A Solution for the Permanence Limitations of Natural Climate Solutions - Dynamic Accounting
Instead of trying to change the climate solutions to fit the accounting framework and claims, change the accounting framework and claims to allow for all climate solutions.
Carbon fluxes aren’t static, they are dynamic. Nature isn’t static, it is dynamic.
Much of the current critiques around the use of nature-based carbon credits within a net-zero framework or for any sort of corporate climate mitigation claim is that they do not have sufficient permanence. In my opinion, based on the current carbon accounting system and claims structures, this is a valid critique.
But that is where the problem lies, not with the climate solution, but with current carbon accounting system. Net-zero claim and accounting structures currently operate using a static system. Static meaning that emissions are measured on an annual basis and carbon credits are retired each year to cover what annual emissions cannot be reduced through decarbonization. Any credit, whether avoided emission or removal that is used to make a claim is “retired” and must be sufficiently permanent to be used as an offset for historical emissions, which most accountants and climate policy-makers would interpret as indefinite permanence. Natural climate solutions will never achieve indefinite permanence.
But, we also know that nature has a critical role to play in climate mitigation, even temporary nature-based carbon removal can lower peak warming in a well-below 2 °C scenario.
“Our results suggest that there is climate benefit associated with temporary nature-based carbon storage, but only if implemented as a complement (and not an alternative) to ambitious fossil fuel CO2 emissions reductions.”
So how can we reconcile these two valid arguments? Enter dynamic accounting.
Dynamic Accounting and why it’s important
Dynamic accounting means that all avoided emissions or removal climate mitigation outcomes are not considered indefinitely permanent once they are retired, they must be tracked in perpetuity as long as they are being used for a climate mitigation claim. And if there is a reversal, they must be replaced. This holds true whether that climate mitigation unit occurred inside or outside of a corporates value chain. You may have heard of the concept of ‘horizontal stacking’ which is functionally quite similar to dynamic accounting as well as Emissions Liability Management which also incorporates dynamic accounting.
Keep in mind, this approach does require continual monitoring of project outcomes to ensure that any reversal event is captured and accounted for. Ten years ago, this would have been prohibitively expensive, but with the advances in remote sensing and dMRV, the costs of MRV on nature-based credits in particular are coming down significantly. I believe that today we are at the point where above ground biomass can be monitored effectively for reversal events using dMRV solutions. I’m not sure we are there yet for soil carbon or marine systems, but there are many groups hard at work to develop more cost effective solutions without sacrificing the quality/integrity of the assessment.
For what cost remains for ongoing MRV, I go back and forth on this, but I think that the organization that ultimately purchased the credit and is using it for a climate mitigation claim should be responsible for the ongoing MRV costs. Simple aligning incentives, the entity using that credit for a claim has the greatest incentive to make sure that credit is still contributing 1 tonne of CO2 to climate mitigation and therefore has the most motivation to be completing MRV on that outcome.
What does Dynamic Accounting do for nature?
Fundamentally, if we implement Dynamic Accounting, then permanence essentially becomes a non-issue for accounting purposes. The durability of a climate mitigation outcome still matters because the overall value of the credit will depend on it’s durability/permanence, but for the purposes of the credit quality and the integrity of the claim, it does not matter if that credit lasts for 1 year or 10,000 years. As long as the overall claim is based on climate mitigation outcomes that are intact and at that given moment represent that exact number of tonnes within the corporate climate claim, that is what matters. As it pertains to carbon markets, let the market price the credit based on the predicted permanence and durability but with dynamic accounting, the corporate mitigation claim will have integrity whether or not that credit experiences a reversal or not. And this system will be effective whether or not you use a two ledger system or you stack those ledgers on top of each other within a net-zero structure.
We don’t need to change the climate solution to be more permanent, we need to change the accounting system to enable all types of solutions (including nature) to play their respective role while maintaining integrity and delivering outcomes.
If we address the constraints that permanence puts on the use of carbon credits within corporate claims by implementing dynamic accounting, nature-based credits or any credit that might not be permanent, can be used with high-integrity to meet corporate climate commitments. I believe this is key to enabling natural climate solutions to be used within corporate (and in the future government) climate commitments with full integrity.
Limitations Dynamic Accounting
dMRV - We need the costs of dMRV to continue to come down to be able to cost effectively monitor the permanence of projects indefinitely. For some projects this is feasible today (e.g. monitoring reversal events in terrestrial forests), for others this will take some time (e.g. monitoring soil carbon for reversals). These costs should be the responsibility of the buyers as the margins on these projects are already so tight, we don’t want this shift and added MRV costs to paralyze production.
Time and Resources - Is it feasible to monitor projects for reversals indefinitely? I’m not sure. Perhaps we should have a monitoring window after the project crediting period where dynamic accounting applies. I’d be curious to hear what others think on this topic.
Operationalizing a new system - It will take time and energy to implement a new accounting system and push corporate adoption, but this could be greatly facilitated by the provision of a centralized system that links to corporate annual sustainability reporting and to carbon credit registries.
Buffer pool - Even with a dynamic accounting system, a buffer pool is still required and must be large enough at the level of the entire system to make sure that there are sufficient “unclaimed” credits that could be used for a claim to cover credits that experience a reversal. Essentially, the main risk of switching to a dynamic accounting system is that a bunch of credits flood the market that have low likely permanence. Then these credits are used to make corporate claims and if we don’t create a robust enough buffer pool, then we could end up with large volumes of credits that are reversed and no “unclaimed and intact” credits outside of corporate claims that can be used to replace those credits.
Time for Action
Even considering the limitations above, I think it is worth seriously considering this climate accounting shift from static to dynamic accounting to ensure natural climate solutions can play a high-integrity role in corporate climate commitments (and government commitments for that matter). Two key groups that I believe need to hear this message are WRI/GHG Protocol and SBTi, let the advocacy begin!
🤔 As always, thanks for the read and I’m very curious to hear how others are thinking about this. Do you agree, disagree? What am I missing? Progress happens through idea creation, feedback and iteration, let’s discuss and build together.
Great framing. Similar to the approach we take here at CarbonSpace for reporting on insetting initiatives for food supply chains and tracking progress of NBS projects. We monitor net ecosystem exchange - so, flux data at the ecosystem level rather than static carbon stock data.
carbonspace.tech/blog/nee