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.