A brand new mannequin for additionality can steer carbon markets to a sustainable future

That is the second article in a six-part collection inspecting how carbon markets can catalyze the transition to a inexperienced economic system. The primary article describes how carbon markets could be reimagined to speed up extra sustainable financial fashions.

The principles and necessities at present governing carbon markets aren’t nicely suited to enabling the kinds of sectoral transitions the world wants. That is particularly the case on the subject of assessing additionality, one of many key tenets that underpins carbon markets — the notion that tasks funded via carbon credit wouldn’t have occurred in any other case.

Whereas the dominant strategy to assessing additionality works simply superb for the market’s present goal (producing emission reductions and removals that an organization could be assured about), it has confirmed insufficient to drive the broader crucial of sectoral transitions. For instance, none of the present approaches to additionality successfully contemplate what occurs when carbon finance is not accessible. As well as, they are usually characterised by cumbersome approval processes and a reliance on deep sector experience, which regularly sidelines stakeholders from the World South and impedes the scalability of climate-friendly applied sciences and practices. 

Rethinking additionality

We will, nonetheless, change the assemble. Quite than persevering with to ask whether or not a person undertaking would have been constructed however for the existence of carbon finance, or whether or not a undertaking makes extra sense economically when in comparison with the choice (making use of monetary additionality as the important thing criterion), we are able to change the main focus towards a extra forward-looking and galvanizing goal. Specifically, we are able to give attention to the adoption of latest applied sciences and practices throughout a complete sector, and body the problem as how to make sure these improvements get enough traction in order that they will finally function on their very own and new ventures not want carbon finance.

A technique to consider that is the everyday S-adoption curve, which posits that sooner or later, improvements can take maintain and transfer into the mainstream market. Underlying the adoption curve is diffusion of improvements idea, which breaks down the inhabitants of potential customers of a selected product and units out that it may be significantly difficult to maneuver from early to mature markets.

Within the context of carbon markets, these ideas may result in figuring out constructive tipping factors (PTPs), the place improvements turn out to be economically sustainable on their very own, eliminating the necessity for additional carbon finance. By figuring out PTPs and leveraging insights from theories of how new applied sciences and practices are adopted, we are able to chart a proactive course that makes use of carbon finance as a device to drive sectoral transformation.

What’s extra, there are already helpful fashions to evaluate additionality, particularly standardized methodologies that contemplate total sectors and embody constructive record approaches, which predetermine these improvements which can be deemed to be further. Constructive record approaches are significantly well-suited to PTPs, and new methodologies may very nicely set applicable thresholds that might allow the longer-term transition of sectors of the worldwide economic system.  

Issues and challenges

Whereas the proposal for forward-looking additionality assessments holds promise, it’s crucial to acknowledge and deal with the constraints and implications inherent in such a shift. One of the vital is that not all tasks generate financial worth past the sale of carbon credit. Certainly, there are some undertaking sorts the place the top of carbon finance may spell the top of the exercise altogether, thereby undermining efforts to realize the inexperienced transition. Such tasks could require different interventions, similar to authorities regulation sooner or later, which I’ll look at in an upcoming article.

As well as, counting on standardized approaches based mostly on figuring out PTPs would face some challenges, together with:

• Upfront funding: The event of standardized methodologies tends to be significantly extra difficult and requires extra time and assets given the necessity to contemplate total sectors of the economic system.
• Differentiation: One dimension is unlikely to suit all. Which means creating these standardized methodologies would require considering the circumstances and particulars of every sector, together with any variations throughout borders or areas inside international locations.
• Common critiques: Monitoring progress in the direction of PTPs and transparency about this progress are essential for stakeholders to evaluate ongoing involvement and for the methodologies to proceed to make sure integrity.
• Potential limitations on crediting alternatives: Growing standardized methodologies for some sectors might not be possible because of inadequate knowledge. This limitation may limit crediting choices, though it may additionally direct restricted funds to sectors the place transitions are attainable.
• False positives: Whereas constructive record and efficiency benchmark approaches purpose to boost accuracy, they don’t fully eradicate the opportunity of false positives, the place actions that aren’t further get authorised.

Forging a future-ready path for carbon markets

The crucial to rethink additionality inside carbon markets has by no means been extra urgent. We have now a possibility to reimagine carbon finance as a real catalyst that can be utilized to introduce new applied sciences and practices, construct vital capability and usually de-risk future investments in sectors of the economic system. Maybe most critically, we have to make sure that we design carbon markets for the time when carbon finance is not wanted or applicable. Rethinking the market’s strategy to considered one of its key tenets will undoubtedly current challenges in addition to complexities, however the potential for a forward-looking additionality mannequin that catalyzes sustainable sectoral transitions is simple.

David Antonioli is a net-zero transition advisor and was the founding CEO of Verra till June 2023. This matter is addressed in additional element in his lately launched report Financing the Transitions the World Wants; In direction of a New Paradigm for Carbon Markets. A brand new chapter of the report will probably be launched each week via July 9.