Guest Article #105

MRV-ing Carbon in Practice

In 2013, we saw the continuation of two emerging trends in the global carbon pricing landscape. On the one hand, it was a challenging year for existing international mechanisms, with credits from the Clean Development Mechanism (CDM) worth no more than a few cents and the Kyoto Protocol shrinking to 12% of global greenhouse gas (GHG) emissions. On the other hand, an increasing number of jurisdictions implemented GHG mitigation instruments meant to put a price on carbon.

Depending on the different circumstances and priorities of countries, these included both explicit instruments, such as domestic emissions trading systems, carbon taxes, and payments for emissions reductions; as well as implicit instruments, such as fuel taxes, performance standards, and regulatory approaches.

Monitoring, reporting and verification (MRV) procedures have withstood storms as a solid pillar of climate action. It is a common feature of all the different carbon pricing mechanisms that countries are contemplating. Moreover, while national governments have shown slow progress to commit to emissions caps in an international agreement, they all stand to gain in agreeing on common methods and procedures to quantify emissions – whether internationally or sub-nationally. This is probably why MRV is one of the fastest moving topics in international climate negotiations, and one of the most likely to succeed. A conference dedicated to MRV is therefore both useful and timely.

MRV concepts and principles are often presented without much attention to how they are applied in practice. Two MRV principles illustrate the gap between theory and practice: conservativeness and materiality.

Conservativeness is a key MRV principle: when the data is uncertain, a conservative value should be used so that emissions are not underestimated. Many presentations on MRV interpret this principle as an incentive to reduce monitoring uncertainty. But most of the rules in carbon pricing mechanisms do not discourage the use of default values or the uncertainty of the monitoring method.

For example, the UNFCCC guidelines for national GHG inventories allow for any type of uncertainty range, provided that the estimate is not biased. The EU ETS limits the uncertainty of some elements but does not reward further uncertainty reduction as long as the threshold is met. The CDM Executive Board has yet to clarify the conservativeness principle, except in the case of surveys and samples, although some CDM tools and methodologies are already awarding fewer credits to more uncertain projects.

Materiality is a concept related to auditing: one should pay more attention to larger numbers than to smaller ones. Materiality has made its way into the verification procedures of most existing carbon pricing mechanisms: accredited auditors can only invalidate a monitoring report when errors exceed a given threshold (e.g. 5% of total facility emissions in the Californian Emissions Trading Scheme). But the concept of materiality is not taken into account in most jurisdictional schemes, either because verification does not take place, as is the case for most sub-national inventories, or because the guidelines do not contain materiality provisions, which is the case for national GHG inventories.

The concept of materiality could be extended beyond verification to monitoring and reporting: fewer resources should be spent on smaller sources than on larger sources, on smaller facilities than on larger facilities. Many provisions exist in carbon markets and carbon taxes to balance stringency with the amount of emissions at stake: smaller facilities are usually not covered by the scheme, and even within the scheme, the uncertainty requirements or the reporting frequency is more lenient for smaller installations. Yet, these provisions do not result in a level playing field. Economies of scale have the upper hand and larger facilities and offset projects end up with lower MRV costs per ton of carbon dioxide. And again, national GHG inventories ignore the concept: the requirements are as stringent for Slovenia as they are for Germany.

Beyond these gaps between conventional wisdom and the practice of MRV, the analysis of existing and emerging carbon pricing mechanisms reveals the operational answers provided to the same set of key questions: How to strike a balance between the stringency of MRV requirements and the associated costs? Are requirements adapted to the volume of emissions at stake (i.e., materiality)? Are there incentives to reduce uncertainty?

These questions will be addressed in Bonn at the MRV Day Conference on 3 June 2014. Answers will be provided based on the analysis of a dozen existing carbon pricing mechanisms: national GHG inventories, emissions trading schemes in the EU, California, Australia and China; offset projects under various standards and in different sectors; and emerging carbon pricing mechanisms supported by the Partnership for Market Readiness and the World Bank's support for building a coalition on carbon pricing. Taking place immediately after the Carbon Expo and before the 40th session of the UNFCCC Subsidiary Bodies, the MRV Day Conference will provide practical information on MRV, the cornerstone to all climate action.