Voluntary Cooperation (ITMOs) the Unknown Monster

An important item under negotiation at COP24 is the concept of voluntary cooperation in mitigation. Screen Shot 2018-12-12 at 3.08.55 AMThis item is of huge importance as developing countries need funding and financing to engage in low-carbon development and adaptation but they don’t have mandatory mitigation targets. Developed countries are the ones with the economic resources but they also need ways to meet their mitigation targets. This is where the cooperation comes in: a developed country finances a project in a developing country and gets credit for some of the mitigation toward meeting their Nationally Determined Contributions (NDCs).   These are called Internationally Transferred Mitigation Outcomes or ITMOs. But what are the rules around when and how these transfers can occur and how they are accounted for? Transparency, accurate accounting and avoiding fraud are essential to creating a system of integrity. (See my previous blog on blockchain for part of the potential solution.)

Article 6.2 of the Paris Agreement is intended to provide some direction but it does so by leaving discretion to the Parties by saying that the framework should be consistent with guidance adopted by the COP. It does however specify that the framework needs to provide guidance to ensure that double counting is avoided. Michael Mehling of MIT released a report recently as part of the Harvard Project on Climate AgreementsGoverning Cooperative Approaches under the Paris Agreement. A concern identified by Michael Mehling is that this system could create a perverse incentive for developing countries to have low NDCs so that they can sell their ITMOs. Screen Shot 2018-12-12 at 3.09.35 AMBecause NDCs are by definition nationally determined this cannot be addressed directly. However, the report stresses that the parties should be careful not to over-regulate with restrictions as it may limit participation and increase transaction costs. Mehling stated that lacking ambition in NDCs cannot be compensated for with restrictions on the cooperative approach. “Whatever its final shape, the governance framework for Article 6.2 should avoid being too weak or too restrictive, as either outcome would diminish the very benefits that prompted introduction of compliance flexibility in the first place.” (Mehling from Summary Doc.)

The advantage to voluntary cooperation through ITMOs is that it effectively creates a market mechanism, it provides ways to achieve mitigation at a lower cost and should facilitate an overall increase in ambition. However, Juan Pedro Sira, a negotiator on this issue at COP24, said that when the concept was developed in Paris they didn’t know the kind of monster they were creating.

The key is that simple rules are created that are transparent and robust in terms of environmental integrity by addressing ambition, agility, and transparency.   This will help create predictability benefitting developing countries that want to create projects ready for this process and private investors that want to invest. The sense is that this issue is very complicated but extremely important to the success of increasing ambition sufficient to avoid our pending disaster.