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 of the Paris Agreement. Through a CAT, one or several governments from countries where GHG mitigation would entail high marginal costs (“partners”) cooperate with a government of a country with a potential of mitigation at low marginal cost (“host”), through the transfer of resources in exchange for credible emissions reductions (international transferred mitigation outcomes, ITMOs) beyond the Host’s NDC. A CAT agreement is to demonstrate the additionality of mitigation and avoid leakage. It minimises transaction costs by using existing commitments and monitoring frameworks and adopting an economy wide or multi-sector approach with the highest feasible level of aggregation, as opposed to project-based approaches.
The CAT agreement comprises:
- a multi-year emissions baseline that uses the host’s NDC as a starting point for negotiation about ITMO transfers;
- pre-commitment of total funds available for payments for ITMOs from partners;
- a pre-agreed price range for payments per ITMO, denominated in tonne CO2e of mitigation beyond the NDC;
- assessment of GHG mitigation results relative to the baseline using the host’s national emissions inventory;
- attribution of observed mitigation outcomes to a package of mitigation policies and actions;
- results-based payments from the partners to the host and the transfer of ITMOs from the host to partners.
A CAT takes a fundamentally different approach to ITMO transfers relative to project-based mechanisms or carbon market linking. Their baseline comprises the whole economy or a set of sectors of the host country, rather than particular projects or sectors. CAT contractual arrangements on ITMO transfers 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).
 Article 6.2 of the Paris agreement allows parties to use Internationally transferred mitigation outcomes (ITMOs) 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?
Joint Implementation (JI), defined in Article 6 of the Kyoto Protocol, allowed Annex B countries, with emission reduction commitments, to acquire emission reduction units (ERUs) from emissions mitigation projects in another Annex B party and use these ERUs towards their Kyoto target. For every tCO2e reduced and credited through JI projects, host countries would cancel one of their country-wide Kyoto allowances (AAUs), thus avoiding 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. There were two forms of JI: “track 1” with rules determined only by countries participating in the transaction, and “track 2” with international oversight by the JI Supervisory Committee (JISC).
More than 90% of the ERUs were issued by Russia and Ukraine, countries with allocations of Kyoto allowances that exceeded their business-as-usual (BAU) emissions (so called “hot air”).
This allowance surplus at the national level meant that additionality of JI units could be assessed only on a project level. Given the absence of international oversight under “track 1”, no credible additionality test was applied to “track 1” JI projects from Russia and Ukraine. Because of this, as well as the lack of credible and stringent baselines for ’track 1”projects, they 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.
CAT and JI are similar in that they involve carbon credit exchanges between countries with national emissions reductions commitments, under the Kyoto Protocol for JI and under the Paris Agreement for CATs. 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 and an ambitious crediting baseline which is set well below a credible BAU scenario and the national (NDC) reference scenario. This ensures that high integrity units are achieved. As discussed above, ‘track 1” JI projects-lacked credible additionality and baseline determination, and were not subject to an ambitious national cap. Demonstration of additionality under a CAT agreement is relatively straightforward, as it involves emission reductions beyond an already ambitious NDC, which effectively sets a binding GHG emissions cap for the host country.
 In its Annex B, the Kyoto Protocol set binding emission reduction targets for 37 industrialized countries and economies in transition and the European Union.
 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 Practice ‘ Climate 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 from the private sector driven 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 potential host country can select a group of partners with whom it would like to work, among the countries principally interested in acquiring ITMOs through a CAT approach, . 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 financial incentives but also political and technical 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 beyond the payment for ITMOs received. Such non-monetary support to can be pre-defined to a certain extent in the Agreement between the different parties but the most effective support will be flexibly adjusted 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 ITMOs generated by the host. They also play a crucial role in generating them. Their support can be technical, political or trade related.
Can host and partners in a CAT be part of different CATs and bilateral agreements?
The host country would have committed to sell ITMOs to its partner countries under a CAT agreement, getting technical, political, and financial support in return. Partner countries want to use these ITMOs towards their NDC commitments. Before a host country can engage in bilateral ITMO transactions beyond CAT partners, it needs to ensure that it will provide ITMOs to these partners as per the CAT agreement. Transfers of ITMOs by the host to third parties agreed after the CAT agreement was in place would have to come from mitigation going beyond the level of the transfers defined in the CAT agreement. Alternatively, the CAT agreement could establish that the host reserves the right to sell a certain percentage of emissions reductions achieved beyond their NDC to other countries.
Partner countries can be part of different bilateral and CAT agreements as long as they commit to purchase the volume of ITMOs provided by their host as specified in the CAT agreement.
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 volume of ITMOs 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 ITMOs at an aggregated level, or second, multiple bilateral agreements each of which purchases units based on achievements from specific projects or sectors. Let’s assume all only allow ITMOs to be transferred to the extent that Chile mitigates more ambitiously than its NDC-based crediting baseline so all ITMOs have the same level of integrity. That will in fact be hard to achieve in bilateral agreements that do not apply an aggregated assessment of a CAT type 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 compared to a CAT but it does expose them to the risk that if the single bilateral 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.
With a CAT, Chile would be able to ensure a significant demand for its ITMOs as well as support for an integrated strategy for mitigation through streamlined negotiations with a small set of parties, instead of having to negotiate numerous, potentially conflicting agreements. As a result, transaction costs and the risk of not having sufficient ITMO demand at an acceptable price would be considerably reduced. On the other hand, a small partner country like New Zealand would have guaranteed access to ITMOs from an attractive host country, with whom it may not have been able to sign 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)?
If economy-wide approaches set a stringent national emissions cap, they guarantee achieving high integrity emissions reductions. For project-based approaches or economy-wide approaches whose baseline is set in a way that generates “hot air”, additionality needs to be determined at the project level, which can be costly. Moreover, domestic emissions leakage across sectors due to price effects is often a concern. Therefore, national emissions could be growing, even if a project producing ITMOs is delivering emissions reductions relative to business as usual. National level crediting baselines and monitoring avoid domestic price-related leakage and, with an ambitious NDC well below BAU, assure additionality. Project-based approaches cannot guarantee that emissions reductions will take place at the national level, while economy-wide approaches like CAT agreements do that by design. Another advantage of economy-wide approaches are lower transaction costs, as it is not necessary to verify emission reductions of every single project and program (Schwartzman et al., 2021). In conclusion, economy-wide approaches based on stringent baselines like CAT agreements can reduce transaction costs and still guarantee additionality.
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 ITMOs to meet voluntary 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 ITMOs to partner countries. The private sector could do this through their investments in emission reduction or removal projects. Ideally, the host country would introduce policy instruments mobilizing these investments.
- Purchasing ITMOs 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.
How will host countries (and their partners) finance the ambitious emissions reductions underpinning a CAT agreement?
A host country in a CAT agreement will go through three phases to achieve ambitious emissions reductions beyond their NDC (as described in Lujan and Silva-Chavez, 2018 for REDD+):
- Readiness. Host countries model a plausible mitigation scenario beyond their NDC, based on realistic policy instruments and volume of mitigation actions mobilized by these instruments beyond those already underpinning the NDC, after inclusive stakeholder consultations.
- Implementation. Host countries introduce the policy instruments that financially incentivize or mandate mitigation action by private companies and households envisaged in the scenario developed previously. Governments adjust the policy instruments based on monitoring of the actually achieved mitigation.
- Results-based finance. Host countries are paid the agreed price for emission reductions and carbon stocks enhancement beyond their NDC achieved as per the monitoring.
Partners in a CAT will commit funding for the purchase of a specific volume of mitigation units at a pre-determined price (or price range). Ideally, the price is specified for the entire period. Their commitment could be placed in an escrow account and disbursed when emissions reductions take place. Given that payments for the credits will only accrue ex post, pre-financing instruments need to be implemented. These can include:
- Loans from partner countries or development banks to the host country government or private entities securitized by the revenue flow from ITMO sales.
- Partners’ partial disbursement of committed funds as milestones set in the CAT Agreement are achieved. For example, with implementation of particular policies and measures; or approval of large infrastructure investments, the partners would disburse a share of the funds committed for results-based finance.
- Host countries issuance of sustainability-linked bonds, whose coupon and repayment is linked to the level of mitigation achieved by the country. The first bond of this type has been issued by Italian utility ENEL in 2020. A related instrument is the sustainable sovereign bond proposed to reduce deforestation in Brazil (Elwin, Robins, Willis and Cozzolino, 2021). Such an innovative financial instrument would link interest payments of a sovereign bond to Brazil’s success in reducing deforestation.
- Private (green) bonds by companies making real investments in mitigation in the host country to support their low carbon investment, at a lower coupon than comparable bonds.
 Lujan, B. and Silva-Chavez, G. (2018) Mapping Forest Finance: A Landscape of Available Sources of Finance for REDD+ and Climate Action in Forests. Environmental Defence Fund, Forest Trends.
Will CAT track the mitigation impact or specific policies or investments and reward them accordingly? Why not?
The concept of CAT seeks to lower the complexity of international transfers of mitigation outcomes. Consequently, a CAT agreement would not require monitoring and evaluation of the impact of specific actions (projects, policies or programmes) beyond what is required under the Paris Agreement. An ambitious national baseline, strongly modelled with the participation of a diversity of stakeholders, is more credible than claims of mitigation by projects or policies. While it is extremely difficult to evaluate the actual impacts of projects and policies in isolation, it is easier to see the actual movements in emissions through the national inventory. At the same time, it will be necessary to maintain a high level of trust between the members of the CAT and credibility in the eyes of the wider global community. To fulfil these requirements, and in line with reporting requirements under Article 6 and Article 13 of the Paris Agreement, Parties must provide qualitative and quantitative information of their collaborative approaches. This entails information about how participating parties ensure environmental integrity, including that the mitigation outcomes are real, additional and verified, baselines are set conservatively under business as usual, robust MRV is applied, non-permanence and leakage are taken into account. In addition, Parties must ensure avoidance of double counting. The CAT agreement may also require reporting on implementation and sustainability impacts of mitigation actions.
How can CAT ensure Sustainable Development co-benefits?
Ambitious climate change mitigation can bring significant co-benefits, such as improved air quality, improved productivity, increased number of skilled jobs, reduced energy dependence or better mobility. Early mitigation can also avoid carbon lock-in and reduce the cost of mitigation in the future. However, a low carbon transition could slow down growth rates as compared to the historical model of development reliant on clearing vast forested areas for agricultural development and powering industry and transport with cheap and dirty fossil fuels. A low carbon transition can also affect some communities disproportionately. For example, those that rely heavily on the fossil fuel industry or intensive agriculture for their livelihoods will face higher challenges than urban workers in the services sector. New cleaner technologies could have a high capital cost, unaffordable for large segments of the population. Other significant impacts could come from changes in land uses for, for example reforestation or for the installation of power transmission lines.
Parties will need to report on how the cooperative approach under a CAT agreement is consistent with the host country’s sustainable development objectives. Social and environmental impacts are assessed at the level of bundle of policies implemented to mobilise mitigation beyond the host Parties’ NDC. Since the CAT concept puts an emphasis on transformational investments, such safeguards against negative effects could be integrated in the agreement. The agreement could, for example, refer to the International Finance Corporation’s Environmental and Social Performance Standards (IFC 2021) . The agreement could incorporate more specific safeguards such as ex-ante and ex-post impact assessments of the host country’s plan for decarbonisation, stakeholders engagement processes, and a grievance mechanism where stakeholders can ask for redress to governments of all CAT partners.
The CAT Agreement can include a clause requiring tracking of sustainable development costs and benefits. Part of the package could be to support job transitions. Also you would involve a variety of stakeholders in the Governance.
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?
Increases in economic activity are the biggest driver behind GHG emissions increases (Dong et al., 2020). Economic growth can be sustained at higher than expected levels for a long period of time if a country is successfully developing. Economic growth can also temporarily be high during a boom cycle. This is likely to be correlated with global or regional economic booms. On the other hand, GHG emissions typically decline during economic crises, and can rebound differently for developed and developing countries (Sadorsky, 2020).
There are two main options to deal with economic shocks under a CAT Agreement. Firstly, the agreement can cover a period of time long enough to allow the shocks to even out. Secondly, the CAT agreement can use a dynamic baseline that adjusts to changes in emissions fundamentals (e.g., GDP, energy prices, fundamental technology shifts) outside the host country’s control. Dynamic baselines minimise the risk of under- and over-crediting and increase confidence the mitigation outcomes created during an economic downturn are real and additional to what would have happened anyway. Such a dynamic baseline would have avoided the “hot air” created in transition economies in Eastern Europe and ex-Soviet Union States. Still, a balance must be found between frequent updates to the CAT crediting baseline and high investment certainty for the governments involved.
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’?
There are two scenarios under which a country may need to update its NDC:
- Low ambition scenario. The emissions reductions considered in the NDC are too low or even including hot air, and the country goes well beyond its commitment. Emissions reductions would be considered as low integrity in a CAT agreement, and the NDC would need to be adjusted. This scenario should be avoided by not entering into CATs with countries whose NDC are seen as unambitious.
- High ambition scenario. The host country had considered emissions reductions in the NDC that are too costly or unachievable even after putting in place the policies and measures anticipated. Therefore, no mitigation units are generated for transfer to CAT partners. An upwards adjustment of the NDC may be contested by multiple stakeholders in the UN process, host and partner country citizens or environmental NGOs. Again, the CAT agreement must cover a risk sharing scenario under circumstances where the host country can show that it implemented all policies originally envisaged to fulfil its NDC target, and thus proves that the ITMO shortfall is not due to ‘negligence’.