Letters of Authorization: A Deep Dive

Authors: Micaela Passetti and Fundi Maphanga

This week’s newsletter covers the latest key policy updates, keeping you informed on global carbon markets developments. We begin with a round up of the key policy resources, and news articles from this week, and then we do a deep dive into Letters of Authorizations (LoAs)

Policy Updates From the Last Week:

• Report: CORSIA and Article 6 face significant alignment challenges (Source: HFW and The Climate Action Center of Excellence, CACE).
• Resource: IETA publish open-access LoA (Letter of Authorisation) Tracker (Source: IETA)
• Media - AlliedOffsets commentary on the VCM overlooking CORSIA insurance bottleneck (Source: Carbon Pulse).
• Media: CFTC Approves Final Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts (Source: Commodity Futures Trading Commission)

Letters of Authorization - A Deep Dive

This newsletter highlights IETA ’s recent announcement and work in increasing transparency around Letters of Authorization (LoAs) and provides information around the different features across LoAs.

A Letter of Authorization (LoA) in carbon markets is a formal approval from a host country’s government, essential for ensuring that credits generated are valid for international trading especially under frameworks like the Paris Agreement’s Article 6.

Key Points to Know about LoAs:

• Host Country Approval: Certifies the host country’s approval of the carbon project, often required before issuing credits.
• Alignment with NDCs: Projects must align with the host country’s Nationally Determined Contributions (NDCs).
• Transfer of Credits: Defines whether the carbon credits can be sold or transferred internationally.

Mitigating double-claiming risk: Government oversight, which may mitigate non-delivery risks.

Current Features of LoAs

LoAs are essential for ensuring the legitimacy and international recognition of carbon credits generated by a project.

Other Important Features to Note

1. Other Internationally Mitigated Purposes (OIMP):

When LoAs specify OIMP, they clarify that carbon credits can be transferred across borders for international use. This is key for defining the purpose of mitigation outcomes (i.e., carbon credits), such as whether they will count toward another country's Nationally Determined Contributions (NDCs) or international market-based programs like CORSIA. This specification helps set conditions for international use, ensuring transparency and preventing double counting of emission reductions.

Current LoA features:

While most Letters of Authorization (LoAs) permit the use of credits for both Nationally Determined Contributions (NDCs) and other international mitigation purposes (such as CORSIA), GS11677's LoA, issued by Malawi's Ministry of Natural Resources and Climate Change, authorises credits specifically for other international mitigation purposes (OIMP) but not for all uses. Specifically, the mitigation outcomes cannot be counted towards another country's NDC.

2. Definitions of “First Transfer”:

Still yet to be clarified by the Article 6 rulebook, definitions of first transfer are important as they trigger the need for corresponding adjustment in the host country’s GHG inventory. LoAs must clearly define first transfers, to ensure legal clarity and ownership of credits. Current LoAs in the market currently define first transfers in two ways:?

• First transfer at authorisation: here, first transfer occurs at the point where a country authorises credits for international use (typically, through the LoA). This moment of authorisation signals the country’s commitment to apply a corresponding adjustment, despite the credits not being sold or moved to a buyer yet.?

Current LoAs which define first transfer at authorisation:

There are currently 2 unilaterally authorised projectsVCS3699 and VCS2749 (DelAgua Health - Rwanda), that specify the definition of first transfer being at the point of authorisation. All other LoAs either specify first transfer at issuance, or do not specify first transfer at all.

• First transfer at Issuance: when the host country authorises the issuance of credits designated for international use. Under this scenario, credits must be correspondingly adjusted even though no immediate buyer has been identified.

GS10823 (Atmosfair gGmbH - Morocco), GS834 (Atmosfair gGmbH - Nigeria), (GS4261 Atmosfair gGmbH - Rwanda) and GS11677 (Hestian Innovation - Malawi) all specify first transfer at first issuance.?

These different definitions have material consequences for when the corresponding adjustment is applied. One way in which these interpretations could be standardised is through first transfer at first international transfer. Here, first transfer only occurs when the credits are actually sold or transferred to an international buyer or foreign country. This is either the first commercial movement, or listing of the transaction on the host country’s registry. Currently no LoAs specify this as a definition, but it would assist in harmonising LoAs in future.

3. Authorisation Period (From/Until):

LoAs typically specify the authorization period (beginning and ending), with the “from” date marking the start of the credits validity for international use, and ruling out all emission reductions issued before this date. The until date sets out that the project can no longer generate authorised credits under the current LoA. We are yet to see LoAs of this nature be renewed, although that is still a possibility.

Current LoA Features

The authorisation end dates for only two LoAs have passed (ART102, VCS2676). Whereas all other LoAs have between 2025 and 2030 to continue issuing authorised credits. Most projects authorise?

What to Expect in the Near Future:

Seeing more harmonised LoAs in future will provide confidence in LoAs, and we expect to see LoAs that have greater legal clarity around the insurability of authorised credits in the event of revocation (that countries do not complete corresponding adjustments in their biennial transparency reports (BTRs) to the UNFCCC. Under CORSIA, insurance can play a role in providing market confidence that steps have been taken to mitigate non-delivery risk. We are developing an LoA risk score, to bring transparency to the different steps stakeholders are taking to mitigate non-delivery risk. But more on that soon…?