The transition to a low carbon economy is on every CEO's agenda nowadays. The impacts of climate change and responses to it will transform every business sector in the coming decades. Although Climate change will affect a majority of companies, all will be expected to contribute to its solution.
Nevertheless, it is challenging for most companies to devise and implement a credible decarbonisation strategy. The transition requires new ways of doing business, including new ways of displaying capabilities and resources and new ways of thinking. But despite the challenges, companies around the world are scaling up their decarbonisation commitments.
We can see this trend with the number of companies committing to reducing emissions. More than 2000 companies have confirmed emissions reduction targets under the Science Based Target initiative (SBTi). Additionally, more than 370 have committed to The Climate Pledge, pledging to achieve net zero emissions by mid-century or sooner.
For most companies and investors, carbon credits play a crucial role in their Net-Zero strategy. They allow companies to make earlier and more ambitious commitments. Credits allow companies to reduce their current emissions through offsets, while taking cost-effective steps to reduce future emissions through asset rotation and business model development. In the long term, credits can play an essential role in offsetting difficult-to-avoid emissions from products for which no low- or zero-emission options exist.
The growing interest in recent years is also reflected in the Voluntary Carbon Market (VCM), which organises the pledging and trading of carbon credits. In 2022, the demand for carbon credits is at its peak. Prices have increased by more than 140% since 2021 and forecasts assume that demand for credits will increase 15-fold by 2030, to $50 billion per year.
But the voluntary carbon market has a problem. It cannot cope with demand. Access, which plays a crucial role in the global effort to combat climate change, is often limited to large organisations and is characterised by opaque pricing and market inefficiencies. Furthermore, due to a lack of transparency and credibility, it has faced a number of problems in recent years.
This report examines the key role for on-chain carbon credits as part of net zero strategies and the VCM. It was prepared by senken to help business decision makers identify and understand the best use of credits for their business.
What is Additionality?
Additionality is a core principle in carbon credit projects, requiring proof that the emission reductions claimed by the project would not have occurred without its intervention. In other words, additionality helps determine whether a project genuinely contributes to the reduction of greenhouse gases beyond what would have naturally occurred.
Why is Additionality Important?
Without additionality, the purchase of carbon credits could end up funding projects whose proposed impact would have happened in any case, failing to achieve real-world emission reductions. A project that is unable to prove additionality can pose risks of greenwashing, resulting in an ineffective climate strategy for those who invested in it. This is why additionality is essential in order to uphold the credibility and effectiveness of carbon credits, along with leakage and permanence.
Additionality is calculated by including baseline scenarios that determine the emissions that would have been emitted if the project was not implemented. Once the baseline has been determined, the credits are calculated by subtracting the project emissions to the baseline emissions.
A baseline represents a ‘business-as-usual’ scenario that is used to estimate expected emissions in the absence of a project. Credits are issued based on the difference between project and baseline emissions (accounting for quantification uncertainties and leakage). Baselines are used to measure additionality when performing an initial project feasibility study and later to measure the project’s impact outcome
In addition to baseline emissions, the following variables are also evaluated when measuring additionality:
Financial Viability: Evaluating whether the project would be financially viable without the revenue from carbon credit sales.
Policy and Regulation: Understanding if the project is subject to any regulatory implications or policies that would require the activities to be carried out in any case.
Common Practice Analysis: Assessing whether similar practices are already taking place in the region, which would suggest that the project could proceed without carbon credit sales.
Over-Crediting Risk: Looking into the project's issuance volume and ensuring that the project doesn't claim to deliver more credits than the actual emission reductions it achieves.
Additionality: Not a Binary Condition
Additionality is not a binary 'yes or no' condition, contrary to common misconception. Instead, it rather exists on a spectrum ranging from 'very unlikely' to 'very likely' to be additional. A comprehensive evaluation of the project's entire context and potential impact is necessary to accurately determine its position on this spectrum.
Implications for Sustainability Leaders
For sustainability leaders embarking on Net Zero paths, understanding and applying the concept of additionality is a must. It requires a keen eye for scrutinising project details and a deep understanding of the varied factors that contribute to a project's additionality.
Alternatively, finding a trusted partner like Senken that can help you navigate through this by offering pre-vetted, trusted portfolios is another way to ensure that your investments in carbon credits genuinely contribute towards climate change mitigation.