Article 6: Will corresponding adjustments tool stop double counting?

In the second part of CarbonCopy’s series on the finalised Article 6, we explore whether  ‘corresponding adjustment’, an accounting tool, will stop double counting of emission reductions or just shift the location and burden of emissions to poorer countries

Negotiations around the market mechanisms for carbon offsets at the COP were marked by the hotly contested issue of double counting. The crux of the argument was that if Internationally transferred mitigation outcomes (ITMOs) or ‘units’ are being traded between two countries, how would this reflect in their overall emission inventories. 

Resolution to this accounting dilemma gave birth to ‘corresponding adjustments’ (CA). CA simply means one country agrees to transfer a mitigation outcome to another country and subtracts the emission reduction from its own GHG accounting. The acquiring country adds the emission reduction to its own accounting. CA prevents countries from counting an emission reduction more than once towards their Nationally Determined Contributions (NDCs) or their climate targets expressed in any other form. Under the Paris agreement, CA is presented as a tool to keep the integrity of global emission accounting intact to provide a real impression of progress towards meeting agreement goals on keeping the temperature between 1.5oC-2oC.

The issue of how and when to apply CA, could not see consensus among negotiating parties until the very last day of the negotiations because of the strong, starkly opposite stances at the table. According to observers, the issue was finally resolved when a bridging proposal, put forward by Japan, came into play. CA will be applied only after the party, which has made the emission reduction to generate the unit (or host party) ‘authorises’ its use, the proposal said. Earlier, CA was expected to be applied at the point of use. This was agreed by all parties and the breakthrough was reached. 

Overall, the Article 6 decision says that CA will be applied to ‘all authorised’ emission reduction units that are traded internationally, whether they take place under Article 6.2 or Article  6.4 mechanism, inside or outside the NDCs. To clarify further:

  • Article 6.2 rules not only enable countries to trade among themselves, but also require them to authorise carbon credits to be used for CORSIA, the UN aviation offset scheme (referred to as ‘other international mitigation purposes’). It also allows them to authorise carbon credits for the ‘voluntary carbon market’ (referred to as ‘other purposes’). As per the decision, for any ‘authorised’ carbon credits that are being used for these said purposes, the host country will be required to apply corresponding adjustments. This means that the authorising country no longer counts the emission reductions to achieve its own NDC and allows others to claim the emission reductions.
  • Similarly, the rules require CA to be made for all authorised carbon credits under Article 6.4 as well, whether they are used towards meeting countries’ NDCs or for “other international mitigation purposes”, such as CORSIA.

Now, whether CA, in the overall scheme of things, will be helpful or not would be only clear in the future as the market mechanisms under Article 6 come into place. But from developing countries’ perspective, for now, it seems like a tool that will help historical polluters from the developed world the most. 

Chirag Gajjar, head-subnational climate action, World Resources Institute, India, a global think-tank, gave an example. If the USA had to cut emissions within its own boundaries it might cost, let’s say, $100 per unit. But it would prefer to buy this unit as an offset from the market because there it might only have to spend $60 per unit. The Article 6.4 mechanism, therefore, could potentially shift emissions from a developed country to a developing country, said Gajjar. 

The inventory of a developing country, which is working to reduce its GHGs, will still reflect higher emissions. Why? Because of CA, Gajjar said. The developed countries will get away buying the cheap credits. They will continue to maintain the emissions they have. Whereas, the burden of emission reduction will be on vulnerable countries of the developing world, he added.

Long-standing challenges resolved

CAs sounds like simple math, but when it comes to international negotiations, each word is open to interpretation. And with more than 200 countries involved, things get a bit more complex, considering the different methods used by them to present their climate targets in Nationally Determined Contributions (NDCs). 

A majority of countries have single targets for 2030, while some have set them for multi-year periods. Metrics that countries have used in their NDCs for their targets are also different. Some quantify it in GHG emissions and some in renewable energy targets. Some countries have pledged economy-wide NDCs, while some only cover certain sectors in their NDCs.  

While all these distinctions present practical challenges for emissions trading, in the four-year-long negotiations on the subject, countries strongly emphasised on being able to become part of trading without having to alter their NDCs. Let’s take a look at the decisions made on these issues under Article 6:

Different metrics: In order to resolve this issue, it was decided countries are free to use other metrics or goals, but they will be required to quantify the impact in tonnes of CO2 equivalent balance.

Emissions reduction units generated outside NDC: Host countries will authorise and apply CA for all ITMOs they transfer, whether they happen outside their NDCs or within them. There are also no accounting exemptions for countries that included only a part of their economy in NDC targets.

During the negotiations, Brazil took a stand asking for exemptions for ITMOs generated outside the NDCs. This issue was a major stumbling block at COP25 as well. Developed countries were against these demands, inferring that such exemptions would give way to double counting and also create incentives for countries to not expand the coverage of their NDCs, or use creative ways to define their goals in order to forego CA. 

Developing countries’ logic behind this demand, however, was more noble. “The obligation of a country is to meet its NDC, not alter its inventory. A country cannot be forced to adjust its economy wide inventory for meeting CA requirements,” Rajni Ranjan Rashmi, former principal negotiator for India at the UN climate change negotiations and ex-special secretary in the MoEFCC, told CarbonCopy.  

According to Rashmi, the sectors that are covered in the NDC are subject to CA if the ITMOs generated in these sectors are traded. Brazil and India argued to keep other sectors not covered by NDCs outside the CA because that would mean forcing countries to enhance their NDCs ( by reporting them to UNFCCC for CA) even when it is not intended. 

CA for ITMOs from sectors outside NDCs might also dampen investments and technological innovations, Rashmi said. Industry will hesitate to invest in green technologies if they are penalised for making additional emission reductions outside the NDCs, he further elaborated. Therefore, developing countries argued that such emission reductions outside the NDC can be subjected to approved additionality norms in terms of methodology and hence there should be no apprehension about their environmental integrity. 

In Glasgow, however, Brazil moved away from this position as part of a package presented to developing countries. The package had a give-and-take approach on various sticking points divided between developing and developed economies. And, finally, it was decided that CA will be applied to traded ITMOs generated from outside the NDCs as well. 

Single vs multi-year NDCs

This is more complicated to put into effect, because many countries’ NDCs have a single-target year, such as 2030, whereas carbon credits might be bought across multiple years.

The finalised Article 6 rules prohibit any carryover of ITMOs from one NDC period to the next period. This prevents countries from generating large amounts of ITMOs which are not backed by actual emission reductions, and then carry them forward to achieve future climate targets, which happened in earlier market mechanisms under the Kyoto Protocol. 

The rules, however, allow for an approach, referred to as ‘averaging’, to address the single-year NDCs problem. 

A loose interpretation of this would mean that a country which has a single-year NDC period of 2030, would apply CA that corresponds to the average of ITMOs traded in till 2030 from whenever the markets come into play.

Based on this interpretation, experts are debating that this ‘averaging’ method can effectively lead to increased emissions, especially if ITMOs are used by airlines to offset their emissions under CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation). See one such example in the picture below presented by a German non-profit Oeko-Institute.

Some experts feel that this interpretation of ‘averaging’ might be over simplistic. 

“The issue of multi-year vs single-year NDCs is yet to be figured out, which will impact the way in which CAs will be applied, specifically the averaging of CAs,” said Gajjar of WRI India. 

He cited the example by the German non-profit “counter intuitive”. If you average out credits, then the CAs will also be applied according to the average number of credits used for CORSIA, he said. “Imagine one certified emission reduction is divided in two halves. One half is used for the host party’s climate commitments and the other half is used for CORSIA. So CAs will have to be applied for one half only,” he said, adding that if all the halves that are used for CORSIA are averaged out as suggested in the images, would it still increase global emissions? 

If the global emissions continue to increase that’s not because of averaging out. That’s because emissions have just been shifted somewhere else, he said.

Moreover, Gajjar said that double counting is highly unlikely given the CAs will have to be applied at the time of first transfer after authorisation by the host party. And this will have to be reported under biennial transparency reports (BTRs) that both the participating parties will send to the UNFCCC.

Further clarity on the issue of single- vs multi-year NDCs is supposed to come in future because the Glasgow decision has also requested the UNFCCC’s subsidiary board on technical issue to undertake further work on “elaboration of further guidance in relation to corresponding adjustments for multi-year and single-year NDCs, in a manner that ensures the avoidance of double counting.” The body is expected to develop recommendations for the consideration and adoption by the Paris Agreement parties in the next session to be held in November 2020.

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