Carbon Markets

Building Trust in Carbon Markets Through MIGA Guarantees

Combating climate change requires substantial private capital and MIGA’s political risk insurance products have long played an instrumental role in protecting investors. Carbon markets possess significant potential to enhance international cooperation and direct essential climate finance towards emerging markets. However, these markets must be trustworthy, transparent, and yield reliable climate mitigation benefits.

When functioning correctly, carbon markets can channel critical resources to high-quality emissions reductions or removals activities, generating broad financial and developmental outcomes and creating new income streams, jobs, and infrastructure in developing economies. With appropriate benefits-sharing and environmental safeguards in place, carbon markets not only offer the public and private sector effective decarbonization options, but the potential to contribute to socio- economic development and environmental protection where it is needed most.

Several critical issues must be effectively addressed for carbon markets to expand. These include, but are not limited to, the integrity of carbon credits, well-established market infrastructure, transparency and accountability on the usage of carbon credits, and legal clarity on carbon credits with adequate carbon market legislation and regulatory frameworks.

The nascent stage of carbon markets presents significant challenges for investors, particularly exposure to risks associated with political and regulatory uncertainties. Key risks include the potential revocation of carbon ownership rights, bans on the export of carbon credit, and repudiation of corresponding adjustment commitments made by host governments. Moreover, in the absence of advanced legal and regulatory framework on carbon projects, nor a government’s binding commitment, it is challenging for private sector participants to seek legal recourse against such adverse actions committed by host governments.

MIGA supports carbon credit projects by providing political risk insurance, which helps foster a more stable investment environment in developing countries and enhance access to financing. Its coverage for expropriation, transfer restrictions, and war and civil disturbance protects against adverse government actions—or inaction—and political violence that may affect the underlying investment projects from which carbon credits are generated. Risks specific to carbon credits are primarily mitigated through MIGA’s Breach of Contract coverage. The Breach of Contract guarantee covers the investor for the risk of the host government refusing to pay an arbitral award entered in relation to the breach of the Host Government of its obligation under a contract. This guarantee is relevant to cover carbon-related risks if a binding agreement between the government and the developer or an insurable Letter of Authorization is in place, which contains, for example, the developer’s rights to own and trade carbon credits, and the government’s commitment on corresponding adjustment. Details of MIGA coverages on carbon credit projects are shown below.

MIGA’s Products for De-Risking Carbon Markets

To the best of MIGA’s due diligence capacity, MIGA aims to confirm that carbon projects meet high integrity standards, generate quality carbon credits, and align with MIGA's environmental and social standards. Development impacts of the projects on the host country's economy are also carefully reviewed, for example, the sharing of the carbon credit proceeds with the communities and host countries, reduction of GHG emission, creation of job opportunities, gender equality, and tax incomes to the government.

As a member of the World Bank Group, MIGA also brings additional value to the carbon market by providing an umbrella of deterrence against government’s adverse actions and engaging in the process of dispute resolution. As soon as MIGA is notified by the guarantee holder of situations that could lead to potential disputes with a host government, MIGA intervenes with the host government, seeking to facilitate the resolution over disputes before they are escalated to a loss. To date, MIGA has been able to resolve all disputes that would have led to a loss under its Breach of Contract coverage. Details of MIGA’s Dispute Resolution can be found at https://www.miga.org/dispute-resolution.

MIGA has been working closely with its partners within the World Bank Group as well as various other stakeholders to identify the role guarantees can play in mitigating key risks impacting private sector participation in carbon markets.  In response to requests from various carbon market participants, MIGA has developed a template Letter of Authorization (LOA) in consultation with investors, project developers, registries, standard setters, exchanges, and rating agencies.

The LOA template is intended for project activities seeking compliance with requirements for mitigation outcomes authorized for use under Article 6 of the Paris Agreement for international mitigation purposes or other purposes. The main purposes of the LOA template are to:

• Promote Carbon Investments: Support host governments’ efforts in facilitating carbon investments into host countries by enhancing transparency and clarity in carbon-related government processes through a standardized template.
• Increase Insurability: Assist potential investors in setting out their legal rights over mitigation outcomes, thereby increasing the insurability of projects generating mitigation outcomes.

By creating the LOA template, MIGA aims to leverage the World Bank Group (WBG) guarantee platform to offer protections like Breach of Contract cover, safeguarding investors and promoting foreign direct investments. The LOA template would also serve as a public good to enhance insurability and bankability for other financial institutions by supporting standardization of host government commitments to market participants. It will be continuously updated in collaboration with key carbon players to reflect the evolving market situation.

MIGA is actively evaluating opportunities for the LOA template to be adopted in carbon transactions. Furthermore, MIGA is working closely with the World Bank team to integrate the LOA template into the broader country policy framework for the carbon market.

MIGA is committed to ensuring that its supported projects generate high-quality carbon credits that contribute to both emission reductions and developmental impacts in host countries. Through a rigorous due diligence process, MIGA identifies and supports high-integrity carbon projects based on the following robust criteria:

• Project Integrity: This includes ensuring environmental integrity through additionality, permanence, and robust quantification. Projects must also demonstrate sustainable development and other co-benefits, as well as robust methodologies and risk assessments.
• Partner Integrity: MIGA evaluates the track record and experience of project partners, their familiarity with the project type, their ability to execute the project, and their relationships with key stakeholders, including government and local communities.
• Host Country Policies: The host country's climate targets and policies, such as Nationally Determined Contributions (NDCs) and legal framework, are considered. Additionally, the project’s alignment with the country’s strategies, as well as the political and business environment stability, are assessed.

By adhering to these criteria, MIGA ensures that the supported projects not only achieve significant emission reductions but also contribute to the socio-economic development and environmental protection of the host countries.