How the Paris Agreement changes climate compensation.

It is clear that the Paris Agreement will change the carbon market.  Under the Kyoto Protocol the majority of the world’s countries had no obligations to reduce emissions. Therefore, it was easy to find low-cost carbon mitigation projects, simply because there were so many sources of greenhouse gas emissions that faced no legal or economic incentives to be reduced.

Things are very different with the Paris Agreement. The fact that every country has now pledged to reduce emissions means that any carbon offset project has to consider the host country emission reduction target.

Firstly, emission reductions must not be counted twice and, therefore, host countries will have to consider carefully if they are prepared to give away the right to emission reductions (i.e. do so-called "corresponding adjustments") within a carbon offsetting scheme.

Secondly, mitigation policies in place in the host countries must be considered when assessing to what emission reductions may take place due to the additional revenue that sales of carbon offsets can bring. This will make quantification of carbon credits significantly more complex.

Players in the voluntary carbon markets are still sorting out what this will all mean. We can advise our clients how to navigate in this new landscape and what buyers can do to avoid pitfalls.