Request Free Trial
August 10, 2023

VCM’s overlooked insurance system against ‘reversed’ emissions removals

Wildfires and other unforeseen events can destroy an offsetting project, reversing the removal of carbon emissions in the process. (Photo: Benjamin Fanjoy/Bloomberg)
Wildfires and other unforeseen events can destroy an offsetting project, reversing the removal of carbon emissions in the process. (Photo: Benjamin Fanjoy/Bloomberg)

Carbon credit registries maintain ‘buffer pools’ in the event that emissions removal is reversed by weather events. But some in this space remain unconvinced.

Voluntary carbon markets, which offer carbon emitters a way to offset their emissions by buying credits from carbon-reduction projects, should adhere to the principle of “permanence”. This is to ensure that the greenhouse gas emissions reductions they achieve are preserved, even in the event that unexpected natural disasters cause a sudden reversal.

To combat the reversal of emissions reduction caused by extreme weather such as wildfires and drought, carbon-credit certifiers like Verra and the American Carbon Registry maintain credit reserves to draw upon, known as buffer pools.

The design of these pools varies across different programmes, and contributions of credits to the pools are set either at a fixed percentage or on a risk-adjusted basis. For example, in California’s carbon market – the largest in North America – forestry offset projects usually contribute 15–20 per cent of their total credits to the buffer pool, according to consultancy Carbon Plan. 

As well as achieving permanence, VCMs are expected to adhere to the concept of “additionality”, where credits can be demonstrated to secure a net environmental benefit and a real reduction in greenhouse gas emissions.

Stress testing plans

As part of a bid to build confidence in the market, the Integrity Council for the Voluntary Carbon Market plans to begin stress testing buffer pools later this year.

Under Verra’s rules, credits from its buffer pool can be released back over time where perceived risks to projects have been mitigated.

Verra senior director of nature-based innovation Candace Vinke tells Sustainable Views: “We’ve been continuously improving as we’ve learned things. So far there has not actually been very many reversals – there’s only been a handful – because most of the time when there’s a loss event, those projects have been able to absorb it.”

Verra will soon release a new tool to help it consider future climate change impacts as part of its assessments.

Meanwhile, ACR says its buffer pool is unique in that it specifically only covers “unintentional reversals” – these being natural disasters beyond a landowner’s control – and also it does not refund buffer pool contributions over time.

“The most obvious consideration in building a robust buffer pool is proper capitalisation, in terms of total and relative contributions, as well as diversification of project type and geography,” ACR forestry programme director Kurt Krapl tells Sustainable Views. 

“If the buffer is pooled across projects, the number and types of projects insured and their geographic distribution should be considered,” he adds. To date, ACR says it has not had to draw on its buffer pool.

Not everyone is convinced. Jess Roberts, vice president of ratings at consultancy Sylvera, believes that while “things are trending positively” for the market, the quality of credits in buffer pools are of concern, since not all credits are fungible from a risk perspective.

The small size of buffer pools is another problem for her. “It’s very likely that a few catastrophic events in large projects could in theory wipe out the entire buffer pool and leave several other projects without this insurance mechanism against reversals,” says Roberts.

No universal approach

In July, the ICVCM released a new framework setting out the criteria for carbon-crediting programmes to qualify for its core carbon principles label, and has pledged “periodic stress-testing” of buffer pools as part of this framework. It has yet to determine, however, how to carry out these stress tests.

“We’re not at the point where we could say clearly ‘we know how this is done’,” ICVCM expert panel co-chair Pedro Martins Barata told Sustainable Views in July. “Nobody has done it.” In order to do it, he added, they would need “the participation and the information coming from the carbon-crediting programmes – so we are keen to have that set out”.

Verra has conducted a stress test before and plans to do another in the next couple of years, using an external consultant. “Initiatives like ICVCM bring standardisation to the market, and that is beneficial to this space as a whole, by setting this quality threshold for all of us to reach,” Verra’s Vinke says.

“In permanence specifically, there are a few changes that we will need to make, but not many. I think our buffer pool is largely in alignment with what [ICVCM’s] expectations are,” she adds.

ACR believes that only the largest of natural disturbances would trigger a carbon stock loss big enough to constitute a reversal, owing to the size of many of its projects and their annual growth. 

“Differing programmes have different requirements and nuances, so it should be expected that stress testing may not lend itself well to a universal assessment procedure,” Krapfl says. “For programmes that have long-standing projects, past performance can provide useful information on buffer pool robustness.”

Quantifying reversal risk

Among buffer pools’ sceptics is also Carbon Market Watch policy lead Gilles Dufrasne. He tells Sustainable Views: “Buffer pools are, for sure, an imperfect way of dealing with the issue of permanence.

“There’s a fundamental issue with the idea of saying we are going to create a system that enables [us] to create this fungibility between carbon that’s stored in biological things, for example, and things that are by nature very much subject to reversal risk – and we’re going to say this is equivalent to reducing emissions,” he says.

“It’s just not credible to state that these human-managed structures are going to continue to be operated for [the length of time] we need, [which] would be multiple centuries… I don’t think it’s credible for anyone to say, ‘OK, in 2200 we’re still going to have Verra managing its buffer pool’.”

Dufrasne emphasises the importance of accurately quantifying reversal risk, “ideally conservatively quantified so that there will be enough credits going to the buffer pool”. 

He believes the market today is not really delivering on that, and that many projects are underestimating risk. Buffer pools could find themselves in a position where they “can’t really function, even from a technical perspective, because they just don’t have a sufficient amount of credits in them”, he warns. 

Dufrasne also hits out at the quality of credits within buffer pools, observing that a big share of REDD+ credits – which aim to reduce emissions from deforestation and forest degradation – are of low quality, and therefore undermine the integrity of buffer pools containing these credits.

VCMs – and their buffer pools – will need to evolve in order to regain the confidence of the wider investment community.

In March, Verra said it would end its current rainforest offsets scheme by mid-2025 after an investigation by the Guardian, Die Zeit and SourceMaterial. After analysing “a significant proportion of Verra projects”, the investigation claimed that 90 per cent of rainforest credits do not amount to actual carbon reductions.

Sylvera’s Roberts doesn’t believe that buffer pools have become much more sophisticated over the years “because one of the key challenges of the carbon market is to make it accessible for all actors in a wide range of countries”. 

However, while VCMs are considering how to improve their approach to permanence, market participants do not appear to be considering the strength of buffer pools when buying credits, according to one programme.

“Even with this year’s extensive wildfires and extreme weather events, our exchange participants are not mentioning buffer pool adequacy as a factor influencing credit-buying decisions,” Henrik Hasselknippe, chief operating officer at spot carbon exchange Xpansiv, tells Sustainable Views.

A service from the Financial Times