When businesses and individuals take the step to purchase carbon credits, they’re faced with a complex market.
Carbon credits, also commonly referred to as offset credits, are created when projects or activities reduce the amount of carbon—as well as other types of greenhouse gas—in the atmosphere, either by replacing a carbon-intensive process with a less carbon-intensive one or by removing carbon dioxide from the atmosphere altogether, through new technologies or nature-based approaches.
All carbon credits are measured in metric tonnes, but not all are priced the same. Why? One key cost driver is additionality.
What is additionality?
Additionality is the degree to which a carbon credit contributes to an emissions reduction or carbon removal that would not otherwise have occurred.
To make things simple: Imagine a land owner has an acre of empty land and wants to generate income from it in some way. They could, on the one hand, pave the acre and rent out parking spaces (a high-carbon outcome), or they could plant the acre with trees (a carbon-reducing outcome) and sell a carbon credit. In theory, a carbon credit generated by planting trees on the land would have high additionality, because without the carbon credit, the land owner would opt for the parking lot.
Now imagine someone who has installed solar panels on their home in order to reduce their electricity bills. A solar power carbon credit credit could be created and sold for this switch to renewable energy, even though the homeowner would have installed the solar panels anyway. In this case, the credit would have very low additionality, because the mitigating action would have happened with or without the sale of the carbon credit.
Additionality isn’t a binary measurement—it’s dynamic. A carbon credit can range from 0% additional (where the carbon credit did not lead to more carbon being removed or avoided) to 100% additional (where the climate impact would not have happened without the carbon credit).
Cost and price of carbon credits can be indicators of the additionality of the project that produces them. In the land owner example, the carbon credit needs to sell for a certain amount to make planting trees worthwhile. These carbon credits may have a high cost to the buyer. But in the solar panel example, the homeowner would be happy to receive any additional revenue from their solar installation, and might accept a low price for their credit. Although not always true, cheaper credits are often associated with low or questionable additionality compared to more expensive credits.
How can we measure additionality?
In the real world, of course, determining additionality is rarely straightforward. By definition, additionality relies on considering a counterfactual scenario: What would have occurred in the absence of the carbon credit?
There are many ways to evaluate additionality, including:
- Eligibility criteria. This method sets certain parameters for different types of projects, such as where the project takes place or standards for project development. If the project meets the set parameters for additionality, it is considered additional.
- Barriers. This method considers the barriers in place for certain technologies or activities and calculates additionality by what is required to overcome those barriers. Existing barriers must be significant enough, based on a predetermined definition, for a project to be considered additional.
- Common practice. This method looks at how common a particular practice is, since common practices would already be likely to occur and therefore have low additionality.
In the voluntary market, carbon credit registries like Verra’s Verified Carbon Registry and Gold Standard’s Impact Registry require additionality to be shown in the carbon credit project methodology. Credit marketplaces, such as Patch, then look to these registries to maintain certain standards of additionality.
Additionality and economies of scale
Additionality is dynamic over time. A project’s additionality can change as market conditions change. In fact, if carbon credit markets are working properly to incentivize climate action at scale, a project’s additionality should reasonably change over time.
We’ve seen this happen with renewable energy. Renewable energy certificates (RECs, or SRECs for solar-specific certificates) are a way for governments to incentivize the growth of renewable energy sources in order to meet emissions reduction goals. RECs are similar to carbon credits in the way they’re created, bought, and sold. However, they’re specific to the electricity grid and represent ownership of a certain amount of carbon-free electricity generation, as opposed to being calculated in tonnes of carbon.
While RECs used to be considered very additional, their additionality has waned over time, as renewable energy usage has become more viable through economies of scale.
“Historically RECs were considered more additional than they are today,” explains Patch’s sustainable business development lead Ariel Hayward. “Renewable energy itself was expensive, and it was hard to get projects to make sense without credit revenue. That’s no longer the case because of how renewable energy has come down the cost curve.” As a result, RECs are no longer viewed as the most impactful way to put climate dollars to work.
Because economies of scale and other market forces change projects’ additionality over time, it’s essential for additionality to be continuously reassessed relative to changing market conditions and alternative project monetization pathways.
How does Patch handle additionality?
At Patch, we assess additionality through both certification and independent rating and analysis processes. All certification methods active on the Patch platform require projects to be additional and go through additionality verification of the certified credits. Using additional project documentation and independent rating partners like BeZero, we also go above the binary bar of “additional or non-additional” to provide analysis of the additionality through which buyers can easily see how additional one project is relative to another. These standards, and the continual assessment of the changing market conditions, are an essential piece of Patch’s transparent and straightforward marketplace.