Additionality of Carbon Offsets: Project-specific vs. Standardized Baselines
42 Pages Posted: 11 Dec 2023
Date Written: November 27, 2023
A carbon offset represents reduction in emissions that can be used to compensate for emissions elsewhere. Developers generate offsets through emissions-reduction projects. A non-profit carbon registry issues offsets to developers while ensuring additionality. That is, an offset needs to represent one unit of reduction from a developer's business-as-usual emissions---what the developer's emissions would have been in the absence of the market for offsets. Accordingly, environmental groups raise greenwashing concerns against non-additional offsets. Ensuring additionality is challenging because business-as-usual emissions is a developer's private information and an unobservable counterfactual for the registry. In practice, the registry assigns a baseline to represent business-as-usual emissions through one of the two methods: Under the project-specific method, a developer self-reports its business-as-usual emissions to the registry, which then inspects the report and assigns reported emissions as the baseline if it accepts the project. Under the standardized method, the registry assigns a common baseline to a group of developers. It is unclear which method leads to fewer non-additional offsets, greater reduction in emissions, and should be chosen by a registry. We analyze these economic and environmental implications. We find that project-specific baselines may lead to fewer non-additional offsets but lower reduction in emissions, cautioning environmental groups against simply advocating for the method that leads to fewer non-additional offsets. We also find that a registry may prefer project-specific baselines even when they result in more non-additional offsets. Finally, we find that a registry's preference between the two methods is typically consistent with a corporate buyer's.
Keywords: Sustainable Operations, Carbon Offsets, Climate Change
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