Verra Pilots Non-permanence Risk Management: Implementing Insurance and Funds
This article is an automatically translated version of the original Japanese article. Please refer to the Japanese version for the most accurate information.
Source: Verra, "VCS Program Durability Pilot to Address Non-permanence Risk: Overview and Application Process" (link)
Overview
Verra will launch a three-year pilot program for insurance and fund-based approaches as new methods for non-permanence (reversal) risk management within the VCS Program. This initiative aims to offer Project Developers diverse risk management options, replacing the traditional Buffer Pool system, and to respond to the evolving Voluntary Carbon Market (VCM).
Key Points
1. Introduction of New Risk Management Approaches
In addition to contributions to the traditional Buffer Pool, Verra will test two alternative approaches, insurance and fund-based, during the three-year pilot period. This will allow Project Developers to expand their non-permanence risk management options and implement flexible responses tailored to project characteristics.
2. "Innovation" Label and Market Impact
Verified Carbon Units (VCUs) using alternative approaches will be affixed with an "Innovation" label. While these VCUs are currently not eligible for the Integrity Council for the Voluntary Carbon Market (IC-VCM) Core Carbon Principles (CCP) label or the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) label, the IC-VCM has indicated the possibility of accepting such innovative approaches in the future.
3. Strict Requirements and Reversal Response
Pilot participating projects must meet strict risk assessment criteria using the Non-Permanence Risk Assessment Tool (NPRT). If a Reversal occurs, remediation through the Retirement of alternative VCUs is mandatory. If not remediated, Verra program measures such as the suspension of additional VCU Issuance or account suspension will be applied.
Background
Previously, Verra's VCS Program adopted a centralized Buffer Pool system, funded by contributions from Project Developers, to manage non-permanence risk in AFOLU and Geological Carbon Sequestration (GCS) projects (i.e., the potential for carbon stored by projects to be re-released into the atmosphere in the future). However, in recent years, VCM market participants have shown growing interest in more diverse and flexible risk management mechanisms, such as insurance products and permanence funds. This pilot was launched to respond to these market demands, maintaining the integrity of Carbon Credits while providing Project Developers with more suitable risk management methods, thereby promoting the sustainable growth and efficiency of the VCM.
Details
Pilot Program Overview
- Duration: 3 years
- Covered Approaches: 1) Insurance, 2) Fund-based approach
- VCU Label: VCUs using alternative approaches will be affixed with an "Innovation" label. Currently not eligible for IC-VCM CCP and CORSIA labels.
- Background: To meet the need for diversification of non-permanence risk management in the VCM.
Project Eligibility Criteria
Pilot participating projects must meet the following criteria:
- Application of NPRT: Apply the Agriculture, Forestry and Other Land Use (AFOLU) or Geological Carbon Sequestration (GCS) Non-Permanence Risk Assessment Tool (NPRT).
- Risk Thresholds:
- Overall risk score for AFOLU projects must not exceed 60, and for GCS projects, must not exceed 7.
- Total internal risk for AFOLU projects must not exceed 35, total external risk must not exceed 20, and total natural risk must not exceed 35.
- Additional Conditions for AFOLU NPRT v5.0:
- Project duration must be a minimum of 40 years.
- Financial payback period must be within 20 years.
- Historical frequency of natural risks affecting 70% of project carbon stocks must be less than once every 10 years.
Minimum Requirements for Alternative Approaches
| Approach | Requirements Overview |
|---|---|
| Insurance | - Regulated insurer with investment-grade rating - Minimum 3 years of non-permanence risk cover - Clearly specified AFOLU or GCS NPRT risk categories - VCU exchange process triggered by Verra notification - Minimum liability amount equivalent to the total volume or value of VCUs issued during the insurance period - Verra is not responsible for the costs of acquiring or maintaining insurance - Documents must be in English |
| Fund-based | - Held in an investment-grade bank - Fees set per VCU Issuance, with justification provided - Certificate of financial capacity from an independent financial institution - VCU exchange process triggered by Verra notification - Disclosure of governance safeguards to prevent fund mismanagement - For GCS projects, distinguish between post-injection site care funds and non-permanence risk management funds |
| Common | - Use ratings from major credit rating agencies (e.g., S&P Global, Moody's, Fitch) |
Loss Events and Reversal Procedures
- In the event of a loss: Project Developers have a reporting obligation to Verra, and the Long-Term Monitoring System (LTMS) will also be utilized.
- Upon confirmation of a net Reversal: Affected VCUs will be marked as "reversed" on the Verra Registry and proportionally allocated among all VCU holders.
- Reversal Remediation:
- Remediated by the Retirement of alternative VCUs.
- Projects that previously contributed to the Buffer Pool can be proportionally remediated by a combination of Buffer Credits and alternative VCUs (e.g., of a total of 1500 issued VCUs, 1000 from the Pool, 500 from insurance. If a 250 tCO2e Reversal occurs, 167 will be remediated from the Pool and 83 from insurance).
- If not remediated: Transfer, Retirement, or Cancellation of affected VCUs is not possible. Suspension of additional VCU Issuance. Potential for Verra to implement account suspension measures.
Application Process (Expression of Interest - EOI)
- Required Documents: Project Developers must submit a 1-3 page Expression of Interest.
- Content to be Included: Motivation and objectives for participation, project overview (including activity category and location), selected alternative approach, Vintage to be included in the pilot, presence or absence of past Buffer contributions, and next Verification due date.
- Supporting Documents: Evidence supporting the chosen approach, such as insurance certificates or financial institution documents (to be submitted concurrently with the EOI or at a later date).
- Submission: Continuously accepted by Liz Guinessey (eguinessey@verra.org).
Conclusion
This pilot program represents a significant step for Verra in exploring innovative approaches to non-permanence risk management and enhancing the maturity of the VCM. By offering diverse risk management options, it aims to encourage Project Developer participation, respond to market needs, and further strengthen the integrity and Durability of Carbon Credits.