Outside in? Using international carbon markets for mitigation not covered by nationally determined contributions (NDCs) under the Paris Agreement

ABSTRACT

The Paris Agreement establishes provisions for using international carbon market mechanisms to achieve nationally determined contribution (NDCs). In international negotiations on the rules governing the Agreement, an important question is whether and under which conditions mitigation outcomes that are not covered by the scope of NDCs should be eligible for international transfer and use by another country to achieve its NDC. Allowing the transfer and use of outside-scope mitigation could facilitate the identification of mitigation potential and reduce the costs of achieving NDCs. It could, however, also provide disincentives for countries to enhance the scope of their NDCs, be perceived as unfair towards countries with similar circumstances and economy-wide targets, reduce countries’ incentives to ensure the quality of carbon market units generated, and lead to double counting. To address these concerns, international rules could: require transferring countries to account for such transfers by applying ‘corresponding adjustments’ even though the emission reductions occur outside the scope of NDCs, or to bring relevant sectors and greenhouse gases into the scope of their next NDCs; adopt safeguards for unit quality, e.g. through international oversight or strict additionality tests; impose other restrictions; and/or require countries to quantify and specify the scope of their NDC in terms of sectors and greenhouses gases covered.

Key policy insights:

• Not allowing the transfer of outside-scope mitigation outcomes, or allowing such transfers without a corresponding adjustment by the transferring country, would both require determining whether a mitigation outcome occurs within or outside the scope of NDCs, which can be difficult in some instances.

• Requiring corresponding adjustments for outside-scope mitigation is more easily implemented than other options seeking to address possible disincentives for broadening the scope of NDCs but could discourage countries from engaging in outside-scope transfers.

• Providing temporary exemptions, accompanied by other safeguards such as international oversight and strict additionality tests, may therefore be an appropriate means of giving countries time to build capacity and gather data and to expand their NDCs in the future. Which exemptions apply, and for how long, are important policy choices when balancing different goals, perspectives and practical implementation challenges.

KEYWORDS:

• Paris Agreement
• carbon markets
• emissions trading
• environmental integrity

1. Introduction

Article 6 of the Paris Agreement establishes provisions for engaging in international cooperation, including through carbon market mechanisms, to support the achievement of nationally determined contributions (NDCs). The cooperative approaches under Article 6.2 recognize that Parties to the agreement may choose to use ‘internationally transferred mitigation outcomes’ generated abroad to help achieve their own NDCs; Article 6.4 creates a mechanism, under international oversight, for crediting emissions reductions that may also be transferred and used by other countries towards their NDCs.

Article 6 includes several provisions to ensure environmental integrity and robust accounting. Article 6.2 requires countries to ‘ensure environmental integrity’ and to ‘apply robust accounting to ensure, inter alia, the avoidance of double counting.’ Double counting means that an emission reduction is used more than once to achieve climate mitigation targets. It can occur in different ways; a key risk is that the country acquiring a carbon market unit and the country transferring it both claim the associated emission reduction to achieve their targets (Hood, Briner, & Rocha, 2014; Howard, 2018a; Prag, Hood, & Barata Martins, 2013; Prag, Hood, Aasrud, & Briner, 2011; Schneider, Füssler, Kohli, et al., 2017; Schneider, Kollmuss, & Lazarus, 2015).

The decision adopting the Paris Agreement specifies that double counting be avoided on the basis of a ‘corresponding adjustment by Parties for both anthropogenic emissions by sources and removals by sinks covered by their NDCs’ (Decision 1/CP.21, paragraph 36). The Katowice Climate Package, adopted in 2018 and also referred to as ‘Paris Rulebook,’ further specifies that these adjustments are to be reported in a ‘structured summary,’ including an emissions balance in which additions to NDC-covered emissions are made to account for the (first) transfer of mitigation outcomes, and subtractions are made to account for the acquisition or use of internationally transferred mitigation outcomes (Decision 18/CMA.1, Annex, paragraph 77(d)). The Katowice Climate Package, however, does not include rules for Article 6 because negotiations could not be concluded. At the Bonn Climate Conference in June 2019, countries expressed different views on whether the provisions in the Katowice Climate Package may need to be revisited in the light of a future agreement on international rules for Article 6.

An important controversy in the negotiations under Article 6 relates to the treatment of mitigation outcomes that are not covered by NDCs. In their first NDCs, some countries communicated economy-wide targets covering all greenhouses gases (GHGs). Other countries, in particular developing countries, have mitigation targets that are not economy-wide and cover only certain activities, GHGs and/or sectors of the economy. For example, China's emissions target covers only carbon dioxide (CO₂) and many Least Developed Countries (LDCs) have communicated only targets for the expansion of specific renewable energy technologies (Graichen, Cames, & Schneider, 2016). In international negotiations on Article 6, two main questions are discussed:

1. Should mitigation outcomes from sectors and GHGs that are not covered by NDCs be allowed for international transfer and use towards another country's NDC?

2. If this is allowed, how should the transfer and use of such mitigation outcomes towards NDCs be accounted for?

These questions are similarly relevant for the use of mitigation outcomes under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) implemented under the International Civil Aviation Organization.

This paper outlines key issues and options relating to these questions. Whether, and how, such mitigation outcomes should be internationally transferred and accounted for raises many issues of capacity, fairness, breadth of mitigation, and incentives for making progress in the scope and ambition of NDCs over successive NDC cycles.

To identify key issues and options for treating such mitigation outcomes, the paper evaluates the draft negotiation texts (UNFCCC, 2019a, 2019b) at the time of writing (September 2019) and submissions by countries¹ (Obergassel, 2017), and also draws on proposals and assessments in the literature (CCAP, 2017; Howard, 2018b; Kreibich, 2018; Kreibich & Obergassel, 2016; Marcu, Vangenechten, Martin-Harvey, & González Holguera, 2017; Mizuno, 2017; Müller & Michaelowa, 2019; Obergassel & Asche, 2017; Schneider & Ahonen, 2015; Schneider & La Hoz Theuer, 2019; Schneider, Füssler, Kohli, et al., 2017; Schneider, Füssler, La Hoz Theuer, et al., 2017; Spalding-Fecher, 2017; Warnecke, Höhne, Tewari, Day, & Kachi, 2018).

The paper first explores what is meant by mitigation inside and outside the scope of NDCs and finds that this is, in itself, not an easy issue to resolve (section 2). The paper then systematically identifies and examines the key advantages and disadvantages cited for allowing for the international transfer and use towards NDCs of mitigation outcomes generated outside of NDCs (section 3). This is followed by an identification and analysis of options for addressing concerns with allowing such mitigation outcomes to be internationally transferred and used (section 4), before drawing conclusions (section 5).

The analysis addresses both Article 6.2 and Article 6.4 and assumes that emission reductions resulting from the mechanism established under Article 6.4 are accounted for under the framework of Article 6.2, even though this approach is not supported by all countries. The paper does not consider a purely domestic context, i.e. the possibility that mitigation outcomes from outside a country's NDC would be used by that country in achieving its own NDC. Likewise, the use of carbon markets for the voluntary offsetting of emissions is not considered. Lastly, the paper focuses on mitigation outcomes generated under crediting programmes because, to date, all emissions trading systems fall within the scope of NDCs (Schneider, Cludius, & La Hoz Theuer, 2018).

2. Determining what is inside and outside scope

Identifying what is inside and outside the scope of NDCs is not straightforward, for several reasons:

• Lack of clarity of first NDCs: In current NDCs, the scope of mitigation targets is not always fully clear (Graichen et al., 2016; Howard, Chagas, Hoogzaad, & Hoch, 2017). The Katowice Climate Package includes detailed provisions on how countries should describe or clarify the scope of their NDCs. These provisions may help address this challenge in the future, but some of these provisions are only mandatory for second and subsequent NDCs² or only require countries to provide relevant information by 2024.³

• Diversity of NDCs: Many NDCs include some form of GHG emissions target. In this case, defining the scope of the NDC is relatively straightforward: the country only has to specify which sectors, gases, categories of emissions by sources and removals by sinks, and, for the land use, land-use change and forestry (LULUCF) sector, which activities and carbon pools are covered by that target. Some NDCs, however, include only non-quantified mitigation actions or targets expressed in metrics other than GHG emissions, such as targets in megawatt of renewable power capacity to be installed, hectares of land to be afforested, or number of clean cookstoves to be distributed. The draft Article 6 negotiation texts, however, address the issue of outside-scope emission reductions by referring to emission reductions and removals ‘from/in sectors and greenhouse gases (that are) not covered by the NDC’ (UNFCCC, 2019a section VI.A, 2019b section VI.A). For NDCs that include specific actions or non-GHG targets, this raises the question of which ‘sectors’ and ‘greenhouse gases’ are covered by the NDC. For instance, a target for the installation of biogas digesters could affect multiple emission sources and GHGs in the energy, waste, agriculture and forestry sector. Would all or only some of these sectors and gases be covered by the NDC? If the international rules for the treatment of outside-scope mitigation relate to ‘sectors’ and ‘greenhouse gases’ covered by the NDC, some countries would need to quantify or convert their actions or non-GHG targets into GHG emissions terms and specify which ‘sectors’ and ‘greenhouses gases’ are covered. This can be complex given that some actions or targets in non-GHG terms could affect many emission sources and gases.

• Determination whether mitigation outcomes occurred within or outside scope: Even if an NDC is clearly formulated and specifies which ‘sectors’ and ‘greenhouse gases’ are covered, determining whether a mitigation outcome occurred within or outside scope can be technically and methodologically difficult, for two reasons: First, some mitigation measures may reduce emissions within the scope of an NDC but increase emissions outside the scope, or vice versa. This could, for example, occur if biomass is used for energy generation and the country's NDC covers the energy sector but excludes the land-use sector. It may also occur through leakage effects, i.e. indirect emissions increases outside the project boundary (Kollmuss, Lazarus, Lee, LeFranc, & Polycarp, 2010). For example, if an NDC covers only CO₂, the use of natural gas instead of oil could decrease CO₂emissions within the scope of the NDC but increase methane emissions from oil and gas operations outside the scope of the NDC. This raises questions of how the net effect (i.e. the mitigation outcomes) should be allocated within or outside the scope of an NDC. Second, some mitigation measures can affect many different emission sources. While quantifying how much emission reduction occurred within or outside the scope of an NDC is straightforward for some project types, such as landfill gas projects, it is more difficult for others. For example, the production of biofuels can be associated with a range of upstream emissions, such as N₂O emissions from fertilizer application, CO₂ and N₂O emissions from fertilizer production, or CO₂ emissions or removals in the land-use sector. Current crediting mechanisms often use simplified approaches, such as default emission factors that include all emission sources. These simplified approaches may need to be replaced by more complex approaches in order to determine what share of emission reductions occurred within and outside the scope of NDCs. As the scope of NDCs varies among countries, new methodological standards would have to be flexible enough to accommodate these.

Due to these challenges, it is also uncertain what share of global GHG emissions is covered by NDCs. Graichen et al. (2016) identified 55 NDCs with GHG targets that cover all sectors of the economy and at least the three main GHGs – CO₂, CH₄ and N₂O – representing together 58% of global emissions. Other studies have estimated the amount of GHG emissions lying outside the scope of all forms of NDC targets, including those specified in GHG metrics, in non-GHG metrics and non-quantified actions. Schneider, Füssler, La Hoz Theuer, et al. (2017), based on NDC data by Meinshausen and Alexander (2016), estimate that 12–14% of global GHG emissions do not fall within the scope of mitigation targets in 2030. This range is in line with an estimate that NDCs cover 88% of global emissions (Fransen, Northrop, Mogelgaard, & Levin, 2017). Most emissions outside the scope of NDCs occur in China, which has communicated a target for CO₂ only.

3. Advantages and disadvantages of inclusion

This section provides an overview of the main advantages and disadvantages of allowing outside-scope mitigation to be internationally transferred and used towards achieving NDCs. The main advantages are:

• Identification of mitigation potential: Countries may not have included all sectors and gases in their NDCs because they have limited information on the emissions or abatement opportunities in these sectors. Incentivizing mitigation action in these sectors through Article 6 could facilitate capacity building and data gathering. Strengthening the technical and political readiness for these sectors could facilitate the expansion of NDC coverage in the future (Spalding-Fecher, 2017).

• Reduction of mitigation cost: A sizeable portion of global emissions are not covered by NDCs. Allowing transfers from outside the scope of NDCs could bring the benefits of carbon markets into these sectors, increase the potential supply of mitigation outcomes, and lower the costs of mitigation in acquiring countries. This may make it easier to achieve NDCs and enhance the ambition of subsequent NDCs, though lower carbon market prices could potentially also have negative impacts on mitigation, such as increasing the risk of carbon lock-in in acquiring countries.

The main disadvantages are:

• Disincentives to enhancing the scope of NDCs: Allowing outside-scope mitigation outcomes to be used towards NDCs without requiring corresponding adjustments could create disincentives for countries to move towards economy-wide targets, because they may fear losing crediting revenues if they do so (Howard, 2018b; Schneider & La Hoz Theuer, 2019; Spalding-Fecher, 2017; Warnecke et al., 2018). This is because increasing the scope of NDCs could reduce the country's ability to transfer mitigation outcomes, as it would need to ensure that it maintains sufficient mitigation to still achieve its NDC. The extent to which such disincentives exist also depends on whether carbon market considerations play a role in defining the scope of NDCs and whether inclusion or exclusion of a sector provides more opportunities to access other forms of climate finance (Spalding-Fecher, 2017).

• Fairness: Article 4.4 of the Paris Agreement ‘encourages countries to move over time towards economy-wide (…) targets.’ Allowing for mitigation outcomes generated outside the scope of NDCs could be seen as disadvantaging countries in similar circumstances that have already moved to economy-wide NDCs.

• Lack of incentives for ensuring quality: If the mitigation outcomes come from within the scope of an ambitious NDC, the transferring country has a strong incentive to only engage in transfers where ‘quality’ is ensured (i.e. which are backed by actual emission reductions). If the country transfers units that lack quality (e.g. from projects that are not additional), it would be more difficult for the country to achieve its NDC as it would have to ‘compensate’ for such transfers by further reducing emissions (Michaelowa, Hermwille, Obergassel, & Butzengeiger, 2019; Schneider & La Hoz Theuer, 2019). However, for mitigation outcomes generated outside the scope of NDCs, countries would not have this incentive.⁴

• Double counting risks: As highlighted above, the draft negotiation texts refer to outside-scope mitigation in terms of emission reductions and removals from sectors and GHGs that are not covered by the NDC (UNFCCC, 2019a, 2019b). Depending on how this provision is understood, transferring outside-scope mitigation could lead to double counting of mitigation outcomes. If coverage of the ‘sectors’ and ‘greenhouse gases’ is only defined based on GHG emissions targets communicated in an NDC, and does not also reflect any actions or non-GHG targets in the NDC, transferring mitigation outcomes not covered by the GHG emissions target could lead to double counting with actions or non-GHG targets that address sectors or GHGs not covered by the GHG emissions target. A country could, for example, have a CO₂ emissions target for the energy sector and a target expressed in hectares of land to be afforested in the LULUCF sector. If the coverage in terms of ‘sectors’ and ‘greenhouse gases’ were to only include the CO₂ emissions from the energy sector, then transferring mitigation outcomes from an afforestation project could lead to double counting with the afforestation target. To effectively avoid double counting with all mitigation communicated in NDCs, countries would need to quantify their NDC in terms of CO₂ equivalents and clarify the ‘sectors’ and ‘greenhouse gases’ covered in a way that captures all sources, sinks and gases affected by the mitigation actions or targets communicated in the NDC.

4. Options for addressing concerns

Countries and stakeholders have proposed several broad options for addressing the concerns arising from the disadvantages of allowing outside-scope mitigation outcomes to be transferred and used by acquiring countries towards achieving their NDCs:

1. Accounting: The transferring country could be required to apply corresponding adjustments, regardless of whether the mitigation outcomes occur inside or outside the scope of the NDC (Marcu et al., 2017; Mizuno, 2017; Schneider, Füssler, Kohli, et al., 2017).

2. Progression in scope: To address concerns regarding disincentives to broadening the scope of future NDCs, the transferring country could be required to bring relevant sectors and GHGs into the scope of its next NDC (CCAP, 2017; Howard, 2018b; Spalding-Fecher, 2017; Warnecke et al., 2018).

3. Quality: To address concerns regarding insufficient incentives to ensure unit quality, mitigation outcomes from outside the scope of NDCs could only be eligible for use towards the acquiring country's NDC if certain conditions, such as sufficient international oversight, are satisfied.

4. Restrictions: To contain – rather than address – risks and concerns with using such mitigation outcomes, their generation, transfer or use could be restricted in number (e.g. through quantitative limits), in time (e.g. by allowing the generation or use only until a certain date) or by eligible countries (e.g. by allowing the generation only from certain countries) (Schneider & La Hoz Theuer, 2019; Spalding-Fecher, 2017).

5. Quantification of NDCs: To avoid double counting with actions or targets expressed in non-GHG terms, countries could be required to quantify all actions and targets in their NDC in terms of GHG emissions and to clearly specify the scope of the NDC in terms of ‘sectors’ and ‘greenhouse gases’ covered.

The next sections explore these broad options in more detail, including by elaborating and examining specific implementation options.

4.1. Accounting

The Paris Agreement, the Katowice Climate Package and the draft negotiation texts on Article 6 require that the international transfer of mitigation outcomes is accounted for through the application of ‘corresponding adjustments’ to NDC-covered emissions. Different options are still being considered for the basis of such adjustments, when they are applied, how they are reported and reviewed, and what (international) governance arrangements are needed (Howard, 2018a; Müller & Michaelowa, 2019; Schneider, Füssler, Kohli, et al., 2017; Vaidyula & Hood, 2018).

To address concerns with the transfer of outside-scope mitigation, the accounting framework under Article 6.2 could require corresponding adjustments by transferring countries, even if the mitigation outcome is not included in the scope of the country's NDC (Marcu et al., 2017; Mizuno, 2017; Schneider, Füssler, Kohli, et al., 2017). Table 1 compares the implications with a situation in which no such adjustments were required.⁵

Table 1. Overview of advantages and disadvantages of requiring the application of corresponding adjustments by the transferring country.

	Not require corresponding adjustments by the transferring country	Require corresponding adjustments by the transferring country
Avoidance of double counting	Yes	Yes (although the adjustment would not be needed to avoid double counting)
Ability of the host country to achieve its NDC target	Not affected	Could be undermined (because the country may have to further reduce emissions within the scope of its NDC)
Incentives for moving towards economy-wide targets	Possible disincentives due to potential loss of revenues from crediting	No disincentives, and possibly some incentives to move towards economy-wide targets (because this would make it easier to use Article 6 to harness mitigation potential in sectors that are currently outside scope)
	Possible incentives because capacity is built to enhance the scope in the future
Potential for using Article 6	Easy to engage in Article 6 for outside-scope sectors	Potentially difficult to engage in Article 6 for outside-scope sectors (because the country may have to compensate for that by further reduce emissions within the scope of its NDC)
Fairness	Puts countries with economy-wide targets at a disadvantage compared to countries with similar circumstances but without economy-wide targets	No disadvantage to countries with economy-wide targets
Incentives for ensuring unit quality	No incentives (because a lack of unit quality would not affect the country's ability to achieve its NDC)	Few incentives (because a country with an ambitious NDC target may have to reduce emissions even further within its NDC if units lack quality)
Need to identify whether reductions lie inside or outside	Yes	No

Both options avoid double counting. Strictly speaking, a corresponding adjustment by the transferring country is not needed to avoid double counting because the mitigation is generated outside the scope of its NDC (Schneider, Füssler, Kohli, et al., 2017). However, the provisions for the reporting of a ‘structured summary’ as part of the enhanced transparency framework under the Katowice Climate Package do not differentiate between mitigation outcomes covered and not covered by NDCs, but generally require additions for (first) transfers of mitigation outcomes. This may be interpreted to imply that corresponding adjustments are required regardless of where the mitigation outcomes are generated; however, the status of these provisions is controversial among countries.

An important difference is how the options affect the ability of the transferring country to achieve its NDC. If no adjustment is required, this ability is not affected, as the emission reductions occur outside the scope of the NDC. If, however, the transferring country has to make a corresponding adjustment to the emissions covered by its NDC, even though these emissions are not reduced by the transfers, its emissions balance would be higher compared to a situation in which it had not engaged in the Article 6 activity. This can make it more difficult for the country to achieve its NDC, as it would have to compensate for the shortfall in emission reductions by further reducing emissions within its NDC scope. However, this consideration only applies if the transferring country has an ambitious NDC target and if the country has a GHG inventory that is sufficiently complete and accurate to observe the emission reductions from the Article 6 activity.⁶

These matters are also relevant for some of the other elements analysed in Table 1:

• Potential for using Article 6: For the reasons outlined above, it would be considerably easier for countries to use Article 6 in outside-scope sectors if no adjustment is required, as compared to the situation where an adjustment is required. Requiring adjustments could thus lead to a lower potential for using Article 6 for outside-scope emission reductions. Countries could, however, broaden the scope of their NDC at any time or use other forms of international cooperation to reduce emissions.

• Incentives for moving towards economy-wide targets: If an adjustment is required, transferring countries would arguably not be disincentivized from moving towards economy-wide targets. Rather, requiring an adjustment could create incentives for countries to broaden the scope of their NDCs, because the inclusion of the emissions in their NDCs would make it easier to use Article 6 to reduce them, as the country would then be able to count the reductions towards its own NDC and would not have to compensate for the shortfall in emission reductions within the scope of its NDC. On the other hand, not requiring an adjustment could also arguably facilitate moving towards economy-wide targets, as it could make it easier to engage in outside-scope mitigation under Article 6 and thereby help to build capacity (e.g. through data collection) to include the emission sources in future NDCs.

• Fairness towards countries in similar circumstances but with economy-wide targets: As pointed out above, not requiring an adjustment puts countries with economy-wide targets at a disadvantage compared to countries with similar circumstances but without economy-wide targets.

• Incentives for ensuring unit quality: Here, neither option provides strong incentives for ensuring unit quality. Whether or not the emission reductions actually occur has no implications for the ability of the country to achieve its NDC. If no adjustment is required, the ability of the country to achieve its NDC is not affected. If an adjustment is required, the ability of the country to achieve its NDC is affected, regardless of whether the units have quality.

A practical – but important – difference between the two options relates to the need to identify whether emission reductions occurred inside or outside the scope of NDC targets. If an adjustment is required for all mitigation outcomes, this would not be necessary, whereas it would be necessary if no adjustment is required or if outside-scope mitigation outcomes were not eligible for use towards NDCs. However, differentiating mitigation outcomes according to where they occur can be challenging (see section 2 above).

Moreover, countries have discretion to broaden the scope of their NDCs at any time, and when submitting a subsequent NDC, they could still broaden the scope of the targets communicated in the period applicable to the first NDC. This could give rise to situations where what is inside or outside the scope of the NDC could change over time. This could increase complexity in tracking and accounting for what lies within and outside scope (Schneider, Füssler, Kohli, et al., 2017).

4.2. Progression

Some countries have proposed that countries transferring outside-scope mitigation be encouraged or required to bring the relevant emission sources into the scope of their NDCs at a future point in time (CCAP, 2017; Howard, 2018b; Spalding-Fecher, 2017; Warnecke et al., 2018). The main rationale of this approach is that the implementation of Article 6 activities may help build capacity and collect data so that the country is likely to be in a better position to include the relevant emission sources in future NDCs.

This option could be implemented in different ways:

• The scope of the NDC could be broadened at the next NDC cycle or as of a certain fixed date (e.g. for mitigation outcomes generated as of 2031). The latter approach may be simpler and would allow a more uniform application across countries with different NDC periods but might require countries to update their NDCs outside the regular NDC cycle (if the current NDC already includes targets for beyond that date).

• The expansion of the scope could relate to the specific geographical areas, categories of emissions or removals, GHGs, or, in the case of the LULUCF sector, carbon pools and activities, in which Article 6 activities are implemented. In this case, it would need to be defined whether all emission sources and gases affected by an Article 6 activity should be included in the subsequent NDC, whether the entire geographical area by the activity should be included, and at which disaggregation level categories of emissions or removals should be included (e.g. at the level of specific IPCC emission categories or broad IPCC sectors). A renewable power generation project could, for example, not only affect CO₂ emissions from fossil fuel combustion in the power sectors, but also emissions from steel and cement production, coal mining or natural gas exploration and transportation. A practical approach could be that all emission sources accounted for in the calculation of emission reductions be included in the scope of the next NDC. Alternatively, the country could expand its scope to an economy-wide target.

An important consideration for this option relates to enforcement. Although countries could, in theory, commit to broadening their NDCs in a particular way, the architecture of the Paris Agreement makes it politically infeasible to enforce any such commitment. Here, a provision involving the concept of ‘locked credits’ could provide safeguards for NDC expansion requirements. Under such a provision, mitigation outcomes could be generated, but would not be eligible for use until the transferring country has broadened the scope of its NDC (Mizuno, 2017; UNFCCC, 2019a, p. 60). This, however, could bring about challenges for the day-to-day operation of carbon markets. It seems unlikely that many buyers would be interested in investing in a project if they do not have certainty over whether the credits can be released for transfer and ultimately for use towards NDCs. The risk of ‘locked credits’ not being usable towards NDCs would have to be borne by one of the countries involved in the cooperative approach: one scenario is a ‘buyer beware’ situation, where buyers finance mitigation outcomes without assurance that these will be eligible for use in the future. Another scenario is one where the transferring country would have to finance its own projects and later bring them to market. A further practical implementation question is how the ‘locking’ of credits is supervised and enforced. Under the Article 6.4 mechanism, the supervisory body could ensure that ‘locked’ credits are only released once the country has updated its NDC, although that may be considered to be outside the mandate of the body. Oversight of such a principle may be more difficult under Article 6.2, where the main responsibility for oversight is likely to be with the countries implementing the cooperative approach.

Overall, it seems this option is politically and technically more difficult to implement than simply requiring adjustments for outside-scope emission reductions.

4.3. Quality

If mitigation outcomes occur outside the scope of an NDC, the transferring country may not have strong incentives to ensure unit quality, or may even have incentives to overstate emission reductions (Kreibich & Obergassel, 2016; Schneider & La Hoz Theuer, 2019; Spalding-Fecher, 2017). To address this concern, several options could be considered:

• Requiring international oversight: In the context of Article 6, mitigation outcomes could be generated either under the Article 6.4 mechanism, which is subject to international oversight through the supervisory body, or under the authority of the countries involved in the cooperative approach. Without international oversight, there may be less assurance that unit quality is always achieved. The experience with Joint Implementation (JI) under the Kyoto Protocol confirms that the risks for environmental integrity are higher in the absence of international oversight (Kollmuss, Schneider, & Zhezherin, 2015; Schneider & Kollmuss, 2015). Although international oversight may not guarantee unit quality, requiring that mitigation outcomes be generated under international oversight could provide a safeguard to ensure minimum standards are met.

• Limited project eligibility: The use of outside-scope emission reductions could be limited to project types for which there is a high assurance that unit quality is ensured. Project eligibility could, for example, be limited to project types that are deemed automatically additional under the CDM (i.e. those project types that are included in ‘positive lists’) (Spalding-Fecher, 2017).

• Additionality requirements: The generation or use of outside-scope emission reductions could be subject to strict additionality requirements, such as tests under international oversight with a high level of standardization (Michaelowa et al., 2019).

• Baseline requirements: The use of outside-scope emission reductions could be limited to projects that apply ambitious and/or standardized baselines, thereby creating a level playing field with activities that occur within the scope of ambitious NDCs. Requirements could, for example, also relate to the frequency of updating baselines or the length of the crediting period (CCAP, 2017; Spalding-Fecher, 2017).

4.4. Restrictions

Policy-makers could also consider establishing restrictions on the generation, use or transfer of outside-scope emission reductions (Schneider & La Hoz Theuer, 2019; Spalding-Fecher, 2017). Such restrictions would not aim to address specific risks, but rather contain the overall risks by limiting the number of such outside-scope mitigation outcomes that are used towards NDCs.

Restrictions could be established in different ways:

• Quantitative limits: Limits have been proposed by some countries to address other policy objectives, in particular to mitigate the risk of transfers of ‘hot air’ and to ensure ‘supplementarity’ (La Hoz Theuer, Schneider, & Broekhoff, 2019). Such limits could also specifically be applied to the generation, transfer or use of outside-scope mitigation outcomes (Schneider & La Hoz Theuer, 2019).

• Time-bound limits: The engagement in outside-scope mitigation outcomes without corresponding adjustments or any other restrictions could also be limited in time, until a certain date, as proposed by some countries as a compromise at the 2018 Katowice Climate Conference. Thereafter, safeguards could apply, such as requiring corresponding adjustments to be applied by the transferring country.

• Country restrictions: The engagement in outside-scope mitigation without corresponding adjustments, or any other restrictions, could be limited to specific groups of countries. Exemptions could, for example, apply to LDCs and small island developing states (SIDS), given that the Paris Agreement differentiates these country groups in its Article 4 and given that these countries particularly lack capacity and data.

4.5. Quantification of NDCs

To avoid risks of double counting with actions or targets expressed in non-GHG terms, the guidance for Article 6.2 could require countries engaging in voluntary cooperation to quantify all mitigation actions and targets in their NDCs in terms of GHG emissions, and to clarify which sectors, GHGs, categories of emissions by sources and removals by sinks, and, for the LULUCF sector, activities and carbon pools are covered by the NDC. This would ensure that the ‘NDC-covered emissions’ (i.e. what is considered ‘inside’) properly cover all mitigation actions and targets communicated in the NDC. The draft negotiation text on guidance for Article 6.2 includes a similar element but does not clarify that such a quantification should cover all mitigation actions and targets communicated in the NDC (see paragraph 38 of UNFCCC, 2019a).

An alternative approach could be implementing adjustments in metrics other than GHG emissions. For example, a country with a target for the megawatts of wind power capacity to be installed could make an adjustment in megawatt to its reported progress of capacity installed if the emission reductions from some of the wind power plants were internationally transferred and used by another country to achieve its NDC (Schneider, Füssler, Kohli, et al., 2017).

5. Conclusions

This paper has introduced and assessed a broad range of issues and potential means to address the disadvantages that arise if transfers of outside-scope mitigation outcomes were to be allowed.

An important finding of the paper is that determining whether mitigation outcomes from crediting activities occur inside or outside the scope of an NDC can be rather challenging in practice. Any options relying on that distinction will face implementation difficulties. Requiring adjustments for all mitigation outcomes, regardless of whether they occur inside or outside the scope of NDCs, is the only option that is able to avoid these practical challenges. Moreover, this option is more easily implemented than other options seeking to address possible disincentives to broadening the scope of NDCs. Provisions that directly encourage or require countries to broaden the scope of NDCs are difficult to monitor and enforce, and restrictions on the number of outside-scope transfers would only contain rather than address the risk.

Requiring corresponding adjustments could, however, discourage countries from engaging in outside-scope transfers. Providing exemptions for a limited time period could therefore be an appropriate means of giving countries more time to build capacity and gather data in order to help them to expand their NDCs in the future. A disadvantage of such exemptions is that they would still require determining whether a mitigation outcome occurred within or outside the scope of NDCs which, as outlined above, can present considerable practical challenges.

If exemptions are provided, further measures could be pursued to address or contain the risks of allowing outside-scope mitigation to be transferred, such as adopting strict additionality tests, limiting the lengths of crediting periods, or requiring international oversight over the generation of mitigation outcomes. Although international oversight can provide more confidence in the quality of the mitigation outcomes than having no international oversight, there are limitations to what it can achieve. Stronger incentives for ensuring quality may be provided if mitigation outcomes occur within the scope of ambitious NDCs. This suggests that any special treatment of outside-scope mitigation should transition to being inside-scope and that any exemptions – such as allowing outside-scope mitigation for activities under the Article 6.4 mechanism – should be only of a temporary nature.

Special treatment for some countries could be another reasonable option as some countries may not have included sectors or gases due to a lack of capacity or data. This may be politically more feasible if established based on country groups that already have recognition of special circumstances under the Paris Agreement, such as LDCs and SIDS.

Lastly, to avoid double counting with actions and targets expressed in non-GHG terms, it is important that all mitigation actions and targets of the NDC are considered when quantifying and clarifying the scope of the NDC in terms of ‘sectors’ and ‘greenhouse gases’.

Which combination of measures is pursued to address the risks that arise from transferring outside-scope mitigation outcomes, and for how long any exemptions apply, are important choices that policy-makers will have to make in balancing different goals and perspectives. Policy-makers also need to consider whether any exemptions apply to the generation, transfer and/or use of mitigation outcomes. This question is also linked to which approach is used to trigger corresponding adjustments and how any banking of mitigation outcomes is addressed.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Lambert Schneider http://orcid.org/0000-0002-5704-0965

Stephanie La Hoz Theuer http://orcid.org/0000-0001-5606-655X

Andrew Howard http://orcid.org/0000-0001-5108-6834

Kelley Kizzier http://orcid.org/0000-0001-6627-7668

Martin Cames http://orcid.org/0000-0003-3745-456X

Additional information

Funding

This work was supported by European Commission: [Grant Number CLIMA.B.3/SER/2017/0011LV].

Notes

1 Views submitted by Parties in September 2016 and March 2017, available at https://www4.unfccc.int/sites/submissionsstaging/Pages/Home.aspx.

2 Decision 4/CMA.1 which includes guidance on information countries should provide to facilitate clarity, transparency and understanding of NDCs (Annex I) and guidance on accounting for Parties’ NDCs (Annex II).

3 Decision 18/CMA which requires countries to provide further information on their NDCs as part of their biennial transparency reports.

4 A related issue arises if the mitigation outcomes occur within the scope of the NDC, but the country has a target that is less stringent than its likely business-as-usual (BAU) emissions – which is often referred to as 'hot air' (Kollmuss et al., 2015; La Hoz Theuer et al., 2019). In this situation, the transferring country may also not have incentives to ensure unit quality, because transferring units that lack quality may not undermine achieving its NDC target. The experience with Joint Implementation (JI) under the Kyoto Protocol suggests that these incentives or disincentives can play a significant role. Under JI, the unit quality was assessed to be significantly higher in the case of countries with ambitious Kyoto targets, as compared to countries that were assessed to have hot air (Kollmuss et al., 2015). Similar risks could arise under the Paris Agreement because some countries are assessed to have targets that are less stringent than their likely BAU emissions (Höhne, Fekete, den Elzen, Hof, & Takeshi, 2017; La Hoz Theuer et al., 2019; Rogelj et al., 2016). In this case, expanding the scope of these mitigation targets, without enhancing their ambition, would not increase the incentive for transferring countries to ensure quality.

5 A variation of the latter approach could be applying corresponding adjustments to the emissions that are not covered by the NDC (Müller & Michaelowa, 2019). This approach would ensure that adjustments are 'corresponding' and create transparency on the total emissions impact in both countries. The implications in terms of the criteria assessed here are identical to the option of not requiring adjustments to the emissions covered by the NDC.

6 If the country over-achieves its NDC target without taking any mitigation action or if the emission reductions are not visible in GHG inventories, it would not have to compensate for any shortfall in emission reductions within its NDC. How much this is an issue depends not only on the ambition of the NDC target but also on the carbon market prices for inside- and outside-scope mitigation. If the prices for outside-scope mitigation were significantly higher than for inside-scope mitigation, the country might use part of these revenues to fund further mitigation within the scope of the NDC. It is, however, unclear whether prices would be higher for outside-scope mitigation and to what extent any higher carbon market revenues would actually be available to the government and not only to private sector entities implementing the mitigation activities.