Reflections on MRV in an Era of Climate Policy Sluggishness

Carbon markets are but a policy tool. One that still may, or may not, see long term adoption or favor over other policy tools. One can equally point to signs of encouragement and disappointment. Through a couple decades of trial and error, we have come to appreciate, and even brand, the technical foundation of climate policy implementation—Measurement, Reporting, and Verification (MRV)—which on its own is an achievement. Now that the carbon geeks have gained some recognition, they can educate the carbon market community with a more sophisticated understanding of MRV.

In the global carbon market community, reasons to lose optimism and reflect on lost potential are easy to find. The vision of a global market of linked cap and trade systems across developed countries, combined with a profusion of developing country offset projects, seems a distant dream. Rather than morn a sunken dream, or itemize the details of recently formed or forming islands of carbon market activity in a search for buoyancy, let us step back and look at the big picture on one substantive aspect of carbon market infrastructure where permanent progress has been made—MRV.

Celebrate the Brand!

It was not long ago that what we now refer to as MRV had no commonly used nomenclature [1]. The topic was rarely central to discussions on climate change policy. And the few working on the topic were disconnected and fragmented. There were “greenhouse gas (GHG) inventories” in the world of national emissions reports under the UNFCCC that were developed around a small and isolated community of IPCC scientists and engineers. We had “carbon footprints” associated with a distinct small community, which hoped corporations might do what politicians would not. This group coalesced around the WRI/WBCSD GHG Protocol. Then we had the somewhat rapid and chaotic emergence of methodology pioneers within voluntary and Clean Development Mechanism (CDM) offset crediting programs. In sum, we had a lot of diverse and disconnected technical innovators and practitioners attempting to create metrics and assurance processes to convey credibility to their policies, programs, and transactions.

For the most part, the work of these technical groups progressed in the shadows of climate policy. Until a couple major events and one broader geopolitical dynamic pulled MRV out into the spotlight and made it a topic of discussion by climate policy makers and thought leaders.

The first event was a problematic Phase 1 of the European Union’s emission trading system (2005-2007). During implementation, insufficient care and attention to data quality in settling emissions baselines resulted in over allocation of emission allowances and a price collapse. The implications of which were contained by a firewall between this first phase and the second, but the policy suffered significant reputational damage. All of a sudden, those preaching the importance of MRV and data quality had their media-worthy manmade disaster to make their point.

The second event occurred over a number of years within the booming and much maligned CDM market. A long running debate emerged surrounding the evolving credibility of the CDM’s offset credits. Debate points necessarily focused on the methodological aspects of reviewing, approving, and calculating credits earned. Policy makers were now not the only ones dragged into the technical weeds, but investors and the financial community were also forced to pay heed to another growing risk exposure. Bad MRV work can easily trash a multi-year investment.

Geopolitically, the legacy of the UNFCCC Berlin Mandate—that drew a bright line between industrialized and developing countries and had shaped the dynamic of the international climate change negotiations for more than a decade—was finally beginning to fade. For the negotiations to move forward, developing countries were asked to do more in exchange for further development assistance. This shift gained momentum in the wake of failure at the 2009 Conference of Parties in Copenhagen, where the vision of continuation of the Kyoto Protocol with broader participation vanished. It was then apparent that the foundational request of developing countries would be to more thoroughly, frequently, and transparently measure (M) and report (R) their own GHG emissions and submit that data to international review (V).

With the loss of the Kyoto paradigm, policy innovators went back to the grab bag of old ideas from the previous decades of policy reports looking for something that better matched the present political reality. One new (old) idea is bespoke voluntary national mitigation pledges that may somehow be funded and credited by donor countries (e.g., Nationally Appropriate Mitigation Actions). Yet, if the “handcrafted” trend was to spread to climate policy, how were funders or carbon markets to measure and credit anything. Non-technical policy makers and negotiators needed, more than ever, a simple “buzz phrase” to talk about these issues with quantifying pay for performance.

In the confluence of these events and trends, “MRV” was adopted as the catchall for the metrics and assurance processes covering the full range of emerging climate change initiatives.

Words do matter

We can see the adoption MRV as a term of art over time in the frequency of web pages and documents using the term in a climate change context. It is easy to disregard the emergence of a new policy wonk term as unimportant. But words do matter. And the successful branding of MRV as a commonly used term with generally understood meaning across the climate change community is a significant achievement. It makes it far easier and the norm to put the issues embedded within the concept of MRV near the top of agendas.

Note: Frequency of web pages by created year containing either the term “monitoring reporting and verification (MRV)” or “measurement reporting and verification (MRV)”.

What is MRV?

MRV, in the context of climate change, is a scientifically guided engineering estimation exercise, that has applications with similarities to financial accounting and project monitoring & evaluation. Fundamentally, it is about developing performance metrics, collecting the data necessary to quantify those metrics (measurement), transparently documenting and communicating those metrics, as well as how they were produced (reporting), and applying quality assurance procedures in an arena containing actors with misaligned incentives (verification).

MRV is now accepted as being core to a wide range of climate change activities. The focus continues to be on GHG emissions mitigation, but it is increasingly spoken of in the context of adaptation and other performance-based environmental markets.

OK, but isn’t this just a bunch of spreadsheets with emissions data and having an auditor review it? There are actually a number of important dimensions to MRV that require serious thought. The first of which is the social and technical infrastructure necessary for an MRV system, which can be conceptualized as having the following components:

1. Scientific knowledge and technologies
2. Technical and management standards (rules, codes)
3. Legal and regulatory systems
4. Information management and decision support systems
5. Human resources and training systems

When we talk about MRV, what we actually care about is data quality. So, it is important to be more precise about what we mean by data quality. This means describing the characteristics we desire our metrics to have, because only then, can we properly design and select MRV infrastructure and systems which support carbon markets and other policies. Data quality characteristics should heed the following:

• Almost all policy applications of GHG emissions data ultimately require the use of point estimates rather than probabilistic ranges. In other words, we want data developed in a scientific manner but then use it in an accounting manner.
• We are concerned with uncertainty, but the concern needs to be on uncertainties in changes in time series and relative to baselines, versus a misplaced focus on the uncertainty in absolute emissions.
• GHG MRV systems need to be robust against data manipulation and gaming to address misaligned incentives of the parties involved, which can entail using methods or data with higher scientific uncertainty in exchange for data that more easily verified. Metrics that are more easily verified should be favored over those that are not
• Accounting frameworks and metrics should be as unambiguous as possible as to the attribution of emissions to responsible parties.
• MRV systems must be perceived as mostly fair by all involved parties.
• MRV systems may be intentionally designed with a quantitative bias in favor of environmental integrity.

The key point in thinking about MRV is that we are not looking for perfect numbers, and we do not necessarily need the number with the lowest possible absolute uncertainty. Data quality has more dimensions than is communicated by a simple statistical confidence interval.

Further, the intended application of the data outputs from MRV processes need to guide choices that affect data quality. Are we using data for scientific inquiry, corporate marketing and public relations, consumer information, voluntary program tracking, regulatory compliance, or environmental markets? As we move along this list, our expectations for data quality, and the characteristics that define it, necessarily change.

Another key dimension of MRV is the actors involved in the process of quality assurance (i.e., verification). The standard framework for thinking about verification is that there are three parties involved:

First-party.               The data supplier,

Second-party.           The data user (management, investor, government, etc.), and

Third-party.               The independent (“third-party”) auditor (i.e., validator and verifier).[2]

But in reality, quality assurance systems need to address concerns and processes from a wider range of stakeholders, including:

“Fourth-party.”        Climate programs that may develop standards and/or provide recognition;

“Fifth-party.”             An accrediting body that audits the auditors, to assure their competency and capabilities;

“Sixth-party.”            Public (watchdog) groups concerned with the intended and unintended effects of the data suppliers’ actions and over all policy or program; and

“Seventh-party.”      Professional community institutions that provide further quality assurance over the personnel engaged in MRV work.

Lastly, any accounting exercise requires a clear definition of boundaries. That is to say, what is within the system boundaries that is counted, and what is outside those boundaries that is not. There are a number of generic boundary distinctions or frameworks that are relied upon for just about any policy or program.

MRV accounting frameworks

Global

National

Sub-national (e.g., province, state, municipality)

Sectoral/program/policy (e.g., NAMAs, REDD)

Value chain/Product

Entity (organization, company, or individual)

Facility/Installation

Project/Activity

To summarize, MRV can be conceptualized along these dimensions: i) infrastructure components, ii) data quality characteristics, iii) actors, and iv) accounting frameworks. Aligning a proposal or initiative along these dimensions is valuable because one can then more easily identify other sister policies or programs, including those outside the climate change context, and draw on their work and lessons learned.

Future of MRV accounting frameworks

MRV accounting frameworks still have a significant amount of maturing ahead of them, especially if we want to use them to support regulatory or carbon market tools to mitigate GHG emissions. Now that we have looked at MRV in a historical and theoretical fashion, we can now make some rhetorical observations about its application to various climate policy frameworks.

National
What is the future of national GHG emission inventories in a world without a global treaty framework? Developing countries are beginning to prepare and submit emissions data biennially through the UNFCCC, which is a huge step forward. However, the national reporting review process under the UNFCCC (i.e., verification at the national level) is not currently scalable. So, even if a global treaty was reached, we do not have the infrastructure developed to verify it. The technical elements of the Kyoto Protocol compliance review system have been under enormous strain simply to process the few developed countries sticking to their binding commitments. This infrastructure is not currently capable of handling any significant increase in the number of reporting countries under a new global regime at the national or sectoral level. A lesson that rarely seems to be learned is that MRV “on the cheap” will be regretted later.

Entity (Corporate or Organizational)
Really, what is the purpose and role of corporate carbon footprinting? Do we expect future policies to use corporate reports for regulatory compliance (versus at the facility or installation level)? The honest answer is that it is unlikely that corporate accounting of GHG emissions can satisfy the data quality characteristics necessary for compliance applications. What about investors? Given the quality of existing reporting, it seems impractical that corporate-scale GHG data can be credibly integrated with financial statements. Thus, it appears corporate reporting will continue to primarily be for public relations. In which case, is MRV infrastructure for corporate accounting where we should be investing our limited resources?

Value Chain/Product
To date, the experiments with labeling products with carbon footprints have not been successful. And so, do we expect most products to have a GHG label on them in the future? Do we think that these metrics will be of sufficient quality for consumers to base decisions and for businesses to willingly participate because they recognize the system is fair? The value chain and product accounting framework is built upon a long history of methodological development for life-cycle analysis (LCA). So, we should note that LCA is not found to be broadly applied to product labels for other environmental pollutants (outside of a few recognition labels). Can an LCA really produce objectively comparative or regulatory quality data across products? There is good reason to be skeptical due to the fundamental uncertainties associated with LCA.

Project
Unfortunately, carbon markets have been shrinking with the collapse of the CDM. But, there is still reason to celebrate the enormous progress and proof of concept that has been MRV at the project-level for carbon offset crediting programs. A wealth of infrastructure has been developed and is being built upon by the voluntary carbon offset market, including the push for more sophisticated and evidence-based methodological standardization and a less intellectually sloppy understanding of additionality.[3] However, we still have not addressed the fundamental challenge of who will pay for the research, development, governance, and maintenance of offset crediting markets.

Facility/Installation
The bedrock of MRV for both regulatory compliance and environmental markets is the installation, or point source of emissions. A lengthy history of environmental law is built around the selection of a smokestack as a unit point of regulation. After much experimentation and innovative proposals built upon other accounting frameworks, the future of climate change policy and carbon markets is likely to remain tied to this simple and legally well-established framework.

Verification
Much could be said about the challenges and lessons learned with GHG auditing. Clearly, CDM demonstrated that the third-party auditor model, lifted from the financial world, was not a “plug and play” solution to quality assurance in carbon markets. Issues of competency and conflict of interest, not to mention ambiguity in review criteria, plagued the CDM market from the beginning.

One fundamental question related to these challenges is the relationship between actors. Specifically, do we have the relationship between third party verifiers, accreditation bodies, and GHG program administrators/regulators correct? Who should be working for or with whom? The current model has been verifiers hired and paid for by data suppliers (e.g., project developers). But, as we learned with CDM, regulators and GHG programs cannot blindly outsource data quality assurance. Part of addressing problems with data quality assurance is to realign these relationships by having verifiers work for regulators and GHG program administrators. Further, regulators and programs should no longer assume they can fully outsource this function. Instead, their staff must be tightly integrated into the substantive work of auditing (i.e., part of the verification team).

Closing Metaphor

It is useful to stay abreast of how well individual trees are growing and which ones seem to have some disease or appear to be dying. But, every good forester knows, it’s imperative to reflect on the forest ecosystem overall. We can celebrate the fact that MRV has become a core part of the climate change agenda, which will hopefully mean that the future policies and programs will avoid some of the technical mistakes and sloppiness of the past. With excellent MRV systems in place, a policy can still either succeed or fail miserably. Yet, the best policy, if it does not do MRV well, will at best have little beneficial impact, if not become a total disaster.

[A version of this article was originally published in IETA’s 11th Edition of Greenhouse Gas Market Report, entitled, “Markets Matter.”]

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