Author: Melissa Lindsay, CEO and Founder of Emsurge & Emstream
Contributor: Dr. Alexandra Soezer, Director of the Climate Action Centre of Excellence
It’s been a great couple of days at the well curated Kenya Carbon Markets Forum, hosted by the Office of Kenya’s Special Envoy for Climate Change
My big takeaway was that there remains a huge amount of confusion around the need for a Corresponding Adjustment (CA), and the conditions under which a CA should be given.
- Projects outside a country’s NDC can be eligible for a CA if the associated GHG emissions are reported through the national inventory. The eligibility of such projects is typically confirmed through Article 6 regulations. If the country does not report these emissions, such a project would not qualify as Article 6 project, nor would it be double counted.
- Projects inside an unconditional NDC don’t qualify for a CA. They can be a contribution credit towards the Host country’s NDC.
- Projects in the conditional NDC, can request a CA but there is not an unlimited supply. Projects may be granted for all or a portion of their credits, a CA for use against an NDC, for Other International Mitigation Purposes (CORSIA) and/or for Voluntary Use.
An LoA (Letter of Authorisation) is only the first step towards receiving a CA. A country must follow the LoA with the submission of an Initial Report to the UNFCCC describing in detail the cooperative approach and how it ensures both environmental integrity and no net increase in global emissions within and between NDC implementation periods.
The UNFCCC Technical Expert Review (TER) will review and request clarifications where necessary and highlight any inconsistencies with the relevant Article rules in their report. The review process involves potentially several rounds of clarification requests before a final report is published by the TER.
In the TER report, expect to see inconsistencies with the reporting requirements as per the Article 6 rules. As an industry there has been little discourse on how a cooperative approach that is reported to be partially inconsistent with the rules will be regarded, and if it will have any impact on buyer appetite. The project must be reported in all Article 6 mandatory reports, including the Biennial Transparency Report – only then, the applicable credits will be considered to have a Corresponding Adjustment.
Kenya is carefully considering how best to use the issuance of CAs to benefit from multiplier effects and to deliver an equitable and accelerated transition to a low carbon economy – electrification being key to success. Kenya has taken what is considered by many a hardline on the number of CAs it can issue. Fixing supply of CAs (its ‘carbon budget’), using conservative estimates of how each sector will perform against its single year conditional NDC target of 32% in 2030 relative to a business as usual (BAU) scenario of 143 MtCO2eq. Kenya’s approach to limit the issuance of Letter of Authorisations reduces the risk of a country overselling CAs. However, it restricts the ability of Article 6 to assist countries in mobilising the necessary finance at the transformational scale anticipated
The TER team has a clear understanding that conditional NDCs—those contingent upon international support—are integral to a host country’s climate commitments. Consequently, GHG emissions reductions associated with these conditional targets cannot be simultaneously transferred internationally and counted towards the host country’s own NDC. This underscores the incompatibility of using carbon finance to achieve conditional NDC targets. To facilitate compliance with Article 6 reporting requirements and minimise inconsistencies, countries are encouraged to reassess and possibly revise the formulation of conditional elements in their upcoming NDC 3.0 submissions. We need to re-assess whether the CA raises global ambition and enables 2+ tonnes of carbon to be removed or reduced, that otherwise wouldn’t.
Problematically, in Kenya, in addition to supply, price has also already been fixed ($4.00/tCO2e + small administrative fees), potentially leaving a supply / demand imbalance that can’t be met through price adjustment. However, if we were to consider a scenario in Kenya where the price of the CA could move with supply/demand forces, you would expect to see a higher cost associated with the CA. The credits that are likely to pay the highest for a CA, would be those at the bottom of the cost curve for CORSIA eligible credits, or those that could then be used towards another governments NDC under a bilateral agreement. The revenues generated could then be channelled into decarbonising the hard to abate sectors – through credit purchases or direct investment. This would also result in those credits that do not need a CA, requesting a CA.
Bringing me onto a final point, that many voluntary carbon buyers are requesting a Letter of Authorisation, when they do not need a CA. The CA is not the only way to be assured you are raising overall global climate ambition. Voluntary Buyers can support projects outside the NDC or recognise that a country is unable to meet its conditional NDC without foreign investment and contribute to its conditional NDC without a CA. The only reason for voluntary buyers to request a CA, is if they want to get 2-4-1 (but you could just buy 2 ordinary credits to achieve that), or to push up the price of compliance for others.
To find a middle ground that protects voluntary buyers from investing in projects that would happen anyway, governments can confirm the credits will be contribution credits if part of an unconditional NDC.
To protect investors from moratoriums on the issuance of credits, governments can also look to provide projects with letters of no objection.
To help buyers/investors avoid procuring Article 6 credits that do not align with the Paris Agreement, and risk further industry integrity issues, Emsurge and CACE are launching an Article 6 Country Readiness Tracker. This is part of a suite of products to service the fledgling A6 market, including auctions and an A6 marketplace for investments, spot and term sales of vetted A6 credits.
Any opinions expressed in this commentary reflect the views of the authors and not of Carbon Pulse.
