What is a Climate Action Team agreement?

A Climate Action Team (CAT) model is an agreement among a small group of cooperating governments, under the umbrella of Article 6.2[1] of the Paris Agreement. Through a CAT, one or several Partners with high marginal cost mitigation potential cooperate with a Host, with lower marginal cost potential, through the transfer of resources in exchange for credible emissions reductions beyond the host’s NDC. A CAT agreement can demonstrate the additionality of mitigation and avoid leakage. It minimises transaction costs by using existing commitments and monitoring frameworks and adopting an economy wide approach, as opposed to project-based approaches.

The CAT agreement comprises:

  1. a multi-year emissions baseline that uses the host’s NDC as a starting point for negotiation;
  2. pre-commitment of total funds available for payments from partners;
  3. a pre-agreed price range for payments per ton of mitigation beyond the NDC;
  4. assessment of results relative to the baseline using the host’s national emissions inventory;
  5. results-based payments from the partners to the host and the transfer of mitigation from the host to partners.

A CAT takes a fundamentally different approach to international transfers relative to project-based mechanisms or carbon market linking. Their baseline comprises the whole economy of the host country, rather than particular projects or sectors. CAT contractual arrangements can be complemented by collaborative activities, technical support agreements, and relationships with private investors and private companies with compliance obligations under policy instruments that mobilize mitigation, for instance an emissions trading system (ETS).

[1] Article 6.2 of the Paris agreement allows parties to use Internationally transferred mitigation outcomes to achieve their mitigation targets

What are the differences and similarities between Climate Action Teams Agreements (CATs) under Article 6 of the Paris Agreement, and Joint Implementation under the Kyoto Protocol?

The mechanism known as Joint Implementation (JI), defined in Article 6 of the Kyoto Protocol, allowed Annex B countries[2], with emission reduction commitments, to earn emission reduction units (ERUs) from emissions reduction or storage projects in another Annex B party, which could be counted towards meeting their Kyoto target. For every tCO2 reduced and credited through JI projects, host countries would cancel one of their country-wide Kyoto allowances (AAUs), which would avoid double counting. Also, JI projects needed to prove that their emissions reductions would be additional to what would have otherwise happened without the incentive of the ERUs. More than 90% of the ERUs were issued by Russia and Ukraine, countries with allocations of Kyoto allowances that exceeded their business as usual emissions (so called “hot air”) and where their incentives to bank allowances for future Kyoto periods where they would have binding commitments was weak (these binding Kyoto targets never did eventuate).

This lack of a binding target at the national level meant that additionality of JI units could be assessed only on a project level.  However the institutions to ensure additionality were not strong – and project additionality is inherently very difficult to establish in most cases.   The lack of credible and stringent baselines for Joint Implementation projects inundated the international carbon market with very cheap credits, bringing down global carbon prices and national carbon prices in those countries that allowed them for compliance with their ETS.[3]

CAT and JI are similar in that they involve carbon credit exchanges between countries with national emissions reductions commitments, under the Kyoto Protocol for Joint Implementation and under the Paris Agreement for Climate Action Teams. However, they propose two very different approaches to do so. CAT agreements are underpinned by a meaningful mitigation baseline for the whole host country economy, as set by an ambitious NDC. This ensures that high integrity units are achieved. JI instead relies on project-based baselines to demonstrate additionality. These project-based baselines are not constrained within an ambitious national cap. They were often not credible, leading to non-additional projects and credits. Demonstration of additionality under a CAT agreement is relatively straightforward, as it involves emission reductions beyond an already ambitious NDC, which effectively sets a GHG emissions cap for the host country.

[2] In its Annex B, the Kyoto Protocol set binding emission reduction targets for 37 industrialized countries and economies in transition and the European Union.

[3] For the NZ experience see Ormsby, Judd, Dominic White and Suzi Kerr. 2021 ‘Delinking the New Zealand Emissions Trading Scheme from the Kyoto Protocol: Comparing Theory with PracticeClimate Policy 11 Feb.  pp. 1-12

Why does the CAT agreement structure have a single Host and a small number of Partners?

CAT agreements are very different to the arm’s length transactions in a liquid global carbon market. A small group of trusted and compatible partners can ensure high integrity emissions reductions and maximise the effectiveness of international support for mitigation. Each Host country can, among the countries interested in supporting international mitigation, select a group of partners with whom it would like to work.  These could be countries with whom they have pre-existing relationships and which have complementary capability to offer.  This set of partners is likely to differ from host to host so each CAT would have only one host.  This does not constrain hosts from cooperating with other hosts in other ways.  A network of CATs with diverse hosts and partners could constitute a relatively efficient global market while also assuring integrity and local effectiveness within each agreement.

Ambitious mitigation requires incentives but also political, technical and financial support. In a CAT agreement both host and partners win if the Host is successful in reducing GHG emissions beyond their NDC. When the team consists of a small number of partners, these benefits are not too diluted across the partners, creating strong incentives for each to actively support the Host. The support to be provided can be pre-defined to a certain extent in the Agreement between the different parties but the most effective support will need to be mutually agreed over time in response to complex local circumstances.  A small team reduces the moral hazard that arises in teams where efficient roles cannot be fully defined in advance and effort can’t be fully observed so that some team members could free ride on others.  Within a small self-selected group it is easier to develop trust and improve observability of the effort exerted by each team member.

Thus CAT partners are not only buyers of emission reduction units generated by the host. They also play a crucial role in generating them. Their support can be technical, financial, political or trade related. Let’s consider an example of a CAT with Chile as a Host and New Zealand as one of two partners where each member of the CAT would share the additional reductions equally. New Zealand could see its expertise in reducing methane emissions in the dairy sector as an opportunity to support Chile’s ambition. Support could take place through New Zealand’s dairy industry foreign investment in Chile, through technology transfer initiatives between New Zealand and Chilean dairy companies, or through Government-led capability and technology transfer initiatives, for example.  As a result, Chile might reduce emissions beyond what was anticipated in its NDC by an additional 3 million tonnes, and New Zealand would get to purchase 1 million tonnes of high integrity credits at prices in a pre-determined range.. When another partner, say Switzerland helps Chile transform it’s electricity grid and reduces emissions by an additional 3 million tonnes, New Zealand also gets to purchase a share of those credits.

Can host and partners in a CAT be part of different CATs and bilateral agreements?

The host country would have committed to sell mitigation units to its partner countries under a CAT agreement, getting technical, political, and financial support in return. Partner countries count on having access to these international emissions reductions to be able to meet their NDC commitments. Before a host country can engage in bilateral project-based mitigation agreements, it needs to ensure that it will provide mitigation units to its partners as established in the CAT agreement. Transfers of emissions reductions by the host to third parties would need to be agreed in advance. For example, the CAT agreement could establish that the host reserves the right to sell 10% of emissions reductions achieved beyond their NDC to other countries. But the host cannot unilaterally decide to sell mitigation units to other countries, since it is the partners’ right to purchase them as part of the agreement.

Partner countries can be part of different bilateral and CAT agreements as long as they commit to purchase the mitigation units provided by their host at the agreed price range and to provide the strong support required.

What are the advantages and disadvantages of CAT agreements over bilateral agreements for the transfer of international transferred mitigation outcomes (ITMOs)?

The two key advantages of CAT agreements over bilateral agreements are risk sharing and lower transaction costs. Let’s consider a CAT with Chile as a host and Switzerland, New Zealand and Canada as partners. In the CAT agreement Chile would have committed to transfer to Switzerland, New Zealand and Canada a share of its ambitious emissions reductions in exchange for payments, technical and political support. There are two alternative bilateral options which we will consider in turn.  First, one large bilateral agreement to purchase all its additional mitigation, or second, multiple bilateral agreements each of which purchases units based on achievements from specific projects or sectors.  Let’s assume all only allow units to be transferred to the extent that Chile mitigates more ambitiously than its NDC-based crediting baseline so all units have the same level of integrity.  That will in fact be hard to achieve in bilateral agreements and is not guaranteed in any so far.  No current trades are contingent on over compliance of the host country at an economy-wide level.  A CAT achieves this by design.

Chile could prefer one large bilateral agreement because it lowers transaction costs but it does expose them to the risk that if that partner cannot continue the arrangement they have no established alternative partner.  Also it means they get the non-financial support from only one partner.  It might also limit them to working with large countries.  From the partner point of view, unless the country is large, it might not want to commit to purchase all of Chile’s extra mitigation even though having fewer larger agreements might involve lower transaction costs.  Chile might provide more than the potential partner needs, or even if they can provide less, the partner will not want to be linked to only one host supplier of units because there is high risk that that host will not be able to deliver units in a specific time frame.  They will both want a diversified portfolio of trading partners.

Having multiple bilateral agreements has some advantages.  Reductions from one sector – rewards for non financial action are more focused (e.g. if dairy sector emissions fall NZ shares the credit only with Chile); May involve higher transaction costs – but it can be hard to negotiate with multiple partners to might be easier.  But if the mitigation units are to have integrity, units are only transferred to the extent that jointly the bilateral agreements are strong enough to create excess reductions beyond an ambitious national crediting baseline.  The bi-lateral agreements are interdependent – it is just not explicitly recognised.  Also mitigation efforts in one sector can support mitigation in others, and a broader agreement can support economy and society wide efforts that could be more effective than sector by sector efforts.  E.g. carbon pricing, education…

With a CAT, Chile would be able to ensure a demand for its emissions reductions as well as support for an integrated strategy for mitigation without having to engage in negotiations with multiple parties and signing numerous potentially conflicting agreements. As a result, both transaction costs and the risk of not finding buyers for its emissions reductions at an acceptable cost, would be considerably reduced. On the other hand, a small country like New Zealand would have guaranteed access to mitigation units from a host country, which may not have been able to ensure in a bilateral agreement.

What are the advantages of an economy-wide approach to international carbon transfers over project-based mechanisms to transfer international carbon credits (such as the Kyoto Protocol CDM and JI or project-based bilateral agreements)?

Economy-wide approaches set a national emissions cap, hence achieving high integrity emissions reductions. Project-based approaches set a baseline at the project level. Additionality is difficult and often impossible to assure this level and domestic leakage is often a concern. Therefore, national emissions could be growing, even if the project producing mitigation units is delivering emissions reductions relative to business as usual.  National level baselines and monitoring avoid domestic leakage and, with an ambitious NDC well below BAU, assures additionality.  In conclusion, project-based approaches cannot guarantee that emissions reductions will take place at the national level, while economy-wide approaches like CAT agreements can. Another advantage of economy-wide approaches are lower transaction costs, as it is not necessary to verify emission reductions of every single project and programm (Schwartzman et al., 2021).

Can the private sector be involved in CAT and how? (including how can the private sector obtain a share of the emissions reductions they facilitate under an economy wide agreement)?

The private sector has no emission reductions commitments under the Paris Agreement but must comply with national climate change legislation in the countries where it operates. It may also be interested in purchasing mitigation units to meet corporate responsibility commitments. The private sector cannot directly be a party to a CAT agreement but can participate in two key ways:

  • Helping to reduce emissions in the host country, which will eventually deliver mitigation units to be transferred to partner countries. The private sector could do this through their investments in low carbon or carbon storage projects. In addition to the traditional revenue stream of those low carbon projects, the private sector could agree with partner countries to get a share of the emission credits achieved.
  • Purchasing mitigation units from partner countries. These units could be used for compliance with national ETS of the partner countries (if applicable), or for voluntary offset purposes.

We would find a vertical integration of emissions reduction generation and consumption when the private sector is involved in both activities. This would be ideal, as it would create strong incentives for a company to invest in mitigation in the host countries where they operate. It is also more effective, as it allows the private company involved to get a better deal when they buy mitigation units, and hence encourages more low carbon investment.

How will host countries (and their partners) finance the ambitious emissions reductions underpinning a CAT agreement?

Will CAT track the mitigation impact or specific policies or investments and reward them accordingly?  Why not?

How can CAT ensure Sustainable Development co-benefits?

How do CAT deal with economic shocks that have substantial impacts reducing or increasing GHG emissions and are out of control of the host country Government?

How do CAT interact with other carbon markets, including voluntary carbon markets in the forestry sector, or national ETS?

How to update NDCs (and share the implications of that for saleable credits between host and partners) and thereby reduce the host concerns about selling ‘low hanging fruit’?