Report

Beyond Additionality in Cap-and-Trade Offset Policy

Leigh Raymond

EXECUTIVE SUMMARY

Perhaps no element of recent cap-and-trade proposals has been as controversial as provisions for offset credits, under which sources whose emissions are limited may increase their emissions in exchange for reducing emissions from an unregulated source outside the cap. At the heart of nearly all offset programs is the requirement of “additionality”— offset credits should only be given for emissions reductions that would not have happened in the absence of the offset program. A recent (May 2010) white paper entitled “Ensuring Offset Quality” for three U.S. cap-and-trade programs for greenhouse gases, including the now-operational Regional Greenhouse Gas Initiative (RGGI), continues to cite additionality as the most important part of any offset policy. This paper questions the usefulness of additionality as a standard on both practical and moral grounds. Practically speaking, additionality requires verifying what a potential offset seller would have done without the offset program. The difficulty of establishing such counterfactuals hamstrings existing offset programs by raising transaction costs. Additionality also calculates offset credits against a weak, Business As Usual (BAU) baseline. By favoring larger historical emitters, this approach is morally disquieting and a threat to environmental integrity under the cap, a primary justification for additionality rules. Ironically, even as programs such as RGGI have stopped rewarding higher emitters through free allocations of allowances based on prior emissions levels, they are creating the same perverse incentives rewarding high emissions baselines and poor environmental performance for emitters outside the cap. The offsets white paper recognizes other standards for calculating offsets, including performance-based benchmarks that could do a better job protecting environmental integrity while simplifying validation and monitoring. For these reasons, this paper argues that offset policy designers should consider going “beyond additionality” to focus on other factors more important to the creation of fair, practical, and environmentally effective offset credits.

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