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.