Controlling realities through accounting is an illusion. It is essential to create multiple incentives for mitigation, including through voluntary carbon markets. While corporate action is essential, only truly additional emission reductions should be used for company offsetting.
25 February 2021 | Last month, the Taskforce on Scaling Voluntary Carbon Markets published its final report, in which it sketches a path towards a 15-fold increase in size for the voluntary carbon market, to between 1.5 and 2 billion metric tons of carbon dioxide annually, by 2030. However, a number of non-governmental organizations and governments are concerned that the voluntary carbon market, instead of promoting mitigation, could undermine policy action in developing countries. They demand, among other quality criteria, “corresponding adjustments” as a remedy against the risk of greenwash that comes with net-zero and other corporate climate pledges.
Reflecting on comments received in response to my previous blog on corresponding adjustments, I contemplate the topic once more – this time focusing on why sustaining political will is more important than a myopic obsession on accounting. This blog looks at the link between additionality and political ambition and, from there, sketches a possible compromise solution that acknowledges the full need for transparency on corporate offsets without putting a brake on Paris Agreement ambition.
Accounting and a False Sense of Control: Kyoto’s Good Old Times
Avoiding double-counting of emission reductions is essential to ensuring the integrity of carbon markets. The Paris Agreement prescribes tallying accounts of countries that participate in carbon market transactions under its Article 6 through “corresponding adjustments.” Emission reductions can only be counted against one national climate pledge (dubbed NDC for “nationally-determined contribution”), or another international compliance system, such the Carbon Offsetting and Reduction Scheme for International Aviation.
However, when it comes to the voluntary carbon market, the current controversy it is not about double-counting of emission reductions, it is about double-claiming of emission reductions, which is completely different.
Double counting happens when the same emission reduction is accounted toward more than one climate pledge, which undermines the environmental integrity of both the pledges and emission reductions. Double claiming, however, happens when two different entities or jurisdictions claim some credit for the same emission reduction, as when a company in one country helps to reduce emissions charged to another country’s carbon accounting. While the Paris Agreement foresees measures against double counting -corresponding adjustments-, there is no indication that the drafters of the agreement were concerned about double claiming.
Double-claiming may obfuscate corporate statements on compensated emissions (offsetting), but it does not jeopardize the environmental integrity of the Paris Agreement. Requiring corresponding adjustments to avoid double-claiming is shooting sparrows with canons. A cumbersome and complex measure is put in place that effectively disincentivizes urgent investments in climate mitigation. It may be worth asking – if mitigation action is real, and the emission reduction is measured and only captured once under the Paris Agreement – why are so many market observers worried about the semantics of a claim?
We may be dealing with a good deal of unprocessed mourning for the late Kyoto Protocol and its supposedly tidy accounting, where countries were listed with negotiated targets in an Annex of the Protocol, which allowed the establishment of a cap-and-trade system based on allocated assigned amount units (AAUs). Countries were linked via a transaction log, and adjustments of accounts were the automatic consequence of AAU trades among countries. The accounting was clear and clean and seemed to reflect the reality neatly.
In contrast, there are no binding international targets under the Paris Agreement and no new commodity that would be comparable to AAUs. NDCs are as messy as the world, as different as national circumstances demand, and rely on bottom-up action and not top-down international orders for their compliance.
The Kyoto Protocol is history, and for all its accounting beauty, let’s remember that it did not work. It covered an increasingly small part of the world’s emissions, the cap was full of hot air, a lot of windfall emission reductions were credited, it all but forgot about adaptation, and did not manage to keep the initially regulated countries committed to its system. The moment they fell out of love with the Protocol, discontented countries – such as Canada, and later Japan, New Zealand, and Russia – left it without any sanctions.
Accounting alone does not result in action and, deceptively, it gives a false sense of control over action. Accounting is essential for transparency, and it’s a condition for accountability. However, it also tends to create a parallel universe that risks becoming more powerful than the reality that it seeks to reflect. Accounting can easily result in complex societal myth-making about control and predictability. It is therefore essential to constantly review the purpose and assumptions that guide accounting in our particular case: does it incentivize mitigation, or does it hold it back?
The verdict on the Paris Agreement is still pending. But what is clear is that it promises a more realistic path towards globally coordinated emission reductions. Unlike the Kyoto Protocol’s top-down climate targets, in the Paris Agreement’s “pledge and review” approach, each country sets its own target, which allowed for the global coverage of emissions. It elevates domestically driven climate policy into the international sphere while providing a mechanism for countries to ratchet up their target over time. In other words, it bets on incentives and positive feedbacks instead of -largely ineffectual- sanctions. Harnessing government, corporate, community, and individual engagement, the Paris Agreement empowers all of us to contribute to its success. The voluntary carbon markets form part of that symphony of action.
Controlling offset claims may be the last effort to control climate change via accounting and – in this case – wording. However, multifaceted cooperation around mitigation action is far more powerful than a diced and sorted accounting and claims system, as neat as that would be from a bookkeeping perspective. Robust greenhouse gas inventories paired with overall transparency on progress towards climate goals are of supreme importance to ensure accountability under the Paris Agreement, not the question of who claims to have contributed to which emission reduction in this system.
Additionality Testing and Corresponding Adjustments
By ensuring that certified emission reductions are real, carbon standards can help to ensure that emission reductions and removals are additional to what would otherwise occur. This requires a review of additionality in the context of countries’ NDCs.
Where an emission reduction is additional, it does not need a corresponding adjustment to claim an offset. In the context of NDCs, an additional emission reduction is one that is not claimed by the government of the country where the mitigation activity takes place. Where a country has adopted economy-wide emission reduction targets backed by a set of clear policies and measures, emission reductions would have to go demonstrably beyond this target. However, this is a tall order that very few – mostly developed – countries will meet. And even where such clear targets have been established, these are vulnerable to the winds of change. Recent experience in the US and Brazil shows that a turnover in political leadership can result in a dismissal of previous climate ambition. This can make emission reductions additional that would have been part of the baseline scenario without a change in government.
But very few countries have absolute and predictable mitigation targets to start with. Many NDCs are not more than aspirational expressions of intent. They lack policy backing and are rarely the result of budgetary planning or emissions modeling. In many cases, the policy measures that could achieve climate targets are in constant flux, and very few countries have defined a concrete pathway to achieve their NDC. Some developing country targets are explicitly conditional on international finance and support. In these cases, NDCs formulate a broad framework for action rather than a pathway for government policy. Countries often depend on an additional push by corporates and non-state actors to achieve their NDCs. In these countries and contexts voluntary carbon market projects deliver mitigation that goes beyond what would have happened anyway.
The Paris Agreement and NDCs cannot replace activity-level additionality tests. National climate pledges differ in their specificity and ambition, are more or less concrete, and backed by different levels of political commitment. It is illusory to assume that NDCs are a fait accompli—that at the moment they are communicated to the UN climate secretariat, their compliance can be taken for granted. Additionality testing can be facilitated by transparent sector benchmarks and standardized baselines, but it remains embedded in the context of the national circumstances of the host country. Projects that are required by regulation, or are considered “common practice”, are already excluded by additionality tests required by most standards. In addition, the establishment of additionality should consider potential future legislation, at least to the extent that it has already entered the planning stage.
A way Forward?
Looking at a compromise that ensures full transparency while creating positive incentives for action, the following measures could show a way out of the current impasse:
- Carbon finance transactions that are formalized under Article 6.2 or 6.4 of the Paris Agreement come with a transfer of ‘internationally transferred mitigation outcomes’ and a corresponding adjustment to the transferring and receiving countries’ NDC accounting.
- Where domestically binding targets exist, corporates could claim offsets if emission reductions generated under voluntary carbon market standards are backed by corresponding adjustments. Alternatively, voluntary carbon market transactions can be treated as climate finance that supports the NDCs of the country in which the project takes place. In this case, corporates could claim an emission reduction but not an offset (following, for example, the UK’s woodland carbon code).
- Where such binding targets do not exist, additionality testing would consider the likelihood of policies to be implemented. Additional emission reductions could be claimed as offsets without requiring corresponding adjustments. Where the project fails to pass the additionality test, corporates can seek to procure a corresponding adjustment or simply claim to support the host country NDC.
Despite all concerns about greenwashing, corporate climate commitments should be encouraged and welcomed. Not all of them may be “gold standard” – in fact, some may be rubbish – but these commitments are voluntary and, by definition, additional to national regulation. This means that corporates act where governments fail to regulate and demand such action. For sure, civil society has to keep a keen eye on the credibility of corporate pledges, and how sincere companies pursue their implementation. However, as governments fall short on meeting international climate finance goals, we should embrace the unprecedented level of climate finance that corporates, through voluntary carbon commitments, can mobilize.
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