Guide to Carbon Credit Buffer Pools
What is a carbon credit buffer?
The intended purpose of a buffer pool is to act as a safeguard to ensure the integrity of previously issued credits. In simple terms, the buffer pool can be thought of as similar to an insurance policy that seeks to ensure that each carbon credit will deliver 1 ton of CO2 emissions removals or avoidance, even if some carbon stocks are unexpectedly lost.
In practice, this ensures projects cannot sell a carbon credit for every single unit of CO2 emissions that are removed or avoided. The total number of credits the project is permitted to sell is equal to the net emissions reductions or removals minus the buffer contribution and any other deductions. A portion of carbon credits generated by nature-based carbon credit projects is set aside and placed in a “buffer pool” or “buffer reserve” instead of being sold. Buffer credits can be canceled from the pool if a “reversal” takes place, with the aim to ensure the integrity of previously issued credits.
A reversal refers to the release of emissions that were previously removed or avoided by the project to the extent that the integrity of previously issued credits is called into question. Reversals can be driven by both human and natural causes including logging, forest fires, and droughts. Buffer pools are typically only used for nature-based carbon credit projects, which have a more material risk of reversal than technology-based solutions.
How does the buffer work?
The 4 biggest registries, Verra, Gold Standard, ACR and CAR all use buffer pools. However, their design and implementation varies slightly between registries and nature-based carbon credit project types.
How are buffer pools structured?
The buffer pool is managed by the registry and can either contain buffer credits from all projects within the registry program in a single combined pool, often divided by project type, or can be individually linked to specific projects.
What happens if carbon stock is lost?
Not all losses of carbon stock in a project area will result in credits being canceled from the buffer pool. Credits will not be canceled from the buffer pool if, on a net basis, the project has avoided or removed emissions during a crediting period.
If there is not a net loss of carbon stock at the next verification, and the project has delivered more emissions reductions or removals than have been lost, buffer pools are not used.
If there is a net loss of carbon stock at the next verification, credits can be canceled from the buffer pool. However, depending on the registry, some alternative actions can be taken which include:
- Future sales of credits can be correspondingly reduced
- Unsold credits can be canceled
- An equivalent number of carbon credits can be purchased from within the same registry but may be from a different project type
If the loss of credits is extreme, and exceeds the project’s individual contributions to the buffer pool or the project is terminated, the liability of the project varies.
- Some registries, like ACR require the project to either procure credits from another project or cancel credits from the buffer pool, equal to the total number of credits ever issued by the project.
- Verra on the other hand, requires credits to be canceled from the buffer pool only. In an extreme case, where a project is terminated early or does not submit a verification report for 15 years, the total number of credits ever sold by the project will be canceled from the buffer pool.
What happens if a project consistently performs well or reduces its non-permanence risk score?
If a project registered in Verra’s VCS program performs well, a small portion of the project’s buffer credits can be returned to the project.
Up to 15% of the project’s buffer pool credits can be released if the project performs well over a 5 year monitoring period by either decreasing its risk score or not drawing from the buffer. This can only occur at least 5 years after the credits were verified.
Assuming a project contributed 10% of credits into the buffer pool, a 15% release would only equate to 1.5% of the verified emissions reductions. As this is such a small share, the project may prioritize implementing activities that reduce the reversal risk of emissions reductions over reclaiming such a small number of buffer credits.
How are contributions to the buffer pool determined?
Contributions to the pool are either a standard flat rate that may be subject to change (i.e. 20% for Gold Standard) or determined on a risk-adjusted basis by project with minimum thresholds set by registries (i.e. Verra >10%). Buffer pool contributions are either made directly from the project’s issuance or, in the case of ACR and Gold Standard, the project proponent can input credits from another project.
Where contributions are determined on a risk-adjusted basis, the contribution required for a specific project is based on the results of non-permanence risk assessments, carried out during each monitoring period. In the case of some registries, like Verra, a project’s contribution to the buffer pool per issuance can go up or down over time depending on specific project level risks during each monitoring period and after a project has been required to cancel credits from the buffer pool.
Verra’s non-permanence assessments reflect the risks to carbon stocks stemming from:
- Internal risk factors including: project management activities, financial viability, the opportunity cost to not keep carbon stocks stored, time remaining on the project
- External risk factors including: land tenure and ownership rights, full prior informed consent, regional governance
- External natural factors including: fire, pests and disease, extreme weather
Where buffer pool contributions are linked to project specific non-permanence risk assessments, projects are incentivized to limit their contributions to and use of the buffer pool in order to maximize the number of credits they can sell, and therefore revenue.
Taking an example of the above, where a project has had to cancel credits from the buffer pool due to fires in the project area. In these cases, the future share of credits a project contributes to a buffer pool can vary according to the level of action they take.
No or little additional action is taken to mitigate the risk of future wildfires:
- The risk to the project’s carbon stock may be raised during the next monitoring period
- The project may need to submit a greater share of credits to the buffer pool in the future, thereby reducing the number of credits a project can sell
Significant action is taken to mitigate the risk of wildfires at a cost to the project (i.e. addition of monitoring towers for rangers to spot fires):
- The risk to the project’s carbon stock may be held constant or even be reduced if additional response measures counteract the previously increased risk
- The share of credits contributed to the buffer pool may be held flat or decrease
Are buffer pools sufficiently robust?
The size of the buffer pools relative to the number of credits issued varies by registry. As of the end of November 2022, Verra’s VCS currently has 65 million credits available in the buffer, just over 6% of the 1 billion credits issued. There have not been many instances where the buffer pool has been drawn on.
Whilst buffer pools are intended to ensure the integrity of all previously issued credits, there are some concerns with their ability to do this.
1. The size of the buffer pool relative to the number of carbon credits may not be sufficient to protect against catastrophic losses.
- Analysis by Carbon Plan, investigated the impact of the 2020 Lionshead Fire in Oregon and estimated that the impact on a single project could erode between 4-11% of the total buffer pool of California’s carbon market. Although risks are diversified between projects, a few catastrophic events could compound this impact and severely erode the buffer pool.
2. For VCS REDD+ projects, losses will only be accounted for appropriately if the baseline is not inflated.
- REDD+ projects will only draw on the buffer pool if there is a net loss that exceeds the emissions in the baseline (business as usual) scenario. If the baseline is inflated, a very significant loss could occur and not be appropriately accounted for, thereby undermining the quality of previously issued credits. However, this is somewhat mitigated as inflated baselines result in inflated contributions to the buffer pool.
3. In some registries, credits can be purchased from other projects and project types, that may not be of equivalent quality, instead of being removed from the buffer pool.
- The quality of carbon credits is not uniform across the market. We recently reported that 25% of the REDD+ projects we have rated fall into our lowest rating category, Tier 3, indicating they have a very low likelihood of avoiding 1 ton of CO2 per carbon credit.
- Projects are incentivized to purchase the lowest cost credits, which may be of lower quality. In the case of Gold Standard, this can include credits from Clean Development Mechanism (CDM) projects, which aren’t required to contribute to a buffer pool.
What is being done to improve the robustness of buffer pools?
As with many elements of the VCM, increased scrutiny is being placed on the design and operation of buffer pools. In turn, registries and market bodies, like VERRA and CARB, are taking steps to update buffer pool requirements and non-permanence risk modelling to reflect the latest scientific thinking.
This, combined with steps forward on MRV technology, broader improvements to certification methodologies and the development of insurance products for carbon credits, should increase the robustness of carbon credits and buffer pools going forward.
The importance of permanence risk assessments
The level of scrutiny directed toward the quality of carbon credits used by corporates is increasing. Given potential limitations to the robustness of buffer pools under evolving climate risks, some buyers require an additional understanding of the risks facing credits they’ve invested in.
This is why Sylvera provides an independent reversal risk assessment via our permanence score and monitors project performance closely over time. Our permanence score assesses the likelihood and severity of natural risks that could impact the project, including fire, drought, pest, storm and flood risk, using in-house climate modeling. Risks stemming from human activities such as project structure, community engagement, and regional political and socioeconomic risks, are also assessed. This provides additional context to buyers looking to purchase high-quality carbon credits.
Contact us to find out more.
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