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Aligning the Voluntary Carbon Market with the Paris Agreement

 
This hub provides the most up-to-date information on what changes will, or are likely to, be needed to existing approaches within the voluntary carbon market in order to align with the Paris Agreement. It will be updated over time to reflect latest developments, lessons learned and new reading materials. 

Over the past fifteen years, the voluntary carbon market has evolved and grown alongside the market mechanisms established under the Kyoto Protocol, including the Clean Development Mechanism (CDM). From 2021, the voluntary carbon market is operating in the context of a new international climate framework, the Paris Agreement.

The Paris Agreement marks a major step change from the Kyoto period, with implications for market activity, including that of the voluntary carbon market. All countries now have national targets in the form of Nationally Determined Contributions (NDCs), which will become increasingly ambitious and broad in scope over time with a view to achieving a global balance of anthropogenic emissions sinks and sources in the second half of this century. The Paris Agreement also introduces a new framework for market-based cooperation across borders, under Article 6, including a new central crediting mechanism similar to the CDM.

 

OBJECTIVES OF THIS PRACTITIONERS’ GUIDE

The purpose of this guide is to introduce practitioners and other interested readers to the main changes that will, or are likely to, be needed to existing approaches within the voluntary carbon market in order to align with the Paris Agreement. Some of these will be applicable for all voluntary market standards and all project types. Others will be specific to a narrower set of stakeholders. This guide refers to steps that Gold Standard is taking to align with Paris and provides links to further materials.

 

WHY ALIGNMENT TO THE PARIS AGREEMENT IS IMPORTANT

For the voluntary carbon market to ensure the continued integrity of the credits generated, issued and used, it is essential that it aligns with the new framework and rules of the Paris Agreement. Core and long-held principles underpinning the quality of carbon credits, such as additionality, conservative baseline-setting and the avoidance of all forms of double counting, are all potentially affected in some way by the new model, meaning existing rules and approaches across the voluntary carbon market will need reviewing and, in many cases, adapting.

Alignment with the framework and rules of the Paris Agreement also serves a broader purpose. The ways in which carbon markets will be used will evolve over time, as we are already seeing with the introduction of the Carbon Offsetting Scheme for International Aviation (CORSIA). As governments introduce ever-more ambitious national targets, we expect to see a growth in the use of markets for compliance purposes and in parallel may see voluntary use of carbon credits decline over time. By aligning with the framework and rules of the Paris Agreement, the expertise, ingenuity and rigour of independent project development, standard-setting and market infrastructure can be applied to serve new compliance uses that are already emerging.

Finally, aligning with the framework and rules of the Paris Agreement mitigates the risk of inadvertently undermining or rendering inefficient government efforts, which could in turn cast doubt on the efficacy and appropriateness of voluntary efforts.

 

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THE PARIS CONTEXT

The Paris Agreement, adopted at COP21 in December 2015, establishes a new framework for international action to address and adapt to climate change. At its heart is a set of aims outlined in Article 2:

  • To hold the increase in the global average temperature to well below 2oC above pre-industrial levels and pursue efforts to limit the temperature increase to 1.5oC
  • To increase the ability to adapt to the adverse impacts of climate change, fostering climate resilience and low greenhouse gas development in a manner that does not threaten food production
  • To make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development

To achieve these aims, all countries are required to undertake ambitious efforts to achieve Nationally Determined Contributions (NDCs). Each country’s effort is expected to progress over time and reflect their highest possible ambition, while recognising that the responsibilities, capabilities, and circumstances of countries at different stages of development differs.

The voluntary carbon market as it exists today has emerged and evolved in a period defined by the Kyoto Protocol. This is evident in many parts of the market’s design. Many of the methodologies used in the voluntary carbon market have been adopted from the Clean Development Mechanism (CDM), and some standards – including Gold Standard – have used tools developed by the CDM, for instance to assess additionality and set baselines.

The Paris Agreement introduces four major shifts that have implications for the voluntary carbon market, and which it needs to align with to maintain integrity, reflect new norms and continue to drive additional, ambitious action:

NDCs in all countries:

Under the Paris Agreement, all signatory governments must set NDCs and introduce domestic measures to achieve them. For the voluntary carbon market, this means that these domestic policies and measures must be taken into account when assessing the additionality of activities and setting baselines. It also has implications for credits used towards offsetting claims, which by their nature imply that one tonne of CO2 emitted has been ‘offset’ by one tonne of CO2 reduced elsewhere. For a buyer to be confident in this claim, the emission reduction should not also be counted towards the NDC of the host country. Finally, the nature of NDCs is different to targets under the Kyoto Protocol: NDCs vary in design, and in most cases are not formulated as strict carbon budgets.
 

New market models:

Article 6 of the Paris Agreement introduces new models for market-based cooperation to support its goals. Under Article 6.4, a new UN crediting mechanism will be established, which will operate in a similar way to the CDM. Meanwhile, Article 6.2 enables countries to cooperate in the achievement of their NDCs, by transferring ‘mitigation outcomes’ from one country to another, and accounting for this through transparent reporting. It is likely that Article 6.2 will also allow countries to authorise and account for mitigation outcomes for purposes other than achieving NDCs, including voluntary use by private actors. These new models will establish new norms for market activity, as well as accounting rules and processes that the voluntary market will need to use to ensure the integrity of credits used towards offset claims.

Progression in ambition:

The Paris Agreement requires that as Parties set successive NDCs over time, each new NDC represents a progression and their highest possible ambition. This should mean that NDCs increase in scope, and that the policies introduced to achieve them become more expansive and ambitious. As a result, activities that are considered additional in the voluntary carbon market may become non-additional over time as new policies are introduced (or barriers, such as financial viability, are otherwise overcome), with the voluntary market moving to support ever-higher hanging fruit.

Promotion of sustainable development:

The preamble to the Paris Agreement highlights the intrinsic relationship between climate action and sustainable development. Article 6 itself recognises that market-based cooperation should promote sustainable development. While it is not new for projects in the voluntary market to be designed to achieve sustainable development benefits, the Paris Agreement places renewed emphasis on the importance of activities delivering holistic benefits for climate mitigation and achievement of the Sustainable Development Goals (SDGs).
 

The Paris Agreement marks a paradigm shift in international efforts to address and adapt to climate change. The voluntary carbon market needs to evolve to reflect this shift and respond to the new reality as described above. But this does not need to be overly disruptive, at a time when carbon finance is needed more than ever. Evolution for the Paris era can and should happen in a way that is targeted, efficient and enables a smooth transition for projects and market participants.

The Paris Agreement marks a paradigm shift in international efforts to address and adapt to climate change. The voluntary carbon market needs to evolve to reflect this shift and respond to the new reality as described above. But this does not need to be overly disruptive, at a time when carbon finance is needed more than ever. Evolution for the Paris era can and should happen in a way that is targeted, efficient and enables a smooth transition for projects and market participants.

At the same time, alignment with the Paris Agreement does not necessarily mean direct application of the rules and approaches developed under Article 6. For instance, some parts of the Article 6 rulebook, if it is agreed, will inevitably represent a compromise between different governments, and the voluntary carbon market may rightly wish to take a more ambitious, though still aligned, approach.

The chapters that follow in this guidebook identify the specific areas where market practices will or may need to evolve in the era of the Paris Agreement and give an indication of what alignment should look like, in order to maintain the integrity of the voluntary carbon market in the years ahead. Further chapters, for instance on a share of proceeds to fund adaptation, may be added in the future subject to the outcome of Article 6 negotiations and lessons learned through implementation.

The guidebook is primarily focused on how rules, requirements and processes within the voluntary carbon market may be affected by the Paris era. However preparing for the transition to the Paris era is about more than just rule changes. At a more fundamental level, it is about the role of voluntary finance in support of the goals of the Paris Agreement, and how it can most meaningfully drive climate action towards and beyond countries’ NDCs.

Additionality
Additionality

Additionality is a core provision for environmental integrity in carbon markets. The demonstration and assessment of additionality ensures that emission reductions generated by an activity would not be achieved in the absence of revenue from the sale of carbon credits.

Additionality ensures that carbon markets are contributing to additional climate mitigation rather than simply providing an additional revenue stream or reward for activities that would take place regardless. Buyers of carbon credits rely on additionality to know that their finance has catalysed real emission reductions. In effect it ensures that a real outcome has been achieved and is a core provision for compensatory claims to be true: an organisation cannot be said to have offset if the outcome used to offset was already happening or going to happen.

Additionality may also be used as a tool to drive a higher threshold of ambition, though this is a secondary function.

What has changed

Additionality remains indispensable for the voluntary carbon market under the Paris Agreement, including for emission reduction, avoidance and removal credits. Much of the experience generated in the assessment of additionality to date also remains relevant, for instance through the tools applied under the CDM and adopted by some standards, including Gold Standard, which have been refined over time.

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Reduced emissions

Anthropogenic CO2 emissions reduced as a result of specific interventions.

Examples include renewable energy or energy efficiency projects.

 

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Avoided emissions

Anthropogenic CO2 emissions that have not been emitted to the atmosphere as a result of interventions with lower or no greenhouse gas emission.

Examples include REDD projects.

 

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Removed emissions

Anthropogenic CO2 removed from the atmosphere and durably stored in geological, terrestrial, or ocean reservoirs as a result of interventions.

Examples include Afforestation or Reforestation projects.

 

The three basic types of emission impact

A major shift for assessing additionality in the Paris era is that all countries now have climate commitments in the form of NDCs and the requirement that governments introduce domestic measures to achieve their NDCs1. This places an additional importance on the demonstration of regulatory additionality: proving that activities are additional to, and not required or enabled by, policies and measures that the host government has introduced. This is also relevant for baseline-setting, as outlined in the following section.

It is expected that the new UN crediting mechanism established under Article 6.4 of the Paris Agreement will introduce new tools to assess additionality, building on those developed and applied under the CDM. Programmes serving the voluntary carbon market may either adopt these tools, as some including Gold Standard have done with the CDM, or re-assess and, if necessary, revise their own tools to ensure they remain appropriate in the Paris era. It should be noted that the additionality of emissions impacts achieved by activities has historically been one of the main subjects of criticism of carbon markets, including the CDM.

Additionality has also been discussed within the Taskforce on Scaling the Voluntary Carbon Market. In its Phase II report, it identified a need for activities to demonstrate both ‘regulatory additionality’ and ‘financial additionality’2 and summarised key debates around the application of the latter. It is envisioned that a governance body will be established to host and curate a set of ‘Core Carbon Principles’ and assess eligibility of programmes against these principles. If this is the case, decisions that the governance body makes about the application of financial additionality will have a bearing on how this is treated within the voluntary carbon market, in addition to any changes needed to align with the Paris Agreement.

Regulatory additionality

Demonstrating that the activity or project or its outcome wouldn’t occur without project certification due to legal or regulatory requirements.
 

Financial additionality

Ensuring the CO2eq avoidance / reduction / removal for which credits have been issued would not have taken place without revenue from credits.
 

Definitions of additionality as defined by the Taskforce on Scaling the Voluntary Carbon Market

What alignment looks like

Many of the principles and approaches already applied in the voluntary carbon market to demonstrate additionality of activities will remain relevant. As has happened in the past, these are likely to evolve and be improved upon over time.

For the purposes of aligning with the Paris Agreement, robust processes will need to be in place to ensure that activities demonstrate regulatory additionality, i.e., that they are additional to the effect of any policy in place or planned within the country. This concept is not new to the voluntary carbon market but is not always required and will not have been as relevant in many countries as it will be in the future with the introduction of NDCs and supporting domestic policies. Gold Standard is exploring how to incorporate this within its own approach to additionality.

Beyond the initial demonstration and assessment of additionality, it will also be important to ensure that projects continue to require income from the sale of carbon credits over their lifetime. Gold Standard already requires projects to provide information on their ongoing financial need at the renewal of their crediting period and will soon strengthen its approach so projects that no longer have a financial need for carbon revenue will not qualify for crediting period renewal. This will be designed in a way that accommodates different project types and financing models.

The importance of assessing ongoing financial need was also recognised in the Phase II Report of the Taskforce on Scaling the Voluntary Carbon Market and may be reflected in the design of the new central crediting mechanism under Article 6.4. Draft guidance published at COP25 states that the renewal of activities’ crediting period shall be approved following a technical assessment that will include any necessary updates to the additionality of the activity.

 
Further reading

 

 

1 Article 4.2 of the Paris Agreement: Each Party shall prepare, communicate and maintain successive nationally determined contributions that it intends to achieve. Parties shall pursue domestic mitigation measures, with the aim of achieving the objectives of such contributions.

2 In the TSVCM Phase II report, regulatory additionality is defined as “demonstrating that the activity or project or its outcome wouldn’t occur without project certification due to legal or regulatory requirements” and financial additionality is defined as “ensuring the CO2eq avoidance/reduction/removal for which credits have been issued would not have taken place without revenue from credits.”

Baseline setting
BASELINE SETTING

If a baseline is ‘inflated’, carbon credits will be issued for emission reductions that would have taken place anyway. Setting baselines accurately or conservatively is challenging but is essential to environmental integrity.

What has changed

Programmes already have processes and tools in place that seek to ensure activity baselines are rigorously developed and conservative. The transition to the Paris era is nonetheless likely to have implications for how this is done in the future, for reasons outlined below.

First, in a context where all countries have NDCs and are required to implement domestic measures to achieve these, it will be essential that baselines take into account host country policies, and that the emissions impact of these policies is not credited. This has not always been required in carbon market activity: a CDM policy on the treatment of national and/or sectoral policies and regulations has allowed project developers to disregard policies implemented after 2001 (known as ‘Type E-‘ policies).

Second, as countries are expected to update or submit new NDCs every five years under the Paris Agreement’s cycle, it will be necessary to review and update baselines on a regular basis. For most project types this should take place at least every five years, though for some in the land use and forestry sector this may not be appropriate. For some activity types, baselines may become dynamic, meaning that they are updated frequently through the activity’s monitoring period to reflect changed circumstances, such as grid emission factors, and enable more accurate crediting.

Finally, it is possible that the new crediting mechanism under Article 6.4 of the Paris Agreement may adopt new principles for baseline-setting that can inform approaches in the voluntary carbon market. The approach to baselines remains a dividing line between Parties in Article 6 negotiations, but the options under discussion at COP25 in Madrid, included:

  • An approach taking into account best available technologies that represent an economically feasible and environmentally sound course of action
  • A performance-based approach, basing the baseline on the emissions of activities providing similar outputs or services in similar circumstances
  • A benchmark-based approach, basing the baseline on an ambitious benchmark for the activity.

In a context where countries are expected to take ambitious action to reduce emissions, it is clear that baselines cannot be based on a business-as-usual scenario but instead must be set below this. It is also now in the interest of the host country to set baselines below business-as-usual, when applying a corresponding adjustment for credits used in the voluntary carbon market. This is as all emission reductions for which a corresponding adjustment is applied cannot be counted towards their own NDC.

 
What alignment looks like

Some of the principles that are required to ensure alignment with the Paris Agreement are already reflected in approaches within the voluntary carbon market. Baselines will need to take into account host country policies and measures at the time they are set. They will need to be updated regularly, at least every five years in most cases, to ensure they remain conservative and that any new policies are reflected. They should also be set below business-as-usual, following an approach that ensures this.

Gold Standard has confirmed, following its February 2021 consultation, that it will ensure its baseline-setting requirements reflect this approach.

It is also possible that host countries will have the right to develop standardised and/or regional baselines for their particular jurisdictional context, as part of the rules underpinning the new crediting mechanism under Article 6.4. If this is the case, it may have implications for approaches to baseline-setting for projects in those countries registered under independent standards.

Like for additionality, the new governance body established by the Taskforce on Scaling the Voluntary Carbon Market may introduced additional requirements, related to the duration of crediting period to ensure frequent baseline evaluations or independent assessment and audit of project baselines.

 
Further reading
METHODOLOGICAL PRINCIPLES
METHODOLOGICAL PRINCIPLES

Methodological principles in carbon markets can be categorised into three groups: (i) those related to carbon accounting such as transparency, accuracy, and conservativeness, (ii) those related to monitoring arrangements such as direct and indirect measurements of monitoring parameters and the treatment of non-monitored (or fixed) parameters, and (iii) those related to the other aspects, such as land eligibility in the case of Afforestation and Reforestation projects.

Most methodologies in current carbon market schemes draw their approach of accounting greenhouse gases (GHG) from the IPCC Guidelines for National GHG Inventories. These Guidelines were most recently refined in 2019. The main programmes serving the voluntary carbon market, including Gold Standard, recognise CDM methodologies as an acceptable standard and have also developed additional scheme specific methodologies. In addition, voluntary carbon market schemes can stipulate other (additional) criterion to be fulfilled, for example, Gold Standard sets additional applicability conditions for recognised CDM methodologies, or limitations as per eligible scopes and requirements.

Approaches such as the conversion of GHGs to a common metric using Global Warming Potentials are universally accepted. However, methodologies for parameters other than emission mitigation, such as sustainable development impacts, have not yet been standardised for universal acceptance. The CDM has a voluntary tool for sustainable development, but it is not enforced.

 
What has changed

The modalities regarding methodological principles under Article 6 are under negotiation. Where a mitigation outcome is measured and transferred in tCO2 eq (i.e. a greenhouse gas metric), the proposal under discussion provides for the measurement of mitigation outcomes in accordance with the methodologies and metrics assessed by the IPCC.

Where a mitigation outcome is measured and transferred in a non-greenhouse gas metric determined by the participating Parties, it is proposed that the information will be reported as required by relevant future decisions of the Conference of Parties serving as Meeting of the Parties to the Paris Agreement (CMA).

Article 6.2

A rich repository has been created in terms of approved methodologies which may be used for transitioning to the Paris regime. Details on the use of non-GHG metrics (MWh, TJ, acres, hectares of land etc.) are awaited. Draft negotiating text on Article 6.2 proposes an annual information report to be submitted by Parties which includes providing an annual emissions balance for tCO2 eq metrics. The draft negotiating text on Article 6.2 proposes that ITMOs must be “Real, verified, and additional”. For comparison, the CDM’s requirements were “Real, measurable, long-term and additional”.

Article 6.4

The most recent draft negotiating text for the new crediting mechanism under Article 6.4 stipulates that each mechanism methodology shall require the selection of a transparent and conservative approach, assumptions, parameters, data sources and key factors and should take into account, as appropriate: uncertainty; any leakage; relevant policy; consistency with the NDC of the host Party, any contribution to reducing emission levels in the host Party, any long-term low GHG emission development strategy of the host Party and the long-term goal of the Paris Agreement; and should encourage an increase in ambition over time. CDM activities eligible for transitioning would continue to apply their current approved CDM methodology until the end of its current crediting period or 31 December 2023, whichever comes earlier, following which, they shall apply an approved methodology.

 
What alignment looks like

While the broad approach remains IPCC compliant, it is yet to be seen how the upcoming modalities will treat units generated under Article 6. This is because the units may not exclusively be emission reductions measured in terms of carbon dioxide equivalent. The units could instead be specific to certain NDC types, and their convertibility to carbon dioxide equivalent is not yet fully understood. Parts of the voluntary carbon market may in the future decide to manage units other than tCO2e. This would require development of standardized quantification methodologies that may be applied to different NDC types.

 

Further reading
AVOIDANCE OF DOUBLE COUNTING
AVOIDANCE OF DOUBLE COUNTING

The avoidance of double counting has been a long-standing principle of carbon market applications. It is essential to maintain the confidence of stakeholders in the reliability and integrity of carbon market activities and also integral to the impact that carbon markets have: if the same emission reduction is counted twice towards separate mitigation targets, for whatever reason, then the atmosphere sees less actual emission reductions than it otherwise would.

There are three main categories of double counting:

  • Double issuance, where more than one unit is issued for the same emission reduction or removal, for instance if a project is registered in more than one registry.
  • Double use, where the same issued unit is used twice, for example if a unit is used by the same buyer to make a claim against two separate calendar years, or if a broker retires a unit on behalf of two separate clients.
  • Double claiming, where the same emission reduction is counted by both the buyer and the seller, for instance if a host country transfers the right to an emission reduction to another country, but still counts the same emission reduction towards their own national target.
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Examples of double counting

 
What has changed

Programmes serving the voluntary carbon market have existing policies and rules in place to avoid double issuance, double use, and examples of double claiming that were possible in the Kyoto Protocol period, such as double claiming of the same emission reduction between a voluntary offset claimant and an Annex I government that had a compliance target under the Kyoto Protocol or the Doha Amendment.

It is expected that policies and rules to avoid double issuance and double use will remain valid in the Paris era, as will some existing provisions to avoid double claiming where the particular risk still exists, for instance double claiming with domestic cap-and-trade systems.

However, with the implementation of the Paris Agreement, it is now important that programmes and other actors consider and address the risk of double claiming between a buyer seeking to make a compensatory claim through the use of a carbon credit, and the government that hosted the associated project within its jurisdiction, when it tracks progress towards its NDC.

The NDC is a new concept under the Paris Agreement; under the Kyoto Protocol, developing countries did not have emissions reductions or limitations targets and so the risk of such double claiming with national targets was not relevant for many carbon market activities.

It will also be increasingly necessary to mitigate the risk of double counting between corporate inventory reporting and offset claims, either by the same or multiple companies. For example, a company improving the emissions profile of its suppliers could not also offset the residual emissions with the same outcome. It is expected that the pre-eminent inventory accounting protocol, the Greenhouse Gas Protocol, will make this a requirement.

 

Rationale

When a buyer uses carbon credits to make a compensatory claim, such as ‘my organisation’s emissions have been offset’ or ‘my product is carbon neutral’, they are implying that the emissions that they have generated have been counteracted by an equivalent volume of emission reductions or removals achieved elsewhere, represented by the carbon credits. A compensatory claim is essentially intended to imply that the atmosphere is no worse off due to the act of compensating.

For this claim to be true, it is important that certain core principles are met. The emission reductions or removals underpinning the carbon credit must, for instance, be real, verified and additional, and it must be ensured that leakage and impermanence risks have been addressed. Additionality requirements are in place to ensure that a specific emission reduction or removal would not otherwise have happened. Leakage requirements are in place to ensure that by avoiding emissions in one place, a project is not simply prompting emitting activities to take place outside of the activity boundary.

The avoidance of double claiming with a host country’s NDC follows a similar principle: it is needed to address the prospect that a host country could defer or delay mitigation activity that it would have undertaken to achieve its NDC, as the emission reductions and removals achieved by voluntary carbon market activities have had the same effect. If this is the case, it would not be true to claim that the atmosphere is no worse off due to the act of compensating, as the same level of mitigation would have otherwise occurred.

The fact that voluntary carbon market activity is generating emission reductions or removals in a country that has an NDC is not in itself bad, and on the contrary, is much needed considering the significant finance and emissions gap. However, if a voluntary compensatory claim made by an organisation is to be true, the emission reductions (as carbon credits) used to make that claim should not also be counted towards the NDC of the host country.

This requirement, that credits used towards a compensatory claim are not also counted towards the NDC of the host country, can be enacted through a ‘corresponding adjustment’. This is a tool being developed through negotiations on Article 6 of the Paris Agreement, by which a country can adjust their emissions balance to reflect the transfer of emission reductions for use by other entities, when they report on the implementation and achievement of their NDC.

Double counting in practice - Source: ERCST - European Roundtable on Climate Change and Sustainable Transition

Under the most recent draft version of Article 6.2 guidance, published by the Chilean COP Presidency at COP25 in 2019, such an adjustment can be made when mitigation outcomes are authorised for use by another country towards its NDC, or for “international mitigation purposes other than achievement of its NDC or for other purposes”. This implies that adjustments can be made for emission reductions used in the voluntary carbon market, where this is authorised by the host country.

 

Implications

Historically, credits bought and used in the voluntary carbon market have typically been used for compensatory claims, to offset emissions and often towards claims of ‘carbon neutrality’. In the Paris era, there may be two broad categories of use of carbon credits in the voluntary carbon market:

  •  Compensatory claims: It is expected that some users will continue to retire carbon credits towards compensatory, or offsetting, claims. To ensure the integrity and truth of such claims, they should only be made when retiring credits that will not also be claimed by the host country. This can be ensured through a corresponding adjustment by the host country.
  • Non-compensatory, or impact, claims: It is expected that some users may adopt different claims when retiring carbon credits, which do not imply that emissions have been offset. Companies with long-term net zero targets may, for instance, wish to support projects that reduce emissions outside of their value chain along their journey to net zero, but not use the credits from these projects to ‘offset’ their own emissions or claim ‘carbon neutrality’. Where this is the case, a host country can count the emission reductions or removals towards its NDC without a risk of double claiming and a need to make a corresponding adjustment.

Both uses of carbon credits can be valid as part of responsible climate strategies, provided claims are made accurately to reflect the attribute of the credits used.

 
What alignment looks like

 

Programmes

To avoid double claiming with NDCs, programmes will need to implement new procedures to manage credits authorised for use under Article 6 by the project’s host country, and for which the country will apply a corresponding adjustment. While there is a difference in view between programmes on the need for this procedure for the voluntary carbon market, all programmes deemed eligible for CORSIA are expected to introduce such procedures to manage units representing post-2020 vintages that will be used for compliance with CORSIA.

Gold Standard is taking the following steps:

  • Introducing new requirements for credits authorised by their host country for use as Internationally Transferred Mitigation Outcomes (ITMOs) under Article 6 of the Paris Agreement, meaning that the host country will apply a corresponding adjustment to avoid double claiming with its NDC. Not all projects will need to follow these requirements but only those that have done so will be eligible/recognised for use cases that require a unique claim, including compensatory claims by voluntary actors.
  • Modifying our registry to enable the identification of credits which the host country has authorised for use under Article 6 and for which it has applied a corresponding adjustment, and to track the purpose for which an adjusted credit was used in order to enable host country reporting to the UNFCCC.
  • Establishing procedures to coordinate with host governments, to enable the tracking and reporting of authorisations, retirements and adjustments.
  • Providing clarity on the claims that can be made with respect to carbon credits depending on whether the user has a unique claim or not, through our Claims Guidelines.
  • Working with actors across the market, civil society, government, and business to build understanding of non-compensatory claims.

 

Host countries

To enable Article 6 authorisations and the application of corresponding adjustments, host country governments will need to play a more hands-on role for voluntary market activity moving forward.

The steps that governments will need to take for the voluntary carbon market are broadly the same as for other uses of emission reductions that they may agree to make corresponding adjustments for, such as use by other governments towards their NDC or use by aeroplane operators under CORSIA. Over 80% of countries have stated that they intend to, or may, use international market mechanisms under Article 6 of the Paris Agreement, so there are positive signs that many governments will put in place the necessary policies and procedures in the near future.

Host countries are encouraged to:

  • Set clearly defined NDCs and track and report on the implementation and achievement of their NDCs in line with UNFCCC Decisions. This includes making adjustments to their emissions balance in line with UNFCCC Decisions to reflect emission reductions authorised for use by other entities.
  • Establish transparent procedures for project developers or other entities to request a letter of assurance and authorisation committing to make a corresponding adjustment for emission reductions achieved by a project, and make information on these procedures publicly available.
  • Authorise a designated body or department to provide letters of assurance and authorisation and manage engagement with project developers, to enable continuity and give confidence on the validity of such letters.
  • Work collaboratively with independent crediting programmes with an open exchange of information, to ensure accurate tracking of authorisations, adjustments and retirements and to enable accurate reporting and the avoidance of double counting.
  • Where desired, host countries may want to produce public information to guide investments by project developers, such as the overall volume of emission reductions that the country may be willing to adjust for each year, the criteria by which applications will be assessed and any preferences for project activities, such as specific sectors or development benefits.

 

Buyers

It is highly difficult to monitor and ‘police’ the integrity of the claims made by users of carbon credits, and it is also not clear whose role it might be to do so. This is particularly the case given the plurality of different claims, many of which are not well-understood by investors, consumers or the general public.

Buyers are therefore encouraged:

  • To understand the potential for double counting to undermine the credibility of their use of carbon credits and to mislead their stakeholders.
  • To conduct due diligence on the credits that they buy and ensure that they buy credits that are appropriate for the type of claim that they wish to make.
  • To make claims that are true and which are supported by enough public information and evidence for stakeholders to understand and verify them. In turn, other actors, including civil society and retailers of carbon credits, are encouraged to support buyers seeking to make responsible claims.

 

 
Further reading

 

TRANSITION OF PRE-2020 PROJECTS
TRANSITION OF PRE-2020 PROJECTS

Many projects originated prior to 2021 remain operational and wish to continue to generate emission reductions and enable sustainable development benefits in the Paris Agreement’s implementation period. The transition of pre-2021 projects registered under the CDM (and the credits issued to these projects) is one of the issues under discussion within Article 6 negotiations. But the question of how to ensure a smooth, stable transition for high-quality projects is also important for the voluntary carbon market.

 
What has changed

One of the issues under discussion within Article 6 negotiations is the transition of existing projects registered under the CDM. According to an Annual Report by the CDM’s Executive Board published in April 2021, over 8,100 activities are registered with the CDM, over 3,300 of which have been issued Certified Emission Reductions (CERs).

The postponement of COP26, on the back of the deferral of a decision on Article 6 guidance at both COP24 and COP25, meant that the second commitment period of the Kyoto Protocol came to an end in December 2020 with no consensus on the future of CDM projects, and whether they can continue to be issued CERs by the CDM’s Executive Board. The CDM Executive Board has introduced interim steps to manage this uncertainty until governments provide guidance.

In light of this uncertainty, a number of projects registered under the CDM are already seeking, or are expected to seek, to transition from the CDM to independent standards. In doing so, they may be able to operate with greater certainty and continue to deliver benefits on the ground.

 
What alignment looks like

Gold Standard has established a process and tools to enable a smoother transition of eligible projects from the CDM. The purpose of this is to reduce barriers and costs for high-impact projects, to enable them to continue to deliver results for the climate and sustainable development. 

Gold Standard has also introduced a requirement that projects from the CDM or other crediting programmes that started their first crediting period prior to 2016 must demonstrate risk of discontinuation prior to being able to transition. The market for credits issued under the CDM in recent years has been characterised by an over-supply, low demand and low prices. The purpose of this requirement – similar to the demonstration of ongoing financial need explained under Additionality - is to ensure Gold Standard is not enabling the transition of projects that were able to operate effectively for a sustained period without revenue from the sale of carbon credits.

More generally, all projects, at the time of renewal of their crediting period, should as a matter of course adopt the latest version of the relevant methodology, review and update their baseline, and provide satisfactory information on ongoing financial need. In this way, there can be assurance that projects that continue to operate remain reliant on carbon revenue, have a baseline that reflects host country policy and developments and apply a methodology that reflects latest best practice.

 
Further reading
SUSTAINABLE DEVELOPMENT
SUSTAINABLE DEVELOPMENT

The promotion of sustainable development is central to the design of high-impact projects, alongside the reduction of emissions. By fostering contributions to the Sustainable Development Goals into project design, project developers can achieve greater social impact, such as improving health, expanding employment, or conserving the natural environment. In many cases, projects with a high development impact can draw a higher price for credits and ensure the long-term sustainability of activities beyond the end of the project’s lifecycle.

 
What has changed

Sustainable development is not new to the voluntary carbon market. However, the Paris Agreement marks a step-change in how sustainable development is treated within market mechanisms at the international level. The preamble to the Paris Agreement recognises the “intrinsic relationship that climate change actions, responses and impacts have with equitable access to sustainable development and eradication of poverty”.

This intrinsic relationship is recognised in Article 6 itself. Articles 6.1 and 6.2 state that voluntary cooperation should “promote sustainable development”, while one of the aims of the new crediting mechanism under Article 6.4 is to “promote the mitigation of greenhouse gas emissions while fostering sustainable development”. It is not yet clear how this will be translated into more detailed Article 6 guidance, but it is likely that governments will be required to report on how market-based cooperation aligns with the sustainable development objectives of the host Party.

Whether or not host governments agree to apply corresponding adjustments for credits used in the voluntary carbon market, it is expected that governments will in many cases play closer attention to, and be more involved in, the projects within their jurisdiction. This may mean that governments show more interest in how projects are supporting their national development objectives. In some cases, they may direct investment towards activities with higher development impacts and may want to track the quantifiable development benefits of projects.

 
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Simplified illustration of sustainable development benefits of Article 6 cooperation

 
What alignment looks like

In many cases, sustainable development is already built into the requirements of programmes and the design of projects. Gold Standard, for instance, already requires projects to contribute positively to at least three Sustainable Development Goals, including SDG 13 – Climate Action. Where this is the case, it is not expected that programmes will need to update their requirements for the purpose of aligning with the Paris Agreement.

Within these requirements, it is possible that the new context under the Paris Agreement will mean some change for project developers. Projects, especially those seeking commitments from their host government to apply a corresponding adjustment, may need to ensure that the development benefits of their projects are aligned with the government’s national development objectives.

There is also an opportunity to monitor the sustainable development impacts of projects more closely and effectively. Among other benefits, this can provide valuable information for governments and other stakeholders tracking and reporting on progress towards national development goals. Gold Standard piloted a new SDG Impact Tool in early 2021, which will be made available for use by all projects.

 
Further reading
GLOBAL WARMING POTENTIALS
GLOBAL WARMING POTENTIALS

Global warming potentials (GWPs) enable comparisons of the global warming impacts of different greenhouse gases, measured relative to the emissions of one tonne of carbon dioxide (CO2). Global warming potentials provide a common unit of measure. For carbon markets, they are important for assessing the emissions impact of activities and ensuring accurate issuance of carbon credits. There is also the potential for market distortion and risks to environmental integrity if GWPs are not applied consistently across programmes, for instance if project developers choose to work with programmes whose GWP requirements will give them a higher issuance of carbon credits for the same reduction.

 

What has changed

Governments agreed at COP24 that each Party shall use the 100-year time-horizon GWP values from the 5th Assessment Report by the Intergovernmental Panel on Climate Change (IPCC), or GWP values from a subsequent IPCC Assessment Report if agreed within the UNFCCC, when compiling and submitting their national inventory reports. This decision is only mandatory for governments’ second and subsequent NDCs, so governments may use different GWP values to report on progress toward their first NDC.

It is expected that activities under the new crediting mechanism established by Article 6.4 will be required to follow the same approach for GWPs, once it is set up. In the meantime, the CDM Executive Board decided in December 2020 – as a temporary measure pending guidance on the future of the CDM – that projects must apply as global warming potential values the lowest value from IPCC Assessment Reports for each greenhouse gas for a 100-year time horizon.

 
What alignment looks like

By requiring use of GWPs from the most recent IPCC Assessment Reports, programmes can ensure consistency across the voluntary carbon market and that the impact of activities is assessed and calculated on the basis of the most recent science. In 2021, Gold Standard introduced a rule update requiring project activities and programmes of activities to apply GWPs from the IPCC’s fifth Assessment Report from 01 January 2021.

The consistent use of GWPs is also relevant where host governments are applying corresponding adjustments for credits used towards voluntary compensation/ offsetting claims, as described in the chapter on Double Claiming. If a host government were to use different GWPs to account for their NDC to those that carbon credits are based upon, then the host government may need to make a corresponding adjustment for a higher or lower number of mitigation outcomes than the number of credits issued and used by another entity. Managing this would require coordination between the host government and the programme.

 
Further reading
OVERALL MITIGATION IN GLOBAL EMISSIONS
OVERALL MITIGATION IN GLOBAL EMISSIONS

While the concept of ‘overall mitigation in global emissions’ (sometimes referred to as ‘OMGE’) means different things to different actors, it is understood by its primary advocates to mean the use of carbon market mechanisms going beyond a ‘zero-sum game’. In other words, if one entity transfers the right to emission reductions to another entity, a portion of these emission reductions should not be available for use by either the buyer or the seller but should instead be ‘cancelled’ or otherwise withdrawn. The impact of these emission reductions would represent a contribution to overall mitigation in global emissions, in addition to emission reductions needed to meet the targets of the buyer and seller entities.

 

What has changed

The Paris Agreement states that the new crediting mechanism established by Article 6.4 shall aim “to deliver an overall mitigation in global emissions”. This concept was not reflected under the Kyoto Protocol, and its implementation under Article 6 has been part of the negotiations since COP21.

Some Parties have argued that an overall mitigation in global emissions can be achieved through the setting of conservative baselines, though in practice this would lead to more reductions remaining with the host country rather than a higher overall mitigation impact. The latest draft version of Article 6.4 guidance, published at COP25, instead proposed that an overall mitigation in global emissions could be achieved through the mandatory cancellation of a percentage of credits (no less than 2%) issued to each project registered under the Article 6.4 mechanism. The latest version of Article 6.2 guidance included a strong encouragement for ‘Parties and stakeholders’ to cancel ITMOs at a level that is ‘commensurate’ with that delivered under the Article 6.4 mechanism.

The operationalisation of overall mitigation in global emissions is still under negotiation. However, it appears clear that the concept will be reflected in the design of Article 6; it appears likely that it will be enacted through a cancellation of a portion of issued and/or transferred emission reductions; and it appears likely that the concept will be reflected in decisions on both Article 6.2 and Article 6.4, though it may only be mandatory for the second of these.

 
What alignment looks like

As described above, it is still unclear how the concept of overall mitigation in global emissions will be reflected in guidance for Article 6.2 and the design of the Article 6.4 mechanism. If overall mitigation in global emissions is part of the guidance underpinning Article 6.2, then this will need to be taken into account for credits for which corresponding adjustments will be, or have been, applied.

Regardless of the outcome in Article 6, the principle of moving the use of carbon markets beyond a zero-sum game is one that could have a place in the voluntary carbon market.

To date, use of the voluntary carbon market has tended to be to enable claims such as ‘carbon neutrality’, through which an organisation buys an amount of carbon credits that equals their unabated emissions. Given the pace of global warming and the urgency of ambitious action, there is real merit in organisations investing through the voluntary carbon market at a scale that goes beyond their carbon footprint, contributing to global climate action beyond their direct responsibility.

There is nothing preventing organisations from buying a higher volume of carbon credits than required to cover their carbon footprint, and some already do so. But there is not always a clear way to recognise this as a contribution to achieving an ‘overall mitigation in global emissions’.

Gold Standard will consider the outcome of Article 6 negotiations at COP26 before deciding how to incorporate the principle of overall mitigation in global emissions. This could be through the introduction of a new option in its Impact Registry, through which account holders would be able to choose to cancel a portion of their credits when they make a retirement for the explicit purpose of contributing to an ‘overall mitigation in global emissions’. These would, as a result, not be available for use by the buyer and will also not be available for use by any other entity including the transferor. In cases where a host government has agreed to apply corresponding adjustments for credits, an adjustment would need to be applied for both credits used by the buyer and those cancelled to achieve an ‘overall mitigation in global emissions’. This functionality would reflect the outcome of Article 6 negotiations, for instance if Parties agree that a specific percentage of mitigation outcomes should be cancelled for any transfers under Article 6.2.

 
Further reading
REGISTRY OPERATIONS
REGISTRY OPERATIONS

The registry sits at the heart of all carbon crediting programmes. It is the ‘source of truth’ and ensures transparency by providing access to project information as well as credit ownership, including credit issuances, transactions and retirements.

 
What has changed

There are a number of external factors that will affect the operation of registries over the years ahead. For instance, there is interest in closer connections between registries and other platforms, such as carbon credit exchanges, through API’s (Application Programming Interfaces). There is interest in the use of new technologies such as distributed ledger technologies to underpin registries and communication between different registries. And there is interest in what attributes are shown for credits within registries, with the Taskforce on Scaling the Voluntary Carbon Market proposing a ‘taxonomy’ of additional attributes for carbon credits, including whether they are removals or avoidance-based, their ‘Environmental, Social and Governance’ (ESG) benefits and whether they have a corresponding adjustment attached to them.

The Paris Agreement will require an evolution in the operation of registries serving the carbon market. The latest draft Article 6 decisions published at COP25 provide an indication of the registry infrastructure that will be required by Parties using Article 6.

The new Article 6.4 crediting mechanism will have a registry akin to that in place for the Clean Development Mechanism.

Meanwhile Parties using Article 6.2 - those hosting activities and transferring mitigation outcomes as well as those using mitigation outcomes towards their NDC - are likely to be required to have, or have access to, a registry for the purpose of tracking mitigation outcomes, which must have the functionality to track authorisations, transfers, acquisitions, cancellations and use of mitigation outcomes. Parties will need to report information regularly to the UNFCCC, which will be compiled in an ‘Article 6 database’ as part of a ‘Centralized accounting and reporting platform’.

This infrastructure is relevant for the voluntary carbon market in cases where host countries have agreed to apply corresponding adjustments for credits used for voluntary purposes. In these cases, the host country will need to track the authorisations they have granted, as well as the issuance, transfer and use of these credits. This will require new reporting and exchanges of information by programmes on the status of credits and, as described below, could be made more efficient through greater interconnection between registries.

 
What alignment looks like

To support new applications and requirements under the Paris Agreement, registries will need to be able to manage carbon credits which the host country has authorized for use as ITMOs under Article 6 and will therefore apply a corresponding adjustment. This will, for instance, require functionality to:

  • Indicate that a host country has authorized a batch of credits for use under Article 6, and then once a corresponding adjustment has been applied;
  • Ensure that credits are retired correctly, so that only credits authorized for use as ITMOs, and for which corresponding adjustments will be applied, can be used for purposes that require this.
  • Ensure that information on credits authorized for use under Article 6 is thoroughly recorded, to enable accurate reporting by governments in accordance with UNFCCC decisions.

Over time, there will also be benefits to introducing automated connectivity between the registry of programmes and those of national governments. Rather than relying on an exchange of information via manual reports, it will be more streamlined and secure for information to flow automatically between registries. This would mean that host countries are able to know automatically each time that credits for which they have agreed to apply a corresponding adjustment have been issued, transferred and retired (and for which purpose), and will be able to track this in their registry and make adjustments accordingly.

One initiative underway to streamline this process is the Climate Warehouse, a project led by the World Bank which includes the design of new infrastructure to improve interconnection between registries and enable better tracking and recording of the transfer and use of mitigation outcomes. Gold Standard, as well as other programmes, are currently involved in the development and piloting of the Warehouse.

 

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Climate Warehouse ecosystem

As described in the chapter on ‘Overall Mitigation in Global Emissions’, registries may also need functionality to allow account holders to cancel credits to contribute to an overall mitigation in global emissions.

 
Further reading
KEY UNFCCC DOCUMENTS
KEY UNFCCC DOCUMENTS

The information below provides links for the most relevant documents and decisions produced within the UNFCCC, most of which were referred to in the above chapters.
 

- Paris Agreement (2015)

  • Includes Article 6 of the Paris Agreement (page 7)

 

- Decision 1/CP.21 (2015)

  • Includes instructions for further work to develop underpinning guidance, rules, modalities and procedures for Article 6, including guidance to ensure double counting is avoided on the basis of a corresponding adjustment (pages 6-7)

 

- Decision 18/CMA.1 – Modalities, procedures and guidelines for the transparency framework for action and support referred to in Article 13 of the Paris Agreement (2018)

  • Includes, in paragraph 77(d), requirements for Parties to make adjustments to their emissions balance to reflect the transfer and use of mitigation outcomes under Article 6, as part of the structured summary they prepare to track progress on the implementation and achievement of their NDC (page 30)

 

- Decision related to Article 6 of the Paris Agreement (2019)

  • Notes that Parties could not reach consensus on decisions related to Articles 6.2, 6.4 and 6.8, and asks Parties to continue negotiations on the basis of three draft versions of decisions for each of these Articles. The relevant draft versions for Articles 6.2 and 6.4 are listed below.

 

- DRAFT negotiating texts – Article 6.2 guidance

 

- DRAFT negotiating texts – Article 6.4 rules, modalities and procedures

 

- CDM Executive Board 108th Meeting – meeting report (2020)

Includes temporary measures for the functioning of the CDM pending future guidance from Parties.

REFLECTION OF THE VOLUNTARY CARBON MARKET IN LATEST DRAFT ARTICLE 6.2 GUIDANCE
REFLECTION OF THE VOLUNTARY CARBON MARKET

Article 6.2 guidance is sometimes described and perceived as a route for bilateral cooperation between governments, while the new crediting mechanism under Article 6.4 provides a more centralised system that enables greater private sector involvement.

In practice, Article 6.2 is primarily guidance for the accounting of transfers of ‘mitigation outcomes’, setting out how ‘corresponding adjustments’ should be made, and how information should be recorded and reported to ensure the avoidance of double counting, as well as the delivery of environmental integrity and the promotion of sustainable development. This accounting guidance is expected to be applicable beyond only bilateral cooperation.

According to the latest draft version of Article 6.2 guidance, published at COP25 in December 2018, such corresponding adjustments are not reserved exclusively for transfers between two governments. They may also be made by host countries when that host country authorises their use for ‘international mitigation purposes other than achievement of its NDC or for other purposes, including as determined by the first transferring participating Party’. The term ‘other purposes’, as defined here, can include use within the voluntary carbon market.

All direct references in the latest draft version of Article 6.2 guidance that are relevant to the voluntary carbon market are provided below. It should be noted that, as per paragraph 1f below, use for the voluntary carbon market is captured by the term ‘other international mitigation purposes’ throughout the guidance.

 

Internationally transferred mitigation outcomes

  1. Internationally transferred mitigation outcomes (ITMOs) from a cooperative approach are:
    ….

    f. Mitigation outcomes authorized by a participating Party for use for international mitigation purposes other than achievement of its NDC or for other purposes, including as determined by the first transferring participating Party (hereinafter referred to as other international mitigation purposes).
     
  2. A ‘first transfer’ is the first international transfer of a mitigation outcome authorized by a participating Party for use towards an NDC or authorized by a participating Party for use for other international mitigation purposes.

 

Other international mitigation purposes

  1. Where a participating Party authorizes mitigation outcomes for other international mitigation purposes, it shall apply a corresponding adjustment, consistent with this guidance, for first transfer, whether or not the mitigation outcomes have been internationally transferred.

 

Annual information

  1. Each participating Party shall, on an annual basis and in an agreed electronic format, submit to the Article 6 database as referred to in chapter VI.B (Article 6 database) annual information on ITMO authorization, first transfer, transfer, acquisition, holdings, cancellation, use towards NDCs, authorization of ITMOs for use towards other international mitigation purposes, voluntary cancellation, and specifying the cooperative approach, other international mitigation purposes, first transferring participating Party, using participating Party and year in which the mitigation occurred, sector and activity type, as applicable.

 

Regular information

  1. Each participating Party shall include in its biennial transparency reports the following information in relation to its participation in cooperative approaches:


    (c) Information on its authorization(s) of the first transfer and use of ITMOs towards NDCs and other international mitigation purposes including any changes to earlier authorizations, pursuant to Article 6, paragraph 3 of the Paris Agreement.

    (e) How it has ensured that ITMOs acquired and used towards achievement of its NDC and those authorized mitigation outcome(s) used for other international mitigation purposes, will not be further transferred, cancelled or otherwise used.

Each participating Party shall include the following annual information report, consistent with chapter III.B above (Application of corresponding adjustments), in each biennial transparency report submitted pursuant to decision 18/CMA.1, and in the Article 6 database pursuant to chapter V1.B (Article 6 database) and shall include any updates to information submitted for previous years in the NDC implementation period:

(c) Annual and cumulative quantity of mitigation outcomes authorized for use, for other international mitigation purposes.

 

Tracking

  1. Each participating Party shall have, or have access to, a registry for the purpose of tracking and shall ensure that such registry records, including unique identifiers, the following, as applicable: authorization, first transfer, transfer, acquisition, cancellation, use towards NDCs, authorizations for use towards other international mitigation purposes, voluntary cancellation, and shall have accounts as necessary.

 

Ambition in mitigation and adaptation actions

  1. Participating Parties and stakeholders are strongly encouraged to cancel ITMOs to deliver an overall mitigation in global emissions that is commensurate with the scale delivered under the mechanism established by Article 6, paragraph 4, and that is not counted towards any Party’s NDC or for other international mitigation purposes.
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