Article 6(2) of the Paris Agreement sets out the requirement for nation states to apply corresponding adjustments (CAs) to carbon credits that are used for trading between nation states. This is to ensure that an emission reduction is not counted as a mitigation by two different countries towards their Paris pledges. Specifically, it applies double-entry book-keeping when a country funds a mitigation project in another country with the expectation of being able to count the verified emission reductions arising from that financial contribution as its own when reporting its progress against its NDC to the UNFCCC.
Some progress was made at COP27 in November 2022 with respect to collaborative efforts under the Paris Agreement’s Article 6 to deliver GHG reductions at scale through market and non-market-based mechanisms. In the continuing absence of a global carbon market to assist nations in their effort to fund and deliver GHG reductions, COP27 recognised the importance of the Voluntary Carbon Market which serves non-state actors taking voluntary action. It does so under the provisions of Article 6.4 which now distinguish between mitigation outcomes delivered by nations that help a specific country meet its NDC; and those which are funded by non-state actors to assist a country meet or exceed its NDC and to support their own climate claims.
These are respectively termed ‘Authorized Emission Reductions’ (AERs) and ‘Mitigation Contribution Emission Reductions’ (MCERs). AERs are subject to double-entry book-keeping accounting so that emission reductions are not claimed twice. That is ensured through Corresponding Adjustments made to relevant country NDCs. MCERs are not subject to Corresponding Adjustments because non-state actors do not fall directly under the accounting framework of the Paris Agreement and so no double counting occurs. This is always the case provided the non-state actor does not use the MCERs to comply with its national emission reduction regulations.
Carbon offset credits with a vintage of 2020 or earlier are not subject to the debate around CAs, as those emission reductions occurred before the start of the Paris Agreement period. To date, a very small number of vintage 2021 credits have been issued, and numbers will remain small until the second half of 2022. Most buyers will therefore be unaffected by the CA issue in the medium term.
As these policy developments take shape, there is a debate about whether claims of neutrality can be made using MCERs; or, whether AERs must be used if double claiming by the host country and the funding entity is to be avoided. For the present, this debate is moot because the modalities of applying Corresponding Adjustments are yet to be agreed and uniformly implemented.
Only a handful of countries currently have an accounting mechanism for issuing CAs, and it is likely to be 2-3 years before most ‘Paris-ready’ national accounting systems are operational. It is therefore unlikely that any significant volume of carbon credits backed by CAs will be issued before 2023-24.
In the longer term, one possible outcome of a revised framework for voluntary action best practice is the differentiation between emission reductions without a CA that help the host country achieve its Paris Agreement pledge, and those with a CA which reduce emissions over and above the national pledge. Both have equal importance and merit in tackling climate change and companies may choose to act in either, or both, causes.
How to communicate these actions forms part of the ongoing process to determine future best practice, and future editions of the Protocol will provide updated guidance as this emerges.