Opinion
Corresponding Adjustments and their Impact on NDCs and Additionality

Pedro Moura Costa

Long-time carbon markets innovator and thought-leader, Pedro Moura Costa, shares his take on the potential benefits, as well as potential shortcomings, of the Paris Agreement for international emissions trading and voluntary carbon markets to deliver enduring international cooperation for climate change mitigation.

09 March 2022  |  The Paris Agreement is a legally binding international treaty on climate change. One of its elements is to establish the basis for the development of a new international carbon market. However, depending on the specifications of the transactions, international emissions trading could result in neutral and even negative global climate impacts. Voluntary markets, on the other hand, could continue to provide the basis for enduring international cooperation for climate change mitigation.

The Paris Agreement, Nationally Determined Contributions, and Emissions Trading

Article 6 of the Paris Agreement[1] creates the basis for international cooperation in implementing Nationally Determined Contributions (NDCs)[2], and, ultimately, allows for higher ambition in the parties’ mitigation and adaptation options. The objective of Article 6, therefore, is to assist parties in following a path that would result in a net-zero greenhouse gas (GHG) emissions scenario. The goal is that GHG emissions would be kept to a minimum, and any that do occur will need to be counterbalanced by an equivalent amount of carbon sequestration. Further, it’s stated that this should occur “on the basis of equity, and in the context of sustainable development and efforts to eradicate poverty.”[3]

While at this stage this objective is neither economically nor socially possible, countries are encouraged to establish a trajectory where emission levels are reviewed periodically, and new, more ambitious targets are gradually set.[4]  However, to engage in more ambitious low emissions trajectories there is a need for significant levels of investment – often beyond the means of some countries. [5]

To help lower-income countries meet their NDCs, the Paris Agreement also creates two new ‘cooperative approaches’. Article 6.2 establishes that Parties can voluntarily provide financial assistance to each other, in exchange for an amount of ‘Internationally Transferred Mitigation Outcomes’ (ITMOs) to be transferred and credited to the account of the country providing the finance. Similarly, Article 6.4 allows the private sector to contribute to the mitigation of GHG emissions of one Party and that the resulting emission reductions can be used by another Party to fulfill its NDCs.[6]

Corresponding adjustments and developing countries’ NDC ambition

Enthusiasm for international trading, however, must be tempered by the need to avoid double counting of emission reductions and ensure ‘overall mitigation in global emissions’ – another objective of the Agreement. In order to ensure the integrity of the international GHG accounting system, cross-boundary emissions transfers must be accounted for by a system of Corresponding Adjustments. This mechanism subtracts the GHG emissions reductions from the host country’s account and adds them to the importing country’s account.

The requirement for corresponding adjustments can have a negative impact on developing countries. Unlike the Kyoto Protocol, when developing countries did not have emission reductions targets, under the Paris Agreement, all countries have to meet the emission targets stated in their respective NDCs. This creates a conundrum: while developing countries depend on inward investment to reduce their emissions, corresponding adjustments required for emissions trading could affect their ability to meet NDC targets. In essence, host countries are disincentivized to adopt ambitious NDCs, as these would jeopardize their ability to attract inward investment and climate finance[7].

Voluntary carbon markets as a basis for international climate cooperation

Voluntary carbon markets, on the other hand, could provide the basis for international climate cooperation without being detrimental to host countries’ targets.

Voluntary projects are often financed by companies that are not mandated to reduce their emissions and therefore do not need these credits for domestic or international compliance.[8] The emission reductions created by their voluntary projects, consequently, do not need to be reflected in any official accounts: the seller’s credits are not debited from the host country’s account, and not added to the national account of the buyer.

Of course, this would not be the case for “mitigation outcomes authorized for use towards the achievement of NDCs and/or Other International mitigation purposes” (e.g., CORSIA and the VCM). In this case, the emission reductions should be subjected to corresponding adjustments.

Corresponding adjustments and environmental additionality

While the requirement for corresponding adjustments was introduced to ensure environmental integrity of Article 6, it is important to recognize that corresponding adjustments could also have negative implications for climate additionality. Given that the emission reductions deducted from a host country authorises GHG emissions on the purchaser’s country, corresponding adjustments result in a zero-sum game with no positive global climate benefit[9]. However, such trades could also result in negative impacts on the host country’s ability to meet its NDC (see Table below).

  NDC coverage of project sector Corresponding

Adjustments

Climate Impact Impact on host country’s ability to meet its NDC
Compliance trading (Article 6)

 

Covered by NDC Requested by UNFCCC Neutral Negative as ITMOs will need to be transferred (and therefore subtracted from NDC achievement)
Outside NDC Requested by UNFCCC Neutral Negative as ITMOs will still need to be transferred, increasing the burden on the sectors covered in the NDC
Voluntary transactions

 

Covered by NDC Not needed Neutral Positive – Contributes to the Host Country’s NDC effort
Covered by NDC Demanded by buyer Neutral Negative as ERs are subtracted from country’s NDC achievement
Outside NDC Not needed Additional Positive – Does not impact Host Country’s ability to meet its NDC and paves the way for widening the scope of current NDCs.

Voluntary transactions without corresponding adjustments, instead, can assist countries in meeting their NDC targets and result in emission reductions that either contribute to, or that are additional to the targets of the Paris Agreement, a truly positive outcome. 

Footnotes:

[1] United Nations Climate Change – Cooperative Implementation: https://unfccc.int/process/the-paris-agreement/cooperative-implementation#:~:text=Article%206%20of%20the%20Paris,sustainable%20development%20and%20environmental%20integrity.

[2] United Nations Climate Change – The Paris Agreement and NDCs: https://unfccc.int/process-and-meetings/the-paris-agreement/nationally-determined-contributions-ndcs/nationally-determined-contributions-ndcs

[3] As per Article 4.1 of the Paris Agreement, “Parties aim to reach global peaking of greenhouse gas emissions as soon as possible, recognizing that peaking will take longer for developing country Parties, … and to undertake rapid reductions thereafter in accordance with best available science, so as to achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century”.

[4] See, for instance, Fransen, et al., 2017: Enhancing NDCs by 2020: Achieving the goals of the Paris Agreement. WRI. https://files.wri.org/s3fs-public/WRI17_NDC.pdf

[5] For instance, for the 14 countries that provided clear cost estimates for the implementation of the land-use components of their NDCs, the mitigation cost a total US$ 20.6 billion, while the adaptation cost estimates total US$ 10.5 billion, for the period 2020 – 2030. See Gabrielle Kissinger, Aarti Gupta, Ivo Mulder, Natalie Unterstell, 2019: Climate financing needs in the land sector under the Paris Agreement: An assessment of developing country perspectives. Land Use Policy, Volume 83, April 2019

[6] In addition to transactions that transfer ITMOs to buyer countries’ accounts, Article 6 also recognises that these could be used for Other International Mitigation Purposes, such as CORSIA and even for voluntary commitments.  In both cases, though, if these activities are recognised and authorised by the host country, the ITMOs need to be transferred from host country accounts and reallocated elsewhere.

[7] See, for instance, S.R. Choudhury, 2021: Corresponding Adjustments, Equity, and Climate Justice www.ecosystemmarketplace.com/articles/shades-of-redd-corresponding-adjustments-equity-and-climate-justice/

[8] There are different types of buyers and motivations to invest in the VCM, from pre-compliance to corporate responsibility, but the immediate impact is the same – they do not need ITMOs given that they do not need to report to any compliance regime (at least at this point in time).

[9] The only positive climate impact would come from the 5% share of proceeds inbuilt in Article 6.4, that are not “correspondently transferred” to the buyer’s country.

Photo: AdobeStock

Pedro Moura Costa is the Director of BVRio Institute Brazil and Oxford Climate Policy UK

Please see our Reprint Guidelines for details on republishing our articles.

One thought on “Opinion
Corresponding Adjustments and their Impact on NDCs and Additionality

  1. Great article and analysis, thank you. I’m curious whether there’s any data about players in the voluntary market right now contributing credits to their host country NDCs? What is expected in 10 years? Will companies increasingly be required to contribute to NDCs? At what rate is this growth expected? It seems clear that if today credits are entirely voluntary, countries and companies should be willing to pay more in the future to meet compliance goes tied to NDCs. Is there any data on projected trends in this space? Thank you.

Leave a Reply

Your email address will not be published.