Most carbon offset programs have established “buffer reserves” to address the risk of GHG reductions being reversed.[1] Under this approach, offset credits from individual projects are set aside into a common buffer reserve (or “pool”), which functions as an insurance mechanism. Reserved credits can be drawn upon to compensate for reversals from any project. If a reversal occurs, credits are retired or canceled 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 offset 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 fuel treatments, and the use of conservation easements or other legally binding restrictions on land use). 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 present 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 out of a buffer reserve – then the landowner could face a strong incentive to harvest. Offset programs approach this issue in different ways. Some programs use buffer reserves only to compensate for natural disturbances and impose contractual obligations on landowners to compensate for any “avoidable” reversals (including reversals due to negligence or willful intent). Others will cover such reversals using buffer reserves, but will not issue further offset credits to a project until the reversal is remedied.
[1] The CDM is alone in issuing “temporary credits” for reversible GHG reductions. Under this approach, offset credits issued for these reductions expire after a predefined period (up to 30 years) and must be replaced with other emission reductions. 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 offset 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).