For example, a recent McKinsey analysis suggested that 40 percent of the greenhouse gas reductions available to us are revenue-positive.

Why does it matter whether or not a project is revenue-positive prior to offset revenue?  It has no bearing on the environmental effectiveness of the offset project, only the economic distribution of offset payments.  I've explained my problems with financial additionality in the article titled "Let me boil it down for you," so I'm not going to rehash them here, but I would love to hear a good explanation of why exactly this financial additionality matters.

And, of course, a lot of possible projects are just flatly unhelpful -- I routinely field questions from well-meaning people wondering if they can get offset revenue for leaving some tract of land undeveloped. If we don't test carefully, non-additional projects will soak up all the available offset financing, undermining a carbon cap and stranding the projects we want to support."

Right, this is environmental additionality not financial additionality.  This is what's important.

 - You'd end up paying for projects that would be done anyway;
 - With the flood of non-additional projects because of no financial additionality, the market prices would go to near zero, and none of the real, additional projects would get built;
 - Credibility would be missing without assurance of financial additionality;
 - Financial additionality does not hinder projects from getting done, it provides incentives for projects to get done;
 - The rules are not as subjective and arbitrary as some would say - if you read the various protocols (almost all of which have financial additionality), you'll see some fairly straightforward rules.

Why does it matter if a project is revenue positive?  Well, it doesn't - those projects that are revenue positive should just get done on their own merits.  I don't feel like paying them for their "carbon offsets" for no reason.  Why give a developer money to do a project that already makes money?  You wouldn't.

But what if a project is not financially viable, but with the addition of the sale carbon offsets that they could sell, it becomes viable?  Then by all means, let's have them sell those offsets.  

I'm not sure I can make it plainer than that.  Perhaps I'm just really crappy at explaining this stuff.  I'm keyed up on this issue because it's close to what I do on a daily basis, and within my company we've been discussing this issue, in conversations just like this, for many months.  I think we're reaching consensus, but it's been really interesting having the conversations along the way.  So pardon me if I come across as shrill.  

Really the point of my posts -- which I don't think I've expressed nearly as well as I had hoped -- is that whatever the problems in measuring or enforcing additionality, you can't simply throw out the concept. It's embedded in any incentive system, and its relative importance depends on factors that are structural, not contingent on how cleverly we write our rules.

Capster -- clearly we agree on this issue, but as a meta-level observation, I do find it fascinating that the carbon market perspective on this differs so sharply from the energy producer/industrial planner perspective. It's useful to find out exactly why, as it highlights areas where policy might be failing.

www.terrapass.com/blog

• First, simply check out the Wikipedia page for the CDM, it's a great place to start.

• There is a discussion of environmental vs financial additionality tests in Robert Dixon's book  The UN Framework Convention on Climate Change Activities Implemented Jointly

There is no financial test in the world that can show that a project actually offsets emissions.  The financial test actually undermines the concept behind additionality.  If you can provide an example of a non-additional project that can only be excluded on financial grounds I may be better able to address your concern.

I'll make it clear again that I agree with the concept of additionality, but I think the financial tests for it are a poor approach and actually undermine what we want to achieve - which with offsets is the ability to reduce the costs of emissions cuts.

Capster, let me try to address your concerns:

- You'd end up paying for projects that would be done anyway;
 - With the flood of non-additional projects because of no financial additionality, the market prices would go to near zero, and none of the real, additional projects would get built;
 - Credibility would be missing without assurance of financial additionality;
 - Financial additionality does not hinder projects from getting done, it provides incentives for projects to get done;
 - The rules are not as subjective and arbitrary as some would say - if you read the various protocols (almost all of which have financial additionality), you'll see some fairly straightforward rules.

The first issue can't be proven one way or the other as I've already clarified several times, but even if you do provide more revenue to a project that would have occurred anyway, what does that matter?  The point of additionality is to ensure that emissions are actually offset - whether or not a project makes a profit has no bearing on that.  As Sean pointed out, you can actually discourage the best offsetting projects by directing offset funds towards projects that can't make it on their own, and this suboptimal investment leads to greater costs - the exact opposite goal of offsets!  

If I understand your view, offset payments should only go to "new" projects, not ones that were already planned or undertaken.  But does that make sense from an investment risk perspective?  Not in my head. I don't understand how a new risky project is more credible than one that can stand on its own, and I don't understand how a financial test is going to lend any credibility to the offset.

Unless you're the person selling offsets, I'm not sure why you're so worried about a low price of them.  The point is to reduce the costs of meeting emission requirements, and a lower cost per ton does just that!  Financial tests can't prove whether or not a project actually offsets carbon emissions (that it is additional), so it's disingenuous to say that projects that would still exist at a low price are non-additional.

Financial additionality tests, as both Sean and I have argued, can in fact discourage good projects from being undertaken.  The fact that they can provide incentives for suboptimal investments does not help me sleep at night.

The CDM protocol is ripe with qualifying language such as the word "unlikely," leaving an incredible amount of discretion to those doing the certification.  This creates a moral hazard for potential offsetters to distort the finances of a proposed project and to exaggerate the barriers of a particular project.  This is precisely why none of the financial tests can prove additionality.

Financial additionality tests reward suboptimal investments while doing nothing to reward proven technologies - I suspect that the motive behind this has more to do with a desire for economic justice than the actual goal of offsetting carbon emissions.  Trying to say that a project is additional based on a financial test undermines the actual concept of additionality.

Ok... release the hounds.

For the record, this has been a really interesting dialogue - thanks for engaging.  And I do now appreciate, to a degree I did not before why voluntary markets (and specifically, offsets) may demand something like additionality testing.

Having said that, I've still not seen any satisfactory answer to the question naturescene keeps raising - and the motivation behind my original beef.  Namely, that there is no hard and fast rule for what additionality means.  And if this doesn't exist, the whole thing still seems like a house of cards to me.  (In the sense that in theory, I can build a house of cards and live comfortably.)

I get your theoretical point, but find the whole debate to this point rather philosophical, a la the old Supreme Court ruling about pornography ("you know it when you see it").  Without knowing what "it" is, and who "you" is, it's not especially useful.  And, to some degree, evasive.

All that said, I agree with your coupon example, and still stand by my initial comment that the guy who rides his bike to work because his car broke down shouldn't get paid for doing so.  But neither of those specific examples help me come up with generalizable rules.  

What are the generalizable rules?

Thanks for addressing some of my points.  But I don't think your arguments hold water (woof woof).  As an aside, it really is difficult to hold this discussion in a forum like this, especially when we are discussing something relatively nuanced like additionality.

I'll just say this:  if you believe in financial additionality as critically important to any GHG protocol, as I do, and you are also a fan of markets, as I am, then you want prices to be accurate - not artificially high or low.  If you allow a bunch of non-additional projects to flood the market, then the price is artifically low, the wrong signals get sent, and true additional projects don't get built.  And then we have fewer GHG projects being built overall.  So I would disagree that the point is low cost emissions reduction - it's true cost emissions reduction.  I want appropriate signals to consumers, producers, etc. so that both demand-side and supply-side projects get done.  $1-3 carbon does not do that.  

There already is a market in place for the projects to which you refer.  It's not the GHG market - it's the free market.  If a project is economic, it should get done.  I know Sean pointed out that in the free market good projects don't get done with some regularity.  I know this is true.  But having very very low value carbon offsets, as would happen without financial additionality, won't change anyone's mind about doing or not doing a project.  

And I'll leave it with this.  I agree the protocols are not perfectly neat and tidy.  But they are not as arbitrary, in my mind, as either you or Sean paint them.  And I'll take some level of messiness, at least initially, for the one thing that all markets need - credibility.  The ability for buyers to trust that what they are buying is delivering what they were promised.  Without financial additionality, you don't have that.  Any/every market needs that.  

Thanks.

 - I want low cost emissions reductions - definately.  That point came out wrong in my note above.  If we can figure out how to remove carbon cheaply, and there is a payback, I'd like those projects done all day long.  

 - I want the market to reflect the true cost of emissions reductions, however, and not be artificially high or low.  I want appropriate signalling.  

Like Capster, I think I'm going to have to punt on most of the other stuff. I'm not fully following the argument, and this is a difficult way to discuss it. For example, it seems pretty self-evident to me why projects should be new to merit offset revenue. How would making payments to a wind farm built in the 1970s bring about GHG reductions? Would you really want a polluting entity to fulfill its obligations under a cap by making payments to such a project? Likewise, I can think of a variety of projects for which financial additionality tests are the key qualifier. For example, there's no reason to flare methane from coal beds other than offset revenue. A simple cost analysis establishes financial additionality. But maybe it's time to leave off on this topic...

Sean -- you're asking a good question. Here's one relatively short explication of a set of generalizable rules (with hand flowchart!). As you'll no doubt notice, though, there is still a degree of subjectivity in making these determinations. As with any exercise in infrastructure planning, someone still has to look at each box in the flowchart and decide whether the answer is yes or no. So your mileage may vary. I think we might simply disagree on how big a problem this is.

One other thing you'll note in the doc is that there is some hope for skeptics of financial additionality. Even if a project is financially attractive, the CDM process makes allowances for projects that simply aren't happening in actual practice. I don't particularly think this will help you (it's more for developing countries), but there is recognition of the fact that some good projects simply don't go forward, regardless of what the spreadsheet says.

www.terrapass.com/blog

Additionality matters to carbon offsets because the entire purpose of the system is not to 'reward' those who offset emissions, but rather to provide an extra source of cashflow to increase the amount of viable GHG reducing projects out there (which leads to an expansion of the viable technical amount of cost effective GHG reductions).

Take a look at the already referred to McKinsey study at:
 http://www.mckinsey.com/clientservice/ccsi/pdf/Greenhouse ...

Especially Exhibit B.  This is the exhibit referred to that outlines the range of projects available and what their net present value are over their lifetimes.

Those projects in the 'negative' dollars (left hand side of the chart) means they are viable, cost effective and would be pursued out of rational economic interest.

However, anything that costs 'real dollars' today would not be pursued because over their lifetime they will not produce a return on investment.

However, if we have 'additionality' that states that those projects on the right hand side are the only ones eligible to receive GHG reduction credits then what happens?

What happens is that the extra stream of cash flows from these credits takes some of the 'marginal' or 'marginally negative' return projects and, over their lifetime, will produce a positive economic return.  

Now instead of 40% of positive return projects with a total technical potential of 1.4 gigatones of emissions reductions, with 'carbon credits' for those projects that were formally not viable for the economically rational investor, you know have (hypothetically) 50% of these projects viable, with a total technical potential of 1.7 gigatons of reductions.

The greater the value of the stream of cashflows resulting from the carbon credits (which is in turn decided by what price each unit of reductions commands) then more projects become viable on this scale and more reductions achievable....

Having weak additionality rules means that the value of credits are reduced (since there is realistically only so big of a pool of money to draw from to fund credits) then maybe the scale only moves from 40% to 41% (or whatever amount less than 50%).  

So additionality equates to having more GHG reduction potential... isn't that why we have this entire system in the first place?

Sorry for the long winded post!

Additionality isn't needed for a voluntary market. Additionality is only needed when a cap-and-trade program is adorned with a CDM-like feature. Without the CDM-like feature, those voluntarily wishing to lower their emissions can either do so directly (at whatever cost) or offset them by purchasing and retiring allowances at the market rate for allowances. As is demonstrated almost every day in the press in the UK, Germany, Netherlands and elsewhere, the CDM under Kyoto is tough and costly to enforce and, so far at least, seems more detrimental than beneficial to the credibility of a carbon market, without providing the promised reductions.

So, why do providers of emission reductions to consumers want offsets and with it the inevitable hastle of additionality? It seems for two reasons: customers want to have a say in how their money is used and providers want to choose the "best" price (i.e., they want an alternative--read lower--price than available through a compliance market) for the "best-available" quality outside the compliance market.

But since few consumers will ever understand additionality, its up to the providers to assuage and to address the unavoidable conerns that come with additionality. All competitors will claim with some justification that they offer the "best quality" offsets. Without some accepted legitimacy, however, those claims can and will be challenged. Without that legitimacy (read government backed rules) we can be reasonably certain that real emissions reductions are occuring but we won't know which are worthy of the cost the consumer paid.

As long as providers offer CDM-like offsets to consumers, it seems confusion about additionality will endure. In the 5-years the Executive Board of the  CDM has been deciding the fate of proposed CDM projects, its been unable to temper objective critcism. The FTC is currently considering its role in defining additionality and methods of enforcement. It's doubtful the FTC can do better than the EB of the CDM. We'll have to wait and see.