Alternative approaches for addressing non-permanence in carbon projects: an application to afforestation and reforestation under the Clean Development Mechanism

Afforestation and reforestation (A/R) projects generate greenhouse gas (GHG) reduction credits by removing carbon dioxide from the atmosphere through biophysical processes and storing it in terrestrial carbon stocks. One feature of A/R activities is the possibility of non-permanence, in which stored carbon is lost though natural or anthropogenic disturbances. The risk of non-permanence is currently addressed in Clean Development Mechanism (CDM) A/R projects through temporary carbon credits. To evaluate other approaches to address reversals and their implications for policy and investment decisions, we assess the performance of multiple policy and accounting mechanisms using a forest ecosystem simulation model parameterized with observational data on natural disturbances (e.g., fire and wind). Our analysis finds that location, project scale, and system dynamics all affect the performance of different risk mechanisms. We also find that there is power in risk diversification. Risk management mechanisms likewise exhibit a range of features and tradeoffs among risk conservatism, economic returns, and other factors. Rather than relying on a single approach, a menu-based system could be developed to provide entities the flexibility to choose among approaches, but care must be taken to avoid issues of adverse selection.