Updated on 25 January 2021 to clarify language on the accounting of reductions.

21 December 2020 | In recent months, a chorus of ever-louder voices have argued that cross-border voluntary carbon market transactions must come with “corresponding adjustments” applied to national GHG accounting or risk obscuring progress in combating climate change. Such adjustments, the argument goes, are essential to ensuring the integrity of voluntary carbon markets. Advocates of corresponding adjustments see the voluntary market as undermining mitigation efforts.

I argue that the opposite is true.

Voluntary carbon markets: what, when, why

Voluntary carbon markets channel the money of corporations, civil society organizations, and individuals that want to reduce greenhouse (GHG) emissions into mitigation projects and programs. Investors, as well as project proponents, can be private or public, and they can be located in the same country or in different countries.

As indicated by the name, the nature of these transactions is voluntary, i.e. not mandated or accounted for under any regulatory or compliance system. Corporate engagement may be strategic — to earn a reputation as a good corporate citizen or linked to sustainability commitments. It may be greenwashing or driven by serious concern, but regardless of the motivation and credibility, it is not part of any effort to comply with mandatory GHG goals. Voluntary markets, as long as they operate within the limits of the law, do not concern government authorities.

Generally, voluntary carbon markets fill a gap where regulatory action is insufficient or absent.

Corresponding adjustments: what, when, why

It’s a different story when countries are using cross-border carbon markets to finance deeper emission reductions. Under Article 6 of the Paris Agreement, countries and authorized entities can also transfer emission reductions, in which case they’re referred to as “internationally transferred mitigation outcomes” (ITMOs). When such transactions occur, countries make “corresponding adjustments” to their national accounting against their climate target (see paragraph 36 of Decision 1/CP.21).  The country where the mitigation took place subtracts the emission reduction from its accounting, while the acquiring country adds the emission reduction to its GHG accounting.

Corresponding adjustments are a tool designed to promote the integrity of emissions accounting under the Paris Agreement. They are intended to prevent countries from counting any given emission reduction more than once towards Nationally Determined Contributions (NDCs, or country climate targets). Avoiding this “double counting” ensures the integrity of carbon accounting at the international level, helping the world understand how much progress is being made towards achieving the Paris Agreement temperature goals of 1.5C and 2C.

The arguments in favor of corresponding adjustments for voluntary carbon markets

Those in favor of requiring corresponding adjustments for voluntary market transactions worry that the voluntary carbon market will let countries off the hook for setting strong policy or reduce the pressure created by NDCs to lower emissions in host countries.  Therefore, they argue that voluntary transactions should be treated as de-facto ITMOs under Article 6 of the Agreement. This would require voluntary transactions to be accounted for under the NDC where the buyer is located, even if that country isn’t seeking such credit.

According to this argument, if a German auto company wants to offset its fossil-fuel emissions by financing a conservation project in Zambia, then the Zambian government should have to subtract the reductions from its national NDC. The reason, advocates argue, is that credits not backed by a corresponding adjustment would result in double-counting or the double-claiming of emission reductions.

Those in the pro-corresponding adjustment camp argue that corporates should not be allowed to make a carbon-neutrality claim using emission reductions counted by a country towards its Paris target. This argument hinges on the belief that it’s unacceptable that “the buyer de facto finances the host country’s efforts towards meeting its NDC”. There is a fear that, without corresponding adjustments, and if “the host country does not increase its own target as a result of the sale of the credit, then overall emissions increase, because no extra abatement has taken place”.

These arguments simply don’t hold up.

And why these arguments are so unconvincing

Let’s take the last argument first. It starts with the false assumption that there is something shameful about having voluntary investors finance a country’s efforts to achieve its NDC. There isn’t. In fact, the opposite is true.

Considering that most carbon buyers and investors come from rich, developed countries, there is a strong argument for such carbon buyers to support the NDCs of developing countries. The principles of equity and common-but-differentiated responsibilities – cornerstone principles of the international climate regime – provide powerful arguments against corresponding adjustments for voluntary transactions. It cannot be acceptable that developed countries take advantage of voluntary corporate action to achieve their NDCs without any adjustments, but that developing countries should forgo the fruits of voluntary action.

To illustrate the point, let’s go back to our example: The auto company implements a climate pledge, and it begins by retooling its factory in Germany to reduce emissions voluntarily. In this case, Germany can enter the emission reductions in its GHG accounting, and no one will claim the automaker let Germany off the hook when it comes to climate ambition.

But if the carmaker compensates for remaining emissions by investing in a project in Zambia, then the expectation is that either Zambia undertakes a corresponding adjustment or increases the ambition of its NDC. Interestingly, it is not exactly clear whether the emission reductions would involve a bilateral transfer between Germany and Zambia or just the writing off of GHG reductions by Zambia. If Zambia agrees to execute a corresponding adjustment in a bilateral transfer, Germany could even double-dip in the carmaker’s voluntary action and count the transferred emission reduction against its NDC (there are currently no rules that would prohibit this). If there is no bilateral agreement backing the corresponding adjustment, the emission reductions used by the car company risk disappearing altogether from the Paris Agreement’s reporting and accounting.

In either case, while Germany is allowed to harvest the benefits of voluntary action, Zambia is not. Take a moment and get the taste of this.

Correspondingly perverse incentives

Approaching this issue from another angle: The Paris Agreement is based on voluntary NDCs and the notion that the positive experience of NDC compliance would lead to increasingly ambitious pledges. Success and breakthroughs would trigger a ratcheting up of ambition. In this vein, voluntary carbon markets should pride themselves in supporting and accelerating NDC compliance, particularly where investment happens in developing or least developed countries. By accelerating compliance, countries become more confident that they can meet climate goals and increase ambition in the next NDC cycle.

Skeptics claim that voluntary carbon markets would delay or deter government action, but there is no evidence that private sector action would displace public sector action. History tells us that NDCs and international goals need every extra push towards compliance. From the US refusal to ratify and Canada’s exit from the Kyoto Protocol, the Millennium Development Goals, ODA, and climate finance targets to the New York Declaration on Forests, there is a rich history of countries failing to meet global pledges or goals.

We also have little evidence that public policy would be held back by voluntary carbon market activities. Quite the contrary. Voluntary markets invest in early projects, test a technology, make it market-ready. The additionality requirement of carbon market transactions also means that voluntary carbon market projects populate niches that government regulation has not yet reached.

The accounting argument remains porous

And finally, the accounting argument. If voluntary carbon markets run parallel and ‘unseen’ to the Paris Agreement, they have no impact on Paris Agreement accounting. Emission reductions will appear in the GHG inventories of host countries (e.g. Zambia), and nowhere else. But let’s assume host countries agreed to make corresponding adjustments for voluntary carbon market projects. This would require an international agreement to account for various forms of GHG reductions, and it would require an understanding of how different segments of the voluntary carbon market operate. Few countries will have the capacity to make corresponding adjustments in the next years. Corresponding adjustments require legal approval of voluntary carbon market projects, a link between monitoring and accounting, robust transaction GHG registries, and an agreement between voluntary carbon market standards and national GHG registries. Most developing countries lack the infrastructure and institutions to establish the architecture to undertake corresponding adjustments. This means corresponding adjustments may not be possible for most countries in the foreseeable future.

To ensure robust accounting countries should invest in national GHG monitoring and tracking to have a good understanding of the GHG emissions in their country. Carbon markets also help to close data gaps and pilot monitoring approaches.

Finally, double claiming and net-zero carbon targets of corporates. As long as double claiming does not lead to double counting, I would consider it a problem of the second or third order. Companies claim a lot (how many ‘World’s best beer’ have we consumed already?). But good, let’s dive into that last argument: To avoid any double claiming, carbon neutrality would have to be backed by ‘fresh’ emission reductions that are not claimed by any government. All governments, whether representing developed or developing countries, would be responsible to meet their NDCs through government action and regulation. Any voluntary corporate action would come on top of this. So, in the previous example, the German government would need to subtract out all the German automaker’s emission reductions/removals not driven by regulation, whether occurring within the company’s Scope 1, 2, or 3 boundaries or if coming from a domestic offset project. Corporate voluntary GHG benefits should be subject to ‘neutrality’ reporting and set-aside accounts wherever emission reductions are achieved – through corporate direct mitigation action or offset projects. This would be clean and pure. It would also be fair, albeit unlikely to be embraced by developed countries, which currently get to count domestic voluntary corporate action in their NDCs. Alternatively, companies could clarify that their commitments support NDCs of their home and offset supplying countries. Corporates could also express confidence that their efforts result in more ambition in the next cycle of NDCs.

Accelerating not putting brakes on action

Let me suggest that we change the topic of our discussion. Let’s put all our energies towards defining and implementing ambitious mitigation actions. We don’t have time to waste. All hands on deck for climate action. Voluntary carbon markets play an important role in unleashing mitigation action. They can generate GHG reductions while governments put in place climate policies. corresponding adjustments have no obvious benefits in driving ambition, but they create significant accounting and bureaucratic barriers for urgent mitigation action. Any requirement that would demand countries to undertake corresponding adjustments for voluntary transactions would discriminate against developing countries that are unable to make the required adjustment, and these countries would benefit most from voluntary private engagement.

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