Additionality of Carbon Credits
Carbon markets have a wide variety of types of credits and pricing points. One of the key differentiators of credits is that you must prove additionality. CarbonPath has developed carbon credits from the premature shutdown of oil and gas wells, decades before economics would tell you to do so.
Additionality is the principal that the carbon offset is necessary to incentivize an action. This has come under fire in media outlets for traditional nature-based solutions including and primarily aimed at the largest component of the voluntary offset market – forestry avoidance credits. It is difficult work and sensitive to a myriad of assumptions. However, we believe is worthwhile work and should be pursued but understand the hesitation in the marketplace.
For oil and gas wells, we can use basic economics to prove additionality. The well is an asset that has been capitalized and is used to generate cash by producing oil and gas and selling that commodity at a market price. The only reason for the well to exist is to generate cash flow. If a well operator plugs that well, it is a large, one-time expense, and removes all potential for revenues and cash flow in the future as access to that oil and gas is permanently impaired. In addition, all optionality from higher oil prices is lost with that decision.
Therefore, any rational actor will continue to operate the wells if there is any positive cash flow and could be inclined to operate at a slight loss in order to avoid the plugging expense and preserve oil price optionality.
If we conclude that the operator of a well will try and maximize cash flow, they will operate the well if there is free cash flow. Therefore, any credit that incentivizes a well to get plugged while it is still generating cash flow is additional and easily audited.
