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

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

The principles and necessities presently governing carbon markets usually are not nicely suited to enabling the varieties 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 initiatives funded via carbon credit wouldn’t have occurred in any other case.

Whereas the dominant strategy to assessing additionality works simply high-quality 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 obtainable. As well as, they are usually characterised by cumbersome approval processes and a reliance on deep sector experience, which frequently 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. Slightly than persevering with to ask whether or not a person mission would have been constructed however for the existence of carbon finance, or whether or not a mission 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 provoking goal. Particularly, we are able to deal with the adoption of latest applied sciences and practices throughout a complete sector, and body the problem as how to make sure these improvements get adequate traction in order that they’ll ultimately function on their very own and new ventures not want carbon finance.

A technique to think about that is the standard 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 notably difficult to maneuver from early to mature markets.

Within the context of carbon markets, these ideas may result in figuring out optimistic tipping factors (PTPs), the place improvements grow 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 complete sectors and embody optimistic listing approaches, which predetermine these improvements which can be deemed to be further. Constructive listing approaches are notably well-suited to PTPs, and new methodologies may very nicely set applicable thresholds that will allow the longer-term transition of sectors of the worldwide financial 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 crucial vital is that not all initiatives generate financial worth past the sale of carbon credit. Certainly, there are some mission varieties the place the tip of carbon finance may spell the tip of the exercise altogether, thereby undermining efforts to realize the inexperienced transition. Such initiatives might require different interventions, equivalent to authorities regulation sooner or later, which I’ll study in an upcoming article.

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

• Upfront funding: The event of standardized methodologies tends to be significantly extra sophisticated and requires extra time and assets given the necessity to contemplate complete sectors of the financial system.
• Differentiation: One dimension is unlikely to suit all. Which means growing these standardized methodologies would require making an allowance for the circumstances and particulars of every sector, together with any variations throughout borders or areas inside nations.
• Common evaluations: Monitoring progress in 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 is probably not possible attributable to inadequate knowledge. This limitation may prohibit crediting choices, though it may additionally direct restricted funds to sectors the place transitions are doable.
• False positives: Whereas optimistic listing and efficiency benchmark approaches goal to reinforce accuracy, they don’t fully eradicate the potential for 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’ve got a chance to reimagine carbon finance as a real catalyst that can be utilized to introduce new applied sciences and practices, construct essential capability and customarily de-risk future investments in sectors of the financial system. Maybe most critically, we have to be certain that we design carbon markets for the time when carbon finance is not wanted or applicable. Rethinking the market’s strategy to one in all 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 just 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 likely be launched each week via July 9.