Opinion: The 2023 Budget reminded us that climate change poses a large fiscal cost to New Zealand. A sizeable amount of what we can expect to pay – up to $23.7 billion by recent estimates – will be for purchasing offshore greenhouse gas mitigation (such as carbon credits) to meet our emission reduction targets under the Paris Agreement.
However, relying on offshore mitigation may actually increase the global carbon budget if it involves renewable energy projects that would have happened anyway.
Between 2024 and 2030, offshore mitigation will cost us at least $3.3b and up to $23.7b, according to the Climate Economic and Fiscal Assessment 2023, published last month by the Treasury and the Ministry for the Environment.
Offshore mitigation is often achieved by using carbon offsetting and crediting mechanisms. These allow one country to earn credits by reducing its domestic emissions, and another country to purchase and use these credits to compensate for its own emissions.
We do not know how New Zealand will make use of these mechanisms. But it’s expected a large portion of our money will be used for financing forest, land use, and renewable energy projects. Globally, these projects generate the majority of the carbon offset credits traded in voluntary carbon markets.
An emission reduction project is considered additional if greenhouse gas emissions are reduced below a baseline scenario that would have occurred in the absence of the project
Forestry and land use projects have their problems, even in New Zealand. Though renewable energy may seem to be an uncontroversial option, that’s not quite the case.
There’s no doubt renewable energy is important, but its future role in carbon offsetting and crediting is questionable. In fact, offsetting emissions by using common renewable energy technologies is no longer regarded as ‘green’.
Verra, the organisation running the world’s largest independent carbon offsetting standard, has discontinued the registration of new renewable energy projects that aren’t based in the least developed countries. The Gold Standard, the other main carbon offsetting organisation, has set a similar guardrail.
The Taskforce on Scaling Voluntary Carbon Markets, an international elite private sector group, has also indicated these projects “may eventually be phased out as renewables become so economically efficient that they no longer satisfy the additionality principle”.
Baseline v additional
An emission reduction project is considered additional if greenhouse gas emissions are reduced below a baseline scenario that would have occurred in the absence of the project.
It is not additional if the proposed emission reduction activity would have been implemented regardless of the potential to earn carbon credits, ie emissions would have been reduced without the incentive of credit revenues.
How do we know whether an emission reduction activity would have been implemented?
Baseline emissions can be those from a technology that represents an economically attractive course of action, such as fossil fuel combustion. The rational decision maker would not implement an emission reduction activity if it were less economically attractive than continuing to use existing technology.
In contrast, if the benefits from implementing the activity – excluding the expected value of carbon credit revenues – are large enough to make it financially viable, it will be deemed a good investment. Consequently, it is likely to take place without any other intervention, and therefore it is not additional.
How much ‘additionality’?
Another matter to consider is that additionality becomes lower if a policy intervention exists, or would come into existence, to prompt the activity to take place under the baseline scenario.
Examples include a significant reduction in the cost of solar PV, strong financial commitments to wind power generation, mandatory renewable energy requirements, and planned closure of coal-fired power plants. These planned interventions would result in a decline in aggregate emissions, even without the opportunity to earn credits.
They present a lower-emission baseline scenario by incentivising, enabling or requiring decision makers to use more renewable energy resources for generating electricity. So, allowing their renewable electricity capacities to earn carbon credits would therefore bring emissions back up.
In many places, solar and wind power generation have become commercially viable. According to a report from the renewable energy organisation REN21, the global weighted average levellised costs of electricity generated from solar PV were US$46 per MWh in 2021, a decline of 88 percent since 2010.
The same report found onshore wind power costs were US$33 per MWh in 2021, a drop of 67 percent since 2010.
In a similar vein, the International Energy Agency states, “in most regions, solar PV or wind already represents the cheapest available source of new electricity generation”. Consequently, the additionality of carbon offsetting through these technologies is declining.
We should focus instead on offshore mitigation opportunities that would otherwise be too costly to implement and therefore require additional financing, such as those in under-developed regions and those involving under-utilised technologies.