Webinar and Q&A: Promises made, promises kept: How NBS developers can guarantee credit delivery obligations in offtake agreements

On January 16, we discussed delivery risk mitigation in carbon offtake agreements, and how carbon credit developers can keep up with the latest shifts in managing under-deliveries in their contracts. The recently released Symbiosis Coalition RFP made clear that the VCM's largest buyers are taking delivery risk seriously - and that developers should have a plan for how they intend to guarantee their minimum required credit volumes. This webinar brought together insurance, legal, and market experts to explore how these evolutions in buyer expectations are redefining delivery risk management for carbon credit developers.

https://youtu.be/roPCQmvWVNI?feature=shared

Webinar Q&A

1. What is wrong with holding an internal buffer of credits, considering you will still receive the excess credits post-verification, which can then be sold on the spot market?

There are a couple reasons why in-kind insurance is more efficient than holding credits in an internal buffer to mitigate delivery risk:

• First, internal buffers are less effective from a risk management perspective. While CarbonPool’s insurance can compensate for losses of all severity, including catastrophic losses that cause a large or total loss to a project, internal buffers are only good for the number of credits that are set aside. In practical terms, if a developer sets aside 30% of project credits as an internal buffer, then any loss above 30% will exhaust that buffer. CarbonPool’s insurance, by contrast, can compensate for total losses.

• Second, by being able to sell more of those credits in your buffer (by holding insurance rather than buffering as high), developers can generate more revenue upfront.

• Third and finally, by holding onto credits to sell later, developers are taking significant market risk. Selling credits upfront allows developers to lock in prices. It may certainly be the case that the price of carbon credits goes up in the future and that credits held in an internal buffer may be worth more later as prices rise. It also may be the case that the price of carbon credits goes down. By holding onto credits to sell later, developers are taking on that market risk themselves. By contrast, by selling those assets upfront, and insuring them, the developer exacts their full value.

  
  

2. How are the insurance premiums calculated by CarbonPool? What factors do you take into account? Do you look at prices in the VCM market, rating of the project, etc.?

Insurance premiums are calculated based on two factors:

1. The price of procuring the replacement credits we will use to compensate clients in the event of a loss, and our view of project risk.

2. CarbonPool forms its view of project risk via our Carbon Risk Model, a bottom-up model developed by our team of client scientists and forestry experts that takes a range of factors into account. Projects are run through the Model 100,000 times to form a probabilistic determination of the project’s likely shortfall and/or reversal, as well as the likely severity of those occurrences. CarbonPool does look to rating agency ratings as a supplement to our modelling outputs, but they are not determinative.

3. How do you see the different roles of pre-issuance project ratings by ratings agencies and insurance?

Project ratings by ratings agencies can help buyers and investors with pre-purchase due diligence, especially with regard to project design, project developer experience, and social/community engagement. Another valid indicator of project risk is its insurability and the insurance premium level, coming from a player with skin in the game, and which can richly complement the assessment of rating agencies on those risks that are covered by insurance. However, while a rating can sort the good projects from the bad, it cannot stop a wildfire. This is where insurance really comes in. CarbonPool’s insurance, which can be taken out by anyone in the value chain, can help compensate for losses due to unexpected events, be it flooding, pests and disease, failure to thrive, or other perils.

4. I think CarbonPool only tackles insurance projects with countries within the OECD. Is this true?

No. CarbonPool can insure anywhere in the world subject to Swiss law.

However, for the time being we are focusing our investments for replacement carbon credits in OCED countries as well as Brazil, to minimize political and social risk.

5. What is the rationale for CarbonPool only investing in projects in OECD countries and Brazil? Does this not limit the scope of the projects that backstop the in-kind insurance, and thus increases the cost of the insurance as well, no?

Only investing in OECD countries, as well as Brazil, helps CarbonPool lower the political and social risks to our pool of replacement credits. As an insurance company that will be held to strict solvency requirements by the Swiss regulatory authority FINMA, CarbonPool must ensure that our credits’ exposure to shortfall, reversal, reputational, and political/social risks are as low as possible. Availability has so far been sufficient, and we have not seen an increase in insurance premiums due to the geographic scope of our investments. However, that geographic scope may widen as the regulatory frameworks in other jurisdictions mature.

6. Can a buyer refuse the replacement credits offered and instead seek an inflation-adjusted payout?

Yes, CarbonPool can offer a cash-based payout should the insured party wish for cash and not credits as compensation.

7. What happens to the communities involved in the development of a project? Can they be covered?

CarbonPool does not have a cover specifically to compensate for risks to communities. However, our insurance does indirectly impact communities expecting to receive returns from the project. By ensuring that developers can deliver on their commitments to buyers, CarbonPool is also helping developers—and thus, their community beneficiaries—receive the full amount they were expected to be paid by their offtake agreements and avoid financial penalties for non-delivery as a result.

8. Does CarbonPool, or anyone in the carbon insurance space, have third-party ratings, e.g. from AM Best? Or is this line of insurance still too nascent?

As an insurer supervised by the Swiss insurance regulator, CarbonPool will have the same solvency requirements, i.e., its ability to pay claims and remain in business, as all other Swiss insurance and reinsurance companies. If and when CarbonPool decides to enter credit arrangements of significant size, it will seek a credit rating from external agencies such as AM Best.

9. Where there are project developers managing multiple projects, as a buyer, what would you consider easier/more feasible to do: build into contracts a clause asking for equivalent deliveries from other projects in the project developer portfolio, or take out insurance? If the former, what is the advantage of insurance?

Many under-delivery clauses do require project developers to compensate with credits from other projects in their portfolio. However, this poses the same inefficiencies as an internal buffer, in that developers must put their supply towards compensating for an under-delivery rather than selling on those credits and receiving the profit from them, and do not benefit from the far wider diversification efficiency that an insurer can bring. By putting cash towards an insurance premium instead of paying in credits to compensate for losses, developers can ensure that they are covered for losses and they can maximize returns for themselves, their communities, and their investors.

Conclusion

Delivery risk in carbon offtake agreements is a growing concern for both project developers and buyers as the Voluntary Carbon Market continues to evolve. Traditional methods—such as holding large internal buffers—come with practical inefficiencies and market risk, making in-kind insurance a compelling alternative. By mitigating potential project shortfalls, securing financial returns, and offering resilience even in catastrophic scenarios, in-kind insurance can help developers confidently meet their obligations and maximize revenue. For buyers, this approach reduces the uncertainty surrounding carbon credit delivery and ensures smoother contract fulfillment. As market expectations rise, turning to robust delivery risk solutions—like CarbonPool’s in-kind insurance—can pave the way for more sustainable, transparent, and financially secure carbon projects worldwide.

Article by: Nandini Wilcke