FEATURE: Confusion on Corresponding Adjustments clouds ITMO dreams

Quantum Commodity Intelligence - A surprisingly high number of project developers across Africa and Asia are hoping to earn 'Corresponding Adjustments' (CAs) for their verified carbon units (VCUs), effectively converting voluntary VCUs into higher-priced Internationally Transferred Mitigation Outcomes (ITMOs) under the Paris Agreement.

It is a common expectation, but rests on two shaky premises that could lead to disappointment or disaster.

The first is that countries, such as Kenya, with abundant solar, wind and geothermal resources, have more flexibility in meeting their Nationally Determined Contributions (NDCs) climate goals than they actually do.

The second is the belief that CAs serve as a quality stamp rather than as an accounting tool designed to avoid double counting in different countries.

"Too many corporates still feel CAs of carbon credits are always necessary and that high quality of the project is sufficient for a CA," said Jos Cozijnsen, a former negotiator for the Netherlands who is now a carbon specialist with sustainability consultancy Anthesis.

"CAs are only necessary if a company uses the credits to meet emissions obligations, such as under Corsia [aviation decarbonisation scheme], an ETS or a carbon tax," he added. "They are not needed when used for voluntary offsetting, unless the host country requires a CA for all VCM transfers."

Voluntary role

Most developing countries plan to use the voluntary carbon market (VCM) to meet their NDCs, with ITMOs used to go beyond those pledges.

But few have published detailed strategies for achieving their NDCs — let alone for exceeding them — and there appears to be lingering confusion over the role of carbon finance in meeting a conditional NDC.

Designated National Authorities (DNAs) are officially responsible for awarding CAs, but the process often involves multiple agencies.

In Kenya, the DNA is the National Environment Management Authority (NEMA), which is also tasked with ensuring the integrity of project developers.

However, the decision to award CAs follows a multi-agency process. It begins with technical teams at the Ministry of Environment, that advise the Cabinet Secretary. If approved, the Cabinet Secretary authorises NEMA to issue the adjustment.

Under draft carbon market regulations, hard-to-abate sectors will be prioritised for receiving CAs.

But for now, agencies are still applying criteria developed last year, where CAs are awarded based on how specific sectors are performing relative to the country's NDC, which sets a single-year target for 2030.

The loss of foreign aid has complicated Kenya's reduction plans, increasing the need for private finance while also casting doubt on the country's ability to meet its target.

In some countries, DNAs appear to believe CAs are mandatory, but many agencies feel pressure to approve corresponding adjustments in order to command higher prices for developers and collect surcharges for host governments.

It is a tempting short-term play, but comes with a long-term risk: CAs are subtracted from the country's own progress toward its climate goals. That progress is difficult to forecast, will take time, and cannot yet be guaranteed.

Countries that over-issue CAs risk flooding the market with "hot air," which can undermine future fundraising efforts. That's why many host countries reserve the right to revoke Letters of Authorisation for ITMO issuance.

This leads to another common source of confusion: market participants often conflate Letters of Approval with Letters of Authorisation.

Both are referred to as LoAs, but they serve different purposes. A Letter of Approval simply means the host country has approved a project. A Letter of Authorisation confirms that the credits will be issued with a CA.

Transparent budgets

While Kenya and other countries say they do have ITMO budgets, these have not generally been communicated, likely because the agencies themselves are unsure of where they stand.

"A transparent budget, which includes 'setting aside' an amount of ITMOs annually to be issued, builds trust in the market and among Corsia participants that offered credits or Letters of Authorisation for new projects will indeed lead to CAs and transfer ITMOs," said Cozijnsen.

The task falls on DNAs, which are caught between the rock of climate accounting, the hard place of market demands, and the realities of government policy.

Frustrated market participants often complain of DNAs being opaque, but Cozijnsen and others argue that these agencies are simply under strain.

"They have a limited budget of credits to draw from, and that budget is constantly changing," he said. "If they're not careful, they will find themselves short in a few years."

Indonesian policy expert Paul Butarbutar agreed, but he also said criticism of DNAs can be warranted.

"Our DNA understands the concept of a carbon budget, and we only allow the issuance of corresponding adjustments after the relevant sector has met its NDC target," he said.

"To do that, the sector must first prepare a roadmap showing how it will meet the NDC. Then, in a specific year, it has to prove the target was achieved. Only then can international trading be authorised, including corresponding adjustments," he added.

The problem in Indonesia, he said, is that officials continue to believe all internationally traded credits must have a CA, despite a push by President Prabowo Subianto and his brother, climate envoy Hashim Djojohadikusumo, to promote international purchases of voluntary credits.

He also said the government seems to believe CAs alone will trigger demand, regardless of methodological rigour.

Regulatory failure

That became evident on January 20, when Indonesia authorised several projects for trade with CAs. But some of these projects failed to meet international standards, including basic requirements for additionality and proper baselining. The offering flopped.

"There's a mismatch between the regulatory concept and the market reality," Butarbutar said. "Hashim Djojohadikusumo gets it. The private sector gets it. But the officials drafting and enforcing the rules do not."

Specifically, the newly independent Ministry of Environment, which split from the Ministry of Environment and Forestry in late 2024, serves as the country's DNA but still follows outdated guidance from five years ago, he said.

"Everyone in the market understands that in the voluntary market, you don't need authorisation or corresponding adjustments," Butarbutar said.

"You can sell credits internationally while still counting them toward your NDC, without it being considered double-counting. But the government treats that as double claiming," he said.

This misunderstanding has blocked the sale of voluntary credits since 2021 and cost Indonesia valuable climate finance.

"We've missed all these opportunities to attract investment just because of this simple misunderstanding," he added.

Cash versus climate

Djojohadikusumo has advocated for international companies to buy Indonesian credits from the forestry and land use sector, but this stance puts him at odds with his own ministry.

At the same time, some critics say his motivations are financial, not environmental.

"The current push is more about bringing money into the country than aligning with the NDC," said one source, speaking on condition of anonymity.

"There's also a belief that international trading means revenue goes directly to the government, but that's not necessarily true. Revenue goes to whoever owns the credits  often the private sector," the source said.

Governments do, however, see carbon credits as a potential revenue source. Some are exploring multiple fees for ITMOs: one for project implementation, including voluntary transactions, and another to compensate the host country for giving up part of its carbon budget.

Be strategic

While Indonesia and Kenya both allow foreign purchases of carbon credits only after specific benchmarks are met within a sector, Kenya's new model, which prioritises credits from hard-to-abate sectors, is gaining traction.

"This makes sense," Cozijnsen said. "But it also shows how difficult this is for developing countries."

Countries must strengthen their national greenhouse gas inventories to generate surplus credits, but developing policies for hard-to-abate sectors can take years.

"That's why the approach has been to target low-hanging fruit first and deal with the hard-to-abate sectors later," he added. "But by prioritising those harder sectors for corresponding adjustments, countries can attract more capital investment."

That strategy brings risk. Without clarity in NDC delivery, the approach may fall short.

David Antonioli, the former Verra chief executive who now runs Transition Finance, encourages governments to be strategic in deciding which credits they use CAs on.

"Some credits might not be high-priced or even from hard-to-abate sectors, but they can be catalytic," he said. "There could be an argument for governments awarding CAs for credits that jump-start new green sectors and pay off over time, but the risk is real."

And the risk, again, falls on DNAs, which often serve multiple masters. Cozijnsen said 'higher ups' need to bear some of that burden.

"With a predictable ITMO budget, letters of authorisation can be issued. The host country has more freedom to decide where to invest, and the market can trust the country isn't overselling," he said.