Will the Transparency Rulebook thwart free-riders in the Paris Agreement?
The 23rd UNFCCC Conference of the Parties (COP23) hosted by Fiji in Bonn, Germany has just concluded. COP23 was the second year of the three-year marathon to build a consensus “Paris Rulebook,” which will provide the operational details for the mandates in the Paris Agreement.
At the end of COP23, the Paris Rulebook negotiators were only able to produce informal notes capturing the Parties’ ideas on each mandate. Together, these informal notes totaled 266 pages, with often contradictory approaches to the essential operational details of the Paris Agreement. Seeing more time was needed, Parties opened the door to convene an additional negotiating session in 2018. The deadline for the Paris Rulebook is December 2018!
As carbon managers and accountants, our focus is on transparency, which is the spine of the Paris Agreement. This spine is formally referred to as the Enhanced Transparency Framework. In theory, transparency will enable the Paris Agreement to function as a soft procedural agreement, with Parties holding each other accountable instead of a legal compliance mechanism. Peer pressure, the theory goes, moves Parties towards higher ambition.
With the conclusion of COP23, we ask: How can the transparency rules, and the review process in particular, ensure the environmental integrity of the Paris Agreement?
To explore this question, we:
- Consider incentives for countries to free-ride under the Paris Agreement, particularly by “fudging the numbers” to exaggerate emission reductions,
- Look at the Enhanced Transparency Framework (ETF) as the monitoring system under the Paris Agreement,
- Examine the review processes as the key component to dissuade false or misleading reporting, and
- Consider the progress at COP23 and recommend seven principles for designing an effective review process.
1) Paris Agreement structure and incentives
The Paris Agreement leans heavily on transparent information.
Under the Agreement, setting targets and reporting progress is mandated (i.e., legally binding). But, the stringency of each country’s reduction target—Nationally Determined Contribution, or NDC— is essentially voluntary. There are not repercussions within the Agreement for failing to meet mitigation targets. The structure of NDCs is also flexible, although increased standardization is expected with the second round of NDCs, submitted in 2020.
The hope is that the Paris Agreement will influence greater climate action through a form of group psychology on the world stage. Countries will see each other’s progress and be pushed towards compliance through diplomatic peer pressure, enabled by transparency. And countries will update their NDCs in successive five-year cycles.
While there are some champion countries, the current mitigation pledges by the global community are insufficient relative to the deep decarbonization needed to keep the world within the “safe” thresholds of global warming. Countries are now primarily focused on low-cost mitigation measures. As those are achieved, the abatement cost of GHGs will likely rise. As global expectations and the costs of mitigating climate change increase, the incentives to cheat will also rise.
The climate system is a “public good:” every country benefits from a stable climate, regardless of whether or how much they contribute to stabilizing GHG concentrations. Therefore, preventing dangerous climate change is a classic collective action problem, with large incentives for actors to free-ride. As the costs of both adaptation and mitigation increase, there will be stronger incentives for Parties to focus on their own adaptation investments and try and avoid the costs of contributing to the collective benefits of mitigation. Countries may attempt to avoid incurring GHG mitigation costs by: (a) explicit non-participation in the Paris Agreement, (b) devising weak NDC targets, (c) visible non-compliance with NDC targets, and (d) intentionally misleading reporting to other Parties.
Options a, b, and c all leave an unfavorable paper trail. So then, is “cheating” a practical option?
Countries can report emissions reductions that have not actually occurred through presenting data or choosing methods that are systematically biased. For example, there may be politically-motivated selection of data sets or choice from among several emission factors to favor a particular outcome. Countries may also willfully ignore emissions from off-book activities, such as illegal coal mining or petroleum extraction. These adjustments of the numbers can mean mega tonnes of CO2 difference and potentially billions of dollars of climate finance.
Overall, the incentive is for Parties to over exaggerate emissions in their early GHG inventories and exaggerate mitigation achievements. The reporting, accounting and review rules implemented under the Kyoto Protocol address this incentive head on. But, such a system cannot be realistically expected to survive under the Paris Agreement, which is principally a procedural agreement, “establishing regular collective decision making processes,” rather than regulatory agreement, with “regulatory limits on certain behaviors.”
A system of transparent reporting should discourage intentionally reporting misleading data and willful ignorance, even under a facilitative model of compliance. Higher resolution reporting and analyses can be more carefully scrutinized by outside observers and allow for more clarity between misrepresentation and good-faith mistakes.
2) The Enhanced Transparency Framework and review process
The stated purpose of the Paris Agreement’s “enhanced transparency framework for action and support” is “to build mutual trust and confidence…” (Article 13.1). This trust can only be built when Parties are confident that misleading information is likely to be identified.
Image Caption: Although the ETF also addresses adaptation and support, we will focus on mitigation or GHG transparency.
The ETF begins through two basic categories of country reporting for mitigation (Article 13.7):
- National GHG inventory reports, shared “regularly.”
- Information to track NDC progress, shared biennially.
Box 1. The principles of the Enhanced Transparency Framework
The Paris Agreement includes five principles for the ETF: it should be (1) facilitative, (2) non-intrusive, (3) non-punitive, (4) respectful of national sovereignty, and (5) avoid placing undue burden on Parties. Our own quick interpretations are below:
“Facilitative” and “non-punitive” suggest that the process is intended to support Parties in improving the quality and transparency of the information reported, not to punish them. Because Parties that intentionally bias information cannot be punished within the Agreement, there is additional weight on reducing free-rider incentives in the design of the Paris Rulebook, discouraging these actions before they occur.
“Non-intrusive” and “respectful of national sovereignty” may inhibit the possibility of a greenhouse gas audit, in which Parties are required to turn over their “books” (raw data). Under the current review process for developed countries, reviewers can look at the raw data. The current process for developing countries (BURs), meanwhile, is “non-intrusive” and “respectful of national sovereignty,” and does not allow reviewers to examine raw data unless initially provided by Parties. [Decision 1/CP.16, paragraph 63.]
“Avoid placing undue burden on Parties” could be considered a clause about reporting efficiency. Parties should report what is needed for the ETF to work effectively, without requiring Parties to report excess information or creating several overlapping reporting processes that run in parallel. Reporting burden both challenges the Parties and transparency by slowing down reporting review, making both processes more expensive, and making it easier to hide inaccuracies in the “noise.”
The text also states that developing country parties shall have flexibility. The degree of flexibility is hotly contested and possibly the largest issue in the transparency negotiations.
Countries’ reports are then evaluated. Typically, we discuss the “measurement, reporting, and verification” (MRV) of greenhouse gases, with verification intended to assess the quality of reported greenhouse gas and mitigation estimates. However, the word “verification” does not appear a single time in the Paris Agreement.
Instead, the Paris Agreement involves two review processes:
- A Technical Expert Review (TER), and
- The Facilitative, Multilateral Consideration of Progress (FMCP).
The TER will review the adherence of country reporting to the forthcoming Paris Rulebook. Each Party is mandated to participate in the FMCP, which will presumably be a roundtable to discuss the participating Party’s progress in reaching their targets. For developing countries, the FMCP will also likely focus heavily on the identification of capacity building and support needs.
These two reviews are expected to be modeled on the existing UNFCCC review processes for biennial reports and biennial update reports. But the details are still under negotiation as part of the Paris Rulebook.
Together, these reporting and review processes form the ETF. The outputs of the ETF are also linked to the Agreement’s Global Stocktake, which evaluates global progress every five years, as well as the Committee on Implementation and Compliance, whose role is yet undefined, but explicitly non-punitive.
3) The review process and deterring false reporting
This review process is to play a key role in the Paris Agreement by countering incentives to intentionally report biased or incomplete information. The purpose of the better-known Global Stocktake is to assess aggregate progress in our race against the atmosphere. The review process, meanwhile, structurally creates international trust by inspecting individual country claims.
When Parties have confidence that a regularized review process will likely capture major inaccuracies, they should be deterred from falsifying or biasing information. Getting “caught” risks both negative reputational consequence and dampening the future climate action ambition of other Parties. To effectively deter false reporting, the Paris Agreement review processes will need to meaningfully assess the quality of reports in terms of both accuracy (Does it reflect the emissions to the atmosphere?) and transparency (Is there sufficient documentation and access to underlying supporting data to be confident in its accuracy?).
In addition to deterring bad actors, higher transparency through a strong review process should promote higher ambition from all Parties. Game theory tells us that an unreliable verification process will give countries an excuse to limit their own honesty and implementation because they rationally expect other countries are doing the same. Alongside benefits at the international level, increased transparency through effective review also allows for additional accountability pathways such as internal government accountability and domestic democratic oversight by enabling the engagement of civil society organizations.
Constructing an effective review process, however, will be vastly more challenging than it has been under previous UNFCCC regimes. NDCs are far less standardized than commitments were under the Kyoto Protocol, there are far more Parties to be reviewed, and many countries are still in the process of building the capacity to conduct rigorous MRV. To successfully operationalize the Paris Agreement, Parties will have to consider creative solutions to these challenges in their negotiations of the Paris Rulebook.
4) State-of-play after COP23 and design recommendations for effective review
What is the state-of-play for the ETF after COP23?
We can get a high-level view of progress by looking at the changing text over the course of COP23.
By the end of the COP, the transparency working group generated 45 pages of dense material. The transparency text grew from approximately 17,000 words to about 28,000 words in the final informal note, a 65% increase. Roughly 54% contains holdovers from the original text and only about 10% of the original text has been deleted.
What does this mean? In the UNFCCC process, less is often more. Shrinking text signals a move towards consensus, growing text shows a diversification of ideas. Given the substantial increase in the size of the transparency text, Parties appear to still be staking out their positions and generating new ideas. Parties are not yet ready to begin pruning text. Lengthy negotiations remain on the way to consensus. For the review process, divergent issues include the frequency of review, the inputs to the review, the participation requirements for Parties, the role of observers, the degree of differentiation between countries, and the relationship between the TER and FMCP.
Over the next year, these negotiations will lay out a blueprint for the Paris Agreement’s review process. The discussion above considers the need for a carefully-designed review process that can capture inaccuracies and deter incentives for countries to report misleading information. By properly aligning incentives, the review process can generate a virtuous cycle of increasing transparency and climate action. It is also paramount that negotiators create a review process that is efficient and adheres to the principles of the ETF (Box.1).
In response to these needs and constraints, we suggest seven “design recommendations” for the Paris Agreement review process:
- Consider replicability as the ideal to strive towards in mitigation transparency. The more closely an analysis can be replicated by qualified reviewers, the more confident Parties and observers can be of both its transparency and accuracy.
- Emphasize a risk-based independent checking and verification of data to best understand the accuracy of reporting, rather than narrowly focusing on methodological critiques. By using a risk-based review approach, in keeping with principles in the auditing field, review resources can be allocated for greater assurance.
- Prioritize categories for review in keeping with each country’s NDC; emission or removal sources with the most planned/implemented mitigation should be reviewed most carefully.
- Standardize the results of the reviews (through tabular formats and other means) so that Parties and non-Party stakeholders not directly engaged in the TER can easily understand and compare the results of the review, allowing higher participation and scrutiny.
- Set the TER as an input to the FMCP. This streamlining will avoid reporting burden through duplication that would exist with two parallel processes. It also allows the FMCP to be a megaphone for the TER and for countries to provide informed feedback, even without experts on the TER.
- Dramatically ramp up the use of digital tools to support both reporting and review activities to readily visualize and compare information across all Parties. This will allow both Parties and non-Party stakeholders to reach informed conclusions on reported information. But, recognize that the scale and complexity of the task under the Paris Agreement is both larger and more complex, and therefore will require new approaches.
- Pragmatically design the review process for the best use of resources. Review requirements must be effective at fulfilling review functions (including deterring exaggeration), but not so stringent that the additional benefit is minimal compared to the additional burden on reviewers or and Parties. Overemphasis on aspects of the review that do not enhance actionable transparency and promote trust and ambition from other countries is an inefficient allocation of resources. This recommendation cuts across several of the suggestions above, such as streamlining and standardization.
 There is a notion that subsequent NDCs will be progressively more ambitious. Article 4.3: “Each Party’s successive nationally determined contribution will represent a progression beyond the Party’s then current nationally determined contribution.”
 Ronald B. Mitchell. “Compliance Theory: Compliance, Effectiveness, and Behavior Change in International Environmental Law.” In Oxford Handbook of International Environmental Law. Editors: Jutta Brunee, Daniel Bodansky, and Ellen Hey. Oxford University Press, 2007, 911 (typology and quotations).
 Decision 1/CP.21 mentions verification three times, and once in the context of the ETF: “98. Also decides that the modalities, procedures and guidelines of this transparency framework shall build upon and eventually supersede the measurement, reporting and verification system established by decision 1/CP.16, paragraphs 40–47 and 60–64, and decision 2/CP.17, paragraphs 12–62, immediately following the submission of the final biennial reports and biennial update reports;”
 Note: the review process has other crucial functions, such as creating a more accurate image for the Global Stocktake and provide constructive feedback for increased trust and ambition.
 Original text: “Preliminary material in preparation for the first iteration of the informal note,” APA Agenda Item 5: Modalities, procedures and guidelines for the transparency framework for action and support referred to in Article 13 of the Paris Agreement, November 8, 2017.
Final text: Draft elements for APA agenda item 5: Modalities, procedures and guidelines for the transparency framework for action and support referred to in Article 13 of the Paris Agreement, “Informal notes prepared under their own responsibility by the co-facilitators of agenda items 3–8 of the Ad Hoc Working Group on the Paris Agreement,” FCCC/APA/2017/L.4/Add.1, November 15, 2017.
These word counts have been adjusted to account for formatting differences between the texts.