Carbon credit standards at COP30
Government delegates, corporate lobbyists and non-governmental organization staff are preparing for the 30th Conference of the Parties (COP30) of the UN Framework Convention on Climate Change (UNFCCC) that began on November 10 in Belém, Brazil. The climate scientific context of COP30 couldn’t be more alarming. The World Meteorological Organization reported on October 16 that the level of carbon dioxide, methane, and nitrous oxide in the atmosphere not only reached record highs in 2024, but that 2024 saw the largest single year increase in the global warming causing gas since measurements began in 1957 (see IATP’s new Scorecard rating meat and dairy companies on their reported emissions, and other work on methane emissions from global meat and dairy companies here and here.)
Leading up to COP30 governments and experts have been debating the rules for a new tool intended to reduce the relentless increase of carbon dioxide and other greenhouse gases (GHGs), known as the Paris Agreement Crediting Mechanism (PACM). The PACM sets the rules for the UNFCCC’s GHG emissions reduction and removal (ER) carbon credit market during the ER project’s crediting period. According to the ER project standard, for GHG reduction projects (e.g., energy efficiency) the maximum crediting period is 15 years; for GHG removal projects (e.g., Carbon Dioxide Removal technologies) the maximum crediting period is 45 years. Each credit represents one metric ton of CO₂ equivalents sequestered or reduced. (Credits representing avoided emissions are not allowed under Article 6 rules.) Agreement among government delegates, carbon credit industry lobbyists, and technical experts on some standards to implement the PACM has been difficult to achieve.
Over the past year, IATP has contributed comments on standards concerning projects to remove or reduce GHGs. As we explain in the following analysis, a removals standard that became effective on October 10 is unlikely to help the PACM succeed in reducing GHGs to meet the Paris Agreement objective of limiting global warming to 1.5⁰C (2.7⁰ Fahrenheit) above the 1850 baseline. The UNFCCC secretariat currently operates the PACM as a pilot project but carbon market proponents intend for the new rules to help scale up the market. Here we analyze why implementation of the standard on the non-permanence of removal and reduction projects is unlikely to increase the transaction volume and price of PACM credit trading to provide significant and sustained climate finance to the developing country hosts of most of the land-based ER projects.
Setting the PACM’s standards and supervising its operations
The Article 6.4 Supervisory Body (A6.4 SB or SB) adopts standards to implement the PACM and will determine whether ER projects are complying with PACM standards and rules. The UNFCCC secretariat assists the A6.4 SB and administers the PACM by registering SB-compliant ER credits for sale to Parties (governments) and non-Parties (mostly private sector investors that claim they are reducing their own GHG emissions by purchasing these credits). The SB will present a package of new standards and rules at COP30 and request their acceptance by governmental Parties to the Paris Agreement.
The Methodological Expert Panel (MEP) recommends standards and rules to the SB, which may adopt, amend or reject MEP recommendations. The MEP requested input on its draft recommendation for a standard on how ER project managers are to monitor, estimate and report on emissions reversals, e.g., those resulting from wildfires or floods within the ER project boundaries. The MEP-recommended standard “translates” the physical result of the reversal into PACM carbon credit accounting terms and rules.
The International Emissions Trading Association (IETA) contended that the first draft MEP recommendation (version 01.0) included “misrepresentations, ambiguities, incorrect definitions, false dichotomies, and a lack of clear structure.” (page 2) More concretely, IETA charged that the draft standard would “exclude all land-based removal activities from PACM, by imposing unrealistic monitoring requirements and durability provisions.” (page 3) (Studies continue to report that “carbon credits are failing to help with climate change” in terms of reducing or removing absolute emissions.)
Instead, IETA proposed that the SB should shorten the time that ER project developers must monitor for emissions reversals and should reduce the “durability” of ER credits — i.e., the length of time that projects must reduce or remove GHGs to receive SB authorized tradeable carbon credits. Additionally, IETA proposed that risk and liability for ER projects’ carbon credit compensation to the PACM for emissions reversals be transferred from ER project developers in the form of “guarantees and insurance products, or monetary contributions to a fund to manage long-term reversals, transfer of risk and liability to third parties.” (page 3) In our analysis, insurance products or monetary contributions may help protect project developers and investors in A6.4 ER credits. But these risk management tools do not increase the PACM’s capacity to use ER credits to compensate for the reversals that increase GHGs. We present this analysis below.
Praiseworthy reporting requirements of the emissions reversals standard
As IATP wrote in our August 2 comments on the MEP’s draft recommendation (version 01.0), “If ER project developers don’t report emissions reversals clearly and completely according to SB rules, prospective PACM credit buyers may shun the credits due to uncertainty about credit value and integrity.” It would be unfair to the SB if we did not note that the appendix to the standard on emissions removals and non-permanence includes most of the MEP recommendations on the ER project developer monitoring for and reporting of emissions reversals. The SB should be praised for retaining the MEP recommendation that if project developers fail to submit emissions reversals reports, their emissions reversals will be designated as “avoidable.” (paragraph 35)
Until such time as the ER project developer submits reversal reports that the SB verifies as complete and compliant with reporting standards, the ER project developer’s credits are cancelled in its PACM Reversal Risk Buffer Account Pool. Cancelled credits cannot be used to claim that the project’s emissions reversals have been mitigated by buffer account pool credits, (paragraph 59) and the PACM publishes the serial numbers of the cancelled credits. (paragraph 60) Prospective buyers of the ER project developer’s credits are likely to avoid purchasing any credits that are not compensated for with buffer pool credits. These reporting requirements provide a compelling incentive for the project developer to file all emissions reversal reports on time, completely, and in compliance with reporting requirements.
Also praiseworthy is the SB’s retention of 11 equations recommended by the MEP (version 02.0) to enable ER project developer to quantify estimates of its removals or reductions, and to enable the SB to calculate how many A6.4 ER credits to issue to the project developers to sell on the PACM registry. (paragraphs 19-37)
Risks of the SB rejection of the MEP definition of “negligible risk of reversal”
The MEP invited input on its version 02.0 of the draft standard. In September 23 comments, IATP stated, “IATP is convinced that the Draft Standard with these version 02.2 changes more than justify the Supervisory Body’s adoption of it at the SB’s 6-10 October meeting.” (page 1) Unfortunately, the SB did not adopt all key provisions of the MEP’s second draft standard, except for the reporting requirements and quantitative equations, as explained above. Under intense lobbying pressure from the carbon credit industry and Parties hosting ER projects, the SB agreed to a standard that implicitly rejected key provisions in the MEP recommendation and instead adopted carbon credit industry proposals.
One key provision concerns the definition of “negligible risk of reversal” of emissions within the ER project boundary. The definition is crucial because ER project developers are freed from emissions reversal monitoring and reporting, including the costs and liability for reversals, if the SB approves a developer’s application to determine that its ER project is at “negligible risk of reversal.” The MEP draft defined that as “A risk of reversal that would result in a loss of no more than [X]² percent of all the A6.4ERs [credits] issued [by the SB] with respect to the total emission reductions and/or net removals achieved by the [ER project] activity…” (Section 2.3 g) In footnote 2, the MEP recommends that the SB define “negligible risk” as a percentage of between 0.5-2.5% of project emissions released to the atmosphere due to a reversal event.
The MEP recommended definition can be implemented by equations 1-3 concerning net changes in GHG emissions and by the reversal risk assessment tool currently under development. The SB could verify project developer use of these equations and the tool to evaluate “negligible risk of reversal” for all project types. On August 2, we commented:
IATP had chosen the most stringent definition of “negligible risk of reversal” proposing that the SB adopt the value of 0.1% likelihood of reversal to be characterized as negligible… However, we are now persuaded by the MEP’s note on the definition of “virtually certain” by the Intergovernmental Panel on Climate Change, which would entail the SB’s adopting a 1% value in the definition of “negligible risk of reversal.” (page 3)
Instead, the SB adopted this definition: “A risk of reversal that would result in a loss of no more than a maximum percentage to be specified in methodologies on the basis of guidance to be developed in the reversal risk assessment tool of all the A6.4ERs issued with respect to the total emission reductions and/or net removals achieved by the activity…” (Section 2.3 g) The SB would have to determine if an ER project was at “negligible risk of reversal” according to the removal methodology developed for each project type. The adopted definition implies a large increase in the SB’s workload and greatly increased Secretariat resources to help to carry out that workload. In June, Parties pledged to increase the UNFCCC budget by 10%, with Bloomberg Philanthropies committing to supply the funds withdrawn by the Trump administration.
Rather than a uniform definition applicable to all project types, this SB definition would allow a “maximum percentage” of emissions for each project type to receive the “negligible risk of reversal” designation and the privileges that come with the designation. For example, projects to capture GHGs in ER project planted trees (afforestation) could be declared at “negligible risk of reversals” if 15% of a project’s claimed emissions reduction were reversed by a wildfire. Projects to directly capture and sequester GHGs from the free atmosphere might be declared be declared at “negligible risk of reversals” if they lost just 1% of projected emissions removals to a technology failure.
The SB will be under great pressure to approve a designation of “negligible risk of reversal” that is quantitatively different for each project type, but without the methodological rigor of the MEP-recommended “negligible risk” definition implemented by the ER project developer’s application of the above-mentioned equations and reversal risk assessment tool to its ER project. The SB-adopted definition of “negligible risk,” in terms of the maximum percentage of GHGs released by reversals in the ER project boundary, incentivizes project developers to report maximum GHG releases in a reversal while maintaining the “negligible risk” designation that frees the ER project developer from project monitoring and reporting obligations. There is no provision for compensating for reversals following the “negligible risk” designation, since there is no monitoring or reporting to use as the evidentiary basis for such compensation from the ER project developer’s account in the PACM Reversal Risk Buffer Account Pool.
A second key change: the duration of ER project monitoring for reversals
The SB approves the issuing of A6.4 ER credits to the project developer whose project design has been verified by an independent Designated Operational Entity approved by the SB. Once the credits are issued for sale on the PACM registry, the “active crediting period” for sale of ER credits begins — up to 15 years for reductions and up to 45 years for removals. However, the project developer can request a much shorter “active crediting period” if it anticipates that all the ER credits on the PACM registry for that project will sell. Then the post-crediting monitoring period for reversals begins. The duration of the minimum monitoring period in the adopted standard is consistent with that of the MEP recommendation:
Mechanism methodologies shall define a minimum period for monitoring during the post crediting monitoring period, after which activity participants may submit a request for termination of monitoring during the post-crediting monitoring period through demonstration of a negligible risk of reversal. The minimum period shall be informed by, inter alia, a consideration of the mitigation activity type and its associated reversal risks. (paragraph 48)
So far, so good. But then the SB introduces a new factor into the political economy of the PACM that is not part of the MEP-recommended standard. This factor is the role of insurance policies and the transfer of liability for monitoring for reversals from the ER project developer to a third party. This factor is not in the adopted standard per se, but in an appendix to the standard, “Elements related to non-permanence and reversals for inclusion in relevant regulatory documents”:
Activities participants [ER project developers and their financiers] may submit through a DOE [Designated Operational Entity] justified demonstration of sufficient insurance policy, or comparable guarantee products, or third-party guarantee to cover the risk that reversals occur including a plan for detecting future reversals for a minimum period which shall be assessed and considered for approval by the Supervisory Body. (paragraph 46)
Here the minimum period for monitoring is not determined by PACM methodologies specific to the reversal risks of a project type but by the financial sufficiency of an insurance policy or unidentified “comparable guarantee products,” perhaps “catastrophe bonds” that protect the insurance industry from large losses.
As we noted in our September 29 comments on the second draft of the MEP-recommended standard (version 02.0), the SB instructed the MEP to find an insurance product that would enable the transfer of reversal risk from the ER project developer to a third party. But we noted that the MEP informed the SB that it was unable to find such a product:
The carbon credit industry has sought to transfer liability for reversals in the post-crediting monitoring period, e.g., to shift liability to the host countries of emissions reduction projects or to transfer liability to insurance products. Although insurance products might transfer investor risk, it is not all clear how such insurance products would provide adequately monetized protection against the climate consequences of reversals. IATP was not surprised that “The MEP was unable to identify any comparable types of insurance products” (paragraph 54 of version 02.0) as called for in paragraph 59 of the Removals Standard. (page 3)
IATP believes that the MEP couldn’t identify an insurance product that would enable the ER product developer to minimize the period it would be obliged to monitor for reversals because such a product doesn’t exist, at least not for the purpose of compensating for reversals in an ER project boundary in the post crediting monitoring period.
Nevertheless, the Appendix “Elements related to non-permanence…” invites ER project developers to apply to the SB to transfer the financial risk and legal liability of reversals after the SB has authorized the issuance of A6.4 ER credits and after investors have purchased those credits. (paragraphs 46-47) In IATP’s opinion, to allow the use of an insurance product or “comparable guarantee” that the MEP cannot identify, is a very high-risk way of trying to scale up the PACM. The financial interests of the ER project developers and the buyers of A6.4 ER credits might be protected by a hypothetical insurance product. But the environmental integrity of the PACM’s operations would not receive such protection because the carbon credit accounting of the reversal risk buffer account pool does not operate like a financial market.
Conclusion
IATP believes that the non-permanence removal’s standard of “negligible risk of reversal,” as implemented for each ER project type, will result in ER projects designed not to minimize reversal risk, but to allow the maximum percentage of GHGs released by reversals within the “negligible risk of reversal” designation. To implement the standard in terms of the methodology for each project type without the overall quantitative limit to GHG reversal losses in the MEP definition is to invite project type methodologies with market incentives to allow “avoidable reversals” in ER projects designated at “negligible risk of reversal.”
As reversals occur and perhaps proliferate in the post-crediting monitoring period, whatever legal shield ER project developers acquire with the “negligible risk of reversal” designation will not protect the project developers from loss of reputation for selling credits from project areas experiencing unmonitored reversals. The volume and price of PACM transactions is unlikely to increase if projects deemed to present “negligible risk of reversal” nevertheless are issued ER credits bought and then sold with reversal risks that are far from negligible.
To allow project developers with access to insurance policies or financial products that claim to compensate in accounting terms for reversal risk puts project developers without such access at a market structural disadvantage. Even if the SB is persuaded that such financial products can compensate for reversals beyond the capacity of the project developer’s credits in the reversal risk buffer pool to do so, why should the project developer be allowed to “terminate its monitoring and reporting obligations in the post-crediting monitoring period at any time during the post-crediting monitoring period”? (“Elements”, paragraph 45)
The SB has just 28 days (paragraph 45) to do due diligence on the integrity and past performance of the financial product presented by the ER project developer and to judge its “sufficiency” for compensating the costs of reversals in the project boundary. This very short period for due diligence entails work overload for the SB and for the Secretariat that could be flooded with project developer claims of “sufficiency,” i.e., financial products sufficient enough to compensate for reversals that occur after the project developer has terminated monitoring and reporting of reversals. Following SB approval of financial sufficiency, “monitoring and reporting and remediation obligations shall be transferred to the relevant third parties, insurers or guarantors.” (paragraph 47). Since few, if any, financial firms have the expertise to carry out these obligations, the default strategy will be to seek termination of those obligations after receiving the “negligible risk of reversal” designation.
Parties and the carbon credit industry are committed to implementing and scaling up the PACM after the failures of the UNFCCC Clean Development Mechanism (CDM) carbon market and the failures of voluntary carbon markets to scale up significantly in transaction volume and credit price since the 1995 Kyoto Protocol launched the CDM. We would not be supporting the objective of the Paris Agreement if we failed to note the continuing criticisms of land-based ER projects as environmentally ineffective and as not providing significant climate finance.
Non-carbon-market means of financing decarbonization continue to be published. The inefficient economics and resource use of the promised technology-based ER projects, such as direct carbon capture, continue to impede their long promised contribution to reduce GHGs now, when they are needed most. There are alternative means to finance GHG reduction and adaptation to climate change, such as those under the aegis of the Paris Agreement’s Article 6.8. Parties should not wait for the PACM to scale up but support these non-market approaches now.
