Diverse Paris climate targets create accounting headache for carbon markets -report

Published 12:41 on February 17, 2016  /  Last updated at 12:48 on February 17, 2016  /  Climate Talks, International, New Market Mechanisms  /  No Comments

The diversity of the pledges made by countries to the UN climate summit in Paris creates accounting challenges for carbon trading and might require international oversight, according to a Wuppertal Institute report.

The diversity of the pledges made by countries to the UN climate summit in Paris creates accounting challenges for carbon trading and might require international oversight, according to a Wuppertal Institute report.

The Paris Agreement marked the first time nearly all countries took on national commitments to help battle climate change, goals known as Nationally Determined Contributions (NDCs).

But the pledges varied in nature: some were absolute GHG emission reductions, some were intensity-based (CO2 per unit of GDP), and some were not directly related to emissions, for example goals for renewable energy, energy efficiency and so on.

For the 100 or so nations that have expressed interest in making use of international carbon markets, which according to the Paris Agreement are to be based on Internationally Transferred Mitigation Outcomes (ITMOs), these variations increase the risk of double-counting unless sound accounting standards are developed, according to the Wuppertal report dated Jan. 2016.

“To maintain environmental integrity and increase ex-ante certainty, parties should be required to fully account for exported units generated from mitigation activities inside the scope of their contribution, while transfers of units generated outside the scope of the contributions must be reported and should be subject to international oversight,” the report said.

“Moreover, international oversight might be required for all types of unit transfers if additionality of underlying mitigation activities is not ensured by high ambition of parties’ contributions.”

The Paris Agreement explicitly calls on countries to apply “robust” accounting standards in relation to ITMOs, to ensure environmental integrity and prevent double-counting.


The study identified the most common types of NDC pledges and outlined options for what would be required for those countries to participate in an international emissions market:

– NDCs expressed as continuous multi-year GHG targets are fairly straightforward though “parties should, however, be required to fully account for net unit flows of units in order to reduce the risk of double claiming and increase ex-ante certainty”.

– Single-year targets are much more problematic, Wuppertal said, because a country’s emission levels in a specific year do not necessarily provide an adequate picture of its impact on the global climate. Buying an emissions unit from a country with a single-year target is especially problematic, according to the report, as there are no clear accounting rules for units transferred in a year not covered by the contribution. “A translation of the single-year target into a multi-year emissions path would represent the most practical solution to solve the issues associated with the use of units for meeting single-year-targets,” it said.

– Contributions expressed in terms of non-GHG targets, as well as multiple targets, are associated with the risk of double-counting, the report said, for example by helping meeting a GHG target in the buyer country and a renewables target in the seller country. The risk of double coverage could be addressed by limiting the export of units to credits outside the scope of the contribution. If units from within the scope of the contribution are also to be exported, all units transferred should be fully accounted for the different types of non-GHG contributions.

– Intensity-based targets could be converted to absolute targets by using GDP growth expectations, but any units sold would need to be ex-post adjusted, creating uncertainty that would make it less attractive for buyers. “In addition, in order to deal with the risk of over-allocation and subsequent overselling, additional safeguarding mechanism may be needed, further increasing transaction costs,” the report said.

By Stian Reklev – stian@carbon-pulse.com

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