Writing the Paris Rulebook - Carbon Mechanisms · In addition, we present a potential case for...

ISSUE 3 | 2017SEPTEMBER - OCTOBER

Writing theParis RulebookPrinciples and guardrails to keepthings in check

CARBON MECHANISMS REVIEW2

4 Guardrails for the Paris mechanisms Operationalizing Article 6 and generatingcarbon market credibility

10 “A New Way of Financing Technologies for Africa”Gareth Philips, the initiator of the “Adaptation Benefit Mechanism” on the demand for adaptation units, theCDM’s failures, and how to demonstrate certifiable adaptation project results

15 A Ton is a Ton that is Compatiblewith the Paris Agreement Environmental integrity on the way fromKyoto to Paris

20 On the Rise? What will be the future demand for offsets from the aviation sector and howwill aviation emissions be treated underthe EU ETS in the future?

26 Stumbling Blocks on the Way to Application The relevance of baseline setting, Monitoring and Homogenous NDC Formulation for Cooperative Approachesunder the Paris Agreement

ContentS E P T E M B E R – O C TO B E R

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Carbon Mechanisms Review (CMR) is a specialist magazine on CDM/JI and new marketmechanisms. The magazine also covers related topics such as nationally appropriate mitigation actions (NAMAs) and emission trading schemes. CMR appears quarterly inelectronic form. All articles undergo an editorial review process. The editors are pleasedto receive suggestions for topics or articles.

Published by: Wuppertal Institute for Climate, Environment and Energy(Wuppertal Institut für Klima, Umwelt, Energie GmbH)JIKO Project TeamDöppersberg 19 42103 WuppertalGermany

Editor responsible for the content:Christof Arens, Energy, Transport and Climate Policy Research GroupWuppertal Institute for Climate, Environment and Energy E-Mail: [email protected]

Editorial team: Christof Arens (Editor-in-Chief) Thomas Forth, Lukas Hermwille, Nicolas KreibichFlorian Mersmann, Wolfgang Obergassel, Timon Wehnert

Distribution: Carbon Mechanisms Review is distributed electronically. Subscription is free of charge: www.carbon-mechanisms.de

Layout: www.SelbachDesign.de

English Language Support Stocks & Stocks, Bonn/Düsseldorf (except “On the Rise?” and “A new way...”)www.words-worth.eu

Photos: Title page: Flickr / UNFCCC / CC BY 2.0 Back page: fotolia.com © pedrosala

This magazine is compiled as part of the Joint Implementation & Clean DevelopmentMechanism (JIKO) project at the Wuppertal Institute for Climate, Environment andEnergy (http://wupperinst.org/p/wi/p/s/pd/592)The editorial team works independently of the JI Coordination Office (JIKO) at the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety.

ISSN 2198-0705

EDITORIAL

Dear Reader!

The Paris rulebook is beginning to take shape. However, inthe case of Article 6, negotiations are still at an early stageand revolve around questions of principle. Thus, in this issueof the Carbon Mechanisms Review, we look at what shouldbe the central ingredients of the Article 6 section of the Parisrulebook, the aim being to identify what needs to be negoti-ated now and what can be put aside for a later date. See ourcover feature in the adjacent article for more.

We also look at how the Paris Agreement poses new chal-lenges for environmental integrity and analyse possiblestumbling blocks on the way to implementing cooperativeactions under Article 6 given the different nature of NDCs.

In addition, we present a potential case for non-marketapproaches: the adaptation benefit mechanism (ABM) – aninitiative of the African Development Bank that uses a mixof non-market and market components. In an interview,Gareth Phillips – the mastermind behind the ABM – sayswhere he sees demand for adaptation units, points to thefailures of the CDM and explains how to demonstrate certi-fiable adaptation project results. The issue is rounded off byan analysis on the future demand for offsets from the aviation sector and how the EU will treat aviation emissionsin its ETS.

On behalf of the editorial team, I wish you an interestingand informative read.

Christof Arens

editorial

mailto:[email protected]

http://www.carbon-mechanisms.de

http://www.SelbachDesign.de

http://www.words-worth.eu

http://wupperinst.org/p/wi/p/s/pd/592

ANALYSIS4

Carbon Mechanisms Review 03|2017

Guardrails for theParis mechanismsOperationalizing Ar tic le 6 and generating carbon market credi bi l ity

by Axel Michaelowa and Stephan Hoch, Perspectives Climate Group

The negotiation clock is ticking away at rapid speed.Only 14 months remain in which the rulebook foroperationalizing the market mechanisms underArticle 6 is to be developed and approved. Its foun-dations have been laid by the Paris Agreement anduniversally acclaimed UNFCCC principles. Neverthe-less, old cleavages between countries have so farprevented any substantial progress in agreeing onthe details. The negotiation meetings in May 2017did not advance beyond “informal informal” lists ofhundreds of topics to be covered in the future. Thus,it is crucial that COP 23 in Bonn delivers substantiveprogress on a number of critical issues. Otherwise,the hope that market mechanisms could become acornerstone of the Paris regime may wither away. Sowhat are the critical issues to be resolved in thenegotiations on the Article 6 rulebook?

Many of the crucial elements for Article 6 are familiarto those who have worked on the Kyoto mechanismsin the past. They include defining roles for a govern-ing body, host countries, auditors, and other stake-holders; ensuring additionality of mitigation actionthat generates emission credits, limiting transactioncosts while ensuring transparency, and providingsustainable development (co-)benefits. But a numberof them are new: How can we deal with crediting ofpolicy instruments? How do we manage marketmechanisms in a world in which the bifurcation ofthe Kyoto Protocol has been overcome, and all devel-

oping countries have defined their own NationallyDetermined Contributions (NDC), even though thesemay have many different “shades”? How do weensure that carbon markets (Article 6.2) with little orwith no international oversight function well andensure that these mechanisms enhance rather thanundermine mitigation ambition? Given the history ofNGO and media attacks against market mechanisms,the need to uphold high environmental integrity isparamount.

Preventing “hot air” from ahundred countriesA brief period in 2012 gave an impressive lesson onthe danger of “hot air” for the credibility of marketmechanisms. The Kyoto Mechanism Joint Implemen-tation (JI) had previously been seen as inherentlysolid and credible due to the fact that both seller andbuyer country have an emissions budget and emis-sion reduction units (ERUs) would be deducted fromthe seller’s budget. Thus, the seller country wouldhave to mobilize a volume of mitigation in its econ-omy equal to the volume of units sold. Unfortunately,this reasoning does not hold if the seller has an emis-sions target that is not binding, i.e. where the busi-ness as usual emissions path is below the target. Thismeans there is a surplus of emissions units – collo-quially called “hot air” – that can be sold without the

need to mitigate elsewhere. Under the Kyoto Proto-col, countries in economic transitions like Russia andUkraine had generated huge amounts of hot air.When in late 2012 the Doha Conference of the Partiesdecided that such hot air could no longer be acquiredunder international emissions trading, Russia andUkraine used JI “Track 1” that was devoid of interna-tional oversight to generate hundreds of millions ofERUs in just a few weeks. A large chunk of those ERUswas then sold to Western buyers. After heavy criti-cism from NGOs, JI was generally seen as a failedmechanism, despite the fact that “Track 2” issued noERUs tainted by “hot air” suspicions thanks to theinternational oversight of the multilateral JI Supervi-sory Committee, which operates under the authorityof the CMP.

Under the Paris Agreement, the situation is muchmore challenging than under the Kyoto Protocol (seealso the discussion by Spalding-Fecher et al. 2017).Many NDCs have baselines that are way above anycredible business-as-usual path. Some NDCs have nobaseline at all. Under the Paris Agreement, there is noprocess in which an international body can scrutinizethe methodological underpinnings and conservative-ness of the baselines used. It is thus highly likely thata significant number of NDCs would generate “hotair” if NDC baselines were to be used as a basis forcrediting emission reductions or allocating emissionallowances. The experience gained with JI leads to aclear recommendation for the Paris mechanisms –international oversight is crucial to prevent transfersof “hot air”.

One critical aspect of baseline setting is the questionwhether baselines should be “frozen” until the revi-sion of the NDC or whether they should be dynamic,i.e. determined on the basis of a set of parameterssuch as economic growth, population development,share of different economic sectors or fuel prices. Theactual values of these parameters should be used “expost” to calculate baseline levels.

Coverage of NDCs: Sectors and conditionalitySome countries do not cover their entire economy intheir NDCs. In principle, mitigation activities not cov-ered by an NDC are akin to mitigation in countrieswithout commitments under the Kyoto Protocol andshould thus be subject to a Clean DevelopmentMechanism (CDM)-type rulebook. Their additionalityneeds to be checked carefully.

Moreover, almost all developing countries have com-ponents of NDCs which they define as conditional oninternational financing, including through marketmechanisms. As long as the additionality of suchactivities is ensured and the baseline of the condi-tional part of the NDC is derived in a conservativemanner, conditionality should not be an issue in gen-erating units under Article 6. When revenues frommarket mechanisms are blended with climatefinance under a conditional part of an NDC, alloca-tion of the mitigation to the different financestreams becomes an issue in order to prevent doubleclaiming (Spalding-Fecher et al. 2017).

Ensuring additionality of policy instrument creditsUnder the CDM, national policy instruments couldnot generate certified emission reductions (CERs).With the advent of upscaled crediting under theParis mechanisms, it is important to understandwhen a policy instrument is additional.

Mitigation policies can generally be differentiatedinto regulation and carbon pricing instruments. Theformer includes efficiency standards for appliancesor vehicles, the latter emissions trading schemes andcarbon taxes. Generally, regulation addresses mitiga-tion which in principle would be profitable but is notundertaken in the business-as-usual situation due toincentive problems – like the famous tenant-ownerdilemma preventing efficiency improvements inbuildings. Carbon pricing aims at mobilizing mitiga-

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ANALYSIS6


tion that has costs and thus would not be under-taken. As far as a country benefits from the removalof incentive-related barriers, such regulatory instru-ments should not be deemed additional unless realbarriers are demonstrated, e.g. access to finance in aparticular foreign currency. In cases of regulationthat mandates a certain efficiency of a technology, apragmatic approach would assess the paybackperiod that would lead to investment into that tech-nology. Academic literature and industry practiceagree that 4 to 5 years would be a typical threshold.

But not all carbon pricing instruments should auto-matically qualify as additional. Given that a govern-ment theoretically should introduce a policy as soonas its benefits exceed its costs, a policy should princi-pally only be seen as additional as long as its costsare higher than its benefits. The challenge here is

that often policymakers do not really believe in theaccrual of the benefits, as can be seen in the contextof many nationally appropriate mitigation actions(NAMAs) that are easily justified by their non-GHGbenefits, but still not implemented. Moreover, speci-fying the discount rate to be applied to costs andbenefits accruing at different dates is highly chal-lenging. A simplified approach to additionalityassessment of carbon pricing would be the definitionof a carbon price threshold from which a policywould be seen as additional, which could in turn bedifferentiated according to the development level ofa country. Furthermore, the political economy of aninstrument should also be considered.

For project and programme-type activities, the ero-sion of environmental integrity through positive listsand automatic additionality seen with the CDM in

Ensuring additionality: falling prices for low-carbon technologies have made wind and solar power plants increasingly attractive in many regions.Their additionality must thus be thoroughly assessed.

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recent years should be scrutinized. Rapid increases inattractiveness of low-carbon technologies, as seen forphotovoltaic and wind power plants, need to be cap-tured by additionality tests. While real economy bar-riers such as limited availability of foreign currencymay remain prohibitive for renewables in some low-income countries, their additionality cannot be con-vincingly explained in more mature emergingeconomies. A thorough investment test with stan-dardization of input parameters should be manda-tory for all activities except the very smallest ones.

Minimum requirements for atransparent approachThe CDM has set a benchmark for transparency ofpublicly accessible documentation of mitigationachieved by a market mechanism. And in a numberof countries like China and India, information onCDM projects gave an insight into the performanceof technologies such as wind or hydropower, forwhich project-specific data had previously been lack-ing. A key for such transparency was internationaloversight and comprehensive publication of docu-ments by the UNFCCC Secretariat on its website. Thismeans that the Secretariat should also publish allrelevant documents for the Paris mechanisms andother climate financing instruments.

Transparency is not a one-way street. Like with theCDM, stakeholders need the opportunity to commenton documentation submitted to the Secretariat, andthose comments need to be publicly available.

Crunching the numberswhile preventing doublecounting: Accounting foremissions units and theirtransferDouble counting or claiming of emission reductionsis the key new challenge that the Paris Agreement

wants to prevent (see Schneider et al. 2015 for key def-initions of double counting). A critical preconditionfor such prevention is that all mitigation units areclearly denominated in t CO2eq. Attempts to createdifferent units (Marcu 2017) – some for GHG and oth-ers for renewable energy – and apply artificialexchange rates should be resisted at all costs. Theargument that this would be necessary due to thevariety of NDC parameters is fallacious – a unit canonly be a mitigation outcome if denominated interms that are 100% linked to mitigation, and thus toGHGs. As Kreibich and Obergassel (2016) stress, thedifference between single- and multi-year NDC tar-gets is a highly relevant issue, and single year targetcountries should not be allowed to transfer unitsunless those units are converted into a multi-yearlogic.

One very important aspect of accounting is the setupof registries and transaction logs. The experiencegained with the CDM registry has been very positiveas it allowed private actors to keep CERs away frompotentially greedy national governments. Given thatunder the Paris regime governments could betempted to want to expropriate units in order toshow compliance with their NDC, a system ofnational registries would be problematic.

Building trust within the private sector: HonouringCDM investments and defi-ning a process for transitionMany policymakers, especially in the EU, seem tothink that the CDM should be discarded in itsentirety. Others, like Brazil and African nations, arguethat the existing CDM pipeline should be fully inte-grated into Article 6. From an economic perspective, acompromise between these approaches is preferable,one which takes into account new interpretations ofadditionality as discussed. However, a more balancedapproach would acknowledge successful CDMreforms, existing high quality projects and secure

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ANALYSIS

investor confidence, given that the private sectorinvested heavily in the CDM due to its long-termnature. The post-2012 market crisis resulting from thepolitically motivated reduction in demand for CERsshook the trust of the private sector that politicallyframed market mechanisms and dried up invest-ments. Destroying all CDM investments with thestroke of a pen, independently of their merits, wouldshatter private sector trust completely and make itvery difficult to attract new private sector invest-ments in the coming decades. Defining the eligibilityof CDM activities for transitioning from the Kyoto tothe Paris mechanisms depends on the progress madewith the Paris mechanism rulebook. For a way for-ward on the transition of the CDM pipeline seeMichaelowa and Hoch (2016).

Key role of international oversight to prevent the opening of loopholesWhile many lobbyists and government representa-tives fight for a complete absence of internationaloversight for the cooperative approaches under Arti-cle 6.2, lessons from the past as well as the need tocreate a level playing field between the mechanismscall for international oversight for Article. 6.2 activi-ties as well. Given that the design of emissions trad-ing systems around the world has been prone toover-allocation owing to intense lobbying efforts byaffected industries, close scrutiny of such systems isrequired before they can generate transferable units.

Scale

Degree of inter-

national oversight

Projects Programmes Policy instruments Sectors

SDM – Art. 6.4 CDM

JI Track 2

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JCM

Our suggestion

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IETA

IET

Notes: IET = International Emissions Trading (Art. 17 Kyoto Protocol), JCM = Joint Crediting Mechanism (Japan); Source: the authors

Figure 1: Characteristics of Paris and Kyoto Mechanisms

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Without such scrutiny, a “race to the bottom” could quicklyensue.

Approaches to unfreeze the market mechanism negotiationsGiven that in Paris a group of market mechanism proponentswas instrumental in getting Article 6 into the Agreement, asimilar kind of activism is required during the next two COPs.Moreover, learning by doing based on practical experience caninspire progress in multilateral rule-making. In order to unlockprogress, concrete investments into pilot activities to testinnovative carbon market approaches could be very helpful.We call on progressive governments and international organi-zations to accelerate their activities, and spread their resultswidely. Also, a strong involvement of private sector actorscould help to restore the level of trust that existed in the earlydays of the CDM. Last but not least, NGO support needs to beharnessed, for example by means of sustainable developmentsafeguards (Spalding-Fecher and Schneider 2017; Hoch et al2015).

Key guardrails for the Paris mechanismsSummarizing our recommendations for the Paris mechanismsrule-setting, we stress the following:

n International oversight is required for both Article 6.2 andArticle 6.4, particularly with regard to prevention of “hotair” contaminating the entire Paris system

n The difference between conditional and non-conditionalparts of NDCs is not relevant for the Paris mechanisms ifadditionality testing on all levels of aggregation (includ-ing policy instruments) – is robust and conservative

n Additionality testing of policy instruments is crucial forthe robustness of Article 6. Regulatory policy instrumentsneed to be checked with regard to the payback period ofthe technologies required by the regulation. Carbon pric-ing instruments should undergo a cost-benefit analysis,taking into account political economy barriers. This couldbe operationalized in the form of minimum price thresh-olds required for carbon pricing to qualify as additional.

n Additionality of projects and programmes should beassessed by an investment test that uses standardizedinput parameters.

n All relevant activity documentation needs to be madepublicly available.

n Accounting should be done through a centralized registrysystem.

n In order to safeguard private sector trust, all CDM activi-ties fulfilling the principles described above should betransitioned into Article 6.4

References S. Hoch, B. Horstmann, A. Michaelowa, J. Hein, Jonas (2015): Newclimate investments must strengthen sustainable develop-ment and minimize trade-offs, Briefing Paper 22/2015. GermanDevelopment Institute / Deutsches Institut für Entwick-lungspolitik (DIE), Bonn.

N. Kreibich, W. Obergassel (2016): Carbon Markets After Paris –How to Account for the Transfer of Mitigation Results?, JIKOPolicy Paper 1/2016, Wuppertal

A. Marcu (2017): Issues for Discussion to Operationalise Article6 of the Paris Agreement, ICTSD, Geneva

A. Michaelowa, S. Hoch (2016): Built on experience: How totransition from the CDM to the Sustainable DevelopmentMechanism under the Paris Agreement, in: Carbon Mecha-nisms Review 1/2016, p. 28-31

L. Schneider, A. Kollmuss, M. Lazarus (2015): Addressing the Riskof Double Counting Emission Reductions under the UNFCCC,in: Climatic Change, 131, p. 473-486

R. Spalding-Fecher, L. Schneider (2017): First, do not harm, in:Carbon Mechanisms Review 1/2017, p. 14-17

R. Spalding-Fecher, F. Sammut, D. Broekhoff, J. Füssler (2017):Environmental integrity and additionality in the new contextof the Paris Agreement crediting mechanisms, Carbon Limits,Oslo

CMR: Gareth, you played the leading role in devel-oping the ABM concept. Could you please explainthe idea behind the scheme in brief and sketch theAfDB’s motivation as a development institutionfor introducing such a mechanism?

Gareth Philips: The idea behind the scheme camefrom trying to think of another use for the CDM,given that the Paris Agreement is weak on marketsbut strong on adaptation. My idea was to use theCDM modalities and procedures (which are actually

very good) to deliver credible and transparent adap-tation benefits with mitigation co-benefits. On fur-ther analysis, I came to better understand how thecommoditisation of emission units and emissionreductions under the Kyoto Protocol had a number of negative impacts on the CDM, ultimately turningit into an (in my opinion) a practically unworkableinstrument. But removing the aspect of commoditi-sation suddenly overcame these barriers.

I have also become increasingly concerned about theemphasis placed on mitigation instruments underthe Paris Agreement. Whilst I was an enthusiasticsupporter of carbon markets and international tradeunder the Kyoto Protocol, the Paris Agreement stops along way short of creating the infrastructure totransfer emission rights. I believe there will be somegovernment-to-government transfers of ITMOs at apolitical level, but I do not foresee a time when Governments or domestic emission trading schemesopen their doors to project based emission reductions.

The ABM, on the other hand, can finance exactly thesame kinds of projects using much of the existinginfrastructure by simply working with differentunits. All we lose is the commoditization aspects –fungibility, a benchmark price and speculation – butin the end these were things which distorted theCDM, led to the uneven playing field and generatedprofits for secondary traders.

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“A New Way of FinancingTechnologies for Africa”Gareth Philips, the initiator of the “Adaptation Benefit Mechanism” on the demand for adaptation units, the CDM’s failures, and how to demonstrate certifiable adaptation project results

Gareth Philips is Chief Climate Change and Green Growth Officer at the African Development Bank.

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AfDB’s core mandate is to address poverty in Africa.Climate change threatens decades of developmentwork and risks plunging millions of Africans intopoverty. Historically, mitigation markets and mitiga-tion projects did little to directly address the liveli-hoods of African people; the CDM did not make a bigimpression in Africa. However, many of these tech-nologies can have a marked impact upon a house-hold’s ability to withstand a climate induced eco-nomic shock – i.e. their ability to adapt to climatechange. The ABM is highly relevant to the AfricanDevelopment Bank because, in the absence of grow-ing supplies of mitigation finance coming to Africa,the ABM could provide a new way of financing tech-nologies that make African people more resilient toclimate change.

CMR: All major players in the corporate world haveestablished Corporate Social Responsibility (CSR)programmes, and some of them sponsor adapta-tion projects. Who is your target group? Why would an investor favour the ABM over, say,the Private Sector Initiative under the NairobiWork Programme?

Our target group is anyone who will pay for an adap-tation benefit, but that can be broken down into anumber of sub-groups. The main question is whywould these sub-groups buy ABUs?

Donors – they have an obligation under the ParisAgreement to provide finance for adaptation, in the-ory at the same level as mitigation. However, adapta-tion projects are currently rare and hard to financebecause there is no obvious mechanism. A results-based finance mechanism drawing on the featuresof the CDM brings credibility and transparency to anadaptation project. The ABM is a way in whichDonors could disburse funds for adaptation in justthe same way as they disbursed for mitigation.Although the deliverables from different ABM pro-jects cannot be added up and compared (somethingthat western cultures and particularly economistsstruggle with), the lack of fungibility of units meansbuyers buy the story behind the unit and hence leantowards the most compelling adaptation needs. This

compares favourably with the CDM, where fungibilityand the commoditization of carbon lead to invest-ment in the cheapest sources of emission reductions– starting with industrial gas credits and ending withrenewable energy in China and India.

Impact investment funds could use the ABM to pro-vide credible third party verification to their investorsthat projects are having adaptation benefits. Or suchfunds could sell ABUs to provide a return to investorsfor technologies that have long to very long termbenefits (for taking old diesel cars off the road now toimprove public health in future decades).

Climate Funds such as the GCF, with a pledge toinvest 50/50 in adaptation / mitigation or the Adap-tation Fund. The ABM could provide a credible meansto disburse funds.

CSR buyers are an interesting case. Some already buyemission reductions to offset their activities but theyoperate in increasingly regulated environmentswhere emission from energy, materials and now evenair travel are being addressed at source. The account-ing provisions of the Paris Agreement increase the

The ABM as non-marketmechanismThe Adaptation Benefit Mechanism (ABM) is aninitiative by the African Development Bank tocreate a global mechanism to monetize adapta-tion benefits in climate and development pro-jects. Projects are to result in adaptation benefitunits (ABUs) to be sold to donors, CSR buyers, andother investors. The mechanism is meant to buildon features of the CDM, such as methodologies,third-party audits, host country approval. TheABM is explicitly labelled “non-market”, but hasalso market elements. More information can befound at https://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/adaptation-benefit-mechanism-abm/

https://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/adaptation-benefit-mechanism-abm/



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chances that emission reductions may be doublecounted and under the Paris Agreement where allParties have commitments, the concept of offsettingno longer works. Moving to a unit which is not theprimary accounting unit of the Paris Agreementwould enable CSR buyers to present a new and per-haps more attractive story – “Company XYZ hasinvested USD1 million in helping 10,000 Africanhouseholds adapt to changes in climate by support-ing their transition to climate smart agriculture”.

Critics of the ABM say that there is no market foradaptation and the lack of a fungible unit makes amockery of a quantification process. I understandthose points; however, in today’s emission reductionmarkets there are no sales of units for complianceobligations – buyers are making voluntary purchasesto meet voluntary commitments and in many casesthey are buying technology or geography-specificunits at negotiated prices. This is not a market either.

The quantification, verification and issuance processfor CERs (and by extension, VERs) was developed toproduce highly qualified units which were accept-able under an international environmental treaty(the Kyoto Protocol) and supra-national legislation(the EU ETS). These units are now massively over-specified and represent a significant waste of trans-action costs. ABUs, the units delivered from an ABMproject, serve are a means of triggering payment forresults and also facilitate the financing of a projectbut to be clear, we expect the transaction costs ofverifying and issuing ABUs to be a fraction of the costof the CDM verification and issuance process.

The only target that we have for adaptation is afinancing target of USD50 Bn per year by 2020. Fundsspent on buying ABUs from a certified ABM project

can be recognized as direct public and private cli-mate adaptation finance. Those funds will leveragefurther public and private debt and equity. The ABMoffers buyers a credible, transparent and cost effi-cient means of demonstrating progress towards thetarget which the Paris Agreement has set.

CMR: The ABM could use a number of well-estab-lished CDM components, such as support struc-ture, modalities and procedures, accredited audi-tors, to name just a few. However, the CDM isfocused on climate mitigation exclusively. What isyour approach to solve the methodological chal-lenges in demonstrating certifiable adaptationproject results? How do you distinguish themfrom conventional development projects?

Firstly – demonstrating certifiable adaptation projectresults: As in the CDM, there would be an approvedmethodology which effectively defines the adapta-tion benefit that will be delivered. It is possible thatthere could be hundreds of different types of adapta-tion benefits but through a process of “learning bydoing” we would expect to see a gradual consolida-tion of methodologies perhaps linked to particularlypopular technologies, or perhaps linked to the contri-bution to the SDGs. The only difference is thatinstead of getting just one type of unit delivered, andbeing able to compare these with one another, wewill get lots of different types of units.

As I said above, that desire to compare and maximiseeconomic efficiency is a particularly westernattribute. It may help to think of adaptation units asan aisle in an EU supermarket where different thingsare for sale, but you know that whatever you buy haspassed some tests. And, don’t forget, no one is sayingyou have to buy any of these units; it’s a voluntaryaction and you buy the ones you like, for whateverreason.

Secondly - how do you distinguish them from con-ventional development projects? This is more chal-lenging and really relates to the fact that we cannotcontinue to consider climate and developmentfinance separately for very much longer. It’s like the

INTERVIEW

”The CDM ultimately turned into a practically unworkable

instrument.”Gareth Philips

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E+/E- rules in the CDM where the EB ignored hostcountry policies in setting the baseline. Our proposedresponse is a) an additionality test that screens outprojects that were going to happen in the next, say, 5 years anyway (e.g. unconditional actions in theNDC, donor funded and government funded projects)– five years is arbitrary but a mechanism which canaccelerate the adoption of technologies buys theinternational community time and helps to addressthe problem of climate change; and b) guidance ondouble counting of climate finance to ensure thatABM funds are not counted as ODA funds. But weneed a grown-up discussion on the overlap betweendevelopment and adaptation.

CMR: Setting up an infrastructure and a registryfor ABM projects will create expectations by pro-ject developers that projects are going ahead.However, if there is not enough private sectordemand – would this not induce calls for publicinvestments, creating further pressure on thealready scarce existing public adaptation finance?

On the contrary. Creating a mechanism that enablesproject developers to generate revenue from adapta-tion technologies will stimulate private finance. In2000, no-one would have paid you anything for aproject that reduced GHG emissions but by 2008, as serious momentum was building in the CDM,investors were queuing up to place equity into emis-sion reduction projects in far-away countries. TheCDM generated a USD500 Bn pipeline (add up the

Clean cookstoves as an example for ABM projects. The ABM certifies supplementary adaptation benefits of projects that make communities and households more resilient to climatechange. Adaptation Benefit Units (ABUs) are issued as a result.

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figures for project investment in the UNEP DTUdatabase) on the possible delivery of a USD10 perCER. Unfortunately, the pipeline burst when the EUETS became over-supplied and demand fell (for vari-ous reasons). Granted, the ABM does not have thesecondary market and speculative element that theCDM benefitted from, so it’s not going to attract thehedge funds and city brokers, but on the other hand,there is potentially uncapped demand for ABUswhich can provide a reasonable return to investors oftechnology, debt, equity and sweat. What the ABMwill do is to leverage scarce public sector resources.For example, if a donor agrees to pay me USD 50 forevery household I connect to the grid or mini grid inSenegal (because connecting a household to a reli-able source of electricity is probably the singlebiggest adaptation benefit we can ever deliver to ahousehold), then maybe I’ll be able to raise equityfrom a pension fund that thinks Senegalese con-sumers will be paying back in 20 years’ time andcombine that with debt from a local bank to financethe project.

Agreed, there is no well-defined signal of demand atpresent, but I believe it will come. For the CDM,demand was created by the Kyoto Protocol targetsand the EU ETS. Once Parties start to implement theParis Agreement and we get a better (broader) under-standing what is encompassed in the term “adapta-tion” – see your question about the overlap betweenadaptation and development –, then Donors will seethe ABM as a mechanism which they can use to dis-burse adaptation finance. The GCF has a commit-ment to channel USD50 Bn into adaptation; the ABMis a credible route. And I think CSR buyers will come

to realise that buying offsets is not a long term solu-tion to the problem and increasingly, I think CSR buy-ers may see ABUs as a better and more efficient wayof fulfilling their corporate responsibilities.

CMR: The ‘Paris Rulebook’ will be – all things goingwell – adopted at COP 24 in Poland next year. Haveyou gained further support for the initiative?What are the next steps for the ABM on its way asa non-market approach?

We are making very good progress. A number ofAfrican countries have indicated their support for theABM and Uganda and Malawi have done so formally.Members of the AOSIS and SIDS have expressed seri-ous interest and we have talked with a number ofEuropean Governments about supporting the initiative.

Some uncertainties exist around the definition ofunits and predictably, some Governments are not yetable to accept the ideal of lots of different varieties ofapples and pears, but we think that with time, thiswill be less problematic.

We continue to develop a number of pilot projectsand seeking funding to work with Parties in the runup to CoP 23.

Probably the biggest single boost would be for anentity to sign an ABU offtake agreement which, in thesame way as an Emission Reduction Purchase Agree-ment worked under the CDM, would help to raisefinance to implement a pilot project. There are anumber of funds which the Bank works with that areable to cover costs of documentation, validation etc.and I think if we could take a real example to CoP23, itwould demonstrate how powerful the mechanismwould be. I remain optimistic and I think that adaptation’s time is coming.

"The ABM offers buyers a credible, transparent and cost efficient means

of demonstrating progress towards a target"

Gareth Philips

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Environmental integrity is one of the central ele-ments of all activities under Article 6 of the ParisAgreement. But what exactly is environmentalintegrity in the context of Article 6? Avoiding “netharm” to environmentally relevant goods wasimplemented, in the days of the Kyoto Protocol, bycondensing environmental integrity to a very shortformula that said it all: “a ton is a ton”. Can this for-mula be recycled for the Paris Agreement? Wheredoes it require modifications? And is there more toenvironmental integrity under the Paris Agreementthan these aspects?

Environmental integrity is to be promoted under vol-untary cooperation for the implementation of NDCsunder Article 6.1 of the Paris agreement (PA) and tobe ensured where such cooperative approachesinvolve the transfer of internationally transferredmitigation outcomes (ITMOs) under Article 6.2.

Article 6.4 of the Paris Agreement and paragraph 37of the Paris Decision do not mention environmentalintegrity separately but aim for an overall contribu-tion to global mitigation (Article 6.4 d). However, asthe most plausible interpretation of Article 6.1 is thatit constitutes a chapeau to be applied by allapproaches mentioned in Article 6, the promotion of environmental integrity is an integral part of

Article 6.4 and needs to be taken into considerationin its design.

Implementation of environmental integrity in thetraditional sense includes the requirements that out-comes have to be real, permanent, measurable, verifi-able and additional. It is hard to conceive – althoughnot impossible – that the implementation of perma-nence, quantifiability and verifiability under themechanisms of the Paris Agreement will change significantly compared to the Kyoto mechanisms.

However, implementing additionality requires newapproaches, as Article 6.4 of the Paris Agreement alsoenables activities on a sectoral level. The implemen-tation of nationally determined contributions (NDCs)through policies will also influence additionalityassessments: with regard to mechanism activities,the implementation of NDCs – at least of theirunconditional and domestic elements – represents“business as usual” and means that a mechanismcannot have caused these reductions.

Conservativeness is another element required toensure that “a ton is a ton”. In order to safeguard thecontribution of mitigation outcomes, these out-comes should not be overestimated. This principlewill continue to apply for the elements needed togenerate the emission reductions, in particular for

A Ton is a Ton that is Compatible with the ParisAgreementEnvironmental integrity on the way from Kyoto to Paris

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establishing reference levels (baselines or caps) and for thelater quantification of reductions, including the measure-ment, reporting and verification of the remaining activityemissions.

Next, a ton is only a ton if the CO2 reduction is only counted,issued or claimed once and not twice or more. Reductionscounted twice or more would give misleading signals fortracking progress towards achieving NDCs or other objectiveswhich are pursued through purchase of emission reductions.These other objectives can include full or at least partial use ofthe reduction for neutralizing the climate effects of products,events, subnational entities or Parties. As some parties haveexplicitly linked further mitigation targets with financialflows, accounting arrangements are also necessary if themechanisms are to be used to quantify climate finance outcomes through result-based finance. Avoiding double ormultiple counting/issuance/claiming requires proper coordination between the different counting and accountingprovisions.

With regard to units from standards from the voluntary mar-ket, securing their mitigation effects and therefore the envi-ronmental integrity of the products using them for effectssuch as climate neutrality will be a challenge and would atleast require some form of coordination between the account-ing for NDCs and privately run mitigation activities. Under theKyoto Protocol, the Joint Implementation mechanism providedarrangements to avoid double counting while otherwisebeing quite similar to the Clean Development Mechanism –except in Track 1, where an exception from international over-sight was granted. Joint Implementation did, however, rely onquantified targets. The Paris Agreement does not provide forsuch carbon budgets. Rather, it stipulates the design of trans-parent accounting provisions which ensure that mitigationoutcomes can be used to track progress in achieving NDCs.The idea of quantified budgets is addressed in more detailbelow.

ANALYSIS

Real, permanent, measurable, verifiable and additional: under the Paris Agrement, the crucial principles of environmental integrity must be augmented and enhanced.

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A ton is a ton that is compatiblewith the long-term goals of the Paris AgreementUnder the Kyoto Protocol, the integrity of its carbon budgets,meaning quantified emission limitation or reduction commit-ments (QELRCs), represented the core objective, the integrity ofwhich needed to be safeguarded. This was the rationale forthe formula that “a ton is a ton”. The Paris Agreement is differ-ent: its NDCs are not its only core objective. While the KyotoProtocol did not contain an explicit feedback loop quantifyinghow far “off” it was from a path towards the ultimate objec-tive of the framework convention, the Paris Agreement con-tains the built-in feedback loop described by Articles 2, 3 and 4– iterative rounds of progressively more ambitious NDCsinformed by the global stocktake. The starting point for theParis Agreement was the recognition that INDCs and the firstround of NDCs – although hopefully improved upon at leastby some Parties after the facilitative dialogue of 2018 – are ona pathway to approximately 3 °C of warming and will have tobe improved upon. Paragraph 17 of decision 1/CP.21 1 para-phrases this recognition by all Parties. From this recognition,the collective journey of Parties towards higher ambitionbegins.

What does this mean for environmental integrity in the con-text of Article 6? Environmental integrity in the sense of Arti-cle 6 of the Paris Agreement includes the integrity of the pathtowards higher ambition in order to reach the long-termobjectives of the Agreement. The articles of the Paris Agree-ment should be viewed as consistent, mutually reinforcingtheir respective implementation. Therefore, the environmentalintegrity of the mechanisms described in Article 6 includesthe integrity of the overall goal of the Paris Agreement, i.e. toenable or at least not hinder the required “much greater emis-sion reduction efforts (…) than those associated with theintended nationally determined contributions”, in the word-ing of paragraph 17 of decision 1/CP.21. Looked at this way, theenvironmental integrity of Article 6 resides in how it isdesigned as a stepping stone towards a 2 °C or 1.5 °C pathway.

It follows from this that Article 6 cannot enshrine the currentlevel of NDCs for longer periods as the Kyoto Protocol has actu-ally done with its fully bankable Assigned Amounts Units, as itwould then become a roadblock on such a pathway. It must becompatible and consistent with future iterations of NDCs.Therefore, the old mantra “a ton is a ton” needs a modifica-tion: A ton is only a ton in Article 6 of the Paris Agreement ifthats ton does not block the pathway laid out in Articles 2, 3and 4.

Avoiding roadblocks and disincentives on the way to well below 2 °C warmingThe potential efficiency of markets can pave the way to 2 °C or1.5 °C by significantly reducing costs. However, this greatopportunity is accompanied by the risk that markets couldreduce the level of ambition of subsequent NDCs, hinder theexpansion of the sectoral scope of NDCs or that they couldenshrine current insufficient levels of ambition over a longerterm. These effects would block progress by providing mis-leading signals in terms of available quantities of emissionpermits and, in terms of inadequate carbon pricing, by hinder-ing instead of enabling a timely and consistent internalizationof external costs.

A Paris-friendly interpretation of environmental integrityrather implies that cooperative approaches must be designedin a way that they do not provide any disincentives to ratchetup ambition. It is therefore of prime importance to designArticle 6 in a way which avoids the quantification of any kindof emission rights that could block the way towards pathwayswell below 2 °C. Paragraph 17 of decision 1/CP.21 underlines thisnecessity. Until now, it has been a general experience in quan-tity-based mitigation instruments, including the Kyoto Proto-col, that their targets were achieved faster and at lower coststhan anticipated, but that those targets were not necessarilysufficient. The Paris Agreement embodies at least somelessons from these situations. Any kind of lock-in into pathways leading only towards the generalized ambition

1 Notes with concern that the estimated aggregate greenhouse gas emission levels in 2025 and 2030 resulting from the intended nationally determined contributions do not fall withinleast-cost 2 ˚C scenarios but rather lead to a projected level of 55 gigatonnes in 2030, and also notes that much greater emission reduction efforts will be required than those associatedwith the intended nationally determined contributions in order to hold the increase in the global average temperature to below 2 ˚C above pre-industrial levels by reducing emissions to40 gigatonnes or to 1.5 ˚C above pre-industrial levels by reducing to a level to be identified in the special report referred to in paragraph 21 below

embodied by current NDCs would pose a significant risk forthe instruments of Article 6 and their reputation. If a total ofNDCs is not in line with the long-term goals and if it is con-verted into enforceable bankable rights under Article 6, theuse of such rights would also weaken the mitigation contribu-tion of the buying Parties and in the end undermine the over-all ambition raising process mentioned above. In a worst casescenario, complementary policies would be discouraged dueto false reliance on Article 6 instruments with their low-cost(in such a scenario) units.

In other words, Article 6 mechanisms should become neither a barrier to policymaking, nor a cause for lock-in into subopti-mal mitigation pathways. They should be designed to be ableto stimulate investment in the longer-term technologiesneeded to address climate change. They should at least pro-vide certainty that such price levels will occur in the futuregiven foreseeable scarcity, e.g. inducing such scarcity ordirectly internalizing external costs through pre-definedparameters. Environmental integrity in this instance alsoincludes the need to appropriately mirror the course-correct-ing measures described in Articles 2, 3 and 4 of the ParisAgreement in Article 6 mechanisms. Such course-correctingmeasures could avoid the ambition gap postulated in para-graph 17 of decision 1/CP.21 being projected further into thefuture.

Which elements are crucial for ensuring environmental integrity? A new formula for environmental integrity in the context ofinternational transfers under Article 6 has been proposed inresearch literature: the international transfer of mitigationoutcomes should not result in higher global emissions than ifthe NDCs had been achieved only through domestic action,without international transfers 2. However, this approach isitself only compatible with the Paris Agreement if it can besafely assumed that the implied domestic counterfactualwithout use of Article 6 instruments would be in line with anadequate long-term pathway. As it is possible that such apathway is only reachable using the efficiencies of Article 6mechanisms, the counterfactual of "only domestic mitigation"

or “emissions without the use of Article 6” could itself implyinsufficient levels of mitigation, which would not be an ade-quate comparative basis for environmental integrity. The con-dition of sufficient domestic mitigation can therefore bereduced to the condition of adequate mitigation pathways as such.

It has also been posited that the environmental integrity ofArticle 6 depends on at least four elements: the ambition ofthe NDCs, incentives for future mitigation action, the integrityof mitigation outcomes and robust accounting. While I fullyagree with the last three of these elements, from the perspec-tive outlined before, the ambition of NDCs does not appear asa suitable criterion, as their current ambition is undoubtedlyinsufficient. As outlined above, this insufficiency is the start-ing point for the Paris Agreement, expressed in Paragraph 17 ofdecision 1/CP.21. Therefore, Article 6 mechanisms would beuseless if they were only usable in conditions of perfect NDCs.Their usefulness and environmental integrity rather resides intheir ability to contribute to the formulation of better NDCsand to raise their ambition progressively over time.

It might also be proposed that a mere reliance on buyerbeware principles without strong international oversight toachieve environmental integrity could be enough. However, inthe view of this author, this underestimates the strength ofthe prisoner's dilemma of carbon markets and overestimatesthe ability of buyers to resist the temptation of low prices orto react very quickly in case of need. Effective reactions by thebuyer to possible cases of abuse by the seller can require achange of regulations within days or weeks or even ex post onthe buyer side, thereby overburdening Parties’ decision mak-ing processes. It would merit further research, but it appearsdoubtful, whether a shift of such risks towards the private sec-tor would constitute a potential way forward, as the realiza-tion of such risks would still need to be triggered by govern-mental measures. I would therefore strongly prefer robust,transparent institutional design and international oversightto ensure environmental integrity.

Another element of environmental integrity could be to limitthe transfer of ITMOs. However, the setting of any such limitmust consider that it should not hinder efforts of climate

ANALYSIS18


2 Schneider, L., Kollmuss, A. & La Hoz Theuer, S. (2016b). Ensuring the environmental integrity of market mechanisms under the Paris Agreement. Stockholm Environment Institute Policy Brief

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neutrality, which will imply the reduction of all remainingdomestic emissions abroad (e.g. domestic reductions of 85%and a further reduction of the remaining 15% of emissionsusing Article 6 instruments). The percentage of action abroadwill necessarily increase once limits of internal feasibility havebeen reached, e.g. once essential agricultural emissionsremain and once the economic carbon cycles have been closedor replaced by alternatives to the extent possible. Therefore, alimitation of transfers in relation to remaining domestic emis-sion levels would hinder carbon neutrality. However, animport limit of, for example, 15% or 20% of base year emis-sions could be an approach which could ensure sufficientroom for climate neutrality efforts while also ensuring sufficient domestic mitigation ambition.

To sum up, the main focus of implementing environmentalintegrity in the design of the Article 6 mechanisms should beon enabling Paris-compatible pathways through those mech-anisms. Parties need to work on criteria which enable toadjust over time the current mitigation pathways incorpo-rated in the mechanisms so that the mechanisms can be inte-grated into the learning curves foreseen by Articles 2, 3 and 4of the Paris Agreement.

This implies that established approaches to ensure that “a tonis a ton” will remain relevant, but that some modifications arerequired to make sure that these tons are also compatiblewith the overall context of the Paris Agreement. How exactlyArticle 6 mechanisms can become a stepping stone towardspathways well below 2 °C needs to be further explored inresearch. At this point in time, the setting of reference levelssuch as baselines (in the case of the mechanism under Article6.4) and timelines (e.g. crediting periods) and their interactioncan be identified as crucial elements for environmentalintegrity. Other approaches that could not be discussed indetail above but which could be relevant for promoting envi-ronmental integrity include: the mitigation value or discount-ing of mitigation outcomes; possible limits for the carry-overof mitigation outcomes; the restriction of transfers to abso-lute emission reductions; tying a Party’s eligibility to partici-pate in Article 6 in future periods to a positive assessment ofwhether its use of Article 6 in previous periods has con-tributed to raising ambition. Research to further developthese options and to establish preferences would be useful.

A ton is a ton – but will that still be the case under the Paris Agreement?

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The future demand for credits from the aviationsector is linked to that sector’s rapid growth, with itsemissions having grown 86% between 1990 and2014 (UNFCCC 2016). One estimate suggests thatwith current trends, the sector is likely to consumeone-quarter of the remaining carbon budget undera 1.5 °C scenario by 2050 (Carbon Brief 2016).

This can be partly attributed to the high cost of miti-gation in the sector, and there are at present nomajor technological breakthroughs for the sectorsuch as have transformed or are transforming theenergy and road transport sector. Instead there havebeen steady efficiency gains in aircraft design, which have been more than overtaken by growth in passenger demand.

Regulatory regime An important distinction is the difference betweenthe regulation of domestic and international avia-tion emissions. Domestic emissions are roughly one-third of aviation emissions (IEA, 2014) and are notdirected regulated by the UN’s International Civil Avi-ation Organisation (ICAO). International emissions,the remaining one-third, are more directly regulatedby ICAO and are subject to the Kyoto Protocol require-ment for parties to work through ICAO. Under theParis Agreement, it's considered that domestic avia-tion emissions are included under nationally deter-mined contributions (NDCs) but the status of inter-national emissions is less certain. This distinction isexpanded on further below.

Particularly regarding international emissions, theclimate regulatory regime faced by the aviation sec-tor could be described as quite lenient. One of themore obvious examples of this is the sector’s exemp-tion from kerosene taxation for international flightswhich is contained in the hundreds of bilateral airservice agreements (ASAs) negotiated between stateswhich permit aircraft operators access to foreignmarkets. This prevents the introduction of fuel taxation, on a global or bilateral basis.

The second regulatory benefit enjoyed by the avia-tion sector is its treatment under the 1997 Kyoto Pro-tocol, which instead of allocating international avia-tion emissions to parties, requested developed statesto work through ICAO to limit and reduce aviationemissions.

There is much uncertainty in the treatment of inter-national aviation emissions under the Paris Agree-ment. While the Agreement requires Parties toreduce all anthropogenic emissions, and requiressteps to address all economy-wide emissions, it isunclear how emissions from international aviationare to be addressed. Earlier drafts of the agreementincluded a reference to ICAO taking the lead role onthis, as per the Kyoto Protocol. However this languagewas dropped during the Paris COP and as a result theAgreement is silent on this.

The Agreement’s main vehicle for pursuing emissionreductions is the national determined contributions(NDC), where each party outlines the steps that itwill take to reduce its emissions. However it isunclear as to whether international aviation

REPORT20


On the Rise?What will be the future demand for offsets from the aviation sector and how willaviation emissions be treated under the EU ETS in the future?

by Andrew Murphy, Transport & Environment

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emissions can be included in these NDCs. While therules governing what can and cannot go in them arenot well defined, it is understood that they doinclude domestic aviation. However because of thelanguage in the Kyoto Protocol requesting parties towork through ICAO, and rules under UNFCCC report-ing requiring states to report fuel used for interna-tional transport (shipping and aviation) separately,there is a view that international aviation emissionsare not required to be in NDCs.

Such uncertainty could be resolved by a subsequentCOP Decision clarifying how international transportemissions are to be addressed. Until then, Parties

would seem to have the freedom to determine forthemselves whether they are included in their NDCs.The EU, in its NDC, has stated that its emission reduc-tions are “economy-wide” and include transport.However to the extent that this results in interna-tional emissions being covered by its NDC, this willbe determined by the scope of aviation’s inclusion inits Emissions Trading System (EU ETS), an issue discussed further below.

The regulatory regime for domestic aviation is some-what stricter. The US has a very limited kerosene tax(1c a litre), while India has a substantially higherkerosene tax imposed on its domestic aviation sector.

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Canada has announced that it will, through carbonpricing, end the kerosene tax exemption for itsdomestic sector with a carbon price of CAD$50 (¤33)from 2022. China has announced that domestic avia-tion will be included in its soon to be launched emis-sions trading scheme, while there is no evidence todate that flights within Europe will be excluded fromits EU ETS. Kerosene for domestic aviation is includedin New Zealand’s ETS.

This distinction between domestic and internationalemissions is important in determining futuredemand for credits. Domestic programmes are mov-ing away from certain types of credits such as inter-national offsets. For example the Canada federal car-bon pricing excludes their use, the EU has excludedthem from its EU ETS from 2021 onwards and NewZealand has suggested that it will not permit thosefollowing future reforms. However for internationalemissions, such a clear move away from interna-tional offsets is made more difficult due to the prohi-bition on fuel taxation, which blocks the introductionof more simple and perhaps more effective policiessuch as a carbon levy. Instead, they are likely to becovered by ICAO’s Carbon Offsetting and ReductionScheme for International Aviation (CORSIA).

CORSIA To briefly summarise CORSIA: starting from 2020, air-lines flying routes between participating states willbe required to purchase a certain number of creditsin order to achieve carbon neutral growth on thoseroutes. Participation by states is voluntary. The crite-ria for credits is yet to be determined, and the mecha-nisms for enforcement remain unknown.

Given the voluntary nature of the scheme, and that itwill only offset emissions above 2020 levels, it isexpected that airlines will be required to offset 20%of their emissions over the period 2021-2035. Andwhile the criteria for what credits will be allowed isunknown, we know that ICAO will aim for the broad-est possible supply. While this may make the schememore attractive for states to join, it will likely depress

the price of credits in the scheme and thereforeundermine incentives to cut in-sector emissions.

The total emission reductions predicted over thisperiod have been estimated to be as high as 2.5 bil-lion tons of CO2 in the first 15 years. However thisshould be seen as a ‘best case scenario’ and is depen-dent on two unknowns: the quality of credits,touched on briefly above, and the level of enforce-ment. The issue of credits quality is well known, withone recent study suggesting that as many 85% ofCDM credits used for compliance with EU climate tar-gets could not be guaranteed to deliver emissionreductions (Cames et al, 2016). If the maximum emis-sion reductions are to be achieved, ICAO will have itswork cut out in ensuring only the best quality creditsare used.

However perhaps the more serious problem is theenforceability of the scheme. While the measure isvoluntary, there is an expectation that once a stateagrees to join, they will fully comply with thescheme’s requirements. However it would seemoverly optimistic to claim that there will be full com-pliance with this scheme from the start. ICAO deci-sions are implemented through standards and rec-ommended practices (SARPs) which are adopted byICAO’s 36 member Council and applicable to all ICAOstates. However not only is it possible for states todissent from such SARPs, by ‘filing a difference’, butthere are weak procedures in place to ensure compliance with these SARPs.

The effectives, or not, of CORSIA will be instrumentalin determining its interaction with, or ability toreplace, other measures in place to address aviationemissions.

Interaction with EU ETS A major question is how CORSIA and EU ETS willinteract in the future. Flights to and from Europeanairports were due to be included in EU ETS from 2012,a decision made by the EU following the failure ofICAO to adopt measures to regulate aviation’s cli-mate impact. The decision to include all flights to

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Future interaction linkage unclear: will EU aviation emissions be covered by the bloc's EU ETS or just only be offset under the CORSIA scheme?

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and from Europe was heavily criticised by third coun-tries, notably the US and China, who considered it aninfringement on their sovereignty. Such an argumentwas rejected by the EU’s European Court of Justice ina December 2011 ruling. However facing considerablediplomatic and industry pressure, including a threatof a trade war with China and legislation passed bythe US prohibiting compliance by its carriers with EUETS, the EU backed down and agreed to suspectflights to and from Europe from the scheme untilJanuary 1st 2017. This left the scheme covering onlyflights within Europe - equal to roughly one-quarterof EU aviation emissions.

In response, ICAO agreed at its 2013 triennial assem-bly to begin work on a global market based mea-sures, which became the CORSIA discussed above andadopted at its October 2016 assembly.

In response to this developed, the European Commis-sion proposed in February 2017 to indefinitely sus-pend flights to and from Europe from EU ETS. Thatproposal is currently going through the EU’s legisla-tive process, requiring approval by the European Par-liament and member states. While this proposal isexpected to be adopted by the end of this year, a dif-ference has emerged between the Parliament andmember states over the duration of the exemption.Parliament has suggested a time limited exemption,to 2020, so that we know more about CORSIA beforedeciding the future of EU ETS. Member states haveagreed with the Commission’s proposal to make thisexemption indefinite. Negotiations between thesides, known in EU parlance as trilogue, will takeplace over the coming months.

A more general disagreement, not necessarilybetween member states and Parliament, is whatfuture will exist for EU ETS post-2020. Sections of theaviation industry have demanded that aviation beremoved fully from EU ETS, with a preference forroutes between member states to be covered by CORSIA. The argument put forward, with the supportof some states and MEPs, is that under ICAO’s defini-tion, these are international flights and should therefore be covered by CORSIA.

However here we have a clash between competinglegal obligations. While under the definition of inter-national flights contained in the assembly resolutionestablishing CORSIA a Warsaw-Lisbon flight would beinternational, removing such a flight from EU ETSwould present several difficulties. The first is that itwould undermine the EU’s 2030 climate target,which include flights within and departing from theEU in its calculation. The EU’s 2030 climate target isthe basis for its NDC, so removing flights from EU ETSwould undermine the EU’s NDC.

It’s also clear that placing these flights in CORSIAinstead of EU ETS would substantially reduce the avi-ation sector’s climate ambition. With a stricter cap,the obligation to purchase allowances under EU ETSis four times the obligation to purchase credits underCORSIA. And as the EU will exclude offsetting from itsEU ETS post-2020, the cost of compliance with COR-SIA is likely to be substantially lower than complyingwith EU ETS. This raises the prospects of distortionwithin Europe’s single market, with one transportmode (aviation) provided with a substantially morefavourable regulatory regime than its potential competitors (rail).

More generally, it's unclear why there is a need toremove flights within Europe from EU ETS. Thestrongest objection to EU ETS was against includingflights to and from Europe: third country carriersoperate only a limited number of flights withinEurope, and are in almost full compliance with EUETS. And developing countries may welcome thegreater ambition that would be achieved by retain-ing intra-EU flights under a more effective scheme.

The current legislative proposal does not deal withthe long-term role of EU ETS, instead suggesting thiswill be dealt with in a future proposal once moredetails on CORSIA are known.

Conclusion The difference between regulatory domestic andinternational aviation emissions is likely to be influ-ential in determining the demand for credits from

REPORT24


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these sectors. Domestic aviation emissions mayincreasingly be covered by carbon levies, or at leastexclude the use of international credits. ICAO’s COR-SIA is likely to provide a major source of demand forcredits, though which type of credits is dependent onrules to be adopted by ICAO. And the future interac-tion between EU ETS and CORSIA is unknown, thoughindustry pressure and competing legal requirementswill play a role in shaping this.

ReferencesCames, M. et al. (2016): How additional is the CleanDevelopment Mechanism? Analysis of the applica-tion of current tool and proposed alternatives.www.infras.ch/media/filer_public/11/0f/110fae5f-d1ff-4e8f-9f97-f83a34c86dd1/clean_dev_mecha-nism_en.pdf

Carbon Brief (2016): Analysis: Aviation could consumea quarter of 1.5C carbon budget by 2050. www.car-bonbrief.org/aviation-consume-quarter-carbon-bud-get

IEA (2014): CO2 Emissions from Fuel Combustion2014, IEA, Paris. http://dx.doi.org/10.1787/co2_fuel-2014-en

Transport and Environment (2016): A comparisonbetween ICAO's CO2 offsetting scheme and the EUETS for aviation.www.transportenvironment.org/sites/te/files/publi-cations/2016_12_CE_Delft_ETS_CORSIA_final.pdf

UNFCCC (2016): National greenhouse gas inventorydata for the period 1990–2014. Report by the secre-tariat. Document FCCC/SBI/2016/19.http://unfccc.int/resource/docs/2016/sbi/eng/19.pdf

First avoid, then offset: the solar impulse is a long-range experimental solar-powered aircraft. In July 2016, it completed the first circumnavigation of the Earthby a piloted fixed-wing aircraft using only solar power.

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http://www.infras.ch/media/filer_public/11/0f/110fae5f-d1ff-4e8f-9f97-f83a34c86dd1/clean_dev_mechanism_en.pdf



https://www.carbonbrief.org/aviation-consume-quarter-carbon-budget


http://dx.doi.org/10.1787/co2_fuel-2014-en

http://dx.doi.org/10.1787/co2_fuel-2014-en

https://www.transportenvironment.org/sites/te/files/publications/2016_12_CE_Delft_ETS_CORSIA_final.pdf

https://www.transportenvironment.org/sites/te/files/publications/2016_12_CE_Delft_ETS_CORSIA_final.pdf

http://unfccc.int/resource/docs/2016/sbi/eng/19.pdf


MARKETS26


Article 6 of the Paris Agreement, specifically “Cooper-ative Action” (Article 6.2) offers Parties the opportu-nity to jointly engage in mitigation efforts, underwhich one country reduces its emissions below a pre-determined threshold and generates emission reduc-tions, so-called Internationally Transferable Mitiga-tion Outcomes (ITMOs). The other Party purchasesthe ITMOs and can use them towards their NDC target achievement.

This provides a range of benefits:

n It allows for moving from the piece-mealapproach of project specific activities to morecomprehensive approaches such as one nationalGHG benchmark for a specific GHG emitting sec-tor and one uniform baseline and monitoringsystem on national scale (instead of many project specific monitoring reporting and verification (MRV) schemes);

n It allows for harnessing policies for climatechange mitigation such as the development ofminimum energy performance standards(MEPS), which enforce energy efficiency for keyelectricity consuming devices such as air condi-tioning, fridges, fans and lighting. If designedwisely, policies may have excellent private sectorleverage while featuring negative or lowmarginal abatement costs. Parties engaging incooperative actions will have to design a baselineand monitoring system that covers the

emissions of the whole sector and hence equallyaccount for the effects of such policies.

n Finally, in analogy to the flexible mechanisms ofthe Kyoto Protocol, it will allow for achievingemission reduction potentials where marginalabatement costs are lowest, ensuring a cost-effective overall achievement of NDC targets ofParties involved.

Cooperative action allows for internationally trans-ferred mitigation outcomes (ITMOs) but requires theselling party to subtract the ITMOs sold and notcount them towards achieving its nationally deter-mined contribution (NDC). Hence, cooperative actionnot only requires a comprehensive sectoral baselineand monitoring system, but also equally places somerequirements on the GHG monitoring system of allsectors included in the NDC.

Parties are currently preparing initial pilot activitiesand donor countries are creating funds such as theTransformative Carbon Asset Facility, aiming at sup-porting Parties in achieving transformational changeby developing, preparing and implementing mitiga-tion programs including those achieved through pol-icy actions. In such cases the NDC of the host countryis of great importance.

It is important to note that the Paris Agreementallows for flexibility in designing NDC approaches,

Stumbling Blocks on the Wayto ApplicationThe relevance of baseline setting, Monitoring and Homogenous NDC Formulationfor Cooperative Approaches under the Paris Agreement

by Martin Burian and Joachim Schnurr, GFA Consulting Group

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which may also apply to the baselines for cooperativeapproaches:

n Reporting of NDC targets in absolute or in relative/indexed terms

n The targets often specified on national level andnot broken down to sub-sectors

n Specifically with respect to the conditional NDCtargets, countries often specify the abatementcosts (e.g. the costs of a hydropower plant)instead of the marginal abatement costs (marginbetween hydropower plant and least cost alternative)

Appropriate financial data may be required for thefollowing reasons:

n Cooperative actions may generate ITMOs forthose mitigation activities that manage toreduce emissions beyond the unconditional NDC target.

n The conditional contribution is bound to externalfunding. External funding should relate tomarginal abatement costs and not the totalabatement costs (i.e. the cost of emission reduction/difference between least cost and mitigation action, not the total cost of electricitygeneration).

n Absence of such marginal abatement cost datadoes not allow assessing whether the financialmeans provided through the sales of ITMOs areappropriate to facilitate the mitigation efforts.

In many cases, the NDCs are based on the countries’GHG inventories developed as part of their nationalcommunication using the IPCC guidance. Workingexperience has shown that in many countries, theGHG inventories are not reliable, up to date datasources. For example, under the Forest Carbon

Partnership Facility (FCPF) many countries preparetheir forest reference level (FRL) and submit it toUNFCCC for review. In-depth analysis supported bythe FCPF proves that for some countries forests act assources, while their national communications claimthat forests serve as GHG sinks.

NDCs may be constructed in a number of differentways and contain different GHG targets: (a) a busi-ness-as-usual (BAU) scenario, (b) an unconditionalNDC target (NDC¬C) and (c) a conditional NDC target(NDCC). The achievement of the conditional NDC tar-get may be bound to external financial (and techni-cal) support that typically corresponds to the abate-ment costs (e.g. the total costs of a hydropower plant)of mitigation measures. Cooperative actions mayevolve as one of the instruments for structuringexternal financial support.

In developing these targets (and pathways/scenariostowards those targets), a wide range of approacheswere applied. The target is either constant (in abso-lute or relative terms), was created considering atrend (based on extrapolation from reference dataover a historic reference period) or is indexed (e.g. topopulation, GDP or to a specific output). In order toproperly account for cooperative approaches, Partieswill have to consider these scenarios in order to subtract ITMOs, which in practice may create some complications.

An ideal caseIf the baseline and monitoring system of the sub-sec-tor chosen for the cooperative approach is well inte-grated into a credible BAU scenario for the overarch-ing IPCC sector, cooperative approaches may gener-ate credible emission reductions1:

n Country A and Country B agree on jointly engag-ing in cooperative approaches for, say, the

1 The subsequent examples implicitly assume that under cooperative approaches, ITMOs cannot only be sold at the date for which the target is formulated (e.g.2030), but also in intermediate steps considering the performance against a pathway towards the target. This could, for example, be every two years follo-wing the timing of national communications and biennale update reports. This would allow to produce payments against performance – not only at theend, but also during implementation, partially addressing Parties’ financing needs. However, it is important to note that such details have not yet been deci-ded in the international negotiation process.

MARKETS28


electricity sector (being a sub-sector of the IPCC‘Energy’ sector). Country B will pay Country A forITMOs, if Country A manages to reduce the GHGemissions of its electricity sector below theunconditional NDC target.

n Country A chose 2010 as reference year and 2030as target year. The sector’s emissions amount to100 units in 2010 and are projected to increase to 120 units by 2030 under the BAU scenario. Itsunconditional NDC target amounts to 110 andCountry A aims to achieve an emission level of100 GHG units with external support (condi-tional NDC target).

n Now let’s assume Country A conducts a range ofpolicy reforms (granting preferential grid accessfor independent power producers using renew-able energy technologies/feedstocks, and reduc-ing fossil fuel subsidies for electricity generation)and offers a feed-in-premium for RE technologiesmarginalized so far (e.g. PV and biomass). Themixture of policies and financial incentives leadsto achieving an emission level of 100 GHG unitsuntil 2030. Country A’s actual GHG pathway cor-responds to its conditional NDC target. Country Amay hence sell 10 ITMOs to Country B, and Article6.2 and the cooperative actions work for bothsides involved.

100

Emis

sion

s

(in t

CO2e

)

Time (in Years)

BAU

NDC Uncond

NDC Cond

110

120

2010 Start Date 2030

BAU: 120 NDC Uncond 110 ERs: 10 NDC Cond: 100 Actual: 100

NDC cond. & uncond. achieved

NDC Conond Actual=NDC

Cond

ERs

:

Figure 1: Ideal case scenario

29


Weak data used for NDC development may lead to in-consistencies for cooperativeactionsHowever, if the baseline and monitoring frameworkof cooperative actions is weak, this may lead toexcess issuance of emission reduction certificates.Returning to above-cited example for the electricitysector:

n The monitoring framework of the cooperativeaction for the electricity sector in Country Aclaims that it produces 10 units of emissionreductions.

n At the same time, monitoring of the energy sec-tor (including the electricity sector) shows thatno emissions were reduced and hence the condi-tional and unconditional NDC targets weremissed.

n Consequently, in such a case it may be unclearwhether the unconditional NDC, the conditionalNDC (including underlying financial data) and/orthe BAU scenario were set incorrectly.

n Also, the accurate baseline and monitoring of theelectricity sector’s emissions may be embeddedinto a less accurate GHG emission estimate forthe energy sector, which may lead to scenarioswhere countries sell ITMOs and at the same timemiss their NDC targets.

This is illustrated by the graph below:

100

Emis

sion

s

(in t

CO2e

)

Time (in Years)

BAU

NDC Uncond

NDC Cond

110

120

2010 Start Date 2030

BAU: 120 NDC Uncond : 110 ERs: 10 NDC Cond: 100 Actual: 105

???

NDC C d

Actual

ERs

?

?105

Figure 2: Weak performance scenario

MARKETS30


Recommendations for engaging in cooperative actionsThe Paris Agreement allows for differing approachesfor NDC formulation. This results in heterogeneousNDC targets and for some countries, the contribu-tions are specified on sectoral level. Testing coopera-tive approaches will require addressing such versatil-ity. Against that background, it is recommended toParties engaging in cooperative actions that theynegotiate clear reporting requirements and establisha strong accounting framework. Thats frameworkmay comprise:

n A quantitative BAU scenario for the sub-sector ofcooperative approaches (e.g. the electricity sec-tor). Such a scenario may be built using Tier 2and Tier 3 data and methods. The BAU scenariomay be built following the UNFCCC’s ‘Standard-ized Baselines’ guidelines, which allow to developa national GHG benchmark using CDM method-ologies and subject to external validation andQA/QC procedures by the UNFCCC Secretariat.This allows not only to address some designneeds of cooperative approaches but also, in thisspecific point, to build a bridge between theKyoto Protocol and the Paris Agreement.

n A quantitative BAU scenario for the sector incor-porating cooperative approaches to ensure thatthe sub-sector (e.g. the electricity sector) is wellembedded in a quantitative manner into the big-ger sector (e.g. the energy sector).

n Quantitative NDC targets (and pathwaystowards those targets over time), both for uncon-ditional and for conditional contribution. Typi-cally, targets for sub-sectors are not specified inNDCs, however they may apply the target settingof the sector or overall, the country.

n Having quantitative pathways would allow forselling ITMOs not only at the point in time forwhich the target is formulated (e.g. 2030), butalso along the way – for example, following thereporting periods of biennale update reports andnational communications.

If the negotiation process allows for the issuance ofITMOs along a pathway, it would not only enablethose countries to participate which have the meansto finance mitigation activities up-front, but alsocountries that depend on external financial support.

n Specification of marginal abatement costs (e.g.the costs difference between one unit of electric-ity generated by a renewable energy technologycompared to the least cost alternative (e.g. coal)),and not abatement costs (e.g. the total costs of ahydropower plant).

Following these principles may help to avoid possibleinconsistencies between the volume of ITMOs credited and the NDC sector’s overall performance.

CARBON MECHANISMS REVIEW

Opportunities for India touse Carbon MarketsA high-level workshop has discussed how Indiacan effectively use market mechanisms toachieve its climate mitigation objectives. The documentation of the workshop is nowavailable. Find out more at www.carbon-mechanisms.de/en/2017/opportunities-for-india-to-utilise-market-based-climate-policy-instruments/

Promoting Carbon Pricing:New BrochureThis brochure provides an overview of carbonmarket projects funded by the BMUB and showcases the diverse carbon market-relatedactivities initiated by the Federal German Government in collaboration with various partners. Download at www.carbon-mechanisms.de/en/2017/new-brochure-on-promoting-carbon-pricing/

GlossaryAll Carbon Market terms and abbreviations areexplained in detail in the glossary on the JIKOwebsite. You can view the glossary here: www.carbon-mechanisms.de/en/service/glossary/

http://www.carbon-mechanisms.de/en/2017/new-brochure-on-promoting-carbon-pricing/

http://www.carbon-mechanisms.de/en/2017/new-brochure-on-promoting-carbon-pricing/

http://www.carbon-mechanisms.de/en/2017/opportunities-for-india-to-utilise-market-based-climate-policy-instruments/

http://www.carbon-mechanisms.de/en/service/glossary

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