What is the Baseline?
“A baseline is an imaginary starting point or basis of comparison for something. To test how a class's performance improves over time, a researcher might begin with a baseline showing their current scores and grades.” - Source
This is the general definition of the baseline. The starting point against which one measures future change. This definition can also be applied relatively easily to the carbon market.
In the voluntary carbon market, projects are implemented that remove CO2 from the atmosphere. In order to determine how much CO2 is removed, one must also define a baseline against which one can measure future changes.
We need to add one more aspect to the definition of the baseline: A baseline is defined by the absence of a recognized intervention . A recognized intervention could be a law, a subsidy, or some other external influence. One example for a recognized intervention is a law requiring landowners in the Amazon to maintain 35 to 80 percent of their property under native vegetation.
Why are some many projects failing to reduce carbon?
“85% of the covered projects [...] have a low likelihood of ensuring environmental integrity” - Source
That looks like a very high number, assuming that "projects" in that context were dedicated carbon reduction projects. However, the study explains where this number is coming from:
“Most energy-related project types (wind, hydro, waste heat recovery, fossil fuel switch and efficient lighting) are unlikely to be additional, irrespectively of whether they involve the increase of renewable energy, efficiency improvements or fossil fuel switch. An important reason why these projects types are unlikely to be additional is that the revenue from the CDM for these project types is small compared to the investment costs and other cost or revenue streams, even if the CER prices would be much higher than today. Moreover, many projects are economically attractive, partially due to cost savings from project implementation (e.g. fossil fuel switch, waste heat recovery) or domestic support schemes (renewable power generation).”- Source
According to the study, the projects least likely to have an impact are hydropower and wind power projects. The reason for this is that these technologies are already widespread and therefore the costs have fallen sharply in recent years. Thus, these projects are usually already profitable anyway. The sale of carbon credits, with few exceptions, would have no influence on the implementation of the project.
What does this have to do with baseline and additionality? Projects that would have been implemented even without carbon credits contributing to the financing do not have additionality. Project developers who want to maximize their profit may still be tempted to sell carbon credits. To somehow justify issuing the certificates, one can fiddle with the baseline. For example, one could simply say that the baseline is set as if the project did not exist.
The first project in the graph does not completely cover its costs by the income generated by the project. There is a gap which would lead to the project not being implemented. The financial baseline can therefore be set below the gap. It is important in this context that government subsidies are also added to the income.
If the sale of carbon credits can fill the gap, additionality would definitely be given. Even if the gap is only a fraction of the costs, the additionality achieved is the full size of the project.
This is because the whole project would not have been implemented. This scenario is shown in the middle.
The third project already covers all its cost by income from the project itself and subsidies. The sale of carbon credits might still seem like a good way to boost profits. However, those carbon credits have no additionality as the project could be implemented without the carbon sales. This is a typical example of carbon certificates that don’t reduce carbon emissions.
Additionality of existing projects
In this context, it is also clear that it is much harder to achieve additionality for projects that have already been implemented. We covered an example of this in one of our last article. An exception to this is only the case that a project would have to be reversed if no additional revenues were generated by the sale of carbon credits.
An example of this are forest conservation projects. If a forest owner has preservation costs and no or too little income from protecting his forest, it could be financially attractive for him to cut down the forest and use the area for other purposes. However, if the forest is already legally protected from logging, this would be a recognized intervention that would move the baseline and therefore the additionality.