“Why should I prove additionality? Is there no value to the activities I am already doing which is benefitting the environment?” — an irate, prospective carbon project developer, probably.

Additionality is a complicated and often controversial concept in carbon markets. Carbon market regulations, especially the voluntary carbon market, require that a project be above and beyond business-as-usual (BAU) — that the project would not have happened without the flow of revenue from selling carbon credits. This is called additionality: proving that the project is “additional” to what would have already happened.

When we explain this concept, it is often met with various questions. The most interesting of which is quoted at the beginning of this article. “Why shouldn’t my already active initiatives be considered for carbon revenue if it is reducing carbon? Why should I prove additionality?”

It is a valid grievance. If the carbon market promotes “additional” measures that reduce carbon, what about the good folks who were implementing carbon-reducing activities before such a market existed? Their activities now has more value — a by-product of their activities is now a tradable commodity. The basics of economics states that if value of something increases, then it must command a higher price.

So why penalize them by excluding them from the carbon market? Why not also consider the value of BAU activities and reward those who have been implementing carbon-reducing activities without the incentive of carbon market revenues?

Offsetting: The driver of carbon credit demand

The answers to these questions lies in where the demand for carbon credits come from. The carbon market was created to encourage polluters to compensate for their carbon emissions. “Compensate” is the key word here. Here’s how this works:

A company emits 1000 tons of carbon due to their industry operations. Since they cannot retrofit their industrial complexes immediately with carbon-reducing technology (either because they don’t exist or high costs or locked-in assets), they can purchase carbon credits from the carbon market to offset — compensate — for these 1000 tons they emitted from their operations.

Because the largest demand for carbon credits come from entities that want to compensate for their emissions, it is important that the credits be generated from those activities that are additional to what would have already happened. The total climate outcome is only neutral if the credited activity would not have happened anyway; otherwise the buyer emits but nothing extra happens to claim compensation.

While there is a lot of new value to carbon because of carbon markets, it seems that not all carbon removed/reduced is equal. Removals and reductions from from BAU activities do not have a market because the demand is for compensation, not just for positive climate impact.

So, what is the incentive for such activities to continue? This question leads to two diverging paths.

Fraud in carbon markets

In the first path, the BAU actors create fictitious narratives on how their activity is actually not BAU and are additional. With these narratives (and supporting calculations), they register projects in the carbon markets and earn revenues. This is a common but fraudulent practice. Research from Berkeley, Oxford, and Carbon Plan found that 85% of offsets sold in 2022 were not additional due to poor foundations in establishing additionality. The total value of the carbon market has fallen from the highs of 2022 (~US$ 2 billion) to more modest figures in 2024 (~US$600 million) due to scandals around poor baselines and the lack of additional, real-world impacts of offsets.

Climate contributions: Benevolence, foresightedness and chasing higher integrity

The second path encourages emitters to fund BAU activities for their inherent benefit to the climate but not claim compensation against their own emissions. These are called “climate contributions” and rightly reward BAU carbon reductions and removals. This model was introduced in 2016 by the Gold Standard. It has since been promoted by policy papers like “A Blueprint for Corporate Action on Climate and Nature” and SBTi’s “Beyond Value Chain Mitigation (BVCM)“.

Klarna, the Swedish payments company, has been a pioneer of this model. Since 2020, it has raised US$ 8.4 million through an internal carbon fee, which it distributes to climate projects rather than claiming carbon neutrality via the Milkywire Climate Transformation Fund. Spotify is another notable contributor to this fund and an adopter of the climate contributions model. Other organizations like Tomorrow Bank, DSM, and Stripe are also incorporating climate contributions into their climate and net zero strategies. 

Climate contributions are also considered in the Paris Agreement’s Article 6 discussions. However, the business case for climate contributions is still weak, and therefore, its scale is miniscule compared to traditional offsets. It requires a degree good conscience from emitters, climate-conscious leadership or sharp foresightedness for long-term business value (more on this in the next article).

The Tropical Forests Forever Facility (TFFF), launched at CoP30 by the World Bank and endorsed by 53 countries, also seems to have the potential to reward BAU, specifically in the forest sector. The Facility creates an investment product for “sponsors”, whose funds are invested in a portfolio that generates returns. Once the investors are compensated, any surplus returns are disbursed to participating nations against their efforts to conserve and manage standing forests. So, if a nation can show that its forests have not degraded, or the forest cover has not reduced against a baseline, money from the surplus funds is allocated to that nation’s kitty within the Facility.

Rewarding both additional and BAU

Recognizing and rewarding both forms of activities is essential. It will avoid frauds in the carbon market and ensure that all actors and all types of activities that support climate action are sufficiently motivated. Climate action requires all hands on deck; let’s not alienate good actors and historically positive actions due to distorted market incentives.

References:

1. Additionality in carbon projects: what, why, and how
2. What is additionality in carbon offsetting? And why is it important?
3. Additionality revisited: guarding the integrity of market mechanisms under the Paris Agreement
4. The Good Is Never Perfect: Why the Current Flaws of Voluntary Carbon Markets Are Services, Not Barriers to Successful Climate Change Action
5. Net Zero Stocktake 2025