WO2012142464A1 - System and methods for insuring forest-related carbon credits - Google Patents

System and methods for insuring forest-related carbon credits Download PDF

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Publication number
WO2012142464A1
WO2012142464A1 PCT/US2012/033595 US2012033595W WO2012142464A1 WO 2012142464 A1 WO2012142464 A1 WO 2012142464A1 US 2012033595 W US2012033595 W US 2012033595W WO 2012142464 A1 WO2012142464 A1 WO 2012142464A1
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forest
frccs
insurer
insurance
carbon credits
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PCT/US2012/033595
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French (fr)
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Michael O. Hill
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Hill Michael O
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    • G—PHYSICS
    • G06—COMPUTING; CALCULATING OR COUNTING
    • G06Q—INFORMATION AND COMMUNICATION TECHNOLOGY [ICT] SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES, NOT OTHERWISE PROVIDED FOR
    • G06Q40/00—Finance; Insurance; Tax strategies; Processing of corporate or income taxes
    • G06Q40/08—Insurance

Definitions

  • the present disclosure relates to managing risks associated with carbon credits. More particularly, the present disclosure relates to insuring forest-related carbon credits ("FRCCs"). Specifically, the present disclosure describes methods and systems for insuring FRCCs in a manner not currently available and for periods of time in excess of those for which conventional insurance products would reasonably be expected to become available. The disclosure also includes arrangements for the use of additional features that may enhance the value of the forest-related assets (i.e., the forest tracts that create the basis for issuance of FRCCs). A system and method of implementing the insurance program are also provided.
  • FRCCs forest-related carbon credits
  • GHGs greenhouse gases
  • International trade in GHG reductions a form of emissions trading, is a large and expanding market.
  • Certain forestry activities have the potential to generate carbon reduction credits for sale on this market.
  • these forestry activities face several risks, and there is not a well-developed method to insure against or effectively manage these risks.
  • Emissions trading is used to control environmental pollution by providing economic incentives to reduce emissions.
  • a central authority typically a
  • a "carbon credit” is a generic term for any tradable certificate or permit, typically representing the right to emit C0 2 or another GHG.
  • One carbon credit is generally equal to one metric ton of C0 2 or, in some markets, C0 2 -equivalent gases.
  • Carbon trading is an application of an emissions trading approach. GHGs emissions are capped and then markets are used to allocate the emissions among the regulated sources.
  • Congress implemented an emissions trading system to control acid rain. Congress legislated a specific cap or limit on emissions— an aggregate emissions level for sulfur dioxide (and other pollutants) that produced acid rain. This emission level was distributed among major emitters who were then permitted to trade their allowances. This created strong incentives for those who could reduce emissions most cost-effectively to do so and to sell their allowances to those who could not. The resulting market in allowances is widely considered to have been a resounding success. In view of the success of the market in addressing the problem of acid rain, there is good reason to believe that Congress will legislate a comparable program for GHGs.
  • the Kyoto Protocol is the predominant framework for the global reduction of GHGs.
  • the Kyoto Protocol also contains a mechanism to facilitate the trading of GHG-reduction credits.
  • the United States did not ratify the Kyoto Protocol and Congress has not yet enacted a regulatory scheme for GHG reductions.
  • voluntary GHG reduction efforts continue in the US. Under these programs, firms or other entities voluntarily agree to hold carbon credits in order to offset some or all of their emissions.
  • VERs Voluntary Emission Reductions or Verified Emission Reductions
  • Voluntary Emission Reductions or Verified Emission Reductions are a type of credit that is exchanged in the voluntary or "over-the-counter" market for carbon credits.
  • VERs are usually certified through a certification process.
  • VERs are typically created by projects which have been verified outside of the Kyoto Protocol.
  • One VER is equivalent to 1 ton of C0 2 emissions.
  • VERs may be developed and calculated in compliance with one of several standards. These standards set out rules defining how emission reductions are measured for various carbon projects. Standards provide assurance for buyers of VERs. In theory, all VERs should be verified by an independent third-party to ensure their quality. One study found that the total size of the VER market in the United States was $73 million in 2009. Moore, Kim, U.S. Offset Supply Grows 13% in '09, POINT CARBON (Mar. 1 , 2010).
  • CAR Climate Action Reserve
  • CTRs climate Reserve Tonnes
  • the California climate Action Registry is a subsidiary program of CAR that was created by the State of California to promote and protect early actions to manage and reduce GHG emissions.
  • the California climate Action Registry established protocols to guide emissions inventories and an online tool, the Climate Action Registry Reporting Tool (CARROT), to serve as a central database for emissions reports.
  • CARROT Climate Action Registry Reporting Tool
  • CRTs are issued by CAR for GHG reductions from a project.
  • the quantity of CRTs issued for each GHG reduction project is specific to each project and is determined in a verification process.
  • the project's account holder pays the appropriate CRT Issuance Fee, the appropriate amount of CRTs are released into the account holder's primary CRT account. From this point, CRTs can be transferred into another CAR account holder's account, moved into one of the project account holder's accounts, or retired.
  • CAR Program Manual at 24-25.
  • CTR For a CRT to be transferred to another party, the receiving party must also have an approved account with CAR. There is a transfer fee of $0.03 per CRT, charged to the seller. All sales of CRTs happen "over-the-counter" between Buyers and Sellers, but the transfer of credits is conducted via software between the two account holders.
  • CAR Program Manual at 25. CRTs may be transferred to other GHG registries and offset programs under processes that are specific to each receiving registry or program.
  • CAR Program Manual at 26 If a CRT is sold to a final entity willing to offset its emissions, that entity become the "beneficial owner.” A beneficial owner has the right to use the reductions from the CRTs to offset the beneficial owner's GHG footprint.
  • CRTs may be "retired" to indicate that the emission reductions they represent have been used to satisfy a voluntary GHG emissions reduction claim or to offset other emissions. When a CRT is retired, it is taken out of circulation so that the CRT cannot be used to support any further claims (i.e., to offset any other GHG emissions).
  • CAR Program Manual at 26.
  • FRCC forest-related CRTs
  • FRCC forest-related CRTs
  • the term FRCC is used to apply to all carbon credits, whether CRTs or other carbon credits, that are generated as a result of forest activities or management.
  • CAR and other authorities at the present time three types of forest projects can generate FRCCs:
  • GHG reductions must also be in addition to any reductions that would have occurred in the absence of the CAR or Authority for GHG reductions generally. "Business as usual” reductions ⁇ i.e., those that would occur in the absence of a GHG-reduction market) are not eligible for registration. CAR Program Manual at 2.
  • Verified Forest projects must be verified by a third-party verification body before FRCCs may be issued and traded. Verification provides a reasonable level of assurance that the GHG reductions quantified and reported are materially correct. CAR Protocol at 72.
  • RGGI Regional Greenhouse Gas Initiative
  • each state has a C0 2 budget trading program that limits emissions of C0 2 from electric power plants, issues C0 2 allowances, and establishes participation in regional C0 2 allowance auctions.
  • RGGI issues FRCCs only for re-foresting land that has been out of tree cover for at least 10 years (known as "afforestation" under the RGGI Model Rule).
  • afforestation under the RGGI Model Rule.
  • GHG reductions are "reversed” if the carbon associated with them is released back to the atmosphere.
  • Reversals are classified as either unavoidable or avoidable. Related to CAR'S requirement for permanence (discussed above), unavoidable reversals result from agents that cannot be naturally controlled, such as fires, pests, drought, and wind. Avoidable reversals are those that occur as a result of controllable agents, such as human activity involving forest clearing or over-harvesting. A reversal is also considered avoidable if it is due to the forest project owner's negligence, gross negligence, or willful intent. CAR Protocol at 61. Other authorities have similar specifications.
  • the CAR Protocol requires compensation for the loss through the retirement of CRTs equal in GHG value to the amount reversed.
  • the CAR Protocol and many other authorities require that the original seller of the FRCCs (typically, the Owner) be responsible to compensate for a reversal. In these regimes, a Buyer is safe to assume that FRCCs it has purchased will always hold their offset value because the seller (again, typically the Owner) must guarantee against any reversal.
  • the CAR Protocol has established such a set aside, and it calls the vehicle into which the otherwise un-issued credits are set aside a "Buffer Pool.”
  • Buffer Pool is used broadly to refer to the system described in the CAR Protocol as well as similar systems that may be used by RGGI or other authorities now or in the future.
  • the Buffer Pool is a holding vehicle for CRTs that essentially provides security against reversals that may occur to FRCCs that have been issued. Each time CAR or a similar Authority issues FRCCs, a certain percentage of those FRCCs is contributed to the Buffer Pool. If an unavoidable reversal occurs, the Authority will compensate for the reversal on the forest project owner's behalf with FRCCs from the Buffer Pool. Under most authorities, if a reversal was avoidable, then the Owner must retire FRCCs at the Owner's expense.
  • the percentage of FRCCs that must be contributed to the Buffer Pool is based on the risk rating of the forest project, which is based on a risk analysis required by the Authority. The higher the risk of maintaining a particular forest project for the required time period (e.g., 100 years), the greater the number of FRCCs that are required to be contributed to the Buffer Pool. If a forest project's risk rating declines (i.e., if the project becomes less risky), the Authority may distribute previously withheld Buffer Pool FRCCs to the forest owner in proportion to the reduced risk.
  • the CAR Protocol and other authorities often require a detailed multi- risk factor calculation for determining the amount of FRCCs required to be placed in the Buffer Pool.
  • the required set-aside is based on the risk factor and ranges from 10% to an upper bound determined by the probability of reversals for the particular forest project(s).
  • the number of FRCCs required to be set aside under the CAR Protocol's Buffer Pool requirements varies with the characteristics of each project.
  • UNFCCC Subsidiary Body for Scientific and Technological Advice Land use, Land-use change and forestry: Definitions and Modalities for Including
  • the Carbon Reduction Corporation's product is expressly advertised as not being an insurance product. Thus, the Carbon Reduction Corporation's product is not subject to the regulations and government oversight that are characteristic of insurance products. The Carbon Reduction Corporation's operates only under the American Carbon Registry. As advertised, the Carbon Reduction Corporation's product is not flexible so as to be applicable to the needs of different Owners, Buyers, and authorities. It does not offer flexibility for different mechanisms for ownership of additional FRCCs that later may become associated with a forest project, nor does it address decision-making relationships with regard to forest management as it relates to the creation of additional FRCCs or management of current FRCCs.
  • Insurance is a method for risk management by which the uncertainty of losses for a group as a whole is reduced through the pooling of risks. Jenny P. Wong-Leung & Michael Ditschke, Can Permanence be Insured?
  • a viable insurance mechanism should preferably account for the full replacement value of loss FRCCs and for the full period of time it is maintained.
  • a method for insuring FRCCs against reversals.
  • FRCCs make up a portion of the reserves held by the insurer. In the event of a covered reversal, these reserves are used to compensate for the reversal.
  • the term of the insurance may be for periods up to 50 years or longer.
  • the insurance products of preferred embodiments of the present invention may be offered by a captive or non-captive insurer, with or without a fronting arrangement with a Traditional Insurer, and with or without the backing of a reinsuring insurer. It may be offered through any combination of a captive or non-captive insurer, and either with or without a fronting insurance arrangement or a reinsuring insurer.
  • Additional embodiments of the present disclosure include transferring the rights to any Additional FRCCs (that is, FRCCs that are based on the forest assets underlying the FRCCs originally issued and insured and that are issued after the beginning of the insurance policy). Further embodiments may also include transferring some or all of the rights to manage or to improve the forest asset, through the use of biochar or other forest management practices, during the term of the insurance.
  • Additional FRCCs that is, FRCCs that are based on the forest assets underlying the FRCCs originally issued and insured and that are issued after the beginning of the insurance policy.
  • Further embodiments may also include transferring some or all of the rights to manage or to improve the forest asset, through the use of biochar or other forest management practices, during the term of the insurance.
  • a computer system may be provided whereby the insurance may be applied for, underwritten, issued, and/or renewed through electronic communications.
  • FIG. 1 is a schematic diagram of the FRCCs issued for a forest project where 20% of the FRCCs are contributed to a Buffer Pool.
  • FIG. 2 is a schematic diagram depicting FRCC distribution for three forest project components, each subject to a 20% Buffer Pool contribution, with the remaining 80% of FRCCs issued to the Owners and available for sale.
  • FIG. 3 is a schematic diagram depicting the arrangement of FIG. 2, in which tract No. 3 suffers a reversal of FRCCs, drawing FRCCs from the Buffer Pool.
  • FIG. 4 is a schematic diagram depicting the arrangement of FIG. 3 in which tract No. 3 suffers a reversal of FRCCs, in which the reversal is insured based on a preferred embodiment of the present disclosure.
  • FIG. 5 is a is a schematic diagram depicting the arrangement of FIG. 3 in which each of tract Nos. 1 , 2, and 3, suffers reversals, in which the reversals are insured based on a preferred embodiment of the present disclosure.
  • FIG. 6 is a flowchart depicting the steps taken by various participants exercising the option of using an embodiment of the present disclosure, and also shows their options of doing so with or without also using the Buffer Pool.
  • FIG. 7 is a flowchart depicting the steps taken by the Insurer in an embodiment of the process of the present disclosure.
  • FIG. 8 is a flowchart depicting the steps taken by the Insurer in an embodiment of the process of the present disclosure.
  • Preferred embodiments of the present disclosure relate to providing insurance for FRCCs.
  • the system and method of the present disclosure may involve provision of insurance contracts to protect against losses of FRCCs.
  • FRCCs 200 are granted for certain forestry activities or for maintaining a forest over an extended period of time.
  • FRCCs 200 are granted for certain forestry activities or for maintaining a forest over an extended period of time.
  • a percentage of these FRCCs are currently set aside 210 and placed in a Buffer Pool 300.
  • the remaining FRCCs 220 are issued to the Owner (and are available for sale to Buyers).
  • the percentage of these FRCCs that is set aside 210 depends on the risk rating of the specific project.
  • Set-aside credits 210 placed in the Buffer Pool 300 provide reserves needed to guarantee that the issued FRCCs maintain their offset value in the case of a reversal in the forest project.
  • the risk rating of the forest project is 20%. Therefore, 20% of 100 FRCCs associated with a specific forest tract are placed in the Buffer Pool, and the remaining 80% are issued to the Owner. The Owner may then sell, transfer, or retain these remaining 80 FRCCs.
  • This structure may be repeated over a series of forest projects, as depicted in FIG. 2.
  • Project Nos. 1 , 2, and 3 each contribute FRCCs to the Buffer Pool 300 from set-aside FRCCs 210 based on each project's relative risk ratings. Additional forest tracts, not shown in FIG. 2, may also be involved.
  • FIG. 3 depicts a reversal 400 affecting Project No. 3 of 20 FRCCs
  • 20 FRCCs would have to be retired 310 from the Buffer Pool to compensate for that reversal. While the Project would be allowed to continue, continuance would be contingent upon the Owner's increasing, following the reversal, its contribution to the Buffer Pool.
  • FIG. 4 depicts a comparable scenario to that shown in FIG. 3.
  • insurance 500 provides the requisite security for the losses resulting from a reversal by using reserve FRCCs 510.
  • FIG. 5 depicts a scenario in which several of the tracts suffer reversals and, in a preferred embodiment of the present disclosure, insurance 500 provides the requisite security for the losses resulting from the reversals.
  • Buffer Pool i.e., a mandatory FRCC set-aside for each project.
  • the size of the Buffer Pool contribution requirement varies, generally in proportion to each forest project's risk of reversal.
  • the present invention contemplates that, in certain preferred embodiments of the present invention, there may be no need for a Buffer Pool and that an insurance product will provide protection against loss of the issued FRCCs, either directly or through a fronting arrangement, and without or without reinsurance support.
  • some combination of Buffer Pool reserves and insurance may be employed to secure against reversals.
  • Other consideration e.g., cash
  • the Buffer Pool or similar mechanism is replaced or supplemented by a provider of an insurance product (hereinafter, referred to as an "Insurer").
  • the Insurer could be a non-captive or captive insurer, it is likely that the Insurer will, at least in the early years, be what is commonly referred to as a captive insurer.
  • Captive insurers often provide coverage that Traditional Insurers are either unwilling or unable to provide.
  • captives often provide coverage at a cost that is substantially lower than the cost at which Traditional Insurers might provide coverage.
  • a captive will offer products by itself; in others, a captive operates in coordination with a Traditional Insurer or other insurer (acting as a "fronting" company ... much like a guarantor), and/or in coordination with a reinsurer (acting, in effect, as an insurer to the captive to help the captive hedge some or all of the captive's risks).
  • a captive working with another insurer is known as a "fronting" relationship.
  • the captive pays a fee or other consideration to a fronting insurance company (typically one that is better known and/or that carries a higher rating from a third-party such as Standard & Poor's or A.M. Best) as an inducement for the fronting insurer to participate in the policy.
  • the fronting insurer acts in a way similar to a guarantor.
  • the fronting insurer issues the required policy on the fronting insurer's "paper" (so the insured has the guarantee from a well-known and highly-rated insurer) but the fronting company may rely on the captive (and its reserves) to cover much (if not the vast majority or all) of any losses incurred.
  • FIG. 7 Another example of a captive working with another insurer is through a "reinsuring" or “backing” relationship, in which the captive pays a premium to another insurer (in this instance known as a "reinsurer”) as an inducement for the reinsurer to share in some of the captive's risk.
  • the reinsurer in effect, provides insurance coverage to the insurer ⁇ i.e. , it insures insurers).
  • an insured's policyholder e.g., an Owner
  • a captive may coordinate with both a "fronting" insurer and with a reinsuring insurer.
  • the Insurer may hold as reserves some or all of the FRCCs that would otherwise be set aside and placed in a Buffer Pool.
  • the Owner or other person that bears continuing responsibility to replace a reversed FRCC may transfer to the Insurer some or all of the FRCCs that would otherwise be sent to the Buffer Pool.
  • the Owner may transfer some amount of cash or other consideration as additional premium.
  • the Owner In return, the Owner is insured against certain reversals to be described in the insurance policy (generally, these will be unavoidable reversals) of the covered FRCCs. The Owner is free to sell the FRCCs that are not transferred to the Insurer.
  • Preferred embodiments of the present disclosure employ highly correlated reserve and insured assets.
  • one benefit of providing the reserve in the form of the same type of asset being insured is that the value of the reserve FRCCs and of the insured FRCCs are highly-correlated. Because FRCCs are usually highly fungible and are typically equal to 1 ton C0 2 , the market value of one FRCC is virtually identical to the market value of another FRCC under the same Authority at any time.
  • the value of the reserve also appreciates, typically in lock-step or in an otherwise highly-correlated manner with the value of the insured asset. This provides security against increases and decreases in the cost of replacement FRCCs. Essentially, the value of the reserves rises and falls with the value of the insured asset, so that reserves of comparable value to the original asset are available throughout the period of time during which the reserves are relied upon as security.
  • An insurance product provided by an Insurer provides two advantages over a Buffer Pool. First, the insurance industry is subject to intense regulation, independent of any offset or cap-and-trade program or regulatory scheme. This provides additional financial assurance.
  • an Insurer is subject to continuing market pressures to operate efficiently and to identify and price appropriate levels of risk throughout the life of the policy (which, again, can be on the order of 100 years). Insurers have a strong and continuing financial incentive to ensure that the insurance product being offered will be economically sustainable as a going concern.
  • the Insurer is uniquely capable of understanding the risks posed by a new type of product, namely, FRCCs. This needed insurance product has proven too novel and/or otherwise difficult (e.g., because of valuation uncertainties and duration requirements) for Traditional Insurers to provide but they may be willing to share some of the risk by entering into fronting agreements with the Insurer given the valuation and other protections inherent in the present embodiment.
  • Biochar is the carbon-rich product produced when biomass (such as wood, manure, or crop residues) is heated in a closed container with little or no available oxygen. It can be used to improve agriculture and the environment in several ways. Its stability in soil and superior nutrient-retention properties make it an ideal soil supplement (i.e., enhancer) to increase crop yields.
  • Biochar sequestration in combination with sustainable biomass production, can be carbon-negative and, therefore, can actively remove C0 2 from the atmosphere. This has major implications for mitigation of climate change.
  • Biochar production can also be combined with bioenergy production through the use of the gases that are given off in the pyrolysis process. "Biochar may represent the single most important initiative for civilization's environmental future.” Our Choice: A Plan to Solve the climate Crisis, p. 219 (quoting Australian climate Expert Tim Flannery). "There is one way we could save our, and that is through the massive burial of charcoal.” Id. (quoting UK climate Expert James Lovelock). "Climate change seems an impossible problem. Impossible, that is, until one looks at the potential for biochar to permanently sequester atmospheric carbon.” Biochar for Environmental Management: Science and Technology, Editorial Reviews (quoting Chris Goodall).
  • FIG 6 depicts a flowchart of the method of a preferred embodiment of the present disclosure.
  • the order of the steps in the process is not critical. Several of the steps may be performed in another order or in concurrence with other steps. For example, the timing of certain events, such as the payment of the premium, is not critical. Documentation embodying certain of the process steps of the method of a preferred embodiment may be prepared and escrowed until the transaction closes.
  • the Insurer will engage in at least two primary insurance-related transactions, collection of premiums and payment of claims, but also will engage in additional reserve asset management transactions.
  • an Authority typically promulgates requirements for the issuance of FRCCs 600.
  • the Owner manages (and/or assures that it will manage) the forest property in accordance with these requirements 620.
  • the Owner then applies for qualification.
  • the Authority evaluates the project to ensure compliance with the Authority's requirements 610. If the evaluation is positive, the Owner secures qualification of the FRCCs 630.
  • the Authority then issues FRCCs to the Owner 650, and the FRCCs are received by the Owner 650.
  • Insurer and the preferred embodiment are approved by the appropriate regulatory or certifying authority ("Authority") as an approved insurance mechanism to provide security against reversals.
  • a forest project is approved and qualified for the issuance of FRCCs 630.
  • the number of FRCCs to be awarded is typically established 640, as well as the potential risk rating of the project. This is typically based on a detailed engineering study of the forest project.
  • the forest project then applies for the insurance product to insure the FRCCs it is to be issued.
  • the insurance application process typically proceeds after the project has been qualified, but the precise timing is not critical and both processes may proceed contemporaneously.
  • Insurer upon receipt of an application, Insurer typically performs any additional risk assessments of the project 700. If the insurance application is approved, the insurance contract is signed by the Insurer and Owner 680, and by any other entity whose involvement is necessary. The insurance premium is paid 680. Payment of the premiums is typically a condition subsequent.
  • the relative order of many of the steps of the method of a preferred embodiment of the present disclosure is not critical.
  • the Authority issues FRCCs to the Owner 640, and the Owner may transfer the required number of FRCCs to the Insurer 760. To avoid transactions costs, in an alternative embodiment the Authority may instead issue FRCCs directly to the Insurer.
  • the number of FRCCs required to be set aside is typically
  • Authority's and Insurer's own separate risk assessments adds a separate layer of protection to the Authority, Owner, and general public to ensure that sufficient FRCCs are set aside for the issuance of any FRCCs; this adds an additional policy benefit and therefore additional reason for regulators to favor the present embodiment.
  • the number of set aside (and reserved) FRCCs may also be dependent upon the amount of other consideration provided for the insurance, if any. A higher premium may result in a lower percentage of FRCCs to be transferred to the Insurer, whereas a lower premium may result in a higher percentage of FRCCs being transferred to the Insurer.
  • the Insurer can reasonably be expected to work closely with the Authority to ensure that sufficient FRCCs are set aside.
  • the Owner is free to sell and/or transfer the credits that have been issued to it, as it desires 670.
  • the Owner manages their forest property in accordance with FRCC requirements for the term of the credits 690.
  • the Owner files a claim 810 with the Insurer 820.
  • the Insurer conducts an investigation 830 to verify the loss. If the reversal is verified 850, the Insurer issues payment to the Insured 870 using FRCCs that the Insurer holds in reserve 860.
  • the Insurer will compensate for the reversal using FRCCs from its reserve.
  • the Insurer may issue a certificate of compensation or other document to the insured as proof that the reversal has been compensated if required by the Authority.
  • the separate and independent (because independently incentivized) risk assessment provided by the Insurer will provide additional protections to authorities, Owners and the general public that an adequate protection against reversals has been established.
  • the embodiment's unique approach by which its reserves will rise and fall in lock-step or near lock-step with the insured FRCCs ensures the availability of loss protection over time periods far longer than those otherwise available.
  • the Insurer in Example 1 holds as its reserves some or all of the FRCCs that would otherwise be placed in a Buffer Pool 660.
  • the Owner or other person that bears continuing responsibility to replace a reversed FRCC transfers to the Insurer some or all of the FRCCs that would otherwise be set-aside and placed in the Buffer Pool 660.
  • the Owner may transfer cash or other consideration as additional premium.
  • the Owner is insured against certain reversals (as described in the insurance policy; generally, these will be unavoidable reversals) of the covered FRCCs.
  • the Owner is free to sell the FRCCs that are not transferred to the Insurer as premium 670.
  • Insurer may take certain steps to offer the insurance.
  • the Insurer Upon receipt of an application, the Insurer typically reviews the application and additional facts relevant to the forest project and security being requested 700. Based on this review and evaluation, Insurer either rejects the application 720, approves it 730, or negotiates further with the applicant 710. This further negotiation, in turn, results in either rejection 720 or approval 730 of the application.
  • Insurer typically issues a "Bindable Quote.” If the Insurer's Bindable Quote is accepted by the applicant, the Insurer proceeds to issue an insurance policy 740. When the conditions for the policy are satisfied, the insurance policy goes into effect 750, typically contemporaneously with the sale of the FRCCs 670. Credits are transferred to the Insurer by the Owner 760. The Insurer then transfers the FRCCS to its reserve 770.
  • the Owner files a claim with the Insurer 810.
  • the Insurer processes the claim 820 and typically conducts an investigation 830. Based on the investigation, the Insurer either verifies the reversal (i.e., the insured loss) 850, or the Insurer denies the claim 840. If the Owner is not satisfied with a decision to deny the claim, the parties may dispute these decisions. If the loss is verified 850, Insurer uses the necessary number of FRCCS from reserve 860, and pays the claim 870 to Insured 880.
  • the Insurer uses its reserves to compensate for the reversal 860.
  • the risk resulting from insuring assets with a highly unpredictable market value is removed.
  • Owner transfers to the Insurer FRCCs and an amount of cash or other consideration as was the case in Example 1.
  • Owner In return, Owner is insured against reversals for the covered FRCCs.
  • Owner could, in return for a discounted premium or other consideration, grant to the Insurer the rights to any new or otherwise additional FRCCs.
  • FRCCs issued based on the same forest asset after the beginning of the policy.
  • Additional FRCCs may be generated as a result of certain management practices, a change in FRCC quantification standards, FRCCs being issued after a reversal as a forest regenerates, or any other reason that may result in the issuance of FRCCs subsequent to the beginning of the insurance policy.
  • the Insurer and Owner may voluntarily (i.e., without any prior commitment stemming from the insurance policy or otherwise) agree to terms by which the Owner, the Insurer, or a third-party would engage in certain management practices to create Additional FRCCs, and they may agree on a division of rights to those Additional FRCCs and other resulting assets.
  • Owner and Insurer may take the steps outlined in Example 1.
  • Owner transfers (as part of or concurrent with the original policy) to Insurer the rights to some or all Additional Credits (as is true in Example 2) and also transfers at that time the right to compel certain management practices designed to create Additional FRCCs.
  • Example 2 A significant difference between Example 2 and Example 3 is that, in Example 3, the Insurer is able to mandate certain practices that may result in the creation of Additional FRCCs. In return for this greater control with respect to future management practices, the Insurer would typically provide consideration, e.g., a reduced reserve and/or other premium contribution and/or the right to a pre- negotiated fixed percentage of any Additional FRCCs issued).
  • consideration e.g., a reduced reserve and/or other premium contribution and/or the right to a pre- negotiated fixed percentage of any Additional FRCCs issued).
  • Embodiments of the present disclosure may include a method or process, an apparatus or system, or computer software on a computer medium. It is intended that various modifications may be made without departing from the spirit and scope of the following claims.
  • the Insurer may independently purchase and agree to preserve forests and obtain credits for those forests, then use those credits as reserves.
  • An advantage of holding actual forests to back FRCC reserves is that forests are capable of regenerating. If a forest underlying reserves is destroyed, it may eventually be re-credited. Furthermore, after 100 years has passed, new FRCCs may be issued for the same forest. Thus, one forest can yield many iterations of FRCCs over time.
  • the Insurer may engage in active forest management of forests (or outsource this active forest management), employing techniques such as biochar to enhance the FRCC value of the forest and further increase its reserves.
  • the Insurer may provide premium discounts in exchange for the Owner's performance of active forest management techniques.
  • the Insurer may require entitlement to a set percentage of the additional FRCCs generated from this technique.
  • Embodiments of the present disclosure can be adapted to apply across various credit regimes and potentially to other types of credit-generating projects ⁇ i.e., not only forest projects). In other regimes where the Buyer of FRCCs may hold the burden of ensuring against reversals, this insurance mechanism can be applied in a very similar fashion.
  • the insurance can also be structured in a way that it covers some or all avoidable reversals, in addition to unavoidable reversals. This may result in a higher premium and/or a higher percentage of credits that may be necessary for the insurer to hold.
  • insurance terms may be less than 100 years (or more), and as short as 1 year.
  • insurance premiums and number of FRCCs to be contributed to the Insurer may also be reduced with the agreed requirement that the Owner pay a "reversal fee" (somewhat analogous to a "deductible” that a
  • a certain number of FRCCs in the Insurer's reserve may be transferred to the Owner (or its assignee) after a period of time if no reversals have occurred.
  • the insurance policy may require certain rights to FRCCs generated from land on which a reversal as occurred in order to compensate for its loss of credits (thus capitalizing on the regenerative quality of forests).
  • the Insurer may negotiate with the Authority or exchange entity in order to waive or reduce credit transfer fees (if they exist) when the transfers are part of an insurance agreement.
  • the Insurer may also retain forest acreage that it leases out directly to the insured as an additional or supplemental insurance mechanism.
  • the Insurer may, , in return, require the Owner to provide a substituting cash or other contribution ), and the Insurer may use that substituting contribution to buy or otherwise obtain substituting FRCCs or other carbon credits elsewhere to serve as reserves.
  • the Insurer may work with the Authority to offer some sort of combination Insurance and Buffer Pool risk mitigation product, wherein the Owner contributes both to a Buffer Pool and purchases insurance.
  • the above described embodiments can be implemented using software, hardware, or a combination of hardware and software.
  • the software may be stored on a computer readable medium, such as RAM, ROM, hard disk, CD- ROM, DVD, and flash drive. However, other storage mediums are also within the scope of the invention.
  • the software stored on a computer readable medium may be executed by a microprocessor, or any other circuit capable of electronically executing the software, in order to implement the above described embodiments.

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Abstract

In a preferred embodiment of the present disclosure, a method is provided for insuring forest-related carbon credits against reversals. The insurance term may be for periods far longer than those for which insurance products known prior to the present invention have been offered, and also to provide replacement coverage far more expansive than that which existing products have been offered. The insurance products bring with them regulatory oversight and other advantages not provided by non-insurance methods. Additional embodiments of the present disclosure include transferring to the insurer the rights to additional forest-related carbon credits that may be issued after policy inception based on the forest assets that are the subject of the originally insured carbon credits. Further embodiments may include transferring to the insurer some or all of the rights to manage the forest asset's carbon reduction effects.

Description

SYSTEM AND METHODS FOR INSURING
FOREST-RELATED CARBON CREDITS
BACKGROUND
Prior Application
[001] This application claims priority to a provisional application, by Michael O. Hill, Application No. 61/475,160, entitled, Systems and Methods for Insuring Carbon Credits Over the Internet, filed April 13, 2011 , which is incorporated herein by reference in its entirety, as if fully set forth herein.
Technical Field
[002] The present disclosure relates to managing risks associated with carbon credits. More particularly, the present disclosure relates to insuring forest-related carbon credits ("FRCCs"). Specifically, the present disclosure describes methods and systems for insuring FRCCs in a manner not currently available and for periods of time in excess of those for which conventional insurance products would reasonably be expected to become available. The disclosure also includes arrangements for the use of additional features that may enhance the value of the forest-related assets (i.e., the forest tracts that create the basis for issuance of FRCCs). A system and method of implementing the insurance program are also provided.
Background Information
[003] The carbon market is important for the reduction, sequestration, or removal (hereafter collectively referred to as "reduction") of greenhouse gases ("GHGs"). International trade in GHG reductions, a form of emissions trading, is a large and expanding market. Certain forestry activities have the potential to generate carbon reduction credits for sale on this market. However, these forestry activities face several risks, and there is not a well-developed method to insure against or effectively manage these risks.
[004] Traditional insurers (i.e., companies that are "admitted" to sell government-approved insurance policies, hereafter, "Traditional Insurers") have been unwilling or unable to provide the type of insurance necessary for these forestry activities due to a variety of factors. These include the inability to evaluate the loss potentials and related limitations, such as a demonstrated disinclination to offer coverage time periods that are sufficient or even near sufficient to provide the protections required (which currently run for as long as 100 years).
[005] Emissions trading is used to control environmental pollution by providing economic incentives to reduce emissions. A central authority, typically a
governmental entity, sets a limit or cap on the total amount of a pollutant that may be emitted. This amount of total emission is then allocated or sold to firms in the form of emissions permits, reflecting the right to emit or discharge a specific volume of the specific pollutant. The permits are also referred to as credits. Credits can also be purchased on a voluntary basis, without the mandate of a cap or other limit.
[006] The transfer of credits from one entity to another is referred to as a trade. In effect, the buyer of a credit ("Buyer") pays a charge for polluting; the seller of the credit is paid to reduce its emissions. Thus, in theory, this market-based mechanism enlists those who can reduce emissions most cost-effectively to do so. This achieves emissions reductions at the lowest overall cost to society. The goal of these market-based mechanisms is to allow markets to drive industrial and commercial processes toward lower emissions than would otherwise occur where there is little or no cost to emitting carbon dioxide ("C02") and other GHGs into the atmosphere.
[007] A "carbon credit" is a generic term for any tradable certificate or permit, typically representing the right to emit C02 or another GHG. One carbon credit is generally equal to one metric ton of C02 or, in some markets, C02-equivalent gases. Carbon trading is an application of an emissions trading approach. GHGs emissions are capped and then markets are used to allocate the emissions among the regulated sources.
[008] There are currently active trading programs for several air pollutants. For GHGs, the largest is the European Union Emission Trading Scheme. In the United States, there is a national market to reduce sulfur dioxide (a cause of "acid rain") and several regional markets pertaining to nitrogen oxide. Markets for other pollutants tend to be smaller and more localized. It is anticipated that these markets will grow and expand to a national or even international scale over time. Of increasing importance to global climate change is the emission of GHGs, primarily C02.
[009] In the 1990 Amendments to the Clean Air Act, Congress implemented an emissions trading system to control acid rain. Congress legislated a specific cap or limit on emissions— an aggregate emissions level for sulfur dioxide (and other pollutants) that produced acid rain. This emission level was distributed among major emitters who were then permitted to trade their allowances. This created strong incentives for those who could reduce emissions most cost-effectively to do so and to sell their allowances to those who could not. The resulting market in allowances is widely considered to have been a resounding success. In view of the success of the market in addressing the problem of acid rain, there is good reason to believe that Congress will legislate a comparable program for GHGs.
[010] Internationally, the Kyoto Protocol is the predominant framework for the global reduction of GHGs. The Kyoto Protocol also contains a mechanism to facilitate the trading of GHG-reduction credits. The United States, however, did not ratify the Kyoto Protocol and Congress has not yet enacted a regulatory scheme for GHG reductions. Despite this, voluntary GHG reduction efforts continue in the US. Under these programs, firms or other entities voluntarily agree to hold carbon credits in order to offset some or all of their emissions.
[011] In addition to this voluntary market, California has approved a mandatory carbon market scheme. This will go into effect in 2013. The goal of this regulatory scheme is to cut emissions in California to 990 levels by 2020— a 22% reduction from business-as-usual output. This is the United States' first multi-sector mandatory GHG reduction regulation. Other states may enact similar regulations, particularly in the absence of federal regulations.
[012] Carbon markets function by allowing entities, usually companies or individuals, to purchase credits from an investment fund or a carbon development company that has aggregated the credits from individual carbon projects that generate credits. Buyers and sellers can also use an exchange platform to trade credits. Purchasing these credits, whether voluntarily or through the mandate of regulations, allows the entities to offset their overall emissions.
[013] Voluntary Emission Reductions or Verified Emission Reductions (VERs) are a type of credit that is exchanged in the voluntary or "over-the-counter" market for carbon credits. VERs are usually certified through a certification process. VERs are typically created by projects which have been verified outside of the Kyoto Protocol. One VER is equivalent to 1 ton of C02 emissions.
[014] VERs may be developed and calculated in compliance with one of several standards. These standards set out rules defining how emission reductions are measured for various carbon projects. Standards provide assurance for buyers of VERs. In theory, all VERs should be verified by an independent third-party to ensure their quality. One study found that the total size of the VER market in the United States was $73 million in 2009. Moore, Kim, U.S. Offset Supply Grows 13% in '09, POINT CARBON (Mar. 1 , 2010).
[015] The carbon market has been expanding, and it is projected to continue to expand. There will be a need to increase the production of all carbon credits, including VERs, in order to meet this increasing demand. Ecosystem Marketplace reports that current suppliers predict that, by 2015, the demand for voluntary carbon reduction credits will vastly exceed the volume of credits that current suppliers forecast being available for sale. Ecosystem Marketplace, BACK TO THE FUTURE: STATE OF VOLUNTARY CARBON MARKETS 2011 , June 2011.
[016] One way to generate these additional VERs and other carbon credits is through forests. Through sustainable management, enhancement, and protection, the forest sector's unique capacity to sequester and store C02 can be used to generate VERs or other carbon credits. All current or future regimes, protocols, or other authorities that issue carbon credits are collectively referred to as "Authorities" throughout this application.
[017] Various national Authorities, such as the Climate Action Reserve ("CAR") in the United States, have developed programs that issue credits for various carbon offset activities. CAR has established regulatory-quality standards for the development, quantification, and verification of GHG emission reduction projects, and it issues carbon offset credits, which it refers to as Climate Reserve Tonnes ("CRTs") generated from these projects.
[018] The California Climate Action Registry is a subsidiary program of CAR that was created by the State of California to promote and protect early actions to manage and reduce GHG emissions. The California Climate Action Registry established protocols to guide emissions inventories and an online tool, the Climate Action Registry Reporting Tool (CARROT), to serve as a central database for emissions reports. Many offset programs, including CAR, also act as credit- regulating organizations that provide offset verification, track the transaction of credits over time, and facilitate the transfer of CRTs. The October 2011 CAR
Climate Action Reserve Program Manual is hereby incorporated by reference herein, in its entirety.
[019] CRTs are issued by CAR for GHG reductions from a project. The quantity of CRTs issued for each GHG reduction project is specific to each project and is determined in a verification process. Once a project is registered with CAR and the project's account holder pays the appropriate CRT Issuance Fee, the appropriate amount of CRTs are released into the account holder's primary CRT account. From this point, CRTs can be transferred into another CAR account holder's account, moved into one of the project account holder's accounts, or retired. CAR Program Manual at 24-25.
[020] For a CRT to be transferred to another party, the receiving party must also have an approved account with CAR. There is a transfer fee of $0.03 per CRT, charged to the seller. All sales of CRTs happen "over-the-counter" between Buyers and Sellers, but the transfer of credits is conducted via software between the two account holders. CAR Program Manual at 25. CRTs may be transferred to other GHG registries and offset programs under processes that are specific to each receiving registry or program. CAR Program Manual at 26. If a CRT is sold to a final entity willing to offset its emissions, that entity become the "beneficial owner." A beneficial owner has the right to use the reductions from the CRTs to offset the beneficial owner's GHG footprint.
[021] CRTs may be "retired" to indicate that the emission reductions they represent have been used to satisfy a voluntary GHG emissions reduction claim or to offset other emissions. When a CRT is retired, it is taken out of circulation so that the CRT cannot be used to support any further claims (i.e., to offset any other GHG emissions). CAR Program Manual at 26.
[022] Under CAR'S Forest Project Protocol ~ Climate Action Reserve, Forest Project Protocol 61 (Version 3.2, August 2010) ("CAR Protocol") - and other
Authorities, certain forest activities can be implemented to reduce emissions of C02 to the atmosphere, thus generating CRTs. These forest-related CRTs are included within the term FRCCs used throughout this application. The term FRCC is used to apply to all carbon credits, whether CRTs or other carbon credits, that are generated as a result of forest activities or management. Under CAR and other Authorities at the present time, three types of forest projects can generate FRCCs:
(1 ) reforestation— FRCCs issued for preservation of a forest that has had less than 10 percent of free canopy cover for at least ten years before being enrolled in the program with plans to allow the forest to regenerate;
(2) improved forest management— FRCCs issued for improved forest management at an existing forest above some baseline "business-as-usual" scenario; or
(3) avoided conversion— FRCCs issued for avoidance of deforestation of a forest suitable for alternative land uses of higher value.
[023] For an FRCC to be traded, it must meet extensive requirements. These requirements vary under different Authorities. There are five basic requirements of CAR applicable to all FRCCs and that are common to most Authorities: (1) permanent; (2) real; (3) additional; (4) verified; and (5) clear ownership.
[024] Permanent. Any forest project receiving any FRCCs for its GHG reductions is typically required to ensure that the reductions be maintained on a "permanent" basis. The CAR Protocol considers "permanent" to be 100 years. . Thus, for a forest carbon reduction to be considered permanent, the CAR Protocol requires assurance that the forest assets creating the reduction benefits (and thus backing the FRCCs) will last for at least 100 years. If the forest assets (e.g., trees) providing these reduction benefits are destroyed by fire, pests, drought or other causes (whether natural or caused by humans) before the 100 years is up, CRTs must be retired to compensate for the reversal because the assets creating the benefits no longer exist. This requirement applies regardless of when during the 100-year period the loss occurs. It also applies regardless of the market price of replacement CRTs at the time of the loss relative to the value of the original CRTs.
[025] Real. The CAR Protocol further requires that the FRCCs be real.
Specifically, the estimated GHG reductions should not be an artifact of incomplete or inaccurate emissions accounting. Climate Action Reserve, Program Manual, 2 (October 26, 201 1) ("CAR Program Manual"). FRCCs cannot be claimed if more accurate accounting reveals that emissions reductions are actually lower than anticipated.
[026] Additional. GHG reductions must also be in addition to any reductions that would have occurred in the absence of the CAR or Authority for GHG reductions generally. "Business as usual" reductions {i.e., those that would occur in the absence of a GHG-reduction market) are not eligible for registration. CAR Program Manual at 2.
[027] Verified. Forest projects must be verified by a third-party verification body before FRCCs may be issued and traded. Verification provides a reasonable level of assurance that the GHG reductions quantified and reported are materially correct. CAR Protocol at 72.
[028] Clear Ownership. Finally, only the registered project developer (hereinafter, "Owner"), and no other person, may be able to claim ownership of the GHG reductions. Owners must show proof of title and use of qualified conservation easements or deed restrictions. CAR Protocol Version 3.1 at 10-11.
[029] Under the CAR Protocol, the Owner must enter into a Project
Implementation Agreement, a contract between CAR and the Owner, before the FRCCs can be sold. These and other requirements are identified only as examples of the types of regulations certain Authorities apply and are not intended to limit or otherwise restrict the scope of the present invention.
[030] Other Authorities in the US, such as the Regional Greenhouse Gas Initiative (RGGI), have similar mechanisms by which FRCCs are issued. RGGI is a cooperative effort in the Northeast and Mid-Atlantic region of the US. RGGI has legislative support in nine states: Connecticut; Delaware; Maine; Maryland;
Massachusetts; New Hampshire; New York; Rhode Island; and Vermont. Through independent regulations of each state, based on the RGGI Model Rule, each state has a C02 budget trading program that limits emissions of C02 from electric power plants, issues C02 allowances, and establishes participation in regional C02 allowance auctions. Currently, RGGI issues FRCCs only for re-foresting land that has been out of tree cover for at least 10 years (known as "afforestation" under the RGGI Model Rule). However, it is anticipated that RGGI will soon issue FRCCs for other forest activities as well. [031] Under the CAR Protocol, GHG reductions are "reversed" if the carbon associated with them is released back to the atmosphere. Reversals are classified as either unavoidable or avoidable. Related to CAR'S requirement for permanence (discussed above), unavoidable reversals result from agents that cannot be naturally controlled, such as fires, pests, drought, and wind. Avoidable reversals are those that occur as a result of controllable agents, such as human activity involving forest clearing or over-harvesting. A reversal is also considered avoidable if it is due to the forest project owner's negligence, gross negligence, or willful intent. CAR Protocol at 61. Other Authorities have similar specifications.
[032] If a reversal occurs, the CAR Protocol requires compensation for the loss through the retirement of CRTs equal in GHG value to the amount reversed. The CAR Protocol and many other Authorities require that the original seller of the FRCCs (typically, the Owner) be responsible to compensate for a reversal. In these regimes, a Buyer is safe to assume that FRCCs it has purchased will always hold their offset value because the seller (again, typically the Owner) must guarantee against any reversal.
[033] The Buffer Pool. Because of the risk of unavoidable reversals associated with credit-generating forest projects, one mechanism used to secure against a natural loss of forest acres that form the basis of an issued credit is to set aside other preserved acres (which acres would not have their associated credits sold to third parties) and to use those set aside acres (with their own associated GHG reduction benefits) to replace any acres for which FRCCs have been issued but that have suffered reversals. The CAR Protocol has established such a set aside, and it calls the vehicle into which the otherwise un-issued credits are set aside a "Buffer Pool." In this application, the term "Buffer Pool" is used broadly to refer to the system described in the CAR Protocol as well as similar systems that may be used by RGGI or other Authorities now or in the future.
[034] The Buffer Pool is a holding vehicle for CRTs that essentially provides security against reversals that may occur to FRCCs that have been issued. Each time CAR or a similar Authority issues FRCCs, a certain percentage of those FRCCs is contributed to the Buffer Pool. If an unavoidable reversal occurs, the Authority will compensate for the reversal on the forest project owner's behalf with FRCCs from the Buffer Pool. Under most Authorities, if a reversal was avoidable, then the Owner must retire FRCCs at the Owner's expense.
[035] The percentage of FRCCs that must be contributed to the Buffer Pool is based on the risk rating of the forest project, which is based on a risk analysis required by the Authority. The higher the risk of maintaining a particular forest project for the required time period (e.g., 100 years), the greater the number of FRCCs that are required to be contributed to the Buffer Pool. If a forest project's risk rating declines (i.e., if the project becomes less risky), the Authority may distribute previously withheld Buffer Pool FRCCs to the forest owner in proportion to the reduced risk.
[036] The CAR Protocol and other Authorities often require a detailed multi- risk factor calculation for determining the amount of FRCCs required to be placed in the Buffer Pool. The required set-aside is based on the risk factor and ranges from 10% to an upper bound determined by the probability of reversals for the particular forest project(s). The number of FRCCs required to be set aside under the CAR Protocol's Buffer Pool requirements varies with the characteristics of each project.
[037] For at least a decade, insurance in the FRCC arena has been expressly called for. In 2002, the United Nations Framework Convention on Climate Change (UNFCCC) Subsidiary Body for Scientific and Technological Advice (SBSTA) recognized the potential for insurance to cover possible losses of carbon
reductions/sequestrations associated with forest projects in the carbon market. The UNFCCC contemplated that insurance may one day be a requirement for forest projects. UNFCCC Subsidiary Body for Scientific and Technological Advice Land use, Land-use change and forestry: Definitions and Modalities for Including
Afforestation and Reforestation Activities under Article 12 of the Kyoto Protocol in the First Commitment Period - Options Paper on Modalities for Addressing Non- permanence (24 Dec. 2002). Further, since at least 2008, CAR has expressly stated in its Protocol that insurance programs are "anticipated" to be developed to replace the Buffer Pool and to insure against reversals. Yet, to date, no such insurance products have been developed, offered, or sold.
[038] The carbon market is relatively young and, as such, the rules and regulations governing it are subject to change. The CAR Protocol is updated almost annually and is only one of a number of other similar carbon reduction regimes. Other Authorities in the United States have different requirements. RGGI has different offset rules and different, but somewhat comparable treatment of forest losses under those rules. See Second Amendment to Memorandum of
Understanding from the Regional Greenhouse Gas Initiative (Apr. 20, 2007). The RGGI Memorandum, Amendment, and Model Rules are incorporated herein by reference, in their entireties.
[039] In November 2010, an entity known as the Carbon Reduction
Corporation— a subsidiary of another entity known as the Finite Carbon
Corporation— announced the availability of a non-insurance product to help Owners secure against potential reversals. This product was described as operating only under the American Carbon Registry and not under the CAR, RGGI, or other Authorities, systems or protocols. Under this product, Owners would obtain protection against a reversal by transferring to the Carbon Reduction Corporation either a percentage (e.g., 20%) of the FRCCs issued for a project and/or pay a fixed cost to the Carbon Reduction Corporation. The Carbon Reduction Corporation advertises that it evaluates a forest project to determine the cost to the Owner of its "risk mitigation product." The company offers to enter into a contract with the Owner, shifting liability for covered reversals to the company and freeing-up any assets that were otherwise reserved for a Buffer Pool. In the event of a reversal, the Carbon Reduction Corporation, and not the Owner, is wholly responsible for the loss.
[040] The Carbon Reduction Corporation's product is expressly advertised as not being an insurance product. Thus, the Carbon Reduction Corporation's product is not subject to the regulations and government oversight that are characteristic of insurance products. The Carbon Reduction Corporation's operates only under the American Carbon Registry. As advertised, the Carbon Reduction Corporation's product is not flexible so as to be applicable to the needs of different Owners, Buyers, and Authorities. It does not offer flexibility for different mechanisms for ownership of additional FRCCs that later may become associated with a forest project, nor does it address decision-making relationships with regard to forest management as it relates to the creation of additional FRCCs or management of current FRCCs.
[041] Insurance. Insurance is a method for risk management by which the uncertainty of losses for a group as a whole is reduced through the pooling of risks. Jenny P. Wong-Leung & Michael Ditschke, Can Permanence be Insured?
Consideration of Some Technical and Practical Issues of Insuring Carbon Credits from Afforestation and Reforestation 3 (HWWA Working Paper No. 235, 2003).
When an individual member of the group suffers a loss, the costs of compensating the individual are spread across the group as a whole. The average loss in an insurance pool becomes more certain as more independent and identically distributed exposure units are added in to the pool. Experience in carbon credit trading, however, is limited. Actuarial data has not yet been broadly developed based on experience with these systems.
[042] Moreover, insurance is a highly regulated industry. Traditional Insurers do not currently offer coverage for FRCCs in the event of a reversal, and it is not expected that Traditional Insurers will create such insurance products that will last for anywhere near the required time period (e.g., up to 100 years) or that will cover the full value of the credits necessary to compensate for a reversal. Insuring against reversals is unpredictable and involves many unknown risks. Based on generally accepted standards for Traditional Insurers, the present inventor anticipates that, if a Traditional Insurer were to offer such a product, it would be unwilling to insure the reversal beyond a short period of time (e.g., five to ten years, which would be inadequate to ensure permanence), and it would be unwilling to provide coverage limits of more than two to three times the original cost of the credit (which is grossly insufficient because prices in this area have fluctuated broadly (e.g., over 500%) just in recent years and just in the United States, and they would fluctuate even more broadly were the U.S. to become better linked with the European market (where prices have exceeded U.S. lows by as much as 3000%). Specifically, Traditional Insurance is not expected to offer a product that would provide actual replacement cost of the FRCCs. The fact that Traditional Insurers have not developed an insurance product in this area, despite years of expressed demand (e.g., by CAR), further illustrates that Traditional Insurers are unlikely to meet this demand through existing models
[043] There are several other reasons why Traditional Insurers do not currently provide insurance against loss of FRCCs. First, absent a history of damages, it is difficult to fix the deductible. [044] Second, Traditional Insurers are likely unable to provide insurance up to the full potential value of the FRCCs because the value of the FRCCs has very little history and are otherwise subject to fluctuations in value that are difficult to predict and have the potential to be very large.
[045] Third, given that many Authorities require that Owners ensure against the loss of potential credits for long periods of time, such as 100 years, a viable insurance product would preferably provide insurance for periods up to and beyond 100 years. Currently, Traditional Insurers offer insurance only for much shorter periods of time, rarely exceeding five to ten years.
[046] These limitations would be unacceptable to most persons or other entities (e.g., Owners, Buyers and Authorities) interested in insuring the permanence of GHG reductions because these limitations would require the continued assumption of substantial risk. A viable insurance mechanism should preferably account for the full replacement value of loss FRCCs and for the full period of time it is maintained.
[047] A gap exists in the market for securing carbon credits and, in particular, FRCCs. Despite calls for insurance products, no traditional insurance products are available to insure against reversals or losses of carbon credits. CAR and the UNFCCC both explicitly recognize the need for viable insurance products. Yet, none exists. Thus, there is a need for improved systems and methods for insuring
FRCCs. Moreover, there is a need for improved systems and methods for providing, purchasing, and facilitating claims of insurance for FRCCs.
SUMMARY
[048] In a preferred embodiment of the present disclosure, a method is provided for insuring FRCCs against reversals. FRCCs make up a portion of the reserves held by the insurer. In the event of a covered reversal, these reserves are used to compensate for the reversal.
[049] The term of the insurance may be for periods up to 50 years or longer. The insurance products of preferred embodiments of the present invention may be offered by a captive or non-captive insurer, with or without a fronting arrangement with a Traditional Insurer, and with or without the backing of a reinsuring insurer. It may be offered through any combination of a captive or non-captive insurer, and either with or without a fronting insurance arrangement or a reinsuring insurer.
[050] Additional embodiments of the present disclosure include transferring the rights to any Additional FRCCs (that is, FRCCs that are based on the forest assets underlying the FRCCs originally issued and insured and that are issued after the beginning of the insurance policy). Further embodiments may also include transferring some or all of the rights to manage or to improve the forest asset, through the use of biochar or other forest management practices, during the term of the insurance.
[051] Additionally, a computer system may be provided whereby the insurance may be applied for, underwritten, issued, and/or renewed through electronic communications.
[052] Additional objects and advantages of the disclosure will be set forth in part in the description which follows, and in part will be apparent from the
description, or may be learned by practice of the disclosure. The objects and advantages of the disclosure will be realized and attained by means of the elements and combinations particularly pointed out in the appended claims.
[053] It is to be understood that both the foregoing general description and the following detailed description are examples and are explanatory only and are not restrictive of the invention, as claimed.
[054] The accompanying drawings, which are incorporated in and constitute a part of this specification, illustrate one embodiments of the disclosure and together with the description, serve to explain the principles of the disclosure.
BRIEF DESCRIPTION OF THE DRAWINGS
[055] FIG. 1 is a schematic diagram of the FRCCs issued for a forest project where 20% of the FRCCs are contributed to a Buffer Pool.
[056] FIG. 2 is a schematic diagram depicting FRCC distribution for three forest project components, each subject to a 20% Buffer Pool contribution, with the remaining 80% of FRCCs issued to the Owners and available for sale.
[057] FIG. 3 is a schematic diagram depicting the arrangement of FIG. 2, in which tract No. 3 suffers a reversal of FRCCs, drawing FRCCs from the Buffer Pool. [058] FIG. 4 is a schematic diagram depicting the arrangement of FIG. 3 in which tract No. 3 suffers a reversal of FRCCs, in which the reversal is insured based on a preferred embodiment of the present disclosure.
[059] FIG. 5 is a is a schematic diagram depicting the arrangement of FIG. 3 in which each of tract Nos. 1 , 2, and 3, suffers reversals, in which the reversals are insured based on a preferred embodiment of the present disclosure.
[060] FIG. 6 is a flowchart depicting the steps taken by various participants exercising the option of using an embodiment of the present disclosure, and also shows their options of doing so with or without also using the Buffer Pool.
[061] FIG. 7 is a flowchart depicting the steps taken by the Insurer in an embodiment of the process of the present disclosure.
[062] FIG. 8 is a flowchart depicting the steps taken by the Insurer in an embodiment of the process of the present disclosure.
DETAILED DESCRIPTION
[063] Reference will now be made in detail to exemplary embodiments of the present disclosure, examples of which are illustrated in the accompanying drawings. Wherever possible, the same reference numbers will be used throughout the drawings to refer to the same or like parts. For brevity, certain elements in the figures described below may be represented as monolithic entities. These elements each may include numerous interconnected components designed to perform specified operations and/or dedicated to a particular geographic region.
[064] Preferred embodiments of the present disclosure relate to providing insurance for FRCCs. Specifically, the system and method of the present disclosure may involve provision of insurance contracts to protect against losses of FRCCs. FRCCs 200 are granted for certain forestry activities or for maintaining a forest over an extended period of time. As shown in FIG. 1 , under certain Authorities, such as CAR, a percentage of these FRCCs are currently set aside 210 and placed in a Buffer Pool 300. The remaining FRCCs 220 are issued to the Owner (and are available for sale to Buyers). The percentage of these FRCCs that is set aside 210 depends on the risk rating of the specific project.
[065] Set-aside credits 210 placed in the Buffer Pool 300 provide reserves needed to guarantee that the issued FRCCs maintain their offset value in the case of a reversal in the forest project. In the example shown in FIG. 1 , the risk rating of the forest project is 20%. Therefore, 20% of 100 FRCCs associated with a specific forest tract are placed in the Buffer Pool, and the remaining 80% are issued to the Owner. The Owner may then sell, transfer, or retain these remaining 80 FRCCs.
[066] This structure may be repeated over a series of forest projects, as depicted in FIG. 2. As depicted in FIG. 2, Project Nos. 1 , 2, and 3 each contribute FRCCs to the Buffer Pool 300 from set-aside FRCCs 210 based on each project's relative risk ratings. Additional forest tracts, not shown in FIG. 2, may also be involved.
[067] FIG. 3 depicts a reversal 400 affecting Project No. 3 of 20 FRCCs Under the specifics of the CAR Protocol, in the event of a reversal of 20 FRCCs of a 100-FRCC project, 20 FRCCs would have to be retired 310 from the Buffer Pool to compensate for that reversal. While the Project would be allowed to continue, continuance would be contingent upon the Owner's increasing, following the reversal, its contribution to the Buffer Pool.
[068] FIG. 4 depicts a comparable scenario to that shown in FIG. 3. Instead of taking FRCCs from the Buffer Pool, in a preferred embodiment of the present disclosure, insurance 500 provides the requisite security for the losses resulting from a reversal by using reserve FRCCs 510. FIG. 5 depicts a scenario in which several of the tracts suffer reversals and, in a preferred embodiment of the present disclosure, insurance 500 provides the requisite security for the losses resulting from the reversals.
[069] Currently, CAR and other Authorities require contribution to a Buffer Pool, i.e., a mandatory FRCC set-aside for each project. The size of the Buffer Pool contribution requirement varies, generally in proportion to each forest project's risk of reversal. The present invention contemplates that, in certain preferred embodiments of the present invention, there may be no need for a Buffer Pool and that an insurance product will provide protection against loss of the issued FRCCs, either directly or through a fronting arrangement, and without or without reinsurance support. In one embodiment, some combination of Buffer Pool reserves and insurance may be employed to secure against reversals. Other consideration (e.g., cash) may also be provided to pay or help pay for the insurance. Insurance Product
[070] Under certain preferred embodiments of the present invention, the Buffer Pool or similar mechanism is replaced or supplemented by a provider of an insurance product (hereinafter, referred to as an "Insurer").
[071] Although the Insurer could be a non-captive or captive insurer, it is likely that the Insurer will, at least in the early years, be what is commonly referred to as a captive insurer. Captive insurers often provide coverage that Traditional Insurers are either unwilling or unable to provide. In addition, captives often provide coverage at a cost that is substantially lower than the cost at which Traditional Insurers might provide coverage. In most circumstances, a captive will offer products by itself; in others, a captive operates in coordination with a Traditional Insurer or other insurer (acting as a "fronting" company ... much like a guarantor), and/or in coordination with a reinsurer (acting, in effect, as an insurer to the captive to help the captive hedge some or all of the captive's risks).
[072] As noted, one example of a captive working with another insurer is known as a "fronting" relationship. The captive pays a fee or other consideration to a fronting insurance company (typically one that is better known and/or that carries a higher rating from a third-party such as Standard & Poor's or A.M. Best) as an inducement for the fronting insurer to participate in the policy. The fronting insurer acts in a way similar to a guarantor. The fronting insurer issues the required policy on the fronting insurer's "paper" (so the insured has the guarantee from a well-known and highly-rated insurer) but the fronting company may rely on the captive (and its reserves) to cover much (if not the vast majority or all) of any losses incurred.
[073] Another example of a captive working with another insurer is through a "reinsuring" or "backing" relationship, in which the captive pays a premium to another insurer (in this instance known as a "reinsurer") as an inducement for the reinsurer to share in some of the captive's risk. The reinsurer, in effect, provides insurance coverage to the insurer {i.e. , it insures insurers). Unlike a fronting relationship, an insured's policyholder (e.g., an Owner) is not necessarily even aware of a reinsuring relationship. Finally, it is possible that a captive may coordinate with both a "fronting" insurer and with a reinsuring insurer.
[074] Whether in the form of a non-captive or a captive, and whether acting alone or in coordination with other insurers, in a preferred embodiment, the Insurer may hold as reserves some or all of the FRCCs that would otherwise be set aside and placed in a Buffer Pool. The Owner or other person that bears continuing responsibility to replace a reversed FRCC (hereafter, such persons are collectively referred to as "Owners") may transfer to the Insurer some or all of the FRCCs that would otherwise be sent to the Buffer Pool. In addition to (or even instead of) the FRCCs transferred to the Insurer, the Owner may transfer some amount of cash or other consideration as additional premium. In return, the Owner is insured against certain reversals to be described in the insurance policy (generally, these will be unavoidable reversals) of the covered FRCCs. The Owner is free to sell the FRCCs that are not transferred to the Insurer.
[075] In the event of an insured reversal, the Owner files a claim with the Insurer. As with other forms of insurance, the Insurer would (if the claim is allowed) use the insurance reserves to compensate for the reversal. Thus, the risk resulting from insuring assets with a highly unpredictable market value is removed. Because the principal assets held as reserves (i.e., FRCCs) are the same as the assets insured (FRCCs), the value of the reserves will rise and fall in lock-step (or near lock- step) with the value of the FRCCs that they are insuring. This method enables the Insurer to avoid risks associated with the uncertainties of valuing the insured assets over the required periods, ejj., 100 years.
[076] There are many potential combinations of the elements of the present invention. Numerous variations and permutations of the system and method of the present disclosure are possible. Each specific policy may be customized to accommodate the specific needs of the Owner, Insured, Authority, and/or other relevant entities.
Highly Correlated Reserves and Insured Assets
[077] Preferred embodiments of the present disclosure employ highly correlated reserve and insured assets. As noted, one benefit of providing the reserve in the form of the same type of asset being insured is that the value of the reserve FRCCs and of the insured FRCCs are highly-correlated. Because FRCCs are usually highly fungible and are typically equal to 1 ton C02, the market value of one FRCC is virtually identical to the market value of another FRCC under the same Authority at any time. [078] As the value of the insured asset appreciates, the value of the reserve also appreciates, typically in lock-step or in an otherwise highly-correlated manner with the value of the insured asset. This provides security against increases and decreases in the cost of replacement FRCCs. Essentially, the value of the reserves rises and falls with the value of the insured asset, so that reserves of comparable value to the original asset are available throughout the period of time during which the reserves are relied upon as security.
[079] An insurance product provided by an Insurer provides two advantages over a Buffer Pool. First, the insurance industry is subject to intense regulation, independent of any offset or cap-and-trade program or regulatory scheme. This provides additional financial assurance.
[080] Second, an Insurer is subject to continuing market pressures to operate efficiently and to identify and price appropriate levels of risk throughout the life of the policy (which, again, can be on the order of 100 years). Insurers have a strong and continuing financial incentive to ensure that the insurance product being offered will be economically sustainable as a going concern. The Insurer is uniquely capable of understanding the risks posed by a new type of product, namely, FRCCs. This needed insurance product has proven too novel and/or otherwise difficult (e.g., because of valuation uncertainties and duration requirements) for Traditional Insurers to provide but they may be willing to share some of the risk by entering into fronting agreements with the Insurer given the valuation and other protections inherent in the present embodiment.
[081] Oftentimes, insurance is secured not only by a reserve but is guaranteed by an insurer with adequate financial reserves and self-imposed requirements for financial integrity, but also separate regulatory requirements to assure the adequacy of its reserves and otherwise to assure the integrity of its operations.
Forest Management Practices Creating Additional FRCCs
[082] As noted above, there are means by which a forest's GHG reduction abilities can be enhanced and the number of FRCCs associated with a particular forest area can be increased.
[083] One management practice that may create additional FRCCs is the use of "biochar." Biochar is the carbon-rich product produced when biomass (such as wood, manure, or crop residues) is heated in a closed container with little or no available oxygen. It can be used to improve agriculture and the environment in several ways. Its stability in soil and superior nutrient-retention properties make it an ideal soil supplement (i.e., enhancer) to increase crop yields.
[084] In addition, biochar sequestration, in combination with sustainable biomass production, can be carbon-negative and, therefore, can actively remove C02 from the atmosphere. This has major implications for mitigation of climate change. Biochar production can also be combined with bioenergy production through the use of the gases that are given off in the pyrolysis process. "Biochar may represent the single most important initiative for humanity's environmental future." Our Choice: A Plan to Solve the Climate Crisis, p. 219 (quoting Australian Climate Expert Tim Flannery). "There is one way we could save ourselves, and that is through the massive burial of charcoal." Id. (quoting UK Climate Expert James Lovelock). "Climate change seems an impossible problem. Impossible, that is, until one looks at the potential for biochar to permanently sequester atmospheric carbon." Biochar for Environmental Management: Science and Technology, Editorial Reviews (quoting Chris Goodall).
[085] There are other management practices that create FRCC increases as well. The use of these practices frequently yields increased environmental benefits as well as the availability of additional FRCCs. It is likely that these practices will be developed and employed by entities— such as Insurers— with the technical and financial means, as well as the financial incentives, to develop them. This allows for carbon sequestration and related environmental benefits, above and beyond those that would ordinarily occur without the financial incentives and other capabilities of the Insurer. For this reason, regulators and other policy-oriented audiences will likely prefer the entry of Insurers into the FRCC market using the present embodiment. System and Method
[086] FIG 6 depicts a flowchart of the method of a preferred embodiment of the present disclosure. The order of the steps in the process is not critical. Several of the steps may be performed in another order or in concurrence with other steps. For example, the timing of certain events, such as the payment of the premium, is not critical. Documentation embodying certain of the process steps of the method of a preferred embodiment may be prepared and escrowed until the transaction closes. [087] The Insurer will engage in at least two primary insurance-related transactions, collection of premiums and payment of claims, but also will engage in additional reserve asset management transactions.
[088] As depicted in FIG. 6, an Authority typically promulgates requirements for the issuance of FRCCs 600. The Owner manages (and/or assures that it will manage) the forest property in accordance with these requirements 620. The Owner then applies for qualification. The Authority evaluates the project to ensure compliance with the Authority's requirements 610. If the evaluation is positive, the Owner secures qualification of the FRCCs 630. The Authority then issues FRCCs to the Owner 650, and the FRCCs are received by the Owner 650.
[089] Insurer and the preferred embodiment (the insurance product) are approved by the appropriate regulatory or certifying authority ("Authority") as an approved insurance mechanism to provide security against reversals. A forest project is approved and qualified for the issuance of FRCCs 630. When the project is qualified 630, the number of FRCCs to be awarded is typically established 640, as well as the potential risk rating of the project. This is typically based on a detailed engineering study of the forest project. The forest project then applies for the insurance product to insure the FRCCs it is to be issued. The insurance application process typically proceeds after the project has been qualified, but the precise timing is not critical and both processes may proceed contemporaneously.
[090] As shown in FIG. 6 and FIG. 7, upon receipt of an application, Insurer typically performs any additional risk assessments of the project 700. If the insurance application is approved, the insurance contract is signed by the Insurer and Owner 680, and by any other entity whose involvement is necessary. The insurance premium is paid 680. Payment of the premiums is typically a condition subsequent. The relative order of many of the steps of the method of a preferred embodiment of the present disclosure is not critical.
[091] The Authority issues FRCCs to the Owner 640, and the Owner may transfer the required number of FRCCs to the Insurer 760. To avoid transactions costs, in an alternative embodiment the Authority may instead issue FRCCs directly to the Insurer. The number of FRCCs required to be set aside is typically
determined by the Authority, and the number of FRCCs typically transferred to the Insurer will typically be the same but may be different (depending on what other consideration may be provided to the Insurer or other terms may be set by the Authority or the Insurer... these terms would typically be specified in the insurance contract). Generally, this will be determined based on the risk rating and the
Authority's and Insurer's own separate risk assessments. Having an Insurer's separate and independent (and financially-incentivized) risk assessment adds a separate layer of protection to the Authority, Owner, and general public to ensure that sufficient FRCCs are set aside for the issuance of any FRCCs; this adds an additional policy benefit and therefore additional reason for regulators to favor the present embodiment. The number of set aside (and reserved) FRCCs may also be dependent upon the amount of other consideration provided for the insurance, if any. A higher premium may result in a lower percentage of FRCCs to be transferred to the Insurer, whereas a lower premium may result in a higher percentage of FRCCs being transferred to the Insurer. The Insurer can reasonably be expected to work closely with the Authority to ensure that sufficient FRCCs are set aside. The Owner is free to sell and/or transfer the credits that have been issued to it, as it desires 670. The Owner manages their forest property in accordance with FRCC requirements for the term of the credits 690.
[092] As shown in FIG. 8, if a reversal occurs 800, the Owner files a claim 810 with the Insurer 820. The Insurer conducts an investigation 830 to verify the loss. If the reversal is verified 850, the Insurer issues payment to the Insured 870 using FRCCs that the Insurer holds in reserve 860. The Insurer will compensate for the reversal using FRCCs from its reserve. The Insurer may issue a certificate of compensation or other document to the insured as proof that the reversal has been compensated if required by the Authority.
Regulatory Risk
[093] The uncertainty associated with the unique long-term permanence requirement for FRCCs will impair market prices for FRCCs and, thus, for the financial benefits to forest owners that preserve their forest assets. Preferred embodiments of the present disclosure offer at least five advantages that regulators interested in climate change mitigation and forest preservation may support. First, insurance provides crucial support for the nascent carbon offset industry by securing against potential losses. Second, insurance encourages ecosystem enhancement provided by forests through the monetization of benefits provided by carbon reductions. Third, the Insurer will achieve these positive environmental benefits in a cost-effective and sustainable manner, because the Insurer has (and will continue to have) a financial incentive to assure against reversals. Fourth, as noted, the separate and independent (because independently incentivized) risk assessment provided by the Insurer will provide additional protections to Authorities, Owners and the general public that an adequate protection against reversals has been established. Fifth, the embodiment's unique approach by which its reserves will rise and fall in lock-step or near lock-step with the insured FRCCs ensures the availability of loss protection over time periods far longer than those otherwise available. These additional factors will enhance and otherwise improve the credibility (and thus, acceptance and potential for success) of the carbon market as a whole.
Example 1
[094] Acting alone or in coordination with other insurers, the Insurer in Example 1 holds as its reserves some or all of the FRCCs that would otherwise be placed in a Buffer Pool 660. The Owner or other person that bears continuing responsibility to replace a reversed FRCC transfers to the Insurer some or all of the FRCCs that would otherwise be set-aside and placed in the Buffer Pool 660. In addition to (or even instead of) the FRCCs transferred to the Insurer, the Owner may transfer cash or other consideration as additional premium. In return, the Owner is insured against certain reversals (as described in the insurance policy; generally, these will be unavoidable reversals) of the covered FRCCs. The Owner is free to sell the FRCCs that are not transferred to the Insurer as premium 670.
[095] As depicted in FIG. 7, in a preferred embodiment of the present disclosure, Insurer may take certain steps to offer the insurance. Upon receipt of an application, the Insurer typically reviews the application and additional facts relevant to the forest project and security being requested 700. Based on this review and evaluation, Insurer either rejects the application 720, approves it 730, or negotiates further with the applicant 710. This further negotiation, in turn, results in either rejection 720 or approval 730 of the application.
[096] If the application is approved, Insurer typically issues a "Bindable Quote." If the Insurer's Bindable Quote is accepted by the applicant, the Insurer proceeds to issue an insurance policy 740. When the conditions for the policy are satisfied, the insurance policy goes into effect 750, typically contemporaneously with the sale of the FRCCs 670. Credits are transferred to the Insurer by the Owner 760. The Insurer then transfers the FRCCS to its reserve 770.
[097] As depicted in FIG. 8, in the event of a covered reversal 800, the Owner files a claim with the Insurer 810. The Insurer processes the claim 820 and typically conducts an investigation 830. Based on the investigation, the Insurer either verifies the reversal (i.e., the insured loss) 850, or the Insurer denies the claim 840. If the Owner is not satisfied with a decision to deny the claim, the parties may dispute these decisions. If the loss is verified 850, Insurer uses the necessary number of FRCCS from reserve 860, and pays the claim 870 to Insured 880.
[098] As with other forms of insurance, the Insurer uses its reserves to compensate for the reversal 860. Thus, the risk resulting from insuring assets with a highly unpredictable market value is removed.
Example 2
[099] In an alternative preferred embodiment, Owner transfers to the Insurer FRCCs and an amount of cash or other consideration as was the case in Example 1. In return, Owner is insured against reversals for the covered FRCCs. In this alternative embodiment, Owner could, in return for a discounted premium or other consideration, grant to the Insurer the rights to any new or otherwise additional FRCCs. These are FRCCs issued based on the same forest asset after the beginning of the policy. These "Additional FRCCs" may be generated as a result of certain management practices, a change in FRCC quantification standards, FRCCs being issued after a reversal as a forest regenerates, or any other reason that may result in the issuance of FRCCs subsequent to the beginning of the insurance policy.
[0100] Contracting for rights to Additional FRCCs is somewhat analogous to contracting for mineral rights (including to later-discovered mineral assets) associated with a particular property. In this Example 2, Insurer would have the rights to Additional FRCCs. In Example 2, the Insurer would not, however, have the ability to compel the Owner to engage in specific management practices that would likely create Additional FRCCs. Nor could the Insurer itself unilaterally engage in activities on the property to create the Additional FRCCs. That said, the Insurer and Owner may voluntarily (i.e., without any prior commitment stemming from the insurance policy or otherwise) agree to terms by which the Owner, the Insurer, or a third-party would engage in certain management practices to create Additional FRCCs, and they may agree on a division of rights to those Additional FRCCs and other resulting assets.
Example 3
[0101 ] In a further preferred embodiment of the present disclosure, Owner and Insurer may take the steps outlined in Example 1. In Example 3, Owner transfers (as part of or concurrent with the original policy) to Insurer the rights to some or all Additional Credits (as is true in Example 2) and also transfers at that time the right to compel certain management practices designed to create Additional FRCCs.
[0102] A significant difference between Example 2 and Example 3 is that, in Example 3, the Insurer is able to mandate certain practices that may result in the creation of Additional FRCCs. In return for this greater control with respect to future management practices, the Insurer would typically provide consideration, e.g., a reduced reserve and/or other premium contribution and/or the right to a pre- negotiated fixed percentage of any Additional FRCCs issued).
[0103] There are many potential combinations of the elements disclosed in the present disclosure. Embodiments may be customized to accommodate the specific needs of the Owner and Insured. Thus, elements of the various
embodiments may be combined in various ways to meet the needs of the Owner and Insured, provided they do not depart from the scope of the appended claims and their equivalents. Embodiments of the present disclosure may include a method or process, an apparatus or system, or computer software on a computer medium. It is intended that various modifications may be made without departing from the spirit and scope of the following claims.
[0104] For example, advantageous results still could be achieved if steps of the disclosed techniques were performed in a different order and/or if components in the disclosed systems were combined in a different manner and/or replaced or supplemented by other components. Other implementations are within the scope of the following exemplary claims. It is intended that the disclosed embodiments be considered as examples..
[0105] In one embodiment, to expand its reserves, the Insurer may independently purchase and agree to preserve forests and obtain credits for those forests, then use those credits as reserves. An advantage of holding actual forests to back FRCC reserves is that forests are capable of regenerating. If a forest underlying reserves is destroyed, it may eventually be re-credited. Furthermore, after 100 years has passed, new FRCCs may be issued for the same forest. Thus, one forest can yield many iterations of FRCCs over time.
[0106] In one embodiment, the Insurer may engage in active forest management of forests (or outsource this active forest management), employing techniques such as biochar to enhance the FRCC value of the forest and further increase its reserves. The Insurer may provide premium discounts in exchange for the Owner's performance of active forest management techniques. In return, the Insurer may require entitlement to a set percentage of the additional FRCCs generated from this technique. Embodiments of the present disclosure can be adapted to apply across various credit regimes and potentially to other types of credit-generating projects {i.e., not only forest projects). In other regimes where the Buyer of FRCCs may hold the burden of ensuring against reversals, this insurance mechanism can be applied in a very similar fashion.
[0107] In one embodiment, the insurance can also be structured in a way that it covers some or all avoidable reversals, in addition to unavoidable reversals. This may result in a higher premium and/or a higher percentage of credits that may be necessary for the insurer to hold.
[0108] I In one embodiment, insurance terms may be less than 100 years (or more), and as short as 1 year.
[0109] In one embodiment, insurance premiums and number of FRCCs to be contributed to the Insurer may also be reduced with the agreed requirement that the Owner pay a "reversal fee" (somewhat analogous to a "deductible" that a
homeowner or other insured may need to pay). With this, each time a reversal occurs, the Owner must pay a certain, previously established price or percentage of the current market rate for FRCCs to be replaced. This creates additional incentives for the Owner to avoid reversals and aligns the Insured's interest in preserving the forest asset with the Insurer's.
[0110] In one embodiment, a certain number of FRCCs in the Insurer's reserve may be transferred to the Owner (or its assignee) after a period of time if no reversals have occurred. [01 11] In one embodiment, the insurance policy may require certain rights to FRCCs generated from land on which a reversal as occurred in order to compensate for its loss of credits (thus capitalizing on the regenerative quality of forests).
[0112] In one embodiment, the Insurer may negotiate with the Authority or exchange entity in order to waive or reduce credit transfer fees (if they exist) when the transfers are part of an insurance agreement. The Insurer may also retain forest acreage that it leases out directly to the insured as an additional or supplemental insurance mechanism.
[0 13] In one embodiment, if the Insurer chooses to reduce the number of FRCCs that an Owner must provide to the Insurer (as premium), the Insurer may, , in return, require the Owner to provide a substituting cash or other contribution ), and the Insurer may use that substituting contribution to buy or otherwise obtain substituting FRCCs or other carbon credits elsewhere to serve as reserves.
[01 14] In one embodiment, the Insurer may work with the Authority to offer some sort of combination Insurance and Buffer Pool risk mitigation product, wherein the Owner contributes both to a Buffer Pool and purchases insurance.
[0115] The above described embodiments can be implemented using software, hardware, or a combination of hardware and software. The software may be stored on a computer readable medium, such as RAM, ROM, hard disk, CD- ROM, DVD, and flash drive. However, other storage mediums are also within the scope of the invention. The software stored on a computer readable medium may be executed by a microprocessor, or any other circuit capable of electronically executing the software, in order to implement the above described embodiments.

Claims

I claim:
1. A method for insuring against loss, comprising:
providing or receiving insurance for forest related carbon credits that are subject to the risk of reversal, where other carbon credits make up a portion of the reserves held by the insurer to compensate for insured reversals.
2. The method of claim 1 , wherein a policy associated with the insurance
transfers to the Insurer some or all of the rights to forest related carbon credits that may, after the policy inception, be issued or issuable to the insured.
3. The method of claim 2, wherein the insurance policy would also transfer to the Insurer some or all of the rights to manage identified forest property in a manner that would enhance the preservation or creation of forest related carbon credits.
4. The method of claim 1 , wherein the term of the insurance is 50 years, or
more.
5. The method of claim 1 , wherein biochar or other methods are used to
enhance the number or carbon credits associated with forest assets.
6. The method of claim 2, wherein biochar or other methods are used to
enhance the number or carbon credits associated with forest assets.
7. The method of claim 3, wherein biochar or other methods are used to
enhance the number or carbon credits associated with forest assets.
8. The method of claim 4, wherein biochar or other methods are used to
enhance the number or carbon credits associated with forest assets.
9. A method for insuring against loss, comprising:
compensating, or receiving compensation, for insured reversals of forest related carbon credits, where other carbon credits make up a portion of the reserves held by the insurer to compensate for the insured reversals.
10. The method of claim 9, wherein the term of the insurance is 50 years, or
more.
1 1. The method of claim 9, wherein biochar or other methods are used to
enhance the number or carbon credits associated with forest assets.
12. The method of claim 10, wherein biochar or other methods are used to
enhance the number or carbon credits associated with forest assets.
PCT/US2012/033595 2011-04-13 2012-04-13 System and methods for insuring forest-related carbon credits WO2012142464A1 (en)

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CN105241423A (en) * 2015-09-18 2016-01-13 北京林业大学 Estimation method for high-canopy-density forest stand volume based on photographic image pair of unmanned aerial vehicle
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CN105241423A (en) * 2015-09-18 2016-01-13 北京林业大学 Estimation method for high-canopy-density forest stand volume based on photographic image pair of unmanned aerial vehicle
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