This is the second article in a six-part series examining how carbon markets can catalyze the transition to a green economy. The first article describes how carbon markets can be reimagined to accelerate more sustainable economic models.
The rules and requirements currently governing carbon markets are not well suited to enabling the types of sectoral transitions the world needs. This is especially the case with regards to assessing additionality, one of the key tenets that underpins carbon markets — the notion that projects funded through carbon credits would not have occurred otherwise.
While the dominant approach to assessing additionality works just fine for the market’s current objective (generating emission reductions and removals that a company can be confident about), it has proven inadequate to drive the broader imperative of sectoral transitions. For example, none of the current approaches to additionality effectively consider what happens when carbon finance is no longer available. In addition, they tend to be characterized by cumbersome approval processes and a reliance on deep sector expertise, which often sidelines stakeholders from the Global South and impedes the scalability of climate-friendly technologies and practices.
Rethinking additionality
We can, however, change the construct. Rather than continuing to ask whether an individual project would have been built but for the existence of carbon finance, or whether a project makes more sense economically when compared to the alternative (applying financial additionality as the key criterion), we can change the focus toward a more forward-looking and inspiring objective. In particular, we can focus on the adoption of new technologies and practices across an entire sector, and frame the challenge as how to ensure these innovations get sufficient traction so that they can eventually operate on their own and new ventures no longer need carbon finance.
One way to think of this is the typical S-adoption curve, which posits that at some point, innovations can take hold and move into the mainstream market. Underlying the adoption curve is diffusion of innovations theory, which breaks down the population of potential consumers of a particular product and sets out that it can be particularly challenging to move from early to mature markets.
In the context of carbon markets, these concepts could lead to identifying positive tipping points (PTPs), where innovations become economically sustainable on their own, eliminating the need for further carbon finance. By identifying PTPs and leveraging insights from theories of how new technologies and practices are adopted, we can chart a proactive course that uses carbon finance as a tool to drive sectoral transformation.
What’s more, there are already useful models to assess additionality, especially standardized methodologies that consider entire sectors and include positive list approaches, which predetermine those innovations that are deemed to be additional. Positive list approaches are particularly well-suited to PTPs, and new methodologies could very well set appropriate thresholds that would enable the longer-term transition of sectors of the global economy.
Considerations and challenges
While the proposal for forward-looking additionality assessments holds promise, it is imperative to acknowledge and address the limitations and implications inherent in such a shift. One of the most critical is that not all projects generate economic value beyond the sale of carbon credits. Indeed, there are some project types where the end of carbon finance could spell the end of the activity altogether, thereby undermining efforts to achieve the green transition. Such projects may require other interventions, such as government regulation in the future, which I will examine in an upcoming article.
In addition, relying on standardized approaches based on identifying PTPs would face some challenges, including:
- Upfront investment: The development of standardized methodologies tends to be considerably more complicated and requires more time and resources given the need to consider entire sectors of the economy.
- Differentiation: One size is unlikely to fit all. This means that developing these standardized methodologies will require taking into account the circumstances and details of each sector, including any differences across borders or regions within countries.
- Regular reviews: Monitoring progress towards PTPs and transparency about this progress are crucial for stakeholders to assess ongoing involvement and for the methodologies to continue to ensure integrity.
- Potential limitations on crediting opportunities: Developing standardized methodologies for some sectors may not be feasible due to insufficient data. This limitation could restrict crediting options, although it could also direct limited funds to sectors where transitions are possible.
- False positives: While positive list and performance benchmark approaches aim to enhance accuracy, they do not entirely eliminate the possibility of false positives, where activities that are not additional get approved.
Forging a future-ready path for carbon markets
The imperative to rethink additionality within carbon markets has never been more pressing. We have an opportunity to reimagine carbon finance as a true catalyst that can be used to introduce new technologies and practices, build necessary capacity and generally de-risk future investments in sectors of the economy. Perhaps most critically, we need to ensure that we design carbon markets for the time when carbon finance is no longer needed or appropriate. Rethinking the market’s approach to one of its key tenets will undoubtedly present challenges as well as complexities, but the potential for a forward-looking additionality model that catalyzes sustainable sectoral transitions is undeniable.
David Antonioli is a net-zero transition consultant and was the founding CEO of Verra until June 2023. This topic is addressed in more detail in his recently released report Financing the Transitions the World Needs; Towards a New Paradigm for Carbon Markets. A new chapter of the report will be released every week through July 9.