As countries gather in Glasgow, they must avert climate catastrophe by setting a clear path to net-zero emissions with a compelling role for carbon markets. This global ambition needs stronger internal reductions and growth in voluntary markets to strengthen climate action and deliver finance where it is needed. But care is required to cultivate incentives and avoid locking in unequal treatment of developing countries.
Verra approaches COP26 in Glasgow with a mixture of hope and trepidation. Much is at stake. We are running out of time for governments to commit to radical climate action that can still serve to cut global emissions in half by 2030 and shift the world firmly onto a pathway to achieve net zero emissions by mid-century. This is what we need to keep a 1.5°C future within reach and reduce risks for our communities, economies, and ecosystems to acceptable levels.
Inherent in a safe future climate is also the flow of finance from the world’s wealthier countries towards developing countries. As long as the rich world’s promise of mobilizing $100 billion per year for developing countries remains unfulfilled, we forgo the chance to enable many countries to contribute fully to mitigation efforts and adapt to inevitable climate change. This pledge should already have been met last year. Developed countries need to show in Glasgow how they will meet that pledge if confidence and trust in the solidarity of countries in meeting the goals of the Paris Agreement are to be preserved.
Reliable and predictable ambition and finance from governments must form the backbone of our global fight against climate change. Countries need to collectively reaffirm their joint commitment to reaching net-zero global emissions by 2050 and commit to concrete steps to accelerate progress: ending the use of coal, moving away from other fossil fuels and towards renewables and electric cars, and phasing out fossil fuel subsidies. Assurance is needed that the $100 billion pledge will be achieved and tomorrow’s even greater finance needs will be supported.
That legendary Scottish bravery will need to rub off on governments.
Clarity on carbon markets
It is time to finally adopt the international rules for country-to-country cooperation under Article 6 of the Paris Agreement. Glasgow will be the third COP at which governments seek to reach agreement. The urgency is growing. The first period for Nationally Determined Contributions (NDCs) has already begun, and countries will soon start reporting on their progress in implementing and achieving their NDCs.
The technicalities of what needs to be addressed in the Article 6 rules are now well understood, as are countries’ positions. The negotiations in Glasgow will draw in Heads of Delegation and Ministers to broker agreement because now is the time to find compromise on the remaining issues and to remember what is at stake if countries fail for a third time to find consensus:
- Cooperation under Article 6 can greatly reduce the cost of climate action and lay the groundwork for countries to increase their NDC ambition. Recent work by the International Emissions Trading Association and the University of Maryland suggests the savings are so significant that countries could double the ambition of the first round of NDCs at no additional cost.
- Countries could still transfer mitigation outcomes under Article 6.2 without further international rules, however, there would be no guidance elaborated on how to account for transfers or how to report on them. Inevitably, there will be less transparency, lower confidence in what governments are doing, and ultimately less certainty in the accounting of NDCs and whether we are reaching the Paris Agreement’s temperature goals.
- Article 6.4 promised to create a global crediting mechanism to build on the CDM’s successes. Without further rules, however, this mechanism will never be operationalized.
Article 6.2 needs to create rigor and accountability for the countries that wish to share the results of their joint mitigation efforts for the purposes of achieving their NDCs. It appears that much of the accounting is already agreed. These rules must form a clear basis for accounting mitigation outcomes between countries. Where countries use acquired mitigation outcomes towards NDCs, corresponding adjustments should be applied by these countries and the transferring countries, even if the mitigation occurred under Article 6.4 (although a delay in requiring such adjustments from transferring countries may be reasonable for Article 6.4 credits if the mitigation occurs in sectors not covered by the host country’s NDC).
On baselines and additionality for the Article 6.4 mechanism, core principles need to be agreed by COP26 – where these are political – or they will only block the mechanism’s governing body later. This guidance needs to encourage more robust baselines and additionality tests that integrate a fair evaluation of autonomous improvement in emissions performance. Article 6.4 should pay attention to this, as future buyers will be guided by third-party assessments of program quality. But ambition comes from implementing crediting activities and the rules should not be so strict, or cause so much uncertainty, that they prevent investment and block activities from taking place. Perhaps it is possible to clarify expectations for how the Article 6.4 mechanism will strengthen its guidance over time.
Supplementing NDC ambition
As hopeful as we are, we know that countries’ collective ambition will need further help if the world is to reach net zero by 2050. At Verra, we see first-hand that the momentum among companies to take action in pursuit of achieving net-zero emissions is accelerating fast. Companies widely accept the “mitigation hierarchy” that prioritizes rapid abatement of emissions within their own operations and value chains to align with emission pathways that track down to net zero. Any residual emissions that remain too hard and costly to abate – at least for now – may be neutralized or compensated through emission reductions or removals achieved in the voluntary carbon market. The Science Based Targets Initiative (SBTi) reports that almost a thousand companies now have targets aligned with a 1.5°C pathway, with nearly a thousand more engaged in establishing targets.
The reality is that the voluntary carbon market and its mitigation projects remain crucial elements of climate action. This is undoubtedly the case with current levels of government ambition and finance mobilization – and the need to encourage and facilitate emitters in going beyond what regulation requires is arguably likely to remain for some time.
The voluntary market supplies real and tangible finance, in particular towards developing countries where support for mitigation is needed most. This generates high-value and credible mitigation impacts. The flow of finance supplements development and climate funds from governments and is necessary to enable many host countries to realize the conditional mitigation pledges they set out in their NDCs. Many countries have said very clearly in their NDCs that international support – including through markets – is the only way to see much of their mitigation ambition being fulfilled.
Voluntary market projects help accelerate mitigation ambition and we expect to see this reflected in increasingly progressive future rounds of NDCs. We have seen from the voluntary market, the Kyoto Protocol’s Clean Development Mechanism (CDM), and domestic carbon markets that projects are very effective in identifying mitigation prospects and building up technology, know-how, and institutional capacity in host countries.
The important role of the voluntary carbon market
Participants and stakeholders have been intensely debating how the voluntary market fits into this new landscape set by the Paris Agreement. That debate is still ongoing.
The voluntary market can provide significant, real finance to reduce emissions now and this can support, in particular, developing countries in transforming their economies. This lessens the challenges involved in achieving net zero and can drive long-term investment into removals. The voluntary market must be deployed at full strength if we are to turn the corner on climate change.
Mitigation through the voluntary carbon market can benefit both companies and host countries. However, this is not double counting in the sense of Article 6 as there is no buying country to use the carbon credits towards an NDC, nor any use under another international treaty. The voluntary market is the domain of companies and other actors wanting to mitigate beyond what they are required to deliver by government policy and beyond their efforts to align their operations and value chains with a 1.5°C pathway. It is also the domain of countries that need this support to deliver mitigation under their conditional NDCs or through opportunities they had not foreseen in their NDCs. This interest in mitigating beyond what governments do with Article 6 needs to be preserved and incentivized.
At the same time, there are concerns that success in reducing emissions through the voluntary market could inadvertently lead to either companies or host countries no longer needing to work further on their own emissions. We refer to this as a risk of displacing other mitigation efforts. It is not a double-counting concern but it could develop over time as an ambition problem.
Applying a mitigation hierarchy that prioritizes emissions from a company’s operations and value chains works to counter this effect at the corporate level. This approach has been broadly advocated and accepted by companies through initiatives such as the SBTi. The Voluntary Carbon Markets Integrity Initiative (VCMI) now seeks to establish clear guidelines on corporate claims to reinforce the mitigation hierarchy and frame the role of voluntary carbon markets as a complement to internal reductions.
There are various ways host countries can provide stronger assurance that they will not slow other mitigation efforts. They can clarify how projects contribute to their NDC implementation and guide project developers on how investments can best support them in expanding their climate action. Project selection and formulation can emphasize multiplier effects and replicability so that emission impacts are felt well beyond the boundaries of the projects within which crediting occurs. Whereas governments and voluntary market projects have tended to be quite distant in the past, we see the future voluntary market offering many benefits from stronger engagement and participation by host countries.
These issues are explored in a recent paper prepared for the VCM Global Dialogue.
Accounting adjustments for the voluntary market
We recognize, as others advocate, that host countries can incorporate voluntary market transactions into the accounting adjustments they make under Article 6. This can counter displacement risk because the adjustments cancel out the emissions benefit felt in host countries’ emission inventories.
However, requiring the universal use of accounting adjustments would overstate the risk of displacement for the countries most in need of finance.
Accounting adjustments assume host countries will reduce their mitigation actions to the tune of 100% of the reductions or removals achieved by voluntary market projects – this is why 100% of this mitigation is added back to the host country’s emission level as an accounting adjustment.
This assumption is simply not realistic for many, if not most, developing countries:
- Low availability of capacity and finance in many countries may mean there is little other mitigation action to displace
- For conditional NDC pledges, it cannot be assumed that the mitigation activity would proceed without the support of a voluntary market project
- For many countries, NDCs do not quantify a target level of mitigation, and climate policy is also not calibrated in a detailed quantitative manner, so a change in an NDC-derived emissions gap would not be a precise driver of mitigation effort
- Any projects outside NDC sectors would not impact emissions that are counted towards NDCs, and therefore would not reduce the emissions gap implied by an NDC.
Of course, we expect these circumstances will change over time as successive NDCs contain broader, deeper, and more quantitative mitigation commitments. Other concerns with adjustments may also dissipate with time: that countries do not have the necessary legislation, systems and processes; that difficulties in securing credible commitments from host countries would dampen investment; and that smaller local actors and communities would experience these difficulties even more strongly.
What is unlikely to change is that any universal requirement of accounting adjustments for the voluntary market would lock in unequal treatment of developing countries. If the risk of displacing country-level mitigation effort is a concern, this would surely be an even greater issue for domestic voluntary markets and even voluntary emission reductions within a company’s own operations. If international voluntary market transactions were singled out, requiring adjustments would drive investment towards countries with domestic demand and away from the developing countries most in need of international support.
Accounting adjustments may still have their place with some countries in the voluntary market, especially given that any risk of displacing host country mitigation may grow as NDCs and climate policy improve. At Verra, we are developing our systems and processes to identify where host countries indicate they will apply accounting adjustments, as well as where units are used for different types of corporate claims. We also expect that host countries, over time, will probably increase their use of accounting adjustments for the voluntary market.
However, we must recognize that there are multiple ways that host countries can work with voluntary market actors to provide further assurance that mitigation is being strengthened rather than weakened, and that the ambition of NDCs is being accelerated rather than undermined.
Aligning Verra’s crediting programs to the Paris Agreement
We look forward to a positive outcome on the Article 6 rules in Glasgow and will develop further guidance next year in areas where Verra’s crediting programs need alignment.
Facilitating different accounting approaches will be a core component of this, building on work already done on Verra’s programs. For example, there may need to be more clarification of where different accounting approaches are most appropriate under various NDC and country circumstances and how this may evolve as NDCs and countries’ climate policies become stronger and broaden their coverage. Where host countries commit to making accounting adjustments under Article 6, information will need to be managed and made publicly available.
This alignment may also need to consider Verra’s processes for setting baselines and assessing the additionality of projects. These will need to take full account of undertakings that host countries set out in their NDCs and climate policies, as well as the base level of emissions performance that can reasonably be expected in the absence of projects but in the context of strengthening mitigation ambition under the Paris Agreement.
Work on such guidance will need to feed into broader work we are doing to capture the implications of the different claims that companies can make as a result of their voluntary market activities and to ensure greater linkage between our registry and systems outside, such as other registries and market exchanges. We are working together with others through initiatives on claims and quality, such as the VCMI, the TSVCM and SBTi, and initiatives to connect systems, such as the World Bank’s Climate Warehouse and other processes.
At Verra, we often like to think we are working ourselves out of a job. But we remain far from the moment when the voluntary carbon market no longer has value to add. It contributes essential investment and support for global climate action and helps countries achieve and grow their mitigation ambition. Aligning the voluntary market with the Paris Agreement will continue the safeguards for its integrity and usher in greater integration, but this does not mean markets that are uniform across the spectrum. Where there are grounds for difference, we should welcome the diversity and leverage it to incentivize still more participants to join.