4 December 2023 | The debate on whether “Corresponding Adjustments” (CAs) must be applied to VCM transactions has created significant policy and integrity uncertainties that put VCM project and program investments at risk. Insecurities around the impact of VCM projects have led government officials in host countries to re-evaluate their policies and created significant worries as to whether VCM investments could complicate the achievement of host countries’ Nationally Determined Contributions (NDCs). COP28 negotiates the first “Global Stocktake” of carbon emissions. This global accounting raises questions about how emissions are counted and the political and scientific implications of accounting tools, including CAs.

In Climate Focus’ freshly released study on “Double Claiming and Corresponding Adjustments,” we fill a critical analytical gap by identifying and analyzing instances of double claiming of emission reductions and removals (ERRs), analyzing them in the context of mitigation incentives, and discussing CAs as a tool to enhance the overall integrity of carbon markets and mitigation action. Our study reveals that the discussion around CAs is less about accurate accounting and more about differing behavioral and policy assumptions. Where greenhouse gas (GHG) accounting rules are used as political instruments to achieve certain policy outcomes, it is essential to assess the underlying assumptions of the particular project, program, or policy to avoid undesired outcomes (i.e., less climate change mitigation rather than more).

Corresponding Adjustments and the quality of the VCM

CAs are an accounting tool designed to avoid double counting of ERRs transferred under Article 6 of the Paris Agreement. If ERRs are transferred internationally under Article 6, then a CA must be applied to the accounts of the host country to ensure that those ERRs are only counted by one country towards its NDC. While the Article 6 rules do not require the application of CAs to ERRs transferred in the context of the VCM, some stakeholders argue that “double claiming” of ERRs by countries and corporates is unacceptable. Double claiming is a form of double counting where the same ERRs are counted toward two or more different mitigation pledges that are reported under different GHG accounting systems. Other stakeholders argue that applying such adjustments to VCM transactions would create more harm (and less emissions mitigation) than benefits. The problem is that the two camps substantiate their opinions from their vantage point and within the logic of their argument but fail to satisfactorily respond to the concerns of the other camp.

Since obtaining CAs is not easy, the demand for “correspondingly-adjusted” carbon credits in the VCM pours cold water on an already struggling market. The availability of adjusted carbon credits depends on host countries having legal frameworks in place to issue the required authorizations as well as institutions and accounting capabilities to make the adjustments. It also depends on the willingness and capacity of host countries to invest in additional mitigation actions for each of the carbon credits they authorize: the ERRs represented by an adjusted carbon credit cannot be counted toward the host country’s NDC, meaning that the country will need to invest in more mitigation to achieve its NDC.

Consequently, whether investors and policymakers request that host countries authorize CAs for VCM projects and programs has significant policy implications for both for host countries’ NDCs as well as for the functioning of the market.

Accounting should facilitate and encourage climate action; each case is unique

Before rushing to authorize CAs for VCM transactions (or deciding not to), policy makers and VCM participants should consider two key questions:

Question 1. Is there a risk of doubleclaiming?

Many VCM ERRs can be transferred without risk of double claiming, and governments and market participants should analyze whether a risk of double claiming exists. The assumption that the use of carbon credits in the context of corporate GHG goals leads to double counting between the host countries’ NDCs and corporate targets is a simplification of the accounting realities. GHG accounting systems used by governments, corporates, and VCM mitigation activities have different purposes and follow different rules with different baseline and monitoring methodologies, equations, indicators, and parameters to calculate ERRs. This results in GHG reporting overlaps between public and private GHG reporting frameworks.

Whether there is an instance of double claiming depends on whether corporates and host countries indeed report and “claim” the same ERR towards their mitigation targets. The quality of NDC accounting depends on, among other factors, the quality of GHG inventories. The quality of many GHG inventories is low, and while data quality is improving, accounting for emissions often depends on relatively rough estimates. This means that bottom-up VCM project ERRs are often not captured in GHG inventories and, consequently, left out of NDC accounting. The quality of VCM ERRs depends on conservative estimates combined with strong and independent validation of assumptions. This means that while GHG measurements may be more granular at the project level, the integrity of ERRs depends, to a large extent, on conservative baseline setting. Overall, this means that ERRs measured and reported in national inventories and by VCM projects were calculated following distinct approaches and often VCM ERRs are not reported as part of NDC achievement.

Establishing whether there is a risk of double claiming between the VCM and a host country’s NDC is especially relevant for policymakers from developing host countries who may be considering using the VCM as a tool for achieving or exceeding their NDCs. When CAs are offered without sufficient prior consideration, host countries may have to “pay double” for the transferred credit: first in the form of a CA within their NDC accounting and, second, in the form of an additional ERR that needs to be achieved within their NDC. In this way, the application of CAs can place an unnecessary obstacle in a host country’s path to NDC achievement. Table 1 summarizes the likelihood of VCM and NDC double claiming of ERRs.

Table 1. The likelihood of VCM double claiming in the context of NDC accounting.

Question 2. What are the implications of CA authorizations in the context of national policies and circumstances?

Like public climate policy, the accounting rules of the VCM and the Paris Agreement seek to influence the behavior of those using carbon crediting systems. Authorizing CAs sends policy signals that may encourage or discourage enhanced mitigation action. It is therefore important that decision-makers consider CA authorizations in the context of national policies and circumstances.  In contrast to the broad agreement that double counting and double claiming of ERRs between companies or across companies and governments is permissible, opinions are not aligned on the issue of whether CAs should be applied to avoid double counting in the VCM. Table 2 lists arguments for and against using CAs in the VCM.

These arguments cannot be assessed in general terms. Instead, it is important for policymakers and VCM stakeholders to consider the arguments in the context of national policies and circumstances. Whether CAs will incentivize or disincentivize climate change action depends on a country’s NDC, the accuracy of its inventory and measurement, reporting, and verification (MRV) system, and its plans, finances, and progress in implementing national climate policies. Whether CAs should be applied to VCM ERRs also depends on beliefs, assumptions, and hypotheses in relation to the effect that CAs have on mitigation action. These are easier to assess in specific national contexts rather than at the global level.

Table 2. Summary of policy arguments regarding CAs used in the VCM.

The risk of double claiming must be weighed against the risk of forgoing VCM investments

In sum, VCM investors should consider forgoing the option to use VCM carbon credits for compensatory or offsetting purposes – these uses are controversial because they do not generate additional mitigation benefits. However, market participants may establish that there is limited risk of double claiming. Investors should ensure that their engagement leads to additional, scalable, and long-term ERRs and mitigation actions. While the theories and assumptions as to how to achieve this may differ, investors should engage in dialogue with host countries and local actors to ensure that their VCM investments lead to long-term climate benefits. These actions are far more significant than short-term concerns about double claiming of emissions. In the end, accounting rules and mechanisms should facilitate – not create barriers for – mitigation action.