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.