ARTICLE 6 APPROACH PAPER SERIES Considerations for Additionality Concepts to Article 6.2 Approaches © 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. “Considerations for Additionality Concepts to Article 6.2 Approaches,” 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. Introduction 1 2. Role of additionality in earlier market-based mechanisms 2 3. Considerations for the role of additionality for Article 6.2 approaches 5 4. Relationship between Environmental Integrity and Additionality for Art. 6.2 9 5. Transition period to streamlined additionality 12 Acknowledgements This technical approach paper has been written for the Climate Warehouse Program at the World Bank, which seeks to operationalize Article 6 through piloting activities. The paper has been prepared jointly by a team of experts that includes Jessica Wade-Murphy (Atmosphere Alternative) and Sandeep Kanda (World Bank). Harikumar Gadde (World Bank) and Seoyi Kim (World Bank) provided substantive inputs and managed the project. Chandra Shekhar Sinha (World Bank) provided valuable comments and suggestions to the authors. This work also benefited greatly from consultation with the Climate Market Club. The Climate Market Club, as of September 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 Considerations for Additionality Concepts to Article 6.2 Approaches Abstract 1. Introduction This approach paper examines the role of Article 6.2 approaches must contribute to achieving additionality for environmental integrity under Nationally Determined Contributions (NDC), enabling Article 6.2 approaches. It analyzes the relevance of climate action and sustainable development through additionality determination methods from market cooperation, while ensuring environmental integrity. mechanisms including Joint Implementation (JI), Environmental integrity (EI) is ensured when mitigation Clean Development Mechanism (CDM), and voluntary outcomes (MOs) are transferred internationally, and offset mechanisms, wherein additionality has been the transferring country can still meet its NDC and judged as a yes/no dichotomy, albeit with inherent is enabled to undertake further climate action, such uncertainty. It also reviews other performance- that there is no net increase in global emissions. based market mechanisms such as emission trading Internationally transferred mitigation outcomes (ITMOs) systems, wherein no additionality demonstration will be subject to corresponding adjustments, meaning was needed. A6.2 has more similarities with JI and they are not counted toward the NDC achievement of International Emission Trading (IET), including the the transferring country. capping of emissions of all participants and performing corresponding adjustments (CA). It is noted that The Paris Agreement Art. 6.2 (A6.2) text does not refer A6.2 differs from former project-based mechanisms, to mitigation outcomes being “additional”, while the where the additionality demonstration has been linked Glasgow decision CMA.3 includes guidance that ITMOs to the absence of the project activity and relied on from A6.2 cooperative approaches are real, verified, business-as-usual (BAU) scenario for baseline. The and additional; however, there is no detailed guidance A6.2 guidance state that the impact of mitigation on how this should be demonstrated. activities should be evaluated compared to a country’s commitment and to future-looking performance of a below-BAU scenario. In the A6.2 context, the host Paris Agreement Article 6.2 country must assess and decide how much and which Article 6.2: ‘Parties shall, where engaging on a MO it wishes to sell, or not, to ensure it achieves voluntary basis in cooperative approaches that its own NDC commitments, without overselling involve the use of internationally transferred or underachieving by not engaging sufficiently in mitigation outcomes towards nationally international markets. Additionality may become a risk- determined contributions, promote sustainable management tool, rather than a yes/no decision tool, development and ensure environmental integrity to determine the quantity of MO from an activity that and transparency, including in governance, may be authorized by the host country for international and shall apply robust accounting to ensure, transfer. This approach paper provides scenarios of inter alia, the avoidance of double counting, when and how activity-based additionality could be consistent with guidance adopted by the evaluated to mitigate risks to the host and buyer. Conference of the Parties serving as the meeting of the Parties to this Agreement’. 2 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES In this context, the potential role of additionality Different possible methods of additionality for environmental integrity under A6.2 needs to be demonstration were proposed under AIJ, including: examined carefully. This working paper builds further on the approaches cited in the ‘Ensuring Environmental a. Measuring additionality for an AIJ against Integrity under Article 6 Mechanisms’ paper (World a credible, quantitative baseline; Bank, 2021) and explores the purpose additionality could serve in A6.2 activities. Also, it examines how b. Defining narrow categories of activity and when additionality may need to be applied in the types whose emission benefits will A6.2 context, analyzing the relevance of additionality a priori be considered additional; or determination methods from project based mechanisms c. Assessing additionality by evaluating including Joint Implementation (JI), Clean Development whether an AIJ overcomes financial, Mechanism (CDM), and voluntary offset mechanisms, institutional, technological, or other as well as the approaches of other performance based barriers to project development. market mechanisms such as emission trading systems / cap-and-trade schemes. Subsequently, the reference to additionality of emissions reductions from COP3 was in the context of the Kyoto Protocol Article 6 and Article 12 market 2. Role of mechanisms, Joint Implementation and the Clean Development Mechanism, respectively, where the text additionality in of the Kyoto Protocol Article 6 states that, “emission reduction units resulting from projects aimed at reducing anthropogenic emissions by sources or earlier market- enhancing anthropogenic removals by sinks of greenhouse gases in any sector of the economy, based mechanisms provided that: … Any such project provides a reduction in emissions by sources, or an enhancement of removals by sinks, that is additional to any that would The Conference of the Party at their first meeting otherwise occur;” and in Article 12 that, “Emission (COP1) took a decision regarding criteria for a reductions resulting from each project activity shall be pilot phase for activities implemented jointly (AIJ) certified … on the basis of … Reductions in emissions as indicated in Art. 4.2 (a) of the UNFCCC. It was that are additional to any that would occur in the decided:“...(d) That activities implemented jointly absence of the certified project activity.” should bring about real, measurable and long-term environmental benefits related to the mitigation of Furthermore, for the latter case, the Marrakech Accords climate change that would not have occurred in the at COP7 gave the more detailed definition that, “a absence of such activities (author’s emphasis); (e) CDM project is additional if anthropogenic emissions That the financing of activities implemented jointly of GHGs by sources are reduced below those that shall be additional to the financial obligations of Parties would have occurred in the absence of the registered included in Annex II to the Convention within the CDM project activity … The baseline for a CDM project framework of the financial mechanism as well as to activity is the scenario that reasonably represents the current official development assistance (ODA) flows;”. anthropogenic emissions by sources of greenhouse gases that would occur in the absence of the proposed These two requirements were called the additionality project activity.” criteria for AIJ. The first refers to the realness of GHG abatement, i.e. emission reduction compared to a As the requirements evolved from COP1 to COP7, the baseline, whereas the second describes that the funds focus went from a unified requirement for mitigation of earmarked for AIJ have no other objective (i.e. fulfilling climate change that would not have occurred “in the previous commitments to development assistance absence of such activities”, to separate requirements or parallel commitment to climate finance). Related for both additionality, defined as emissions reduced literature also cited that if strict additionality criteria below those in the absence of the activity, and a were not defined, AIJ crediting would soften the baseline, defined as the absence of the specific commitments of Annex I countries (Puhl, 1996). project activity. ARTICLE 6 APPROACH SERIES 3 In the Kyoto Protocol context, baseline setting and as a sense-check on how commonplace such activities additionality demonstration have been used to judge were in the same geographical area. All of these steps whether mitigation activities, mostly from host Parties sought to check whether the activity was different than with no emission reduction commitments, were the BAU. Particularly for barrier analysis and common deserving of generating credits and receiving carbon practice analysis, the additionality demonstration finance from cooperative mechanisms. This process used data from the previous one to three years to sought to mitigate the risk of generating credits from differentiate the project from the hypothetical baseline. business-as-usual (BAU) activities, by providing a test to seek to identify whether project activities differed Apart from the Kyoto Protocol-related market schemes, from business-as-usual. the voluntary standards, too, have relied upon the CDM additionality tools for emission offsets originating from host countries and sectors without a GHG reduction Cooperation for Mitigation obligation. Cooperative approaches prioritize less- In mathematical terms, it could be stated that emission expensive mitigation for financing, in place of reductions (ER) from a CDM activity were a function of costlier mitigation that could happen elsewhere. additionality and baseline¹. Prioritizing lower cost mitigation should allow countries to achieve more, faster, since at lower Emission reductions (ER) = fn(additionality, baseline) abatement costs, the same amount of finance will result in more mitigation. Still, the equation ER = fn(additionality) x fn(baseline) is only effective if the replacement mitigation Wherein, additionality provided a binary signal (1,0) and occurs as a result of the cooperative scheme. baseline, a continuous (analog) signal. In that context, additionality has been judged as a yes/ no dichotomy, albeit with inherent uncertainty. As an Baseline alternatives were defined, usually employing example, in the case of investment analysis, in which a historic data to describe how the contemporary project’s financial indicator is compared to the indicator circumstances would bode for different choices about of an alternative investment or to a benchmark, a new investment or continuation of existing practices. project indicator that is just slightly lower than the Then, an additionality test was carried out following alternative would be deemed additional, whereas various steps. The foremost step involved checking the project whose indicator is just slightly higher is that the project activity and baseline alternative(s) deemed non-additional. This results in an all-or-nothing complied with legal requirements. Subsequently, outcome where, for two nearly identical projects, one investment analysis and/or barrier analysis were applied could certify emission reductions for all of its impact as to demonstrate the activity was not economically compared to the baseline, while the other could certify attractive or faced justifiable barriers to implementation. none at all. The same has applied in the case of the Thereafter, common practice analysis was undertaken demonstration of barriers. MRV is also a critical component of certified emission reductions, but it is not addressed here, since it is expected to have a similar role in 1 earlier market-based project mechanisms and Article 6 cooperation. 4 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES Figure 1: An example of additionality investment analysis to illustrate all-or-nothing approach Additionality Project 1 IRR: Project 2 IRR: Benchmark: Investment Analysis Results 11.8% 12.2% 12.0% 100 90 80 70 Credited 60 Emission 50 90 Reduction 40 30 20 10 0 0 Project 1 Project 2 Baseline Project Emissions Baseline Emissions Furthermore, under this all-or-nothing test, in the case eligible activities. Buyers have relied on the additionality of a potential investment with economic attractiveness filter to justify directing of incentives to mitigation that reduced GHG emissions, often such a reduction activities whose associated emissions reductions would would be assessed as (entirely) non-additional. otherwise not have occurred. Additionality has taken Over time, the investment analysis became the de on a central role in the narrative of legitimacy of carbon facto method of demonstration of project-specific finance directed at mitigation outcomes from projects additionality. and programmes. So far, the role of the host country governments in directing the flow of carbon revenues to particular Responsibility for additionality in the CDM mitigation activities has been very limited. Additionality The responsibility for demonstrating additionality as a part of environmental integrity has not been a lay with the project proponent, while the central criterion for host parties to approve mitigation responsibility for confirming additionality actions in their jurisdiction, with the focus rather occurred in parallel via the validation process being on the voluntary nature of the activity and its by the Designated Operational Entity (DOE) sustainable development benefits. In the circumstances and acceptance of the assessment by the of host countries with no emission reduction regulator, the CDM Executive Board (CDM EB). commitments, a general view has prevailed that the more carbon finance the better. In a related way, the additionality demonstration has acted as a risk management tool for carbon credit buyers seeking to direct the flow of carbon finance to ARTICLE 6 APPROACH SERIES 5 Additionality under JI received further inputs from 3. Considerations COP18, which requested the Subsidiary Body for Implementation (SBI) to recognize, “such concepts as positive lists of project types that would automatically for the role of be deemed additional and prior consideration of joint implementation projects, taking into account, additionality as appropriate, the application of standardized baselines.” It appears that the experience with JI led to the conclusion that standardized methods could be for Article 6.2 more effective for additionality, using concepts such as positive lists and standardized baselines. Given the approaches similarities between 6.2 and the JI mechanism, this conclusion may hold true for the new context. To analyze the potential role of additionality for A6.2 A6.2 also has significant similarities with International activities, first, the characteristics of A6.2 are compared Emission Trading (IET), wherein no additionality to those of other market mechanisms (including demonstration was needed. The similarities between performance based and project based)² to identify the two include that the participants are capped, similarities and differences. As the role of additionality Corresponding Adjustments (CA) / equivalent allowance and its application are analyzed, conclusions are trading are applied, and reduced emissions under drawn on which past models may not apply, and an NDC are like reductions below a cap by regulated which experiences provide lessons learned for the entities. Whereas the main differences between A6.2 consideration of additionality in A6.2. In the following and IET include that emissions units derive from table, A6.2 is compared to Kyoto crediting and identified activities under A6.2, and caps are set by offsetting mechanisms and other market mechanisms. countries themselves and not an outside regulator. This latter difference contributes to concerns about the Considering the characteristics shown in the table, A6.2 environmental integrity of A6.2 mitigation outcomes, has most similarity with the JI crediting mechanism. In and that they could represent “hot air” due to the case of JI, trading carbon credits between a buyer unambitious NDC goals. This concern is very similar to country and a host country would be climate neutral, the situation observed in the context of JI, where there because of the cap on GHG emissions for developed was concern of ‘hot air’ emanating from low ambition countries. This is unlike the case of CDM, wherein over- levels in the Kyoto pledges; however, additionality generated CERs could lead to global GHG emission testing did not address this concern, since additionality increase, as host countries did not have any cap on addressed only whether the particular activity would their emissions. have happened or not. “Hot air” in an emission trading scheme would be addressed by stringent caps. 2 Additionality refers to the eligibility requirement that offset credits must be in addition to what would have happened in the absence of the project, and that reductions are above and beyond business-as-usual. A performance standard establishes a threshold for technologies or processes that must be met or exceeded in order for a project to be additional. A project-based standard evaluates projects on a case-by- case basis and allows for the use of different additionality tests (e.g., financial, technological, common practice), depending on the type of project. (PMR, 2015) Table 1: Comparison of Article 6.2 to Kyoto crediting and offsetting mechanisms and other market mechanisms 6 Characteristic Paris Agreement Article 6.2 JI CDM Cap-and-trade or Offset mechanisms (e.g. International Emission Gold Standard, VCS, JCM, DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES Trading (IET) Alberta, CARB, RGGI) Emissions limit Paris Agreement requires Kyoto Protocol set Did not exist for Participants have targets Unregulated host countries define their them for hosts (host host countries set by regulator / Assigned own nationally determined country – has agreed of CDM project Amount Units (AAU) contributions (NDC) and target), within national activities (host targets set under those emissions mitigation country – no target) could become a reference commitments under the for Article 6 activities Convention Assigned Amount Units -AAU Usage/transfer Mitigation Outcomes of Emission Reduction Units Certified Emissions Allowance units traded to Reduction credits / of units host may be used to meet (ERU) of host may be Reductions (CER) of attain emissions limits / offsets generated outside own mitigation targets used to meet emissions host may be used the covered sectors or NDC of the buyer targets of buyer to meet emissions AAU trading at the and traded/retired targets of buyer national level Corresponding Host country must Host country cancels None by host Trading of allowances Not needed adjustments make corresponding an amount of AAUs is similar to trading (CA) adjustments to NDC corresponding to the with corresponding for transferred MO ERU emission reduction adjustments from the JI project, equivalent to CA Objectives Achieving NDC Meeting of Meeting of Not exceed emissions Incentivize emissions (host and buyer) commitments commitments cap (supplier and buyer) reductions/removals (host and buyer) (of buyer only) outside covered sectors Environmental • No net increase in • Ensured by • CDM Additionality • Ensured by targets • Positive list, voluntary, integrity global emissions conservative baseline, tools and bookkeeping of beyond BAU, etc. • Baseline below or positive lists, or CDM allowance units ‘business as usual’ additionality tool & ERU to AAU conversion³ • Addressing non- permanence risk Note: The elements that are similar between A6.2 and the other mechanisms are put in bold. JI operated in two tracks (Track 1, Track 2), and subsequently the paragraph 15e of the Doha guidance (2012) relating to JI Parties agreed on the new unified JI track with “clear, transparent and objective 3 requirements to ensure that projects are additional to what would otherwise occur.” ARTICLE 6 APPROACH SERIES 7 Delving further into similarities and differences, under Risk – Crediting of activities required by regulation: CDM, JI and other offset mechanisms, the emission A6.2 activities must go beyond regulatory requirements, reductions have been linked to the absence of the since all existing policies must be considered in the project activity, and baselines generally have been baseline/reference levels. Using positive lists and developed considering the continuation of historic standardized baselines set by the host country, for conditions, e.g. last three years’ operation. The concept activity types that surpass the goals of their regulatory of additionality demonstration has required assessment and policy framework, could provide a streamlined of hypothetical scenarios in the absence of the project. method for qualifying activities. Such information is Under Article 6 and the related Glasgow decisions, also critical for mitigating buyers’ reputational risk and there is no reference to mitigation outcomes accruing developer risk of materializing carbon finance. in comparison to a scenario without the mitigation activity; instead, the impact of a mitigation action will Based on this analysis, it does not seem appropriate to be evaluated compared to a country’s commitment, apply the same additionality requirements as CDM or and future-looking performance compared to a below- other voluntary offset mechanisms to A6.2 mitigation, BAU scenario. Further, the requirement for no net and more adequate to explore how requirements to increase in global emissions relates the outcomes to ensure the environmental integrity of the results under the NDC commitments. Specifically for A6.2, its aim JI and IET would be applicable to A6.2 mitigation. is cooperative approaches not limited to projects and programmes. Thus, the guiding question of the CDM additionality test, “would the mitigation happen in absence of the project activity?”, does not suit the A6.2 context. A6.2 activity additionality cannot be judged on the basis of whether an individual action is different than the scenario without that particular action. Another way in which A6.2 differs greatly from CDM, arises since host countries have their own emissions target under the Paris Agreement, changing the context of mitigation activities significantly as compared to CDM or other offset mechanisms. The relevance of additionality testing to address the different risks of concern to host countries and buyers for A6.2 mitigation may be as follows. Risk – Overselling: The Paris Agreement establishes incentives for host countries neither to sell non- additional units, nor to oversell credible mitigation outcomes. Since the main risk to the host lies with overselling, the host country should define eligibility of activity types and approve MO transfer to control this risk. Risk – Crediting of “hot air”: In the context of JI, where there has been concern of ‘hot air’ emanating from low ambition levels in the Kyoto pledges, additionality did not address this concern. In this A6.2 context, this concern would be better addressed by confirming the stringency of NDC commitments, via an independent assessment. This step would ensure that the operation of A6.2 mirrors more closely the circumstances of International Emission Trading (IET), wherein no additionality demonstration was needed. 8 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES MANAGING RISKS IN A6.2 ENVIRONMENTAL INTEGRITY In the case of A6.2, host countries have their own In this context, historic additionality demonstration emissions targets; therefore, the host country methods could be adapted by host countries as needs to have an active risk management a risk management tool, to judge the likelihood strategy both in terms of avoiding excess transfer that project types would be implemented without of mitigation outcomes (i.e., overselling and incentives from cooperation. The conclusions could not meeting its own NDC), and also in terms of serve as a gatekeeper to the amount of mitigation underachieving mitigation (i.e. by not engaging outcome to transfer internationally, thereby helping in international markets and attaining only the the host country to avoid overselling and also mitigation it can finance without cooperation). to ensure no net increase in global emissions. Host countries need risk management tools One identified risk to buyer countries, on the other to support them in the expanded role that will hand, is reputational, related to the credibility be required of them by the A6.2 conditions, of purchased units, and the additionality test as compared to their very limited role in the has been perceived as a tool that minimizes this CDM. Risk management tools can help host risk to buyers. Buyers have used additionality countries judge which mitigation actions generate demonstration as a filter for directing the flow of outcomes suitable for transfer, and how much carbon finance, as a proxy to answer the question, mitigation outcome should be transferred  4 . “will the project happen only with carbon finance?” Again, in most cases, it is not possible to answer Early in the discussion of additionality, the simply “yes-or-no” if a project will happen without probabilistic nature of additionality demonstration carbon finance, with the exception of the actions was highlighted (Meyers, 1999). The question of that entail costs but no other income sources, like whether or not mitigation actions will go ahead landfill gas flaring. For buyers of Art. 6.2 mitigation without carbon finance is rarely a strict yes/ outcomes, a check of the host country’s NDC no answer, but a question of likelihood that should help to gauge reputational risk. Reviewing can be answered generally across a sector the project types or technologies included, or not, or project type. As a simple example, when in the NDC could improve the buyer’s understanding considering a class of new investments with of how likely it is that their financing of mitigation investment indicators in a normal distribution outcomes will catalyze or expand mitigation. around a benchmark, the probability could be ITMOs from a host country with a stringent NDC that 50% would have gone ahead without carbon would pose low reputational risk of unintentionally finance, and 50% would not have gone ahead. financing mitigation action that would be likely to happen without incentives from carbon finance. Different tools would be needed to determine the optimum price for ITMOs. 4 ARTICLE 6 APPROACH SERIES 9 4. Relationship Environmental integrity under A6.2 is a broader concept than additionality under the CDM. If the NDC is defined rigorously, baselines/reference levels are between set accordingly, and corresponding adjustments are undertaken, then additionality, as a test of approval at Environmental the activity level, may not be needed for A6.2 actions, since additionality would be demonstrated already by the mitigation going below the BAU scenario and being Integrity and consistent with a rigorous NDC. Additionality The Ensuring Environmental Integrity under Article 6 Mechanisms approach paper provided proposals for ensuring EI under different scenarios, linked to NDC for Art. 6.2 stringency and unit quality, where “unit quality” meant the level of confidence that the face value of the MOs is correctly calculated and fairly represents the quantity Under project-based mechanisms, environmental of MOs created. Further, it highlighted that NDC integrity in the past has been judged largely on a stringency would be best assessed by an independent project-by-project basis5. While in emissions trading entity, using the assumptions, data, sources and schemes, environmental integrity has relied on methodology of the NDC, and suggested terms of stringent emissions caps. In the context of the Paris reference for independent assessment of NDCs. Agreement, the A6.2 approach straddles project- based mechanisms and ETS, entailing cooperative The following table analyses the requirements toward approaches not limited to projects and programmes. ensuring environmental integrity for A6.2 mitigation outcomes under different country conditions, assuming Environmental integrity of A6.2 approaches and that independent NDC assessment is applied. activities can be judged on the basis of expanded information, namely, the host country’s NDC, in which In the A6.2 context, the host country must assess and it identifies which mitigation actions it considers decide how much and which MO it wishes to sell, or realistic and achievable. In the future, periodic reporting not, to ensure it achieves its own NDC commitments, under the enhanced transparency framework will without overselling or underachieving by not engaging provide even more context for evaluating A6.2 activities. sufficiently in international markets. Additionality The availability of this information will be guaranteed becomes a risk-management tool for the host country by the participation requirements for A6.2, including to determine which MO may be authorized for up to date NDC and national inventory report (NIR) international transfer. The host country may decide submissions. Note that the NDC provides information up-front, via a positive list, or may decide on an activity on country context for types and categories of basis, about whether MO from an approach may be mitigation action, even if the NDC does not provide a fully or partially transferred. For an activity-based specific performance benchmark or project baseline. decision, there will need to be tools for the host to The NDC, no matter its stringency, provides new, assess the transfer and decide whether transferring expanded information for evaluating mitigation would impact the ability to achieve NDC goals, such actions against the country context and mitigation that there is no net increase of global emissions (GE) commitments. from the transaction. Employing the information provided by the project participant and validated by an independent auditor, considering the individual project 5 circumstances. 10 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES Table 2: Requirements for ensuring environmental integrity for Article 6.2 mitigation outcomes under different country conditions Where NDC Corresponding Requirements to ensure Remarks Independent Stringency adjustments Environmental Integrity* Assessment of NDC is Baseline/ No net increase Reference level in GE More Required Describe Addressed by Activity- stringent consistency host and buyer based than BAU with NDC attaining NDC additionality testing is All mitigation not needed outcomes may Possible be transferable Less Required Required through All MOs below Activity- stringent conservative cap/ the stringent based than BAU baseline, using cap/baseline additionality NDC/BAU as transferable testing is point of reference not needed Not possible Difficult to Required Required through Part of MOs Activity- ascertain conservative transferable based cap/baseline, additionality using technical evaluation determination, required not based on NDC n.a. n.a. Required Required through Part of MOs Activity- conservative transferable based cap/baseline, additionality using technical evaluation determination required *The requirement for minimizing risk of non-permanence is not addressed here ARTICLE 6 APPROACH SERIES 11 This assessment will vary on a country basis, Finally, the grey row analyses the case of mitigation depending on the country circumstances and action outside the scope of the NDC, where similar to respective NDC. Scenarios that may be observed are the orange row case, NDC assessment will not provide presented in the table and described as follows. In the the information needed to judge the stringency of a green row, the host country NDC can be assessed, baseline in the country context. As in the previous and it is found to be more stringent than BAU, so the case, activity-level methods and a “haircut” on the assumption is that the host country has its bearings on international transfer of mitigation outcomes may be the likelihood of implementation of mitigation activities appropriate, to contribute to raising ambition and as a in different sectors and has developed its NDC nudge toward expanding the scope of future NDCs. accordingly, thereby the overselling risk is minimized, and activity-based assessment is not needed. In mathematical terms, it could be stated that Therefore, the buyer’s confidence comes from the internationally transferable mitigation outcome from confirmed stringency of the NDC, whereas the seller’s an A6.2 activity that is real, verifiable and additional is confidence in the transaction is from its informed a function of environmental integrity  6 . decision-making about the net benefits of MO sales in comparison to the baseline/reference level. ITMO = fn(EI) = fn(IT) x fn(MO) Whereas the yellow row shows the case where ITMO = fn(no net increase in GE) x fn(Baseline/ information is available to assess the NDC, and reference level) the conclusion is that it is less stringent than BAU; ITMO = fn(NDC, Additionality) x fn(Baseline/reference still, given that information is sufficient to draw this level) conclusion, it will also be sufficient to set a stringent baseline. In this case, buyer confidence stems Wherein, a stringent NDC that partially or wholly partly from the assessment of the NDC along with addresses the buyer reputational risk could still be a the defined baseline/reference level below BAU binary signal, whereas the additionality assessment scenario. In this case, the seller will mitigate its and baseline may be continuous (analog) signals and risk by acknowledging the below-BAU scenario. address any residual buyer risk as well as host country overselling risk. The mitigation outcomes are a function On the other hand, the orange row demonstrates of a stringent below-BAU scenario, and these MO the case where information about the host country become ITMO upon receiving an authorization for context from the NDC is incomplete, sparse, of low transfer that is linked to an additionality assessment quality and so forth, such that NDC assessment is by the host country. This additionality check need not not possible, and the host country may not be able to be a pass/fail determination, but rather an expression quantify the risk of over-transferring, nor the buyer to of risk management by the host country leading to make an informed decision about unit quality. In this the outcome of the authorized quantity of MOs that case, activity-specific methods may be required to may be transferred internationally, and still achieve define a stringent, below-BAU scenario, while at the the NDC. The host country authorization labels units same time, it may be advisable to transfer less than as transferable, whereby the host country indicates 100% of the mitigation outcomes to provide a cushion what is additional by their positive list or the stringent that mitigates the risk of over-selling. In such a case, baseline/reference level definition and confirms all MO it may be appropriate to adapt the CDM additionality below that level can be ITMOs. On the other hand, tool for an activity-level additionality demonstration, actions outside the pre-approved positive list, would not as a yes/no output, but rather to assuage the be subject to the evaluation and judgement of the host buyer risk and to enable the host country to arrive government, as to what percentage is transferable 7. at the quantity of MO for international transfer. Again, MRV is also important, similar to the case for emission allowances or Kyoto emission reductions. 6 To provide predictability, it may be useful to refer to the example of JCM, whereby an ex-ante percentage was defined for the host country 7 and the buyer (50% for each). 12 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES INDEPENDENT NDC ASSESSMENT With respect to the feasibility of independent of the new conditions with respect to ambition. assessment of NDC stringency, there are concerns These circumstances could potentially cause that the diversity of NDCs in terms of coverage operational delays to NDC assessment, which (e.g., economy wide target, sectoral targets, etc.), may affect investor confidence. The question level of ambition, and conditionality, as well as also remains as to who would conduct such NDC different national circumstances and development assessment and sensitivities related to the results priorities, would be a barrier to developing a generated. At the same time, the NDC assessment standardized framework for assessment. Also, there approach warrants serious consideration, to bring is uncertainty regarding the level of complexity more transparency around NDC formulation, to and time to acquire data underpinning emissions support increasing ambition levels and as a nudge projections and potential discrepancies between toward harmonization. There are precedents information requirements at the NDC level and for independent assessment related to country the activity level. Furthermore, countries’ policies policies, e.g. sovereign credit ratings. Here, it is are constantly changing, requiring reassessment assumed that such NDC assessments are feasible. There should be a process whereby NDCs are 5. Transition period continuously improved, and the Glasgow decision guidance for A6.2 approaches nudges countries toward increasing the transparency and ambition of to streamlined their NDCs by requiring regular NDC updates and NIR reporting for participation. In the transition period, in additionality which NDCs are yet to converge in their transparency, clarity, and ambition, the proposed approach suggests a means to move towards a systematic way to address The proposed approach of not applying a separate additionality concerns and unlock the potential of additionality test may fit particularly well for sectoral mitigation investments through clear market signals and policy crediting approaches. In such cases, use of that would drive more advanced investments. independent NDC assessments may be feasible, and the additionality test may not be needed. However, An independent assessment of the NDC could the majority of activities in the early days of the market further support the understanding of the rigor are expected to be implemented at the project level, of the contributions of each country, and prior to implementation of the NDC assessment whether they go beyond BAU. The assessment approach. Therefore, a transition period could be would, as well, facilitate the application of in order, in which all activities are treated along the streamlined additionality for A6.2 activities. red row of the Table 2. In other words, apply activity- specific methods define a forward-looking, below-BAU scenario as the baseline/reference level, and consider transferring less than 100% of the mitigation outcomes to mitigate the risk of over-selling As countries subject their NDCs to independent assessment, their EI assessment for A6.2 activities may change to align with the yellow or green row in Table 2.