Corresponding Adjustments: Bad Idea at the Wrong Time

January 10, 2022

by Craig Ebert, President, Climate Action Reserve

In our fight to contend with the climate crisis, many parties have noted the importance of requiring corresponding adjustments for actions that are taken to reduce emissions. The basic argument for corresponding adjustments (CAs) in international greenhouse gas accounting is sound—the world can ill afford more than one country counting the same emission reduction against their national targets. The need to avoid such double counting is highlighted by Article 6.2 of the Paris Agreement, which establishes the rules of the game that allows one country to transfer an emission reduction to another country in a very clear-cut manner to avoid both countries counting the same emission reduction. For similar reasons, emission credits that the international aviation industry uses to meet their emission reduction targets under CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation) must be subtracted from the host country’s claim against its own commitments to avoid double counting (due to archaic rules governing greenhouse gas accounting, emissions from international aviation are a separate carbon pool not counted in national emission inventories and need to be treated separately).

Unfortunately, some parties have tried to extend this argument to the private sector, insisting that voluntary emission reductions by the private sector, particularly the use of offsets, should be subject to CAs so that a company and the host country cannot claim the same reduction. This argument obliterates the distinction between double counting and double crediting and is seemingly oblivious to the fact that most national greenhouse gas inventories are comprised of private sector activities within a host country’s boundaries (e.g., manufacturing, production of fossil fuels and electricity, transportation related to corporate operations, etc.).1 That is, countries are already “taking credit and counting” emissions from private sector activities since these emissions comprise a significant portion of national greenhouse gas accounts. Any attempt to separate out emission reduction activities by the private sector from national greenhouse gas reduction commitments makes no sense—countries ought to credit private sector emission reductions as part of their national commitments to reduce their emissions. At the same time, any company investing in such reductions should also be able to claim credit. This double claiming is critical to the climate fight, reducing the barriers to private investment in emission reductions while also allowing the host country to claim credit.

Some proponents for CAs for corporate emission reduction activities argue their focus is only on voluntary emission reduction activities that occur beyond a company’s boundaries, i.e., voluntary credits or offsets. The rationale for this proposition is unclear. Voluntary actions are simply one of many policy strategies available to any country to achieve its reduction goals. For example, in the 1990s a key component of US climate policies wasere a wide variety of voluntary programs launched by the US Government (e.g., EnergyStar, Natural Gas Star, AgStar, etc.). Regardless of one’s opinion about voluntary actions, they are one policy lever available to countries to employ and should not be disadvantaged. It should also be noted that requiring countries to increase their emission reduction obligations for every tonne of credits achieved by the private sector creates a totally untenable situation the more successful voluntary actions are. For example, if a country were wildly successful with encouraging private sector voluntary actions within its borders, but had to debit its national account with Cas, it is possible a country could find itself with reduction commitments it can no longer realistically achieve (the math is simple: assume voluntary actions reduce national emissions beyond 50% of its commitment, but national targets get adjusted upward to account for voluntary actions, then a country is left with the implausible goal of achieving all of its reduction commitments on less than half of its emissions). What is the rationale for a policy that leads to such an untenable result?

The requirement for Cas will also stifle private sector investment in climate mitigation. If companies have to obtain a CA from the host country and the country has to adjust its commitments upward, one is creating a zero sum game between private voluntary actions and national commitments. Moreover, any company would be facing additional, unknown barriers to obtaining credit for any emission reduction investments it intends to make voluntarily (i.e., countries have yet to set up the procedures that would be required to obtain a CA). Most importantly, Cas would significantly retard if not outright kill the incentive for companies to take voluntary action. What CEO could justify voluntary investments if it were also having to contend with potential compliance-related actions down the road when countries could rightly claim: “We don’t care what you did voluntarily with Cas that did not benefit us; now our country has to meet its commitments so now you are going to be required to do more?” The impact on investment would be chilling.

Erecting barriers to private sector investment would deprive the international community of a major opportunity for channeling sustainable investment into the countries that need it most, i.e., the developing world. The sad truth today is that the international community is failing in its commitment to assure that developing countries have the financial resources to invest in a more sustainable future. One needs look no further than the ongoing debate over providing $100 billion/year as part of the Paris Agreement. While additional commitments were made at COP26 in Glasgow, the world is still short of the $100 billion goal, and that goal is woefully inadequate for developing countries’ needs. Private sector investment potential is far greater than this amount, including recent estimates that the demand for voluntary credits alone could reach hundreds of billions of dollars per year. Stifling this investment pool by not allowing the host country to claim credit is in no one’s interest.

The international community also needs to give more thought to the wisdom of telling companies to focus on reducing their own emissions before investing elsewhere. For many companies in the voluntary space, the major source of their emissions come from electricity use (also known as Scope 2 emissions). Do we really need the major companies of the world, often located in the richer countries, helping these same rich countries green their electricity grids? Renewable options such as wind or solar PV are already economic or nearly so in many markets. The EU and California are already well on their way to proving how feasible a more sustainable electricity grid can be. They don’t need the help of Fortune 500 companies to do so. Companies that are willing to voluntarily invest in reducing their own emissions should be encouraged to support countries that have insufficient capital to build out a more sustainable grid. Both the companies and the host country should receive credit for doing so.

One last point: Critics of voluntary credits often argue that we can’t be sure that actual reductions are occurring. That is nonsense. Voluntary credits are nothing more than an emission reduction beyond the boundaries of a company’s operations. We know how to measure those reductions in a high-quality fashion as accurately, if not more so, than the emissions on which they are based.2 Furthermore, efforts are underway to define what “high quality” means and should shed light for all of us on how to obtain higher-quality credits. Criticisms will be leveled that perhaps the outcome was not perfect. Those criticisms are debatable, but that is not the point.

The world is out of time to address the climate crisis and we are failing ourselves, our children, and future generations miserably by the inaction ruling the day. The international community can continue to refine its understanding of high-quality accounting principles along the way, but most importantly, let us not let perfection be the enemy of the good. We need to unleash massive amounts of investment now by all public and private sector entities to avoid catastrophic climate change. Companies are justifiably concerned that they will be accused of “green washing” if voluntary actions are viewed with suspicion. These concerns are keeping enormous amounts of capital on the sidelines, presumably until there is more clarity about the “right path” to follow. But that day of clarity may never arrive. The world does not know exactly how it is going to achieve a non-carbon world. But we need to demand that investment happen today and all credible efforts should be applauded. That does not mean companies should not be subject to scrutiny about the wisdom of their investments; they definitely should be. But let us build on the momentum toward a no carbon world along the way by recommending better solutions and not castigating companies or countries for past actions. The opportunity for success is much more important than the fear of failure.

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