Jurisdictional pay-for-performance systems, with nested accounting of smaller project activities, offer potential to more rapidly scale up carbon finance for reducing deforestation as well as to ensure greater environmental integrity compared to stand-alone projects. However, the design and implementation of such programs raise numerous challenges, including for mobilizing upfront investment when there is a risk of non-performance at the jurisdictional level. This paper provides the first analysis to examine the use of insurance mechanisms to mitigate this jurisdictional delivery risk.
A conceptual model based on the theory of individual choice under uncertainty is developed to examine the impact of performance uncertainty on large-scale reductions in emissions from deforestation and forest degradation (REDD+). We calibrate the model to perform simulations of how reductions could change with and without the availability of revenue insurance as well as of a carbon buffer to manage performance risks.
Performance uncertainty constrains the potential for large-scale mitigation supply when payments are contingent on emissions falling below a threshold level and when it is important to break even on payments to domestic actors. We show that insurance would allow jurisdictions to increase emissions reductions despite this uncertainty and that building a performance buffer offers nonlinear potential to unlock supply in a complementary manner.
Private insurers, together with philanthropic and public funders, have a critical role to play in establishing an insurance market that can de-risk jurisdictional program investments and unlock forest conservation and other climate and nature protection efforts at scale.