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.
