Corresponding Adjustments not an Unsurmountable Obstacle - Interview with Hugh Salway
Originally published in Carbon Mechanisms, Vol 9 n°1 Spring 2021
Malin Ahlberg and Nicolas Kreibich talk to Hugh Salway of Gold Standard on the transition of the voluntary market, avoiding double claiming, and using credits with integrity.
Q. The focus of Gold Standard’s recent consultation is how to align with the Paris Agreement. The growth and development of the voluntary market has in the past few decades been largely independent to government frameworks. Why is it important for you to align with the Paris Agreement?
A. The Paris Agreement marks a major shift in the global context for climate action, as well as for the practice of carbon trading. In the past, climate targets were largely short-term and primarily in more industralised countries. Now, essentially all countries have NDCs, and there is a collective international commitment to bring global emissions into balance with carbon sinks in the second half of this century. The voluntary carbon market has to work in support of this global effort, rather than play by its own rules. For Gold Standard, we want to make sure that our projects work to complement to national ambition and action rather than risking displacing it. We want to ensure that our projects continue to represent best practice for carbon trading, aligning with – and where necessary going beyond – provisions agreed under Article 6. And as the lines blur between voluntary and compliance markets, we also want to ensure that our standard and our projects are able to serve not only the voluntary market, but also other forms of demand that are emerging. This represents a major opportunity, as market applications diversify and more and more align with Paris as their starting point.
Q. With regard to the transition of existing projects, you are proposing a new concept that requires projects to demonstrate their vulnerability: the demonstration of ongoing financial needs (OFN). How is this different from the already existing rule for pre-2016 projects to demonstrate “risk of discontinuation” and why are you proposing it?
A. The purpose of carbon finance it to support and make possible mitigation activities that would not have occurred in the absence of that revenue stream. This is a fundamental tenet of carbon markets. What we’ve seen is that some activities that required carbon finance when they first started have now become financially sustainable without this revenue, for instance because technology costs have fallen. This is a good thing. Our goal is to ensure carbon finance goes where it’s most catalytic in accelerating decarbonisation. Gold Standard already requires information on a project’s ongoing financial need at the time it renews its crediting period. But we have proposed making that a formal decision-making criterion in the crediting period renewal process, as a safeguard to ensure credits are only being issued to projects that continue to rely on the revenue from their sale. This serves the core purpose of the carbon market and avoids unfair competition of vulnerable projects with those that are independently financially viable. For projects from other certification systems, including the Clean Development Mechanism, that started operations prior to 2016, we already require demonstration that the project is at risk of discontinuation when they apply to transition to Gold Standard. This is a different assessment process but with the same broad purpose. One methodology to assess this risk has been developed by the New Climate Institute.
Q. In the context of carbon credits being used for voluntary carbon offsetting, you are clearly opposing any notion of double claiming. Could you explain why double claiming is an issue, when we are considering voluntary action by companies?
A. Gold Standard, like many others in civil society and beyond, have recognised for several years that there is a risk of double claiming between the voluntary market and national NDCs. In our recent consultation, we outlined our proposal for how to address this risk: introducing a requirement over time for ‘corresponding adjustments’ to be applied by host countries when a carbon credit is to be used towards a voluntary offsetting claim. When a company offsets its emissions, it is essentially making a claim that the atmosphere is no worse off as a result of its purchase of credits. It has emitted a tonne of CO2, but it has counteracted this by paying for a reduction or removal elsewhere. Take a scenario where a government has committed to reduce its emissions by 20% by 2030 from a 1990 baseline. That government allows voluntary market projects to take place and counts the reductions or removals that they generate towards its NDC, at the same time that they are sold as carbon credits. The emissions impact of the projects helps the government to meet its NDC. In some cases, it could mean that the government decides to take less action than it otherwise would have done, as it can meet its NDC without introducing or strengthening other policies or measures, perhaps elsewhere in their NDC. The NDC has been met in this case, which is good. But what matters here is the claim that the company buying the carbon credits is making. If they claim these as ‘offsets’, they are saying – as above – that the atmosphere is no worse off. When in fact, it is possible that voluntary projects in the country have displaced other action that would have otherwise been taken to meet the NDC, and that could have achieved the same emission impact. That is why we consider a corresponding adjustment, which removes the possibility of this type of double claim, to be necessary for offsetting: to ensure that voluntary action comes in addition to host country efforts and that we can be sure the intent behind the claim is achieved. There are of course other ways that the promise of offsetting can be undermined, such as weak additionality or a poorly defined baseline. Its important that these things are also addressed as an adjustment does not provide guarantees for these related issues.
Q. Could you outline how double claiming in the context of offsetting is different from double claiming in inventory reporting (when a company with a voluntary mitigation target is also contributing to the national inventory of the country in which it is based)?
A. When a company voluntarily reduces its emissions directly and this contributes towards the NDC of the company’s host country, there is truth to both claiming the reduction for their respective purposes. The distinction for offset claims, as described for the previous question, is that we cannot be sure that the intent behind the claim has truthfully been achieved if it can also be counted towards the host country’s NDC. This can be addressed by a corresponding adjustment, or by changing the nature of the claim as we talk about in our consultation. Claims aren't just semantics. They are necessary to maintain trust in the market. As a carbon market standard that issues credits, we take responsibility to ensure that buyers can purchase Gold Standard credits and make claims with integrity and confidence.
Q. You are proposing a staggered approach for corresponding adjustments. While all new projects based in developed countries will have to provide a confirmation for the future application of CAs, projects based in developing countries will only have to provide such a confirmation for credit vintages starting 2023 (Projects in LDCs, SIDS, LLDCs and conflict zones: 2025). Why have you chosen these dates and how do they align with domestic progress as well as processes under the UNFCCC?
A. As we’ve outlined, we consider corresponding adjustments to be necessary when carbon credits are used towards voluntary offsetting claims. We recognise though that it will take some time for many governments to build capacity and procedures to approve and apply these adjustments. We have therefore proposed a staggered introduction of this requirement based on countries’ development status – and in the case of LDCs, LLDCs, SIDS and conflict zones, an assessment of whether circumstances allow. This is clearly important to get right, and we are actively interested in stakeholders’ views and feedback on the most appropriate approach and criteria. We will of course also fully respect the wishes of host countries, if they require corresponding adjustments to be in place earlier than our timeline. Like others, we hope that UN negotiators are able to adopt Article 6 guidance at COP26 this November, and any further guidance required the following year. Our dates have been proposed with this timetable in mind, considering reasonable timeframes for national regulators to put in place or align domestic processes once decisions have been made at the international level. If Article 6 negotiations fail again this year, we may need to look again at our proposals. This is just one example of the importance of governments finding agreement this November, to reduce the uncertainty holding back market activity.
Q. Gold Standard has discussed a financing model that allows companies to invest in projects by purchasing “quality carbon credits” that are not backed by CAs. At first sight, there are commonalities with the approach by VERRA, which also proposes to introduce two different kind of ‘credits’, one backed by CAs and one without CAs. However, and in stark contrast to VERRAs proposal, you are suggesting that credits not backed by CAs cannot be used for offsetting claims, while VERRA opposed the idea to regulate buy- er’s claims. How do you ensure that companies do not use these ‘credits’ for carbon neutrality claims? And more broadly, how do you ensure that these two type of credits are not conflated? As ‘credit’ has in the past indicated ownership of emission reductions, would an alternative term (support units or statements) be better suited?
A: Abdicating responsibility for how the market uses Gold Standard credits is simply not something we’re prepared to do. Gold Standard will clearly differentiate in our registry between carbon credits for which a corresponding adjustment has been committed, and those without such a commitment and will publish associated claims guidelines. This will enable buyers to purchase and use credits appropriately for different purposes, whether that is in the voluntary market, CORSIA or domestic compliance regimes. All Gold Standard credits will at their core still meet the same rules and requirements and represent the same degree of integrity and quality. The distinction is purely whether or not they have an associated adjustment. We have taken this responsibility to ensure commitments to corresponding adjustments are in place where they are required, and that this is clearly indicated in our registry and in claims guidance. But it’s clear we cannot police the entire market, nor is it our role to do so. This shift also requires collaboration among other market participants, including buying entities and those who facilitate this. We expect others will take seriously the importance of credible claims, and – as always – that external scrutiny will be applied where credits are not being used with integrity.
Q. In the debate about avoiding double claiming within the VCM, many stakeholders have raised concerns about the risks associated to corresponding adjustments, including technical challenges but also related to corruption. Gold Standard is currently exploring different safeguards to address these concerns. Are you also exploring ways on how to deal with the risk that the host country might not achieve its NDC and the credits issued will therefore no longer be backed by robust accounting?
A. Absolutely, this is an issue that Gold Standard is considering carefully, as of course are other standards that will serve CORSIA. We are considering the different options to safeguard against such risk and will consult with stakeholders on proposed solutions. Taking a step back, it is understandable that concerns exist about corresponding adjustments. This is a new process for which there is no practical experience to point to. But it is by no means an unsurmountable obstacle: the larger voluntary standards have in the past few years worked together on the processes and guidance for corresponding adjustments in the context of CORSIA, much of which is directly applicable for other applications like voluntary offsetting. So, many of the solutions are there. What we need now is for host governments to put in place the necessary processes as soon as practicable. There is a huge opportunity for those who move first to do so, in particular where their participation in Article 6 is clearly aligned with plans to achieve their NDC, as well as with their long-term climate and development strategies. In some cases, there will no doubt be an important role for capacity- building to enable this to happen, and we hope programmes or activities come forward to support this. On our side, Gold Standard will do what we can to support the transition to this ‘new normal’, including through practitioners’ guidance for the transition of the voluntary carbon market that we will release later this year. This is being developed with support from the German Ministry of the Environment (BMU) and in partnership with atmosfair.