EDITORIAL: The risk of revocation for Article 6-authorised credits: real or imagined?

Quantum Commodity Intelligence – An auction of carbon credits deemed eligible under the Paris Agreement's Article 6.2 market started this week, after a few weeks' delay. The sale by the UK-based carbon exchange CTX, which will run until July 23, has also raised questions over the potential political risks related to credits that have host country Article 6 'Letters of Authorisation' (LoAs).

CTX is selling up to 1.5 million carbon credits at a starting price of $10 a tonne of carbon dioxide equivalent, each from a Gold Standard-approved cookstoves project in Malawi.

The credits in question have been issued with an LoA from the Malawi government that is a commitment, but not a guarantee, that the African country will carry out a so-called Corresponding Adjustment (CA).

CAs are a greenhouse gas (GHG) accounting practice that remove credits from the host country's emissions ledger to avoid them being double counted towards two countries' GHG goals. With globally agreed rules for CAs not yet in place, LoAs are currently the only way to show a host country's commitment to make the adjustment.

Price premium

Credits with LoAs generally trade at a premium to those without, given their Article 6 eligibility status. But having the latter has not removed the possibility that a country may revoke this decision in the future and not make CAs, for instance, if it's economy expands and the emissions reduction or removal is needed to meet its own GHG goals.

A debate arose over these concerns last week in relation to the CTX auction, which resulted in clarifications being published by both the exchange and the Malawi government.

CTX said in a statement on July 12 that a clarification letter from Malawi had emerged confirming that it would make CAs in relation to the units.

The letter, which is an addendum to the LoA already issued by Malawi states that CAs will occur on issuance of the credits from a cleaner cookstoves project in the African nation. CTX said the auction "demonstrates the implementation of the Corresponding Adjustment (CA) mechanism, which is effectively locked in" with the  "relevant documents" supporting the claim having made available on the live CTX auction platform.

A separate press release then emerged from the Malawi government on July 12 reiterating that it will make CAs in relation to these credits.

"To ensure that these emission reductions are not counted as a mitigation by two different countries, the government of Malawi, through a Letter of Authorisation, declared that Malawi will not use emission reductions authorised as Internationally Transferred Mitigation Outcomes (ITMOs) to implement and achieve its Nationally Determined Contribution," it said.

Separately, CTX argued in a blog post on July 11 that a host country withdrawing Article 6 approval "defies logic".

The post said revocation in the future by a country is a "ludicrous proposition … that a least developed nation would 'cut off its nose to spite its face'– that some future government would decide to stop taking international funds on a recurring annual basis, for a carbon 'asset' that cost that nation little or nothing to produce".

Delegated rights

CTX also argued that credits issued under an LoA and then sold cannot be retracted "because they have already delegated the rights to the emissions reductions".

Their argument basically seems to be that there isn't an issue. But why then was the potential for revocation being discussed during the UN climate talks, and was one of the issues that led to no agreement being reached at COP28 in Dubai last year?

Also, in the last seven days, two separate insurance products have been released that aim to cover financially the risk of a CA not being made.

First Oka announced it was partnering with  insurance software solutions provider Socotra to launch Corresponding Adjustment Protect, followed on July 15 with Kita and Tokio Marine Kiln offering a political risk product that includes CA coverage.

Those products alone would seem to suggest that risk of revocation is a real one, otherwise why would they bother to offer the products?