Climate Neutral Design Principles:
Appendix I

Additionality for Climate Neutral Network Offsets DRAFT Discussion Paper — Comments Encouraged
Daniel A. Lashof, Natural Resources Defense Council

The basis for the Climate Neutral concept is that some consumers will be willing to pay a premium, directly or indirectly, for products or services that are bundled with "offsets" for the associated greenhouse gas emissions. To maintain credibility, consumers must be assured that the offsets they are paying for represent genuine emission reductions that are additional to what would have happened anyway.(1) In other words, consumers should be sure that they are getting something (for the environment) for their money.

Determining additionality is inherently problematic because it requires resolving a counter-factual question: What would have happened in the absence of the specific project proposed for offset credit? This question can be viewed as requiring a determination of the motivation of the project sponsors, and therefore an arduous (and ultimately subjective) project-by-project review that would impose prohibitive transaction costs. Concern that such an approach would stifle any offset activity have led some to suggest dropping the additionality test altogether. Demonstrating additionality is crucial to the integrity of the Climate Neutral label, however, for the reasons explained above. Rather than abandon this essential principle, a practical and objective operational definition of additionality is needed.(2)

The approach to additionality proposed here is based on a combination of performance benchmarks and procedural guidelines that allow an objective, reproducible determination of appropriate offset credit for specific types of projects. While there is no practical way to eliminate the anyway tons problem, the intent of the benchmarks and guidelines described here is to minimize the potential for anyway tons to qualify, while making it possible for bona fide additional emission reduction projects to earn credit based on a straightforward and transparent procedure. The benchmarks and baselines need to be tied to appropriate measures of output (production, electricity generation, building occupancy-hours, etc.) to ensure that credits are not generated by shutdowns or curtailments.(3) Similarly, measures directly required for compliance with existing statutes and regulations clearly are not "additional," and should not generate credits. Ideally the approach would achieve a balance between "free riders" and "free drivers." That is, the credit granted for anyway tons should be balanced by the emissions reductions driven by truly additional project activities that are not accounted for as offset credits.(4)

The proposed approach for satisfying these criteria is to use performance benchmarks for new construction or equipment and a declining baseline for retrofit projects. Because this is a voluntary program that is likely to represent only a small market segment for the foreseeable future, relatively demanding requirements are needed to prevent the demand for credits from being satisfied simply by selecting preexisting projects that happen to be better than average. In all cases, measurement and verification of the actual performance of the project is required, using protocol consistent with the IPMVP developed by the Department of Energy.(5) Experience from measurement and verification protocols developed by successful utility demand-side management programs (e.g., California, New Jersey) should be applied.

The performance benchmarks for "new" projects should be chosen to represent the high-performance end of the spectrum of current commercial practice, using the qualification threshold for the Energy Star label where available.(6) Credits would be calculated as the reduction in greenhouse gas emissions relative to a project conforming exactly to the benchmark threshold.

For retrofit projects the approach is somewhat different due to the availability of a measurable baseline of energy consumption/emissions prior to the project. At the same time, no existing facility will last forever, and a considerable average rate of improvement will be needed to comply with national targets. Credit for retrofit projects should therefore be calculated relative to a baseline derived from measured pre-project emissions, but using a "straight line depreciation schedule" for the baseline set at 4% of the original baseline per year. In addition, to prevent "cream skimming," post-project performance should meet the Energy Star criteria, where such criteria have been established as applicable to existing facilities. Alternatively, minimum percentage performance improvements could be specified in some cases. The slope of the "depreciation schedule" is chosen to represent a reasonable lifetime for existing facilities as well as an improvement rate consistent with achieving national targets, given the need to accommodate emissions from new facilities. It is also similar to the approach to early reduction crediting proposed by the CAST First Movers Coalition group.(7)

Before moving forward with this approach, analysis is needed to consider the potential for projects to qualify as well as the likely balance of free rider and free driver tons. Based on such an analysis, this general approach will have to be tailored to be suitable for specific project types. As a starting point, special considerations should be identified for the project categories indicated in the table below. Rather than attempt to settle all the details up front, some form of "Implementation Committee" will be needed to resolve specific issues as they arise.

Footnotes

1. This issue is referred to variously as the additionality principle, the anyway tons issue, or the free riders issue.

2. The question of additionality does not arise for emission reductions made within a Climate Neutral firm or product line. Rather any internal emission reductions, achieved through on site renewable energy projects, energy efficiency improvements, or other means, directly reduce the emissions that would have to be offset through external "additional" projects. Other things being equal, then, internal emission reductions will be the first choice, as they are not subject to the baseline "depreciation schedule" or other conditions described below for offset projects. At the same time, I would propose that internal investments in advanced technology (e.g., on site renewable energy) should still be considered a contribution to the proposed requirement that 10% of the emission reductions in the overall portfolio come from advanced technologies.

3. Shutting down an existing facility and replacing it with a cleaner one could generate credits, as long as the emissions associated with replacing the output from the retired facility are accounted for in calculating the net emission reductions.

4. Examples of free drivers include reductions in the cost of a new technology driven by the project which then stimulates additional use of that technology as part of standard practice that does not qualify for credits.

5. International Performance Measurement and Verification Protocol, available at http://www.ipmvp.org.

6. Where no Energy Star criteria are available, performance benchmarks would have to be established for specific new project types before these projects could qualify for offset credits. These benchmarks should be designed to represent roughly the 25th percentile of performance (ranking similar projects from the best performance to the worst), which is similar to the design criteria for Energy Star.

7. The Coalition to Advance Sustainable Technology (CAST) has proposed a First Movers Coalition early action credit program based on a "Meet Kyoto" benchmark of achieving a 3%/yr reduction in greenhouse gas emissions per (constant) dollar of sales, and a "Beat Kyoto" benchmark of a 5% improvement. A key difference is that these benchmarks are to be measured company-wide, whereas a project-by-project approach is used here.