Can Permanence be Insured? Consideration of some Technical and Practical Issues of Insuring Carbon Credits from Afforestation and Reforestation

Greenhouse gas (GHG) removals by afforestation and reforestation project activities under the Kyoto Protocol's Clean Development Mechanism (CDM) are vulnerable to a variety of risks and uncertainties, resulting in the partial or total reversal of such removals. Hence, GHG removals from these sink activities are considered to be of temporary nature and non-permanent. Specific modalities related to non-permanence will need to be developed in order to include afforestation and reforestation project activities under the CDM and for a decision on modalities to be reached at COP 9 in December 2003. Two main options on how to address non-permanence have been proposed, these being temporary credits and insurance of emission reduction credits. This paper discusses the practicality and potential difficulties of the insurance approach for addressing non-permanence of sequestered carbon stocks and the validity of CERs generated. The insurability of CERs or non-permanence is considered against common insurability criteria. The marketability of the insurance product and several technical questions in relation to developing this new market instrument are asked. In addition, inequities likely to arise if the approach is adopted as a mandatory modality are discussed.