Insuring against variability in the performance of Nature-Based Climate Solutions

Nature-Based Climate Solutions supply carbon benefits in exchange for much-needed funding, but their credibility is challenged by the inherent variability in net drawdown (i.e., additionality) from carbon sequestration or avoided emissions, and the risk of future releases (impermanence). We recently showed how project developers can gain credibility by conservatively anticipating that all net drawdown is eventually released following a release schedule, issuing additional credits if reality is less pessimistic than projections. This paper computes optimal release schedules using ex post observations of drawdowns, balancing the competing interests of generating credits evaluated as being more permanent with limiting the risk of negative additionality. We study this approach using Monte Carlo simulations of both theoretical and real-life projects and discuss how our approach incentivises project performance. By resolving the trade-off between a credit's permanence rating and risk reduction, our approach provides a pragmatic solution to a key challenge facing project effectiveness.