This LOI represents a new approach to carbon buffer pools by adding insurance, which aims to make them more resilient to unexpected losses, increase efficiency in risk modeling, data analysis and monitoring, reporting and verification (MRV), boost liquidity, and provide a financial safety net for both sellers and buyers of carbon credits.
A buffer serves as a central pool of CO2 credits, to which every project developer must make individual contributions, and these credits cannot be sold. Carbon standards have incorporated buffers as a built-in safeguard to guarantee the stability of the carbon scheme’s permanence. Buffers are devised to protect carbon credit purchasers, primarily shielding them from the potential reversal risk.
Kita and ERS will work together and collaborate with additional partners as necessary to identify the most effective means through which Kita can offer insurance to protect ERS’s buffer. This insurance aims to mitigate the early-stage delivery risk and ensure resilience until the buffer achieves critical mass. Kita’s Carbon Purchase Protection Cover addresses this early-stage delivery risk, fostering essential market confidence by offering financial security to both buyers and sellers venturing into a new buffer project. It also provides financial security for the buffer itself as it expands and matures.
ERS serves as the certification body for ecosystem restoration initiatives within the Voluntary Carbon Market. Through its advanced certification process, the organization facilitates market entry for ecosystem restoration projects that have historically been under-certified. Presently, a mere 3% of carbon credits are issued from reforestation efforts.
Going forward, the two organizations will explore whether insurance-backed buffers can enhance liquidity by diminishing risk-assessed buffer contributions and improving the evaluation of fungibility across different credit types.
“Buffers are continuing to evolve to meet emerging market needs, with carbon standards updating buffer requirements and risk modeling to take into account scientific developments and ever more sophisticated MRV techniques,” said Natalia Dorfman, CEO and co-founder at Kita. “At Kita, we believe that incorporating insurance is part of the next stage of buffer evolution and we are delighted to be working with ERS to provide innovative new solutions that will channel financing towards high-quality carbon projects.”
“After a successful Public Consultation phase, we recognize that integrating insurance is a crucial part of the next stage of buffer evolution,” said Thibault Sorret, CEO at Ecosystem Restoration Standard. “Our partnership with Kita is a significant step forward in strengthening our permanence and risk profile of nature-based carbon projects.”