Buffer Depletion Protection Cover
Protecting Carbon Standards’ buffers against depletion
There is increasing recognition that integrating insurance as a tool to strengthen buffer pool safeguards can build trust in the integrity and resilience of buffers, particularly in the face of increasing climate-related reversal risks.
All buffers face a risk of outlier loss that diminishes their solvency and ability to meet outlined expectations for buyers of carbon credits. It is possible that an extreme number of losses could deplete the buffer past its ability to perform its function.
Buffer Depletion Protection Cover provides:
A creditworthy protective wrap against depletion of the buffer pool
A backstop against unexpected loss and security to counterparties
Clarity as to how losses are addressed and compensated – outlined in a legally binding and regulated contract
How does Buffer Depletion Protection Cover help Carbon Standards?
What benefits does it provide?
a creditworthy financial backstop, offering resilience in the face of outlier loss and protecting against default;
efficiencies of scale around risk modelling, data analysis and MRV;
increased liquidity and third-party assessment of fungibility between credits by providing additional management of risk-assessed buffer contributions;
a smoothing strategy to help manage the downside risk of unexpected failure (where actual losses are higher than those modelled);
confidence that investors (i.e. carbon buyers) will receive expected returns; and
certainty of contractual expectation for underlying asset owners (i.e. carbon sellers).
What does it do?
Buffer Insurance operates as a creditworthy wrapper, protecting the buffer in the instance of unexpectedly high loss levels that might lead to a buffer depletion past comfortable levels.
For established buffers, this insurance protects against the core risks of reversal and other non-permanence events that could lead to undesirable levels of depletion.
For establishing buffers, there is the additional risk of not achieving critical mass – where early-stage projects don’t achieve the carbon sequestration projected, thus damaging the buffer’s ability to manage near-term liquidity risk. For these newer buffers, the insurance increases financial resilience and provides a backstop in the case of catastrophic loss, reducing the risk that the buffer won’t hit critical scale or could default in the timeframes required for carbon stores to grow.
