What is a corresponding adjustment?
A ‘corresponding adjustment’ is a tool that countries use to ensure carbon offsets are not double-counted when they are transferred or sold internationally. When carbon credits are transferred across borders to be used as a carbon offset, the country where the credit was produced gives up its right to use that credit towards its Nationally Determined Contribution (NDC). The NDC is the country’s target carbon reduction as part of the Paris Agreement, so the corresponding adjustment is used to ensure that the carbon credit is not counted towards this target and can be used by the buyer instead.
When a country gives up the emissions reduction to another entity, this is known as authorising it. The corresponding adjustment is then the accounting tool that the government uses to action this authorisation. There can be a time delay between the authorisation and the corresponding adjustment, which could happen upon authorisation, issuance, use or cancellation, which introduces risk for the credit buyer who is dependent on the originating country’s government completing this action.
Why it matters in compliance markets
As both compliance and voluntary markets’ goals are to reduce overall greenhouse gas emissions, double-counting emissions against both the buyer and the originating country harms the overall objective of reducing carbon emissions and means that the purchaser’s investment has not had a material impact on carbon emissions. Most compliance markets therefore require a corresponding adjustment for the credits to be valid.
Voluntary markets are more complicated
Authorised credits are not always used in voluntary carbon markets, and there are some who are critical of their use, but the general expectation is that they will become more common, if not mandatory on some exchanges, particularly as Article 6.4 of the Paris Agreement recently extended the rules’ scope.
The current uptake in voluntary markets is fragmented. For example, Verra, who provide carbon verification and certify projects, do not require corresponding adjustments to meet their standards, but host countries can choose to apply them. Whereas Gold Standard, another carbon standard, mandate that host countries must apply a corresponding adjustment for a credit to be claimed as an offset, but they are not required if the purchaser is only claiming to support a carbon reduction project, not to offset their emissions.
Credits without a corresponding adjustment therefore have a more limited use, and in general, there is demand for authorised voluntary credits, particularly as end buyers of carbon credits voluntarily retire them to make a real-world difference to their climate impact, and face significant reputational risk if their carbon actions do not actually meet this goal.
However, as with standards, corresponding adjustments are not tracked on all registries, which means that certificates may not state whether credits are authorised. It can therefore be down to both buyers and sellers to perform adequate due diligence and ensure that their own records include the traceability they need to assure stakeholders of a credit’s veracity.
Many of the risks of using authorised carbon credits stem from uncertainty over whether the credit is truly authorised and whether the corresponding adjustment has or will certainly take place. Because of this, and the rules governing whether a credit can be used as an offset, some buyers and markets will not accept credits without verification of the corresponding adjustment.
Greenwashing is always a risk in carbon offsetting, and a buyer claiming an offset when they have (knowingly or unknowingly) bought a credit that has already been claimed towards the originating country’s NDC would be a prime example of this.
If registries are not recording whether and when corresponding adjustments take place, it is down to buyers to ensure this is in the contract terms and to sellers to provide the verification. And as many transactions in voluntary markets are over-the-counter, custom contracts, it’s also important to record the authorisation status of each credit in your inventory if they will be sold on so that you can fulfil each contract.
And as mentioned above, the time delay between the authorisation and the corresponding adjustment can introduce more uncertainty and risk. Authorised credits also have an expiration date as they must be used and adjusted for in the correct NDC period, which depends on each country’s own deadlines. So it is vital that any contracts that include the expectation of a corresponding adjustment have all time obligations clearly included.
Technology has a lot to handle
Leaving aside the risks and challenges of carbon markets generally, corresponding adjustments carry a lot of risk and administrative tasks for buyers, producers, and traders of carbon credits. Most procurement and CTRM systems predate carbon credits and do not have the flexibility to manage all the risks of this complicated asset (or liability). Therefore, many organisations find themselves using spreadsheets to manage these complex trades and inventories, introducing even more risk into the process, and further reducing both traceability and assurance.
The first challenge your technology needs to solve is in tracking a wide range of different attributes. Just for corresponding adjustments, your people need to know whether a credit is authorised, its vintage and expiry, and when the corresponding adjustment is scheduled to take place.
And logging these attributes is not enough. Buyers and regulators require traceability and verification, so your processes need to be auditable, or they expose your business to further risk. If credits cannot be properly traced back or sellers cannot verify the corresponding adjustment, buyers may attempt to retire disallowed credits with a registry, be unable to claim them as the offset they were expecting, or be unable able to sell them on to other buyers who require authorised credits.
Your processes also need to ensure your contracts are created correctly. They need to specify all the details of the credits you are purchasing or selling to protect the business from the risks above. They also need to ensure that any obligations to create the corresponding adjustment or notify the relevant authorities are included in the contract and clearly understood by counterparties. And again, this is on top of the counterparty checks and contract approval processes that would usually be in place.
This can be a challenge for even the most experienced teams if they do not have the systems in place to support them. The good news is that there is technology that can help. Gen10’s NetZero OS is a digital ecosystem that helps you manage all your environmental assets and liabilities, with the flexibility to handle whichever credit attributes matter to your business, and automated workflows that control operational risks and automate many of the administrative processes that take up time and can lead to costly errors.
Get in touch with us today to find out more about NetZero OS and how it could help your organisation with your carbon processes.
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