Offset Credit Invalidation Insurance

California ARB (Air Resources Board) Offset Credit Invalidation Insurance is a new product which underwrites the risk of invalidation associated with ARB Offset Credits (Offsets). The risk of invalidation has created a price differential between Offsets where the invalidation risk remains with the buyer (`Buyer Liability') and those where the risk is transferred to another party.
The risk of invalidation is unattractive to many buyers, especially those who are seeking compliance certainty combined with least costs. Equally, many sellers are unable or unwilling to assume the invalidation risk given their limited balance sheet capacity and credit rating.
The insurance product developed is designed to remove the risk of invalidation for both Offset sellers and buyers.

 


The Insured is the underlying project entity with the owner of the Offset being the Loss Payee. This allows the Offset to be traded without limitation in the future.
The Policy Period will cover the risk of invalidation for up to 3 years from the date of Offset issuance, (Second Verification is required within 12 months of issuance)
The Insured Risks cited below are the reasons for invalidation as set out in sections 95985© of the California Cap & Trade Program Regulations being.

 

  • I. The Offset Project Data Report contains errors that overstate the amount of GHG reduction or GHG removal of enhancements by more than 5%;
  • 2 The Offset Project activity and implementation of the Offset Project was not in accordance with all local , state, or national environmental and health and safety regulations during the Reporting Period for which the ARB Offset Credit was issued; or
  • 3 AR13 determines that Offset Credits had already been issued in another voluntary or mandatory program within the same Offset Project boundary, and for the same Reporting Period in which ARB Offset Credits were issued for GHG reductions and GHG removal enhancements

The Policy Limit is determined by the volume of Offsets issued and the monetary limit per Offset required. This monetary lirnit per Offset should be set based on the expected replacement cost of the Offsets (which may be up to 3 years in the futhure).


 

Product Summary

The Basis of Indemnity is the market price at the date of determination by ARB lhat invalidation has taken place, or the actual replacement cost of the Offset. Additional costs such as acquisition costs (legal fees. broker commissions etc.) may also be included. The policy is settled in cash, but subject to the agreement replacement Offsets may be provided instead.
The Insurer Security supporting the policy will be investment grade with a minimum S&P rating of 'A'.
The policy has been standardized as far as possible to keep premiums low, but designed to be flexible enough to meet the particular needs of project developers and their off-takers. By working closely together, we can formulate the most cost effective coverage for the particular project concerned.

 

Policy Summary

Insured,

Loss Payee,

Policy Period,

Policy Limit,

Basis of Indemnity

Form of Indemnity

Security

The project

Owner of the ARB offset credit(s) at the time of invalidation

3 years

As required and per request

Market price at date of invalidation, or cost of replacement for equivalent compliance instrument

Cash settlement, will consider physical settlement

A+ ( standard & poor's ) ( S&P )

Key Terms:

  • No limit on trading
  • Re-verificaion required
  • Obligation to minimize loss
  • Document Retention
  • Premium Payment
  • Full Disclosure

Law & Jurisdiction:

Key exclusions:

  • California
  • 1st party fraud
  • Market Termination