With the growing demand from investors, customers and other stakeholders for companies to become net products and / or sell net emissions goods and services, there is a growing interest in the voluntary carbon market as a source of carbon offsets. . This is because very few goods and services, if any, are provided today without fossil fuels somewhere in their value chain. Simply storing goods in a warehouse puts fossil fuels in the value chain due to the construction of the building. And even looking ahead, fossil fuels will remain embedded in global supply chains to some extent for several decades, if not a century.
The voluntary market has been slow on the scale for the past two decades, but is now growing rapidly. There have been constant concerns related to the quality of the carbon units that come out of it. For example, do carbon units represent real reductions? Anyway, would these reductions have happened? However, it is on the verge of greater growth, driven by corporate commitments to achieve zero net emissions targets. This means that the voluntary market is about to become a critical mechanism to help reduce global emissions, as a special working group was set up to address concerns and implement and approaches to a quick future climb. The working group was initiated by Mark Carney, UN special envoy for climate action and finance; is chaired by Bill Winters, chief executive of the group, Standard Chartered; and is sponsored by the Institute of International Finance (IIF). The final report was recently published and can be found here.
One of the many points of discussion in the report is how a carbon unit should look in terms of actions already underway or planned in the host country for the project. For example, the report discusses the need for a future voluntary market governing body to consider whether it may be necessary or when the projects demonstrate additionality to the nationally determined contribution (NDC) of the host country under the Paris Agreement. and the appropriate instruments to implement them. a requirement (for example, the corresponding adjustments).
While the quality of carbon units is very important, some perspective on the role and shape of the voluntary market is also needed. The corresponding adjustment is a mechanism of the Paris agreement to avoid double counting at the country level and to maintain environmental integrity against NDCs. The use of the corresponding adjustments is clearly set out in Article 6 of the Paris Agreement. It is designed to operate at the country level where a defined NDC exists and I discussed this in detail in a 2020 publication and in a 2019 publication.
In contrast, the voluntary market operates at the company level. The same issuance activities (sewers and sources) can be seen through two completely different accounting approaches, one for countries and one for companies. So does the demand for adjustments to the Paris Agreement on the voluntary market mix the voluntary world and the regulator in a way that is useful or detrimental to the voluntary market?
The voluntary market is a means of channeling capital into emission mitigation projects and measures results with the emission of carbon credits that recipients can use as they see fit. These carbon credits have no immediate value in a regulatory world, as the recipient cannot use them to meet compliance obligations or be recognized by other jurisdictions. The recipient simply requires them to prove that the total sum of their market and investment activities is zero net emissions. This is a simple model, but it has worked over time, albeit in a relatively limited way.
In the voluntary world, when a company sells a carbon neutral product in the UK, there are emissions of the product in the UK and this is offset by a unit that could represent a sewer of forestry activity (say) of (say)) Kenya. These are combined to offer the carbon neutrality claim by the company in question. But this forestry activity will also lead to a larger increase in Kenya’s official GHG inventory for its Paris Agreement commitments, thus helping Kenya meet its NDC. Similarly, emissions from the use of the product will also be recorded in the UK inventory, which delays the achievement of its NDC.
Both sets of accounts continue in good shape without a corresponding adjustment. Kenya measures its emissions and sinks and reports them under the Paris Agreement and the UK measures its emissions and sinks and reports them in a similar way. Although the voluntary declaration of carbon neutrality used a Kenyan sink in the UK, the UK inventory does not recognize this, as it is counted in the Kenya inventory. Rather, the UK should report product emissions to its NDC and take steps to mitigate it so that its NDC target is met.
It is important to note that the company that offers the carbon neutral product is not a country, as reported at the company level. The UK issue for the product provided by the company and the wear and tear of Kenya by the company’s investment are added by the company and reported on its footprint, which has nothing to do with the Paris accounting.
None of this is double counting, it is double counting.
However, if the UK had used Kenya’s sink and reported it to its inventory for the purposes of its NDC, then it would have to make a corresponding adjustment. But that doesn’t happen in the voluntary market.
Also, imagine what it would take if Kenya needed to commit to a corresponding adjustment for the use of its sink in the UK voluntary market. The company making use of the unit could ask the UK to accept the unit under Article 6 and for Kenya to implement the corresponding adjustment, but the UK may not necessarily wish to do so. So the company should ask Kenya to make the appropriate adjustment anyway.
Voluntary selling and the corresponding adjustment would require Kenya to find a further reduction somewhere in the economy to balance its NDC, which would create an economic cost beyond what they had budgeted for the delivery of the NDC. While the project itself would benefit from the sale of the voluntary unit, the economy is penalized, which would likely require the project developers to fund the difference. This in turn increases the cost of carbon units in the voluntary market and potentially decreases investment in projects. It also means handing over the voluntary market to governments, because they will rightly seek control of local developments that result in changes to their Paris Agreement accounts.
The solution is to recognize that the voluntary market and the Paris Agreement are two different ways of looking at the same set of activity emissions and sinks. The voluntary market provides a mechanism for individuals and businesses to invest in achieving NDC by purchasing carbon-neutral products and services. This is a positive development and should be encouraged, especially because some developing countries and most less developed economies, where many of these voluntary market projects are located, are asking for help to finance their CDNs. In addition, in the country where carbon-neutral products and services are provided, the process raises awareness of emissions mitigation. However, it will be crucial to understand with voluntary market participants that the activity in which they participate can help other countries achieve their NDC and not necessarily the country where they live. This can also help generate a broader appreciation for the role of carbon trading. But penalizing the voluntary market with requirements derived from a completely different accounting structure may not be useful and may have the perverse effect of curbing emissions reductions and stifling an expanding flow of climate finance to developing countries.
Finally, the voluntary market can be merged within a framework regulated by Article 6, but for now these are two very different approaches to emissions management. Neither has matured yet, so an early merger of the two may not be in the best interest of the global development of the carbon market.
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