Lessons from Virtual Pilots: Raising Climate Ambition through ITMOS

Article 6 of the Paris Agreement facilitates use of cooperative approaches in reducing greenhouse gas emissions. A step up from project-based CDM or even programmes of activities, this new and flexible mechanism has the potential to harness market forces to foster emissions reductions at a sector-wide scale. The hope is that cooperative approaches will lower the costs of compliance and enable greater overall climate ambition.

Through cooperative approaches, it is envisioned that two or more countries will work together to reduce greenhouse gas emissions in a mutually beneficial manner, supporting both countries towards meeting their climate goals as documented in their Nationally Determined Contributions (NDCs), and as applicable, their long-term strategies. Ideally, cooperation will help drive even higher levels of ambition than what is reported in NDCs.

Cooperative approaches are subject to accounting practices aimed at ensuring the resulting internationally transferred mitigation outcomes (ITMOs) will be additional to business-as-usual levels of climate mitigation and will not be counted towards more than one NDC. ITMOs generated under Article 6.4 also need to demonstrate overall mitigation of global emissions and contribute to the Adaptation Fund. However, while it is anticipated that cooperative approaches will be used to support achievement of NDCs, just how this is done is not elaborated, particularly for the host country that generates the mitigation outcome through domestic actions.

If the cooperative approach involves the host country selling the entire value of emissions credits to a buying country and generating the emissions reductions from a sector that also contributes to its own NDC, then the host country must make a “corresponding adjustment” to their NDC. That is, the host country would need to increase the ambition of its NDC by the total number of ITMOs to prevent the action from counting towards both its own NDC and the buying country’s NDC.

Considering CCAP’s experiences designing “virtual pilot” ITMO examples, information on other pilot projects, and developing country perspectives, there are a number of strategies that can be used, either individually or in tandem, to increase the likelihood that the selected ITMO design will support the host country in meeting its NDC and long-term goals:

• The ITMO is designed to be additional to the NDC. Under this scenario, the emissions reductions that are internationally transferred are demonstrated (through robust MRV) to be in excess of the host country’s NDC. This can be the case where domestic actions already are expected to achieve the NDC in the target sector(s), and the NDC itself can be used as a crediting threshold or emissions cap for a linked cap-and-trade program. Achieving emissions reductions in excess of the NDC can facilitate subsequent ratcheting up of mitigation targets.[1]

• The ITMO costs more than anticipated unilateral actions. The emissions reductions are “likely” to be in excess of the host country’s NDC or unilateral contributions towards the NDC, because the measure costs more (on a cost per ton reduced basis) than those needed to implement the NDC, or those expected to be implemented unilaterally. Such actions may be situated on the higher end of the cost curve.

• The ITMO achieves deeper and/or faster emissions reductions. The emissions reductions are demonstrated to be in excess of the host country’s domestic policy baseline towards meeting its NDC, indicating that reductions would occur deeper or faster than the planned trajectory. One example of this, being explored through a virtual pilot in the Philippines, involves using international cooperation to achieve reductions in HFCs deeper and faster than might be achieved through compliance with the applicable schedule set by the Kigali Amendment.

• The cost to generate the ITMO is substantially less than the market price. In contrast to the second bullet, above, if the mitigation outcomes cost substantially less than the market price (or the price the buyer is willing to pay), it may be possible for the net proceeds generated from that ITMO to pay for other mitigation outcomes the host country could then apply towards its own mitigation goals. While this scenario has the host country transferring abroad its most cost-effective mitigation outcomes which could otherwise be used towards its own NDC, this could be in its own self-interest if the sales price substantially exceeds the costs to generate the ITMO. Countries seeking to use this approach might look for low-cost mitigation outcomes in the forestry sector.

• The ITMO overcomes barriers to sector transformation. The payments for emissions reductions are designed in a way to overcome barriers to sector transformation or deliver cost-effective technologies that previously were unavailable, facilitating the host country’s ability to meet its NDC, including the enhanced ambition stemming from the corresponding adjustment, at a lower cost. One example of this, being explored through a virtual pilot in Chile, involves use of ITMO funds to overcome a key barrier to decarbonization in the energy sector. Specifically, the ITMO is being designed to encourage “firm and flexible” forms of renewable energy, supporting enhanced uptake of nonconventional renewable energy and facilitating the phase-out of coal.

• Emissions reduction credits generated from the ITMO are shared between the host and buyer countries. A final way to ensure that both countries’ NDCs benefit from the ITMO is through sharing the emissions reductions, so that each country counts a portion of the emissions reductions generated towards its own NDC. Under this scenario, the host country takes a corresponding adjustment just for the share of emissions reductions that is internationally transferred, and the buying country effectively pays a higher per-ton price for emissions it purchases. This scenario could be best where none of the strategic approaches described above apply, or could be used alongside other approaches.

While each of these scenarios can support achievement of the host country’s NDC, it is important to remember that these ITMO designs alone will not be sufficient to meet the NDC. It is still incumbent on the host country to develop national policies and incentive programs sufficient to meet its NDC, including the required corresponding adjustments. Even where the ITMOs can be well-justified using one or more of the above rationales, host countries should be careful not to sell so many mitigation outcomes that meeting the NDC becomes too expensive. This could especially be the case where a country’s NDC is already quite ambitious. It is also a risk where countries have not assessed their domestic mitigation options (both cost and reduction potential) and defined sufficient policies and measures to meet their NDC. Accordingly, in addition to the above strategies, we suggest moderation in use of cooperative approaches until the full implications on national ambition and compliance cost can be evaluated.

[1] Laurence Blandford, Stacey Davis and Paolo Cozzi, Using Transfers to Enhance Ambition over the NDC cycles