ARTICLE 6 APPROACH PAPER SERIES Corresponding Adjustment and Pricing of Mitigation Outcomes © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution Please cite the work as follows: The World Bank. “Corresponding Adjustment and Pricing of Mitigation Outcomes,” World Bank Working Paper, Washington, DC. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Design by Clarity Global Strategic Communications (www.clarityglobal.net) Table of Contents Abstract 1 1. Background – importance of the issue 2 2. Mitigation costs, opportunity costs and pricing of ERCs 3 2.1 The cost of a mitigation activity 3 2.2 The cost of transferring ITMOs 3 2.3 Determination of opportunity cost 4 2.4 A heuristic approach to opportunity cost for corresponding adjustment 5 2.5 Opportunity costs and marginal costs for 2030 NDCs 6 3. From costing to pricing 8 4. Limitations of opportunity cost-based pricing 8 5. Alternative approaches 9 6. Considerations for countries and practical approaches 9 Acknowledgements This technical approach paper has been written jointly by the Climate Finance and Economics and Fund Management teams at the World Bank. This work also benefited greatly from consultation with the Climate Market Club. The Climate Market Club, as of January 2023, has representatives from 14 countries and five non-sovereign entities as its members with the MDB Working Group on Article 6 acting as the secretariat. ARTICLE 6 APPROACH SERIES 1 Corresponding Adjustment and Pricing of Mitigation Outcomes Abstract Every country has mitigation opportunities in different sectors with varying costs depending on several factors such as the maturity of technologies, access to finance, policy support, and natural resources available. A country can plan its nationally determined contribution (NDC) based on such abatement cost information and prepare its strategy to achieve the NDC most effectively. The provision of Corresponding Adjustment under Article 6 of the Paris Agreement is an important factor to consider when the country decides to engage in international carbon markets. When the host country transfers authorized emission reduction credits1 or internationally transferred mitigation outcomes (ITMOs), Corresponding Adjustment creates an obligation and the associated liability for the host country – i.e., the host country has to increase its NDC burden by the volume transferred. Without informed decisions, countries may oversell and end up having to implement more expensive mitigation activities to meet their NDCs. This potential liability to the host country is linked to the marginal cost and the associated opportunity cost of meeting the NDC. The Global Change Analysis Model (GCAM)2 suggests that many or most host countries would need to charge Corresponding Adjustment fees well above US$25/ tCO2e in addition to the cost of the emission reduction credits. Such Corresponding Adjustment cost is NDC-specific and varies depending on the level of NDC ambition. Each country can derive its own Corresponding Adjustment costs through modelling exercises3, and the more ambitious the host country’s NDC is, the higher the cost is. This opportunity cost-based pricing approach is one possible way to mitigate the overselling risks (risking the NDC compliance) linked to corresponding adjustment. Alternative approaches include: earmarking mitigation activities that go beyond host country NDC compliance needs and selling them at a price that covers the costs of respective mitigation activity; setting a uniform corresponding adjustment fee in linkage to a global least-cost scenario to achieve the 2030 NDC pledges or the climate goals of the Paris Agreement; and auctioning ITMOs. Advantages and disadvantages of each approach are provided in chapter 5. Lastly, developing suitable institutional structures is important to ensure that such pricing approaches are appropriately considered and assessed by the government and used to effectively support achieving the NDC commitments. Chapter 6 suggests establishing a sovereign climate fund as one possible institutional structure with an illustration of potential transaction flows. 1 An emission reduction credit represents a standard unit to measure an emission reduction equivalent to one metric ton of carbon dioxide (tCO2e). A generic term for emission reduction credit is a carbon credit. https://openknowledge.worldbank.org/handle/10986/38258 2 GCAM is a dynamic-recursive model that can be used to explore climate change mitigation policies. As an open-source community model, the source code, data, and documentation are publicly available. It is also used in all IPCC assessment reports. See GCAM documentation at https://github.com/JGCRI/gcam-core/releases 3 While a country can use its own modeling tool, there are existing models such as the open-access GCAM and the World Bank/IMF Climate Policy Assessment Tool (CPAT). 2 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES To ensure that host countries meet their NDC cost 1. Background – effectively, while engaging in transfers of mitigation outcomes with corresponding adjustment for Article 6, other international uses or for the voluntary carbon importance markets, it is important that countries have a robust pricing strategy to better understand the opportunity of the issue cost of making corresponding adjustment, the marginal cost of meeting the NDC, and accordingly the price at which they sell their ERCs whose revenues could help countries implement additional mitigation Future climate markets will differ substantially from activities as necessary to meet their NDCs. those that emerged under the Kyoto Protocol. The Paris Agreement requires all countries to voluntarily This paper aims to develop guidance on the pricing adopt individual targets, elaborated in their nationally based on opportunity cost pricing for Adjusted ERCs. determined contributions (NDCs). This requires Adjusted ERCs are emission reduction credits that increased oversight and capacity by countries come with corresponding adjustment. In the context ranging from setting a NDC target and developing of the Paris Agreement, the term Internationally strategy for the use of international cooperation Transferred Mitigation Outcome (ITMO) is often used – including carbon markets – to implementing to refer to Adjusted ERCs used in the compliance mitigation activities to achieve the NDC. carbon market. The opportunity cost for corresponding adjustment is based on the marginal cost of the host The cost implication of performing corresponding country to achieve its NDC. The marginal cost of adjustment for the transfer of credits outside the 2030 NDCs for regions and countries are estimated country is one of the key considerations for a host using the Global Change Analysis Model (GCAM)6. country strategy for the use of Article 6. International These results are then utilized to present the pricing transfer of emission reduction credits (ERCs)4 implications of corresponding adjustment. The paper authorized by a host country should be correspondingly concludes with proposed arrangements to implement adjusted (i.e., be reflected in the host country’s NDC the opportunity cost-based pricing for the host accounting to avoid double counting), and this may5 country to charge a fee/levy/cess/tax (depending increase the NDC burden by the amount that was on the applicable regulatory framework in the host transferred. Since every country has limited mitigation country) for ERCs accompanied by corresponding opportunities available, and because those mitigation adjustment for Article 6 or other “authorized” uses of options have different costs, countries would have to the ERCs including the voluntary carbon markets. implement more expensive mitigation activities to meet their NDCs as a result of corresponding adjustment. An ERC represents a standard unit to measure an emission reduction equivalent to one metric ton of carbon dioxide (tCO2e). 4 A generic term for ERC is a carbon credit. https://openknowledge.worldbank.org/handle/10986/38258 If a host country’s NDC target emissions are below a business-as-usual level, international transfer of ERCs “will always” impose a cost to 5 the host country’s economy as “additional” mitigation should happen to replace the transferred ITMOs for NDC compliance. GCAM is a dynamic-recursive model that can be used to explore climate change mitigation policies. As an open-source community model, 6 the source code, data, and documentation are publicly available. See GCAM documentation at https://github.com/JGCRI/gcam-core/ releases ARTICLE 6 APPROACH SERIES 3 reductions that ensure financing and operation of the 2. Mitigation costs, mitigation activity and create no additional liability or obligation for the host country where the mitigation activity is located. The concept of corresponding opportunity costs adjustment for the transferred ERC, however, creates an obligation for the host country to invest in additional and pricing of ERCs mitigation activity that is likely to be at a higher cost. 2.2. The cost of transferring ITMOs The price of emission reduction credits varies widely Costing of emission reductions changes and depends on many factors including the qualitative fundamentally if these emission reductions are choices and preferences of market players. In addition transferred out of the host country of the underlying to the cost of the mitigation action that generates ERCs, mitigation activity. If this is the case, they must there are several additional factors such as project be excluded from being accounted against the type, quality of units, size, location, and how buyers host country’s NDC to avoid double counting value the (co)benefits of the underlying project, which of mitigation and undermining of environmental influence the price of ERCs. In addition to the cost- integrity of international carbon market transactions. based and quality-based pricing considerations, the Under the rules of the Paris Agreement, double NDCs creates opportunity cost when corresponding counting is prevented by applying corresponding adjustment is needed. This is a result of additional adjustments to national emissions/NDC accounts. mitigation measure – often at a higher cost – that the host country would need to implement to meet If a country has a NDC target to reduce emissions by the NDC due to corresponding adjustment. 100 units and at the same time transfers 10 units of emissions reductions out of the country, its economy 2.1 The cost of a mitigation activity needs to generate 110 units of emission reductions instead of 100 units in the scenario without the transfer A mitigation activity generates emission reductions to meet the NDC target. These additional emission relative to a counterfactual baseline. It can consist reductions come at an additional cost that accrue to in an individual project such as windmill for power the transferring country because of the transfer. This generation, a program of mitigation activities such represents the opportunity cost of the transfer. If, for as the distribution of clean cook stoves, a sectoral or example, a private project entity in a host country could jurisdictional program such as a REDD+ program, or reduce emissions at a cost of $3/tCO2e, transferring a policy such as the removal of a fossil fuel subsidy. these emission reductions out of a country with an emissions target (its NDC) might require implementing All these mitigation activities come with a cost for an additional mitigation activity at a cost of $20/tCO2e their development, implementation and operation somewhere else in the economy so that the NDC can including the monitoring, reporting and verification still be met. Whereas the private project entity could sell (MRV) of the generated emission reductions. In most its emission reduction for as low as 3$/tCO2e, the host cases, implementation is the most important cost country would need to pay $20/tCO2e to meet its NDC. category, and for an individual project, implementation costs are primarily investment costs. The share of this mitigation activity cost is covered by secured financing (if any), and there can be a remaining cost gap that needs to be closed. This remaining financial gap can be used to develop pricing for the emission reduction using different approaches such as incremental cost pricing, financial gap analysis, etc. This approach applies to costing of and payments for emission 4 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES 2.3 Determination of opportunity cost A generalized (albeit somewhat idealized) approach to opportunity cost determination can be based on economic analysis using marginal abatement cost (MAC) curves. MAC curves rank mitigation activities available to a country from lowest 7 to highest cost in function of the volume of mitigation they can deliver. The NDC target can then be expressed as a point on the MAC curve indicating the pledged mitigation and its marginal cost (see figure 2 below). If such MAC curves are available, the opportunity cost, of selling and transferring ERCs can be identified as the cost of the lowest cost mitigation activity going beyond the NDC target, e.g., activity H in figure 2 at a cost of $20/tCO2e. It is important to note in this context that there are basically two different types of MAC curves: bottom-up rankings of technology costs at given prices and quantities in the economy, and top-down MAC curves derived from general equilibrium modelling with endogenous prices and quantities. While the bottom-up MAC-curves are suitable for assessing marginal project-type of mitigation activities, the top-down MAC-curves are required to analyze larger-scale interventions affecting key economic parameters such as policies or large-scale sectorial mitigation programs. Figure 2: Stylized MAC curve with NDC target NDC Goal 30 25 $+ Opportunity Cost (related to the marginal cost of the NDC) I 20 H 15 $ m Market Price G 10 (linked to the cost of measure E) F $/tCO2 5 E D C 0 10 20 30 40 50 60 70 80 90 -5 B -10 -15 A -20 -25 MtCO2 reductions Some mitigation activities might come at a negative cost, e.g., some energy efficiency measures. 7 ARTICLE 6 APPROACH SERIES 5 2.4 A heuristic approach to opportunity cost for corresponding adjustment Host country specific MAC curves can provide opportunity costs. In the analysis here, the GCAM is used to provide comparable opportunity costs for different regions and countries following a heuristic approach which consists of determining the marginal cost of achieving a host country NDC assuming a least cost solution, i.e., a solution that would be generated by a carbon tax or a comprehensive ETS covering the whole economy. Once this NDC achievement cost is known, the opportunity cost for corresponding adjustment can be approximated through simple linear extrapolation. Adding those opportunity costs of the corresponding adjustment to the cost of generating the underlying mitigation will then provide the cost of the Adjusted ERCs. This approach can be summarized in five steps assuming the most common case of NDC targets expressed in mitigation relative to a BAU scenario: (1) Determine c(ERC) = unit cost of the emission reductions that underly the Adjusted ERC; (2) Determine unconditional NDC mitigation pledge relative to BAU;8 (3) Estimate marginal cost of mitigation pledge = c(NDC); (4) Estimate marginal cost of ITMO augmented pledge = c(NDC+ITMO) = Opportunity Cost ($+); (5) Find ITMO cost = c(ITMO) = c(ERC) + Opportunity Cost ($+). *As mentioned above, ITMO refers to Adjusted ERCs used in the compliance carbon market. One can replace ITMO with Adjusted ERCs in the steps above to find the cost of Adjusted ERCs. Steps 2 and 3 require economic modeling for which the GCAM is used. Step 4 can be done through linear extrapolation. Table 1: Hypothetical example of ITMO costing using heuristic approach Country c(ERC) NDC % BAU NDC absolute c (NDC) ITMO c (NDC+ITMO) = OC ITMO cost A – 1,000 mt 5 $/t 5% 50 mt 10 $/t 1 mt p (5.1%) = 10.2 $/t 15.2 $/t B – 500 mt 5 $/t 20% 100 mt 40 $/t 1 mt p (20.2%) = 40.4 $/t 45.4 $/t C – 6 mt 5 $/t 33% 2 mt 66 $/t 1 mt p (50%) = 100 $/t 105 $/t Table 1 shows in column 1 three hypothetical countries A; B; C with their respective BAU emissions in million tones (1,000; 500; 6). These countries each implement the same type of mitigation activity at a cost of $5/t (column 2). Country A’s emission target is -5% relative to BAU, translating into targeted emission reductions of 50 mt (columns 3 and 4). For country B, numbers are assumed to be -20% and 100 mt, and for country C, -33% and 2 mt. Column 5 shows the marginal cost of achieving the three countries’ respective NDC targets (assumed to be respectively 10$/t; 40$/t; 66%/t in consideration of column 3, i.e., a country’s emissions target compared to its BAU). These NDC costs will need to be derived through modelling. Each of the three countries aim to transfer 1 mt of emission reductions as ITMOs (column 6). To achieve this additional mitigation, country A needs to reduce its emissions relative to BAU by 5.1% to still achieve its NDC target (up from 5% without ITMO transfer). For country B it is 20.2%, and for country C, 50%. Column 7 provides the corresponding marginal cost of achieving these BAU determination will in most cases need to rely on historical trend extrapolation and/or econometric approaches. In case a host country 8 provides a different BAU scenario, the NDC target need to be calibrated to the BAU scenario so that the cost of the pledged mitigation effort is correctly reflected in the modelling. 6 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES augmented mitigation needs. These represent the opportunity cost of transferring ITMOs. Column 8 shows the total cost of the ITMO transfers per unit (including the cost of generating the underlying emission reductions) for the three countries. These total ITMO costs per unit constitute the minimum prices the three countries would need to ask for, to be able to deliver the ITMOs without loss and regret.9 Three observations can be made from looking at that example: (1) Emission reductions generated at the same costs in all three countries come with different ITMO opportunity costs and therefore different total ITMO costs per unit; (2) ITMO costs are always higher than the costs of generating the underlying emissions reductions, and often they are substantially higher; and (3) ITMO costs are higher the more ambitious the host country’s NDC is, and the larger the ITMO volume relative to the NDC target mitigation is. If ITMOs were paid at just their cost, prices would increase in NDC ambition and ambition enhancement. Donor countries or providers of private philanthropic climate financing that aim to contribute to net mitigation through cancelling purchased ITMOs might follow this approach. In case ITMOs are acquired for compliance and offsetting purposes, pricing will typically not only reflect cost but will also reflect the willingness to pay of the buyer which can exceed, potentially by a substantial margin, ITMO costs depending on the marginal cost of the buyer to achieve its own mitigation target (see section 5 below). 2.5 Opportunity costs and marginal costs for 2030 NDCs The GCAM estimates the level of carbon price in 2030 required for each country to meet their respective unconditional NDCs, and results from the study have been used to estimate the comparable marginal cost of reaching each country’s 2030 NDC. These provide estimates of the opportunity cost for providing corresponding adjustment for ERCs, which can be found in table 2. The marginal costs of NDCs are higher, the more ambitious the host country’s NDCs are. It should be noted that the data used in GCAM were sourced from the NDCs submitted without independent assessment of the NDC and BAU information (i.e., if the BAU level that the country used is credible, and if the expected emissions level with the implementation of NDC truly generates less emissions than the BAU level). If this independent assessment of the NDC and BAU is conducted, the GCAM model can produce more realistic opportunity cost for each country. A special case of ITMO costing is for a country that uses exclusively a carbon tax to achieve its NDC target and where ITMOs are generated 9 by crediting emission reductions from such a tax. For that case, Strand has shown that the cost of generating emissions reductions through the tax (operationalized as the deadweight loss of the tax) can be approximated by half of the tax rate and the ITMO cost by the double of the tax rate, which means ITMO cost = 4 x MO cost. See: Strand, J., Supporting Carbon Tax Implementation in Developing Countries Through Results-Based Payments for Emissions Reductions, 2020, https://openknowledge.worldbank.org/handle/10986/34651 ARTICLE 6 APPROACH SERIES 7 Table 2: Opportunity Costs and Marginal Costs for 2030 NDCs derived from the GCAM model Opportunity Cost GCAM Regions/Countries ~ Marginal cost* (cNDC) ($/tCO2) Africa East Africa 67 North Africa 46 West Africa 31 Southern Africa 21 America USA 155 Northern South America 78 Southern South America 36 Central America and Caribbean 20 Asia Japan 145 South Korea 123 Central Asia 74 Southeast Asia 25 South Asia 11 Europe EU 129 European Free Trade Association 127 Eastern Europe 56 Non-EU 17 Middle East Middle East 50 *Carbon price level required to achieve 2030 NDCs in 2015 US$ Source: Ou Yang, Iyer Gokul, Clarke Leon, Edmonds Jae, Fawcett Allen A., Hultman Nathan, McFarland James R., …. Stephanie Waldhoff, Sha Yu, Haewon McJeon. 2021. “Can Updated Climate Pledges Limit Warming Well below 2°C?” Science 374, no. 6568: 693–95. https://doi.org/10.1126/science.abl8976 8 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES 3. From costing 4. Limitations of to pricing opportunity cost- Marginal costs for NDCs, and the linked opportunity based pricing costs identified through the approach explained in chapter 2, are expected to provide guidance regarding Opportunity cost pricing approach for ITMOs has the minimum price which host countries should several drawbacks, but these issues mostly apply to consider when providing corresponding adjustment for alternatives as well. ERCs. In other words, this opportunity cost, estimated based on the marginal cost of the host country’s First of all, the approach comes with assumptions NDC, could form the floor price for Adjusted ERCs. on future technology costs which change over time and are difficult to predict precisely. While the The actual price will in practice be determined approach should be built on most likely scenario based on negotiation between the seller and buyer of how costs might evolve, there is a possibility countries in relation to many factors including the to overestimate or underestimate them, in which quality of the credits, underlying category of the case, the host country will end up having revenues project (e.g., sector, technology) and so on. The that exceed or fall short of the necessary amount negotiated price of the Adjusted ERCs will also be to cover additional mitigation activities to meet determined by the buyer’s willingness to pay which, its NDC. To minimize such discrepancy, countries in turn, will be influenced by the marginal costs of would need to update the cost curve (MAC curve) the buyer’s NDC. This means that the price of ITMO periodically – at least every NDC period, although it will be determined at some level between these two would not solve the fundamental uncertainty issue. as shown below through the negotiation process by two transacting countries. c(ITMO)10 in the host Also, a host country, when implementing and fulfilling country ≤ P(ITMO) ≤ c(ITMO) in the buyer country. its unconditional NDC, may not always be able to use its least expensive mitigation alternatives, due to lack of full knowledge of these alternatives, and to potential constraints on what mitigation alternatives are available in practices. If so, mitigation costs could be higher than the costs assumed in our calculations, and the opportunity and ITMO costs correspondingly higher. On the other hand, there could (and is very likely to) be positive co-benefits accruing to hosts from their mitigation activity, for example due to lower air pollution, greater energy security and lower long-run energy costs, when part of their fossil fuel consumption is phased out. These factors lower the host’s real costs of implementing its mitigation activity, and at the same time reduces its opportunity and ITMO costs. It is difficult to say in general how these factors in total would impact on these costs; this must be evaluated in each individual case. c(ITMO) = c(ERC) + OC where c(ERC) is the unit cost of the emission reductions that underly the ITMO and OC: opportunity cost; marginal 10 cost of ITMO augmented pledge = c(NDC+ITMO) ARTICLE 6 APPROACH SERIES 9 5. Alternative 6. Considerations approaches for countries Opportunity cost pricing is not the only conceivable and practical approaches approach, and a few alternatives could be explored. For instance, host countries could identify and earmark mitigation activities whose implementation cost is higher than the marginal cost of achieving their NDCs. It is important to ensure that the revenues in excess of Under a least-cost NDC strategy, selling ITMOs immediate mitigation costs, generated with the ITMO from such activities would not compete with NDC price derived from the above approach, do not become achievement, and therefore opportunity cost becomes a windfall to project developers and are instead irrelevant. In this case, pricing the ITMOs based on retained for use to implement additional mitigation respective activities’ implementation costs could work. activities to meet the NDC. For that purpose, it is necessary for the host government to have the ability However, the earmarking approach significantly to collect these payments, at least the portion covering reduces transaction opportunities and flexibility for opportunity cost associated with the corresponding host countries in achieving their NDCs by limiting the adjustments. Such payments to the host country could scope of eligible activities. Also, mitigation planning be operationalized in various ways such as imposing happens under uncertainty on baseline emissions a fee for Authorization and/or levying a tax on ERC and actual performance of mitigation activities, transfer among other possible transfer schemes. One which could make initially considered mitigation possible approach can be that the host government activities that are beyond the NDC the ones that establishes a sovereign “climate fund” to capture the the host country would need to meet its NDC. fee/levy/tax in lieu of the opportunity cost linked to the marginal cost of meeting the NDC. As illustrated in Another alternative could be charging a uniform the figure below, the sovereign climate fund manages corresponding adjustment fee based on either a ERC transactions, pays the market price for carbon carbon price level needed to achieve the 2030 NDC credits to the project entities, and invests part of the pledges or the climate goals of the Paris Agreement. sale proceeds in activities which raise NDC ambition The recent studies suggest that the former would be and increase climate resilience in the host country. within a range of $9/t - $73/t11 while the latter would be There may be pure voluntary market and private around $100/t12. While this approach has the merit of sector transactions where the sovereign fund or the simplicity, it could potentially generate large windfall government is not at all involved. The sovereign climate gains in host countries that have low NDC ambition. fund or the government needs to be involved only when the transaction requires corresponding adjustments. Finally, auctioning can be used to discover the price of ITMOs if the host country has an in-depth understanding of their NDC and its ITMO costing as well as a well-designed auction mechanism. This is, however, not the case for many host countries as they lack the required capacity. Using auctioning without a proper understanding of the ITMO costing could result in too low prices below opportunity costs. Jae, E et al, How much could Article 6 enhance nationally determined contribution ambition toward Paris Agreement goals through economic 11 efficiency, Climate Change Economics 2021, https://scholar.harvard.edu/files/jaldy/files/edmonds_et_al_2021_cce.pdf 12 See: State and Trends of Carbon Pricing 2022, World Bank, https://openknowledge.worldbank.org/handle/10986/37455 ARTICLE 6 APPROACH SERIES 10 The use of the sovereign climate fund requires the host country to set out clear country-level processes for participation in voluntary and Article 6 carbon markets. By having a centralized channel through which all ERC transactions are processed, it will enable the government to manage the NDC progress tracking more easily and use these revenues in a planned manner to effectively support the NDC commitments and overall development goals (e.g., use the revenues to increase the viability of certain mitigation projects in the country). Furthermore, this sovereign fund gives visibility to how the revenues from fee/levy/cess/tax are used, which will help in branding the country’s emission reductions in international carbon market. Figure 3: Illustration of transaction flows using the Sovereign Climate Fund Buyers in carbon markets (e.g., Country buyers for compliance markets and private sector for voluntary markets) Credits with corresponding $+ adjustment commitment (ITMOs) Voluntary market credits with no Sovereign Climate Fund corresponding adjustment commitment $ $m $m $m Emission reductions Invest in low carbon/ Private sector for ITMO transactions resilient infrastructure emission reductions by authorized entities $+ is the price paid for mitigation outcomes (MOs) with corresponding adjustment (CA). This price reflects the opportunity cost to the government to generate additional MOs to meet the NDC due to CA for the sold mitigation outcomes. $m is the market price for carbon credits in the voluntary markets where the emission reduction credits are not associated with government commitment for corresponding adjustment.