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Meeting the Paris Agreement’s ambitious goal – to hold “the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial level” – will necessitate dramatic reductions in total emissions of greenhouse gases.
Market-based approaches that follow well-established “rules of the road” for emissions accounting and transparency have a powerful role to play in helping countries to meet their near-term commitments as efficiently as possible, and in encouraging and even accelerating the broad and ambitious long-term climate action that the Paris Agreement demands.
By affirming a role for market-based approaches in Article 6, the Agreement recognizes the realities on the ground, where emission-trading systems are already at work in over 50 jurisdictions home to nearly 2 billion people. More than half of the world’s countries have so far expressed an interest in using carbon markets to meet their pledges, including for achievement of conditional targets, in their NDCs (“nationally determined contributions”) under the Paris Agreement.
But if the Paris Agreement goals are to be met, the risk of “double counting” emissions reductions must be avoided.
That is why the Paris Agreement rulebook to be finalized this December in Poland at COP 24 should clearly and unambiguously state that any country that voluntarily chooses to transfer some of its emissions reductions must transparently “add back” a corresponding amount of emissions to its own emissions account. This is known as a “corresponding adjustment,” and it should apply to all transfers: whether the transferred reductions occur inside or outside the country’s NDC; and whether the reductions are being transferred to another country or to the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
A corresponding adjustment has clear environmental benefits for both participating countries and our shared climate. Here are 7 of them:
1) A corresponding adjustment ensures the “robust accounting” required under Article 6 of the Paris Agreement, including the need to avoid double counting.
If done properly, the country (or airline, in the case of CORSIA) using a transferred emission reductions would in turn subtract the corresponding amount of emissions from its emissions account. This transparent, well-established “double-entry” bookkeeping process is familiar to anyone who manages a bank account.
Without a corresponding adjustment for all transfers, a single mitigation outcome may be counted towards two different mitigation efforts. This is double counting. It is the equivalent of paying your bills, but not deducting the amounts from your bank balance. That would be dangerous for your financial well-being, just as failing to account for transfers of emissions reductions is dangerous for the health of our climate.
EDF’s preliminary analysis concludes that double counting even a third of available transfers from “outside” NDCs (i.e. reductions not originating within the scope of countries’ currently-pledged climate action) could wipe out the estimated global effect of NDC ambition and cause global emissions to rise, rather than fall.
2) A corresponding adjustment provides market value.
A corresponding adjustment is a host country’s strongest “stamp of approval” on a mitigation outcome, providing a buyer with confidence in the full value of the emissions reduction asset transferred*. While emissions reductions that clearly and transparently avoid double counting may command a price premium, that premium enables buyers, like airlines complying with CORSIA, to avoid the financial and reputational risk of purchasing reductions that turn out to be stranded assets because they are being counted by host countries toward the countries’ own climate action. Analyses indicate that even with the premium, the costs are eminently affordable.
For these reductions to have maximum value, it is important that the seller complies with its NDC and that the purchased reductions are additional to those needed to meet the seller’s NDC (or otherwise contribute to global mitigation). To assist with its NDC achievement, the host country might use revenues generated from NDC transfers to fund further reductions, or retain some portion of reductions for use by the host country.
3) A corresponding adjustment for all transfers – regardless of source – minimizes transaction costs.
In some cases, it is somewhat artificial to distinguish between NDC and non-NDC emissions reductions. That’s because some projects and programs may generate reductions both inside and outside of NDCs. Requiring “apportionment” of those reductions because of inconsistent accounting rules would add unnecessary burden and additional transaction costs, with no environmental benefit.
It would be simpler and more environmentally effective to have one rule with integrity requiring that all transfers should be adjusted in a country’s NDC emissions account, regardless of whether the reductions may wholly or partially originate inside or outside an NDC.
4) A corresponding adjustment facilitates host country efforts to preserve environmental integrity.
A corresponding adjustment can help a country manage the risk of generating low-quality reductions or otherwise overestimating emissions reductions. A jurisdiction that is properly “adding back” transferred emissions to its emissions balance will want to ensure each ton of carbon emissions it transfers represents at least one ton of actual domestic reductions, to ensure its total emissions do not rise as a result of the transfer.
5) A corresponding adjustment eases the expansion of NDCs over time.
A consistent accounting approach for all transfers from inside or outside of NDCs would avoid penalizing countries that expand the scope and coverage of their NDCs. Requiring corresponding adjustments for all transfers would thus support the increased global ambition needed to meet the objectives of the Paris Agreement, while increasing confidence in the integrity of carbon market cooperation under Article 6. (Non-NDC transfers that bypass accounting rules could in effect constitute an unfair subsidy to non-NDC sector activities.) Without the need to compensate via a corresponding adjustment for exported mitigation outcomes, a host country may find it difficult to expand the scope of its NDC.
6) A corresponding adjustment helps avoid a return to an outdated, bifurcated world of climate action.
If all reductions transferred must comply with Article 6.2 accounting guidance requiring a corresponding adjustment, Parties can avoid resurrecting the sharp polarization between developed and developing countries that existed under the Kyoto Protocol. Consistent corresponding adjustments would ensure the Clean Development Mechanism’s bifurcation is not copied post-2020.
7) A corresponding adjustment promotes public understanding and confidence in carbon markets.
From common practice, individuals and the public expect that when an asset is voluntarily transferred, whether from a bank account or a carbon account, the original holder no longer owns it. Carbon market guidance under the Paris Agreement should follow well-established accounting practices that facilitate public understanding of the value and integrity of carbon markets, and build market confidence.
Conclusion
At this year’s international climate negotiations, countries have a unique opportunity to lock-in robust procedures that rule out double counting of emissions reductions, by requiring corresponding adjustments for all transfers of emission reductions and articulating related transparency provisions to provide confidence in implementation.
Clear rules that ensure emissions reductions achieved in one country and transferred elsewhere are only counted once will help keep the atmosphere whole and provide direct benefits to participating countries.
For additional resources on counting and reporting international transfers of emissions reductions under the Paris Agreement, please visit edf.org/cop24.
*Project developers, for example, believe units that are backed by host country corresponding adjustments “represent the currently available ‘best in class’ host country-approved… carbon credits.” See First-of-its-kind REDD+ carbon credit integrated into Peru’s plan to achieve Paris targets.
By Alex Hanafi
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