INTERNATIONAL AVOIDED DEFORESTATION OFFSET PROJECTS: INSURING THE RISK OF REVERSAL PENALTIES

Ken Allinson, University of North Carolina at Chapel Hill

Abstract

The paper explores the potential for insurance with respect to avoided deforestation offset projects, as they represent a significant potential for low-cost emission reductions. The paper first reviews recent legislation proposed at the US Federal level, including the American Clean Energy and Security Act, and suggests subtle but significant changes to the legal language to improve transparency for companies operating in the carbon market – specifically that a reserve pool be required and that insurance be allowed. The paper then presents a detailed financial analysis (using national figures from Ghana as a hypothetical case study), exploring the viability of insurance from the perspectives of both an insurance firm and a project developer. Lastly, the authors discuss how an insurance model might be implemented, including measures to control risk and reduce insurance premiums.