4. Reversals and Leakages

The permanence of carbon storage is one of the most heavily scrutinized aspects of CDR credits. Buyers know that even if stored carbon is later released, they will not be left holding worthless claims. Suppliers, in turn, must demonstrate confidence in their durability claims.

One of the central risks in carbon removal transactions is the possibility of a "reversal"—meaning that carbon dioxide that has been removed from the atmosphere is later released back, whether through natural events, human activity, or technological failure. Effective allocation of reversal risk is therefore a critical component of any offtake arrangement, and market practice is still evolving around the tools and mechanisms used to address it.

Permanence refers to the duration for which carbon remains removed. Geological storage may offer permanence measured in millennia, while biological storage may last decades or centuries.

Leakage refers to unintended emissions increases outside the project boundary. For instance, afforestation in one area could displace agriculture to another, causing emissions elsewhere. Offtake Agreements may require suppliers to monitor leakage and to discount CDR credits accordingly.

Contractual Remedies vs. Insurance Solutions

Two principal approaches are used to manage reversal risk: contractual remedies embedded directly into the Offtake Agreement and third-party insurance products designed to cover specific risks.

Contractual Remedies

Offtake Agreements often include provisions such as buffer pools, replacement obligations, or volume discounts in the event of a reversal. For example, if a fire destroys a biochar storage site, the supplier may be required to provide replacement CDR credits from a reserve pool, discount the affected delivery, or draw on a buffer account established precisely for such contingencies.

These mechanisms keep the remedy within the contractual relationship but may expose the supplier to liabilities that are difficult to manage if reversals occur at scale.

OSCAR does not contain explicit language to this effect but requires the Supplier to operate the Project in accordance with the Carbon Standard Rules, including the Protocol (as such term is defined in OSCAR), which should provide for mechanisms relating to reversals and leakages.

Insurance Solutions

A growing set of insurance products is emerging to cover permanence risk, natural disasters, or even legal invalidation of CDR credits. Insurance may provide a more robust safety net for both parties, as it transfers risk to a third-party provider.

Contracts can require suppliers to maintain evidence of insurance, allocate the cost of premiums between the buyer and the supplier, and define the rights of the buyer as a named beneficiary under the policy. However, insurance markets for carbon removals are still nascent, and coverage may be expensive or limited in scope.

Emerging Market Practice

There is no single standard at present. Some buyers are comfortable relying solely on contractual remedies, particularly when dealing with projects where buffer pools and replacement CDR credits are well established. Others, especially institutional buyers, lenders, or investors seeking "bankability," may insist on the additional layer of protection provided by third-party insurance.

A balanced approach may combine both strategies: embedding contractual remedies as a first line of protection (even if indirectly through reference to the applicable rules of the Carbon Standard and the Protocol, as defined in OSCAR) while layering insurance coverage for catastrophic or systemic risks.

This hybrid model helps align buyer confidence with supplier feasibility, ensuring that reversal risk is managed in a commercially reasonable and credible manner without overburdening early-stage suppliers with obligations they cannot realistically fulfill.