21 September 2022
BeZero’s carbon risk factor series: Non-permanence
Following previous insights on additionality, over-crediting and leakage, the fourth article in our risk factor series explores non-permanence. The BeZero Carbon Ratings team unpack the critical components of assessing non-permanence and the different safeguards implemented across registries. They draw on BeZero’s database of over 250 carbon credit projects to explain how non-permanence risks affect carbon credit performance.
Non-permanence is the risk that the carbon avoided or removed by a project does not remain so for the duration committed to. Assessing the degree of such risks promotes comparability across sectors.
BeZero assesses non-permanence by interrogating the appropriateness of employed safeguards and the degree of information risk associated with a carbon project, alongside other risk drivers where relevant.
For NBS projects, we find no clear relationship between our assessment of non-permanence risks and the extent of buffer pool contributions. We explore some of the drivers behind this.
Permanence is often discussed in the market as the length of time a given amount of carbon will be stored for, whether through removal or avoidance by a project. In the case of some removals projects, this can theoretically stray into the hundreds, if not thousands, of years.
While much of the commentary on this topic focuses on how permanent a given technology or project type may be in theory, there is less focus in the market on the permanence of the contractual commitment of a given project and its issued credits.
A key role of the BeZero Carbon Rating (BCR) is bridging this gap between theory and reality. This is particularly pertinent to the risk of non-permanence.
A full assessment of these risks requires an understanding of: 1) how long is actually committed to ensuring the carbon avoided or removed remains so, 2) the mechanisms in place to guard against any losses, and 3) the strength and accuracy of the claims made.
The information required to make an assessment of these three factors is not always readily available in the market, as we will go on to show in this article. At BeZero, we are working hard to encourage greater transparency and disclosure of key data points such as the commitment period and the mechanics of any insurance mechanisms in place, whether operated by the project, registry or another entity.
What is Non-permanence?
Non-permanence is “the risk that the carbon avoided or removed by the project will not remain so for the time committed and any associated information risk”. Given that commitment periods vary from sector to sector, evaluating non-permanence is a complex issue which demands both top-down and bottom-up analyses. By making assessments of the likelihood that a project’s carbon benefits will remain for the duration of its commitment period, it is possible to level the playing field and enable comparability across the market for different project types.
Mitigating non-permanence risks is vital in ensuring that the Voluntary Carbon Market (VCM) acts as a truly effective long-term form of climate action. If such risks - whether human or natural - are not addressed, carbon can be re-emitted and undermine a project’s carbon benefits, resulting in reversals.
Market participants have given increasing attention to the risk of non-permanence in recent years, and it is an issue where the risk level varies considerably. The security of carbon removed or avoided by Nature-based Solutions (NBS) projects is particularly at threat, due to a host of natural and man-made risks. This has been highlighted by a number of recent high-profile reversal events, such as wildfires within North American project boundaries. Meanwhile, technology-based avoidance projects face no risk of reversal, at least from a theoretical perspective.
Where fire and drought are pertinent to a project's non-permanence assessment, we use remotely-sensed burned area and fire detection data developed by NASA, alongside satellite-derived climate models, to help assess the risk. Meanwhile, our team is spearheading new ways to track and classify fire events in near real time.
Below we explore the key factors which determine non-permanence risks across the VCM, including projects’ commitment periods, their degree of associated information risk and the safeguards put in place to mitigate risks. We go on to look at how these considerations relate to the BeZero Carbon Ratings (BCR) framework, through examples drawn from the 250+ projects rated so far.
Key factors when assessing risk of non-permanence
To break down our assessment of non-permanence, we lay out the primary considerations and how they vary across different sectors and registries: commitment periods, information risks, and employed safeguards.
1. Commitment Periods
In order to make an assessment of a credit’s non-permanence risks, it is first necessary to determine the time period a credit commits to, and then whether the credit faces reversal risks. Commitment periods are the duration over which sequestration or abatement activities have permanence horizons, and differ from crediting periods (the timeframes during which reductions or removals are eligible for issuance as verified carbon credits).
For example, Verra's Verified Carbon Standard (VCS)-registered projects which fall under NBS are required to assess risks at a permanence horizon of up to 100 years. However, across registries there is a lack of standardised terminology relating to how measurement, reporting and verification (MRV) is conducted over multi-decadal timescales, as highlighted in Table 1.
2. Risks and safeguards: Sectoral variation
Types of non-permanence risks and countervailing safeguards depend on a project’s sector. Some of the risks which commonly threaten the permanence of both NBS and non-NBS projects are presented in Table 2, along with possible safeguards which act to lower risks.
3. NBS buffer pool requirements
Procedures for assessing and mitigating non-permanence risks also vary across the main market accreditors. Gold Standard (GS) requires all NBS projects to make a fixed contribution of 20% towards a pooled risk buffer. VCS, on the other hand, requires that such projects undertake an independent and bespoke risk assessment to determine the proportion of its credits which must be transferred to a global buffer pool.
The use of a buffer pool can serve to mitigate unforeseen losses in carbon stocks. We consider projects registered under VCS to follow best practice, given the requirements that both internal risks (e.g. project management) and external risks (e.g. natural hazards) are quantified and accounted for. Projects registered under Climate Action Reserve (CAR) also require an independent risk assessment, however this involves many ‘default’ risk factors which can lead to project-specific details not being considered. Meanwhile, the American Carbon Registry (ACR) has a buffer pool, yet also permits the use of a variety of insurance mechanisms. These can include bonds and letters of credit, and are designed to act as proof that a project developer could cover the costs of sufficient credits to offset a reversal event.
For NBS projects, understanding how and why buffer pool contributions are made is vital for making non-permanence assessments, especially since there is strong evidence of risk buffer rules not always being fully implemented. We will address this specific issue in more depth in a future article on buffer pool mechanisms.
4. Information risk: The importance of reliable data
Another key part of assessing risk of non-permanence is gauging a project’s exposure to information risk, i.e. the reliability of the data used to report carbon performance. A project’s commitment and enforceability is significantly linked to the reliability of the information used, and though it is particularly relevant for projects with no technical risks of reversal, it remains a key component of our assessments across every sector.
BeZero’s assessments of information risks are informed by the degree of publicly available data provision, its quality, and its sources. We first determine the degree of information risk from a top-down perspective, with possible sources of such risks deriving from data uncertainties at a national level.
Since many projects employ national datasets for credit issuance calculations and when determining non-permanence risks, it is important to assess the extent to which such data are accurate and reliable. To provide an indication of this, we use public data such as the World Bank Property Rights Index (WBPRI) and the Corruption Perceptions Index (CPI) as proxies for government effectiveness, and help in determining the veracity of national datasets.
The top-down analysis is then corroborated with a project-specific assessment. This involves interrogating project documentation and ascertaining whether the information provided is comprehensive, and thus effective in mitigating information risks.
For example, information risks can be lowered for technology-based avoidance projects if data are made publicly available pertaining to financial assessments, revenues from electricity sales and adopted emission factors, among others. This process enables a full assessment of project-specific information risks, related to sector, methodology or registry, in addition to information risks linked to the broader country effects.
1. Credit type: Technology-based avoidance
Since there are no inherent risks of reversal for technology-based avoidance credits, such as renewables or enhanced oil recovery, evaluating the non-permanence associated with such projects relies on determining the degree of information risk
This assessment may be top-down, where the information is accessed from external sources such as national data, or bottom-up when the information comes from internal project-specific sources - or a combination of both.
2. Credit type: Removals
For removals, on the other hand, the length of a project’s commitment period and appropriateness of safeguards - such as buffer pool contributions - are crucial for this assessment, alongside information risks.
The primary risks for technology-based removals are physical, i.e. leakage from geologic reservoirs. In contrast, the types of risks typically associated with NBS removals projects range from natural hazards such as wildfires and pests, to political risks and land tenure issues. As noted above, for NBS projects, a portion of credits are deposited into a global buffer pool to mitigate such risks, yet with different requirements from the major registries these contributions vary.
To provide an accurate evaluation of non-permanence risks, it is vital that the suitability of applied risk assessments is interrogated at the project-level. This allows for bespoke analysis which considers the scope and relevance of a project’s risk assessment and corroborates this with peer-reviewed literature and other independent sources (e.g. fire analysis), to determine whether a buffer pool contribution is sufficient.
Mapping Non-permanence in the BCR universe
Across the VCM, the degree of non-permanence risk depends on both external and internal hazards, the safeguards in place and the sources of information risks. We reflect the varying degrees of risk using the following language, from highest risk to lowest risk: ‘significant risk’, ‘notable risk’, ‘some risk’ and ‘little risk’.
A key insight from our universe of rated NBS projects is the weak relationship between a project’s risk buffer contribution and its non-permanence score. Our analysis therefore finds that non-permanence risks are not wholly mitigated by a project’s buffer pool contributions. This highlights the need for a more in depth assessment of the non-permanence risks faced by a project than the headline buffer pool contribution.
Our analysis demonstrates that non-permanence risks vary considerably across registries. Within our universe of rated NBS projects, CAR- and ACR-registered projects typically hold the lowest risks, and projects under GS and VCS have the highest.
Given that VCS employ, in our view, more robust measures relative to CAR and ACR, this reveals that even a high or project-specific risk buffer contribution does not always negate non-permanence risks. Therefore, non-permanence risk levels are not entirely determined by such contributions, underlining the need to consider broader factors such as information risks concurrently.
The examples of CAR and ACR help to illustrate some of these other drivers. The low risk level for projects under these North American registries is at odds with recent scrutiny they have faced due to reversal events caused by wildfires. However, the projects highlighted for reversal events are a small subset in high fire risk areas, and are thus not representative of all NBS projects under CAR and ACR. A large number of the projects attached to these accreditors within our BCR universe, on the other hand, are based in areas with lower fire risks.
Projects under these North American registries typically conduct bespoke risk assessments, of which only a small and often default proportion is assigned to fire risk. Therefore, despite the buffer contributions for fire risk buffers in the recently publicised instances being largely depleted, the overall risk buffers may still be effective safeguards.
Moreover, our analysis of non-permanence also takes into consideration factors such as the presence of conservation easements, project management and financial risks and information risks related to data veracity. These factors may support a project’s activities to continue beyond its commitment period and between any change in landowners. For example, projects with conservation easements may permit salvage logging and replanting in the event of a reversal. We also consider how a buffer pool contribution evolves, since projects are required to raise their contribution in the case of a reversal event. These factors further illustrate that it is inappropriate to view buffer pools as the sole proxy for non-permanence risks.
Chart 2 reveals considerable variation in buffer pool contributions along the BeZero Carbon Rating risk levels. The small number of outliers represent projects which are not required to make buffer pool contributions e.g. reducing methane emissions through the use of feed additives, while those with significant buffer pool contributions and high non-permanence risks hold information risks due to data uncertainties.
The lack of a strong relationship alludes to two converse possibilities - where buffer pool contributions do suffice as a risk predictor or that the extent of a buffer pool contribution alone doesn't determine non-permanence risk. We find that both of these factors are in play within our universe of projects rated:
In cases of reversal events, projects increase their risk buffer contributions to prevent under-capitalisation of global pools and this response can be reflected as lower risk.
Our view of non-permanence holistically considers all possible risk drivers, including information risks and other possible safeguards such as easements and management risks, beyond the risk buffer dynamics.