Under the Paris Agreement, each country communicated its plan for climate action through Nationally Determined Contributions (NDCs). The NDCs represent voluntary commitments by countries to mitigate and adapt to climate change. Article 6.2 of the Paris Agreement recognizes that countries can participate in voluntary cooperation, including carbon markets, through a variety of bilateral and plurilateral approaches to achieve and enhance their climate goals. Mitigation Outcomes (MO) generated from low carbon projects can be sold internationally (whereupon they would become Internationally Transferred Mitigation Outcomes or ITMOs) to generate revenues for the project.
ITMOs can be used by the buying country to demonstrate the achievement of their NDCs. While engaging in ITMO trades is voluntary, the Paris Agreement requires that Parties apply robust accounting to ensure that MOs that are traded are not double-counted, i.e., by the buyer as well as the seller, toward their respective NDCs. Therefore, the selling country (i.e., the host country where the project is located) is required to make a “corresponding adjustment”. In other words, since the buying country may count the ITMO toward its NDC target, the host country must adjust its accounts to ensure that the ITMO is not also counted toward its NDC.
A corresponding adjustment is essential for the buyer to use an ITMO to demonstrate the achievement of their NDC. Therefore, “delivery” of the ITMO is completed when evidence of the corresponding adjustment is provided. If the host country is unable to provide evidence of such corresponding adjustment, the buyer may not be able to use the ITMO at all, leading to a loss equivalent to the money spent for its purchase.
It is likely that there will be a time lag between the purchase of MOs and the corresponding adjustment being undertaken. The evidence of any corresponding adjustment can be verified through biennial transparency reports (BTR), which countries would submit every alternate year. This presents a potential regulatory risk for buyers of MOs since there is a timing mismatch between the ITMO being transacted and the host country delivering on its commitment to carry out a corresponding adjustment.
One potential solution to this challenge is a political risk insurance (PRI) product such as MIGA’s Breach of Contract cover.
Moderator
Director of Economics & Sustainability, MIGA
Speakers
Director for Climate, Energy, Extractives, Capital & Financial Markets, MIGA
Adviser, World Bank
Hugh Salway
Head of Environmental Markets, Gold Standard Foundation
Chris Leeds
Head, Carbon Markets Development, Standard Chartered Bank
Please contact us at migaevent [at] worldbank.org if you have any questions.
Sincerely,
MIGA Events Team