Is Your Carbon Offset Program 10-K Ready?

Under new SEC and California state regulations, a growing cohort of listed US companies must disclose climate-related information — including their use of offsetting, and associated risks — in their financial filings. While the SEC has paused the implementation of the rules for the time being due to legal challenges, Corporate finance and risk departments are still getting up to speed to understand the new reporting requirements by fast-approaching deadlines, the first California regulations having entered effect already.

Understanding your risks is the first step towards managing them. The typical carbon credit faces potential danger from three directions. Do you know them all?

According to some studies, nearly one-third of California’s forestry offsets may have been over-credited and nearly all project reserves have been destroyed by climate change-induced wildfires (Source). Carbon credit risks are real — but they’re not insurmountable.

Reversal: Carbon once captured can be re-released into the atmosphere. The most common example is a forestry project that falls victim to wildfire, but each project type is vulnerable to a wide variety of reversal risks — from illegal logging activity, to changing land uses, to faulty storage technology, and more.

Additionality and Over-Crediting: One credit should represent one metric ton of carbon removed or avoided relative to a ‘baseline scenario’. The project developer may calculate that scenario incorrectly — for instance, failing to prove that a forestry project prevented deforestation — or issue more credits than there has been carbon removed.

Improper Practices or Adverse Impact: From project inception to credit retirement, there extends a long value chain of third-party participation — from project developers, to local partners, to third-party validators, and more — which compounds the risk of potential accounting fraud or negative-impact practices that may disqualify the project. 

If a verification body identifies one of these risks, the project may fail and the associated credits be impaired.

Why Should You Care?

Alongside each offset-related disclosure mandated by the SEC, companies must address carbon-credit risk in some format. In other words, carbon credits — and their associated risks — are about to be yanked out of the shadows and submitted to the stark spotlight and heavy scrutiny of capital markets. Documented in regulatory filings and financial reports, carbon-credit risk assessments by companies will inform corporate risk assessments by investors and the general public. 

Required Disclosure Associated Risks
(i) the amount of carbon avoidance

The number of metric tons of carbon removed or avoided  could have been calculated incorrectly (additionality risk).

The amount of carbon removed or avoided may change (reversal risk).

(ii) the nature and source of the offsets or RECs The third parties involved in the creation, validation, or management of the offset project may have weak governance which may lead to risks (Improper Practices or Adverse Impacts).
(iii) a description and location of the underlying projects; 

The project location may be in a geography with political risk which could lead to improper crediting (Over-crediting Risk).

The community where the project is located may be negatively impacted in some way (Adverse Impact Risk).

(iv) any registries or other authentication of the offsets or REC The registry may change its view on the project, place it on hold, or revise the methodology used to issue the credit (Invalidation Risk).
(v) the cost of the offsets or RECs. The price of the offset may change dramatically.

 

Risk Mitigation Meets Risk Management

Carbon credits, like any other asset, carry inherent risks. They can be mitigated but never eliminated fully. Carbon insurance helps you manage them. Protected by dedicated insurance, you can insulate your offsetting program against the risk of failure, while reassuring your regulators and stakeholders that you have gone the extra mile on climate-related risk.

Reputational Risk Management: For shareholders seeking reporting transparency, carbon insurance communicates, in universal terms, that your offsetting claims are credible and credits high quality. 

Financial Risk Management: Oka pays out a cash settlement in the event of project failure, ensuring that a metric ton of carbon purchased is always worth one metric ton of carbon removed. Secure your capital expenditure.

Speak with a member of our team today to find out how Oka can help you secure your decarbonization strategy and capital investment.

Build Your Carbon Credit Insurance Portfolio

Connect with one of our experts to secure your carbon investments.

Corresponding Adjustment Protect™

An insurance solution that protects the risks of an authorized credit losing its Article 6 authorization due to the Corresponding Adjustments not being applied or LoA revocation by the host country.

Carbon Protect™

An insurance solution the provides financial compensation in the event of unforeseeable and unavoidable post-issuance risks to ensure carbon credits.