Double counting of greenhouse gas (GHG) emission reductions or removals (ERRs) can undermine the integrity of carbon markets. Accounting provisions can help to address and avoid double counting and ensure that the impact of mitigation projects on GHG emissions levels is understood. In the case of the Paris Agreement, the double counting of ERRs among the Nationally Determined Contributions (NDCs) of Parties to the Paris Agreement is avoided through corresponding adjustments (CAs).
Whether and how CAs should be applied to the voluntary carbon market (VCM) is contested. The controversy’s starting points are measurement and reporting considerations, but the core of the problem are different assumptions about how accounting impacts climate policy.
A new study from Climate Focus fills a seemingly wonky, but critical, analytical gap on this topic.
The Article 6 framework is based on cooperative approaches and corresponding adjustments.
Article 6 of the Paris Agreement supports countries in achieving and exceeding their NDCs by providing a framework for “cooperative approaches” through which Parties to the Paris Agreement can transfer ERRs generated within their territories to other Parties or authorized entities (e.g., a corporation). ERRs traded between Parties and authorized entities under the Article 6 rules are called Internationally Transferred Mitigation Outcomes (ITMOs).
The Article 6 framework includes requirements to avoid double counting, which is when the same ERR is counted more than once toward a mitigation target or goal. The framework requires that if a Party authorizes the transfer of an ERR as an ITMO, the first Party has to apply a CA to its own ERR accounts so that the transferred ERR is not double counted.
Article 6 gives Parties flexibility to set their own rules for authorizing these transfers. For example, Parties can decide not to authorize ERRs generated in the VCM or only to authorize some types of VCM ERRs. This means that ERRs can still be traded internationally in the VCM – which is a private, unregulated market – and the Parties where the ERRs were generated do not have to apply CAs to their accounts. Whether and how Parties authorize ERRs for transfer with CAs is a political decision that should be aligned with incentivizing climate change mitigation.
Cutting through the clutter
Our new study aims to help policymakers identify how and when CAs should be applied. It provides a comprehensive, fact-based analysis of the accounting and political implications of CAs and the double counting they are designed to avoid in NDCs, corporate GHG accounting systems, and the VCM. In doing so, our study attempts to clarify when GHG reporting rules reflect the factual reality of emissions levels versus when GHG accounting rules are used as political instruments.
5 Key Findings to Consider
1. Decisions about using Corresponding Adjustments in the VCM should be based on driving incentives for climate change mitigation.
Our new study finds that the debate about double counting and use of CAs in the VCM is less about accurate accounting and more about setting the right incentives for mitigation action. Those who argue for and against CAs are primarily concerned about supporting policy goals such as NDC achievement and the development of high-integrity carbon markets. However, the political and behavioral assumptions about CAs that inform these debates are hard to verify due to lack of evidence. Thus, we advocate for a cautious approach to making decisions about CAs.
2. CAs help to avoid double counting between NDCs, but enforcing their application to the VCM could harm host countries.
Enforcing the indiscriminate application of CAs to the VCM could disproportionately harm Parties that host VCM activities without meaningfully improving GHG accounting. “Host country” Parties are often lower-income countries, while the buyers of VCM ERRs are often from higher-income countries. If host Parties authorize the transfer of VCM ERRs under Article 6 rules, those “host country” Parties will not be able to count the VCM ERRs towards their own NDCs. This could obligate host countries to invest in extra climate change mitigation activities to meet their NDCs while also being required to establish and maintain the complex accounting infrastructure required to issue CAs.
3. Policymakers should consider double counting in light of their national circumstances when deciding whether CAs should be applied to the VCM.
First, policymakers should analyze whether and when double counting occurs in their GHG emissions accounting. This is especially relevant for policymakers from developing host countries who may be considering using the VCM as a tool for exceeding their NDCs. Policymakers may find that VCM projects do not lead to double counting and by authorizing CAs they may end up paying double for the internationally transferred ERRs, which would place an unnecessary obstacle in their path to NDC achievement.
Second, policymakers should consider CA authorizations in the context of national policies and circumstances. Using generalized global conditions to assess whether CAs should be applied to VCM activities is ill-advised. Whether CAs will incentivize or disincentivize climate change action (and therefore whether CAs should be applied to CA units) depends on several context-specific factors. These include the accuracy of the national GHG inventory and the country’s progress in implementing climate policies.
Taking a cautious, context-specific approach is the best way to ensure NDC compliance is not put at risk and carbon finance is used most effectively.
4. VCM investors should consider the implications and potential risks before requesting CAs for carbon credits.
Application of CAs to VCM credits can make it harder for host countries to meet their own mitigation targets. To avoid putting host countries in the situation of defaulting on their NDCs, investors may decide not to use VCM carbon credits for compensatory or offsetting purposes altogether. This would avoid the possibility of double claiming and thus the need for a CA.
5. The ultimate purpose of Article 6 of the Paris Agreement is to facilitate cooperation between countries that supports climate change mitigation ambitions.
CAs are one mechanism to help achieve these goals, but they are neither the only nor the best approach in all scenarios.
Climate Focus’ new report provides guidance to help public and private decision makers evaluate assumptions about carbon accounting and determine whether, when, and how to apply CAs. Read the full report on corresponding adjustments here.