Most carbon crediting programs have established “buffer reserves” to address the risk of project reversal.[1] Under this approach, a portion of carbon credits from multiple projects are set aside into a common buffer reserve (or “pool”), which functions as an insurance mechanism. Buffer reserve credits can be drawn upon to compensate for reversals from any project with reversal risk. If a reversal occurs, credits are retired or cancelled from the buffer reserve on behalf of the project’s buyers. The number of credits a project must contribute to the buffer reserve is usually based on an assessment of the project’s risk for reversals. Over finite time periods, this approach can fully cover catastrophic losses affecting individual projects, as long as the buffer reserve is sufficiently stocked with credits from projects across an entire program.
Carbon crediting programs also encourage – or require – projects to reduce the risk of reversals. Some programs, for example, allow lower buffer reserve contributions if project developers implement risk mitigation measures (such as forestry projects that implement fuel treatments, and the use of conservation easements or other legally binding restrictions on future land uses). Other programs make reversal risk mitigation a requirement for eligibility.
Buffer reserves can effectively compensate for reversals due to natural disturbance risks — such as fire, disease, or drought affecting forests and soils. However, they run into a “moral hazard” problem if used to compensate for human-caused reversals, such as intentional timber harvesting.[2] If a landowner faces no penalty for harvesting trees for their timber value, for example – because any reversals caused by harvesting would be compensated for out of a buffer reserve – then the landowner could face a strong incentive to harvest. This would be a classic example of an “uninsurable” risk that would quickly compromise the effectiveness of a buffer. Because of this, most crediting programs are careful to place the primary responsibility for compensating intentional reversals on project developers. However, not all crediting programs have equally credible mechanisms for enforcing these obligations. Some do so through legal contracts, for example, while others simply withhold future credit issuances – which may not be effective if a developer simply “walks away” from a project after an intentional reversal.
[1] The CDM is alone in issuing “temporary credits” for reversible GHG reductions. Under this approach, carbon credits issued for these reductions expire after a predefined period (up to 30 years) and must be replaced with other avoided emissions credits. This approach effectively guarantees permanence if it is enforced (whether the CDM’s administrative structures will be maintained in the future is an open question). However, it has faced significant hurdles, not least because it puts the onus for ensuring permanence on carbon credit buyers. As a result, buyers have been far less willing to pay for these credits, and the market for them has been largely non-existent.
[2] See Murray et al. (2012).