Additionality of Carbon Offsets: Project-specific vs. Standardized Baselines

Abstract

Developers generate carbon offsets by investing in emissions-reduction projects to receive two sources of revenue: project revenue, e.g., from the electricity sold in a renewable energy project, and offset revenue based on offsets issued by a non-profit carbon registry. The registry ensures additionality, i.e., the offset should represent one unit of reduction from the developer's business-as-usual emissions---what the developer's emissions would have been without the offset revenue. Although environmental groups raise greenwashing concerns against non-additional offsets, ensuring additionality is challenging because it requires assessing project revenue, which is the developer's private information. 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 similar projects. 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 emissions reduction, 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