For project types where lack of permanence is a significant risk, all major carbon offset programs have mechanisms to address this risk and compensate for it (see Permanence). Thus, buyers of carbon credits generally bear little risk themselves related to the reversibility of emission reductions. Nevertheless, buyers should be aware that there is always at least some risk that the insurance mechanisms established by programs to cover reversals may fail, and credited emission reductions for these projects may effectively be impermanent. If non-expiring credits are purchased anyway, then buyers should examine a project’s circumstances and management practices to determine whether these risks have been minimized. Recommended due diligence questions include the following.
For any project type…
- Is there a possibility of an emissions “reversal” due to project failure? Unless a project involves carbon storage of some kind (e.g., sequestering carbon in trees), a reversal of emission reductions is highly unlikely. In theory, however, a “reversal” occurs any time GHG emissions rise above what they would have been in a project’s baseline scenario. A hypothetical example would be where a solar panel and battery storage system is used to provide electricity to a building, allowing it to operate off the grid (and avoiding grid-based electricity emissions); however, the solar panel fails and a backup diesel generator is brought in to provide power instead, causing more emissions than would have occurred in the baseline using grid electricity. Technically, this would lead to a “reversal” of any prior emission reductions. Such circumstances will be rare, but for some project types it may be worth evaluating the risks. Buyers should steer clear of projects with these kinds of “failure-induced reversal” risks.
For project types where permanence is a particular concern…
- What is the magnitude of the project’s reversal risk (e.g., as calculated in accordance with program standards)? Most carbon offset programs require forestry and land-use projects to develop a project-specific assessment of reversal risks (e.g., taking into account the likelihood of natural disturbances, management or financial failures, etc.) Although programs usually take this risk into account when insuring against reversals, carbon credit buyers may still prefer projects with lower risks. If a program does not require a project-specific risk assessment, buyers should request one as part of their due diligence.
- Does the project have a formal plan for managing and reducing reversal risks, and is this plan being followed? High-quality carbon sequestration and storage projects will have management plans in place to help lower the risk of any reversals. These plans may cover physical measures like thinning or other treatments to reduce the risks of fire and disease in forests; financial management practices to reduce the risk of project failure or bankruptcy; and/or easements, legal restrictions, or other measures to guard against over-harvesting or land conversion. Often, carbon offset programs will require that such plans be in place. For carbon credit buyers conducting due diligence, it is nevertheless a good idea to review such plans and evaluate their implementation and effectiveness. Important review questions include:
- Have the project owners allocated sufficient staff and budget to maintain the project’s intended impact?
- Are implementation partners responsible for management and maintenance contractually obligated to perform these prolonging duties?
- Is the project in good financial standing? Is there a prospect of financial instability or bankruptcy?
- Do you trust the offset program’s insurance or “buffer reserves”? Most major offset programs have insurance mechanisms in place to compensate for reversals. Usually, these take the form of “buffer pools” or reserves stocked with offset credits contributed by projects subject to reversal risk (e.g., forestry projects). Programs differ, however, in how they determine the required contribution of each project. They also differ in the extent to which they cover “intentional” reversals (e.g., those due to overharvesting or land conversion) or just “unintentional” ones (e.g., reversals due to natural disturbances). A full comparison of offset programs’ insurance mechanisms is beyond the scope of this guidance. As an offset credit buyer, however, you may wish to familiarize yourself with the policies of the programs whose credits you buy and decide you are comfortable with their ability to compensate for any reversals.