Advancing Effective and Equitable Crediting for Natural Climate Solutions : Mitigating Credit Transaction Risk Through Contract Design

Natural Climate Solutions (NCS) have the potential to provide one-third of the climate mitigation needed to limit global warming to well below 2 degrees. But to achieve this goal, investments in NCS need to rapidly scale up, including private sector investments. Private actors seeking to engage in NCS credit transactions will encounter a variety of risks related to market dynamics and market perceptions. The design of of NCS carbon credit agreements, also known as emission reduction purchase agreements (ERPA), presents a major opportunity to mitigate these risks. This paper considers five types of risks that can be managed through contractual design: generation, delivery, reversal, price, and reputational risks. Sections 2 and 3 discuss the landscape of actors and entities involved in NCS contracts as well as the incentives for buyers and sellers under various classes of contractual structures. Section 4 provides specific tools and opportunities for addressing risks. Many of the risks discussed in this paper are not unique to NCS transactions; some of these insights may therefore also serve as a helpful reference for de-risking emissions credit transactions more broadly