FAQ on the Handling of Mitigation Credits in the IKI

All mitigation credits generated or used in connection with IKI-funded projects must (at a minimum) comply with the quality requirements of the Article 6.4 Paris Agreement Crediting Mechanism (PACM) or be of equivalent quality. The PACM serves as a quality benchmark for all mechanisms, including Article 6.2 cooperation and the voluntary carbon market (VCM), and should also be used as a reference for national crediting approaches (national pricing systems).

Key requirements include, in particular: robust and scientifically sound methodologies, demonstration of additionality, avoidance of double counting and double claiming, appropriate consideration of permanence and reversal risks for carbon removals, compliance with high environmental and social standards, promotion of sustainable development in the host country, and transparent monitoring, reporting and verification (MRV).

If no applicable Article 6.4 methodology is yet available for a particular project type, other methodologies may, under certain circumstances and in consultation with the IKI, be used if they comply with the PACM standards and tools. In such cases, it must be demonstrated that the requirements applied overall are equivalent to the quality requirements of the PACM.

Example: A project develops reforestation activities and intends to certify the resulting carbon removals under a carbon standard. If no suitable PACM methodology is yet available for the project type, a VCM standard may be used, provided that the requirements applied are qualitatively equivalent to the Article 6.4 PACM requirements (see above).

Yes, but only under the following conditions: IKI funding may only be used directly for the implementation of emission reduction or carbon removal activities in specific exceptional cases. It may be used for preparatory measures or measures creating the enabling conditions for such activities (e.g. development of Article 6.4 methodologies, capacity building or MRV systems). IKI funds must not be used for the technical implementation of emission reduction or carbon removal activities that generate internationally transferable and tradable mitigation outcomes (Internationally Transferred Mitigation Outcomes – ITMOs).

However, the generation of Mitigation Contribution Units (MCUs) through IKI funding is possible. 

If the technical implementation of the activities is subsequently or simultaneously financed through other sources of finance, ITMOs (and MCUs) may be generated from the resulting mitigation outcomes. There is also a specific case for revolving funds (see Question 8).

Example: An IKI-funded project develops a methodology and a pilot project for reducing SF₆ emissions in the electricity sector (“preparation”). The technical implementation of the SF₆ emission reduction activities is financed by a private investor after the IKI project has ended or in parallel. In this case, ITMOs may be generated from emission reductions achieved on the basis of the preparatory measures and internationally transferred by the investor. 

In case the technical implementation of the activities is co-financed with both IKI funds and private finance, the mitigation credits must be allocated in proportion to the respective share of the total financing of the activity (see Question 7).

IKI funds are exclusively provided to ODA-eligible developing and emerging countries and are reported by the German Federal Government as international climate finance. To ensure that emission reductions achieved with public funds exclusively benefit the NDCs of host countries, they may not be used in the form of mitigation credits for compliance purposes in industrialised countries (so-called Annex I countries). Double claiming for compliance purposes and climate finance contributions would undermine the integrity of climate finance.

Yes, but only under the following conditions (see also Question 2): The PACM serves as the quality benchmark (see Question 1). This includes, in particular, requirements relating to robust methodologies, additionality, permanence, a robust NDC of the seller country, sustainable development, and strict environmental and social standards.

In addition, the German Federal Ministry for the Environment, Climate Action, Nature Conservation and Nuclear Safety (BMUKN) advocates applying, in analogy to the PACM, a contribution for Overall Mitigation in Global Emissions (OMGE) and a Share of Proceeds (SoP) for the Adaptation Fund.

Example: An IKI project supports the establishment of an MRV system and the development of pilot projects in the waste or energy sector (up to financial close). A buyer country intends to finance the implementation of these projects in order to acquire the resulting ITMOs. The host country and buyer country conclude a bilateral agreement on cooperation under Article 6.2 and the financing of selected projects (e.g. a Mitigation Outcome Purchase Agreement – MOPA). The resulting ITMOs may be transferred to the buyer country.

Yes, but only under the following conditions (see also Question 2): If no Article 6.4 methodology is yet available for the relevant project type (e.g. in the area of land-use change), mitigation credits may – in consultation with the IKI – be generated under VCM standards. The mitigation credits must be of equivalent quality to the requirements of the PACM (quality benchmark), and double claiming must be avoided (see Questions 1 and 2).

Example: An IKI-funded project supports the development of reforestation activities on degraded land in a partner country, including planning, capacity building for local authorities and the establishment of MRV systems. The technical implementation of planting and maintenance activities is carried out by local actors and financed by private investors. As there is not yet a PACM methodology available for the project type at the time of planning and implementation, mitigation credits may be generated under a VCM standard, using the Article 6.4 PACM as the quality benchmark.

Mitigation credits generated directly through mitigation projects financed with ODA funds through the IKI may not be internationally transferred or marketed. They may either be accounted towards the host country’s NDC as Article 6.4 Mitigation Contribution Units (MCUs) or used within a national pricing system of the host country (see Question 10). In the case of a blended finance approach, see Question 7.

Example: An IKI fund fully finances the development and construction of a biogas plant in a partner country through a grant. The resulting emission reductions may therefore not be internationally transferred or marketed. Instead, they must remain in the host country and either accounted towards the host country’s NDC or used within a national pricing system. This ensures that the mitigation outcomes benefit the host country.

In cases of blended finance (public/private) and risk-sharing instruments, a clear split applies: The share of mitigation credits corresponding proportionally to the IKI share of the total financing of the activity may not be internationally transferred or traded and must be accounted towards the host country’s NDC (e.g. as MCUs). The share corresponding to external financing may be used to generate internationally transferable and tradable mitigation outcomes, subject to compliance with the IKI rules (see also Questions 1 and 2).

Example 1 – Equity participation / concessional loan for energy-efficient air conditioning: An IKI-funded fund provides a concessional loan amounting to 30% of the total financing to support private investment in the introduction of climate-friendly air-conditioning systems. The remaining 70% is co-financed through commercial loans and private-sector equity. In this case, 30% of the mitigation credits generated during the project period (the IKI share) may not be internationally transferred or traded but must be accounted towards the host country’s NDC. The remaining 70% may be internationally transferred and marketed by the private actor.

Example 2 – First-loss tranche for renewable energy: A climate mitigation project replacing diesel generators with photovoltaic systems is financed through a climate fund in which IKI funds provide a first-loss tranche amounting to 20% of the total financing. These funds serve to absorb potential losses first and thereby mobilise private investment (80%). If the project generates mitigation credits, the following applies: The share of mitigation credits corresponding to the IKI-financed risk share (20% in this case) may not be internationally transferred or traded and must be accounted towards the host country’s NDC. The remaining 80% of the investment may generate mitigation credits for international transfer. The relevant factor is the share of IKI financing in the risk-bearing structure, not whether the first-loss tranche is actually drawn.

If IKI funds are provided through a revolving fund, the revenues from the sale of mitigation credits corresponding to the IKI financing share must flow back fully into the fund (see Question 7) and be reinvested in the financing of further climate mitigation activities. This ensures that the financial revenues generated through public funds remain available for climate action on a long-term basis.

When the fund is closed, however, it must be ensured that the IKI financing share remains invested in climate mitigation activities in developing countries; no internationally transferable and tradable mitigation credits may be issued for this share at that stage.

Example: An IKI-funded revolving fund supports the development of climate mitigation projects and secures their financing through long-term offtake agreements. The resulting mitigation credits are subsequently sold to companies with net-zero targets. The revenues from the sale flow back into the fund and are used for the development and upscaling of further climate mitigation activities (new upfront financing).

Yes, this is explicitly encouraged in order to mobilise private capital for climate mitigation activities under Article 6 – primarily under Article 6.4.

Example: An IKI project supports the development of a technology to reduce methane emissions in the waste sector. A company subsequently finances the introduction and implementation of the technology and may market the resulting mitigation credits internationally or use them for its own climate targets. In the case a blended finance approach is applied, see Question 7.

Yes, this is possible provided that the mitigation credits remain in the partner country. The PACM should serve as a reference framework for the relevant quality criteria of the crediting programme (see Questions 1 and 5). These mitigation credits may be used in both mandatory and voluntary national pricing systems of the host country. The BMUKN recommends reinvesting any revenues from the sale of mitigation credits in the upscaling of further mitigation activities.

Example: An IKI project provides a grant covering 50% of the construction of a biogas plant in Colombia. Half of the mitigation credits generated may be used by the project owner to meet the applicable national CO₂ tax obligation. This is possible under Colombia’s national CO₂ tax offset mechanism. Revenues from the sale are reinvested in further mitigation activities (upscaling).

Yes, provided that the actual emission reduction or carbon removal activities are not financed with IKI funds but by the company.

Example: A German company wants to address residual emissions as part of its net-zero strategy. An IKI project supports the conceptual development of a carbon removal project, while the company finances the implementation of the carbon removal activities through an offtake agreement and purchases the mitigation credits generated subsequently.