure is installed or distributed at zero cost to the end-user or be involved in any public schemes. This type of additionality test allows developers to bypass investment analyses.
- Where it works: rewarding waste collecting by people, at zero cost in some LDC for instance
- Where it does not work: waste collecting process by a regular waste industrial actor
Positive list additionality (implicit)
An accreditor-defined list of methodologies or activities that are granted automatic additionality if placed on this list.
- Where it works: VCS 1716: an isolated mini-grid project in the Democratic Republic of Congo (DRC). This test is only suitable for projects that generate less than 15MW - and the low rates of rural electricity access in the DRC. Despite their potential small-scale, programs like these are largely neglected in the DRC and access to external finance is tough and costly.
- Where it does not work: The same project but at a large scale, where deeper analysis is required because of the funding it would imply.
Note: Positive list additionality is stronger assessed than investment analysis additionality for such projects.
Methodology-driven additionality (implicit)
This test is a simpler combination of the common practice analysis and benchmark test (financial). It can incorporate legal, policy and penetration components.
- Where it works: Typical approach that gathers several limitation factors for the project. A mix of lack of regulations, more profitable alternatives, and technical barriers. Riverse approach to biobased construction materials is very similar to this (no clear regulation, more profitable heavily intensive alternatives, strong barrier to be profitable).
- Where it does not work: Most of the classic forestry projects, that need a complete analysis
How the Riverse Standard Rules validate additionality
Overall approach of additionality in Riverse Standard Rules
Riverse has chosen an hybrid approach to fit ideally the context of European Greentechs and the transition to a circular economy.
Therefore, each project has to demonstrate the following
- Regulatory additionality
+ One of the following
- Financial (i.e. Investment analysis) additionality
- Prevalence (i.e. Common-based analysis) additionality
- Technological (i.e. Barrier analysis) additionality
Concretely, regulatory additionality means the project must demonstrate there is no existing or expected law, regulation, statute, legal ruling or other regulatory framework that makes the implementation of the project compulsory.
For financial additionality, the project must prove either
- it is not sufficiently profitable to be developed
- it is operating at a financial loss
- additional funding would allow for the solution’s short term expansion.
For prevalence additionality, the project must demonstrate it may not be widely adopted because it is a new technology, or simply because it is not the norm. This barrier of common practice may be overcome with financing from carbon credits by allowing, for example, for competitive pricing, which may facilitate the adoption of the mitigation activity over the prevailing status-quo option.
For technological additionality, the project must demonstrate technological barriers may exist that prevent the mitigation activity from occurring or expanding. This may include access to equipment, infrastructure, or skilled labor. Funding from sales of carbon credits may allow projects to overcome these barriers.
Example of electronic devices refurbishment project
Below are examples of different types of additionality detailed for a Riverse electronics reconditioning project.
- There is no law in France nor in European Union for the refurbishment of electronic devices.
- There is only an objective of collecting WEEE, from which we are far away for the moment.
- Less than 5% of the electronic devices bought are refurbished ones in Europe.
- Less than 1% of the electronic in end-of-life are effectively refurbished in Europe.
- 70% of the refurbished electronic devices bought in Europe comes for China and the US
- Each project could with additional financial support open new production capacities
- On average, projects could multiply by 4 their capacity on existing projects with additional fundings.
- Refurbishment of new devices is always more complex due limitation put by devices producers.
- New technological investments are always needed to increase refurbishment rate, limit the rates of new required items, and waste production.