Carbon projects are powerful tools for tackling climate change. Whether it’s protecting tropical forests, restoring mangroves, or distributing clean cookstoves, these initiatives generate carbon credits that finance sustainable development. But they also face a range of risks that can undermine their success. Investors worry about political instability, communities fear unfair benefit distribution, and developers struggle with price volatility. If these risks aren’t addressed, projects can fail — eroding trust in the carbon market.
The Carbon Finance Playbook highlights both the risks that carbon projects face and the strategies available to mitigate them. In this blog, we’ll explore the major categories of risk, real-world examples, and the financial and governance tools that can help make projects resilient.
Types of Risks in Carbon Projects
1. Political and Regulatory Risks
-Land Tenure Disputes: In many emerging markets, land rights are unclear. Conflicts between governments, communities, and private actors can derail projects.
-Policy Changes: Governments may impose taxes, royalties, or bans on carbon exports.
-Weak Governance: Lack of enforcement of environmental laws can reduce project credibility.
Example: Some African countries have debated placing heavy royalties on carbon credit sales, creating uncertainty for investors.
2. Financial Risks
-Carbon Price Volatility: Voluntary carbon market (VCM) prices fluctuate widely, from as low as $2 per ton to $40+ for premium credits.
-Liquidity Risk: Unlike compliance markets, VCMs remain small and fragmented. Selling credits can take time.
-Currency Risk: Most carbon credits trade in USD, but expenses are in local currency. Exchange rate shifts can hurt returns.
Example: A reforestation project in Latin America relying on pre-sale contracts at $10/ton may lose potential gains if market prices rise to $25/ton later.
3. Environmental Risks
-Permanence Risks: Forest fires, pests, or drought can wipe out carbon stocks.
-Leakage: Protecting one forest may push deforestation elsewhere.
-Additionality Concerns: Projects must prove they deliver carbon reductions beyond business-as-usual.
Example: In 2020, wildfires in U.S. forest offset projects raised concerns about permanence and buffer pool adequacy.
4. Social and Community Risks
-Lack of Community Buy-in: Projects may fail if they don’t engage Indigenous Peoples and Local Communities (IPLCs).
-Inequitable Benefit Sharing: If revenue doesn’t reach communities, disputes can arise.
-Reputation Risk: Negative media coverage can reduce demand for credits.
Example: REDD+ projects have faced criticism for not delivering promised benefits to communities, harming credibility.
5. Technical and MRV Risks
-Measurement Errors: Carbon calculations may be flawed.
-Verification Delays: Slow validation by registries can delay credit issuance.
-Technology Failures: Digital MRV systems may face challenges in remote areas.
Risk Mitigation Strategies
1. Insurance Products
-Political Risk Insurance: Protects against expropriation, currency transfer restrictions, and civil unrest.
-Carbon Delivery Guarantees: Specialized insurance ensures buyers receive credits even if a project underperforms.
-Catastrophe Coverage: Insurance against fires, floods, or other natural disasters.
Example: Providers like Parhelion and Oka have developed carbon-specific insurance products.
2. Blended Finance
Combining concessional finance (grants or low-interest loans) with commercial capital spreads risk:
-Grants: Cover early-stage feasibility and community engagement.
-Concessional Debt: Provides low-cost capital for capital-intensive projects.
-Private Equity: Follows once risks are reduced.
Example: Donor-funded grants in Africa have de-risked early REDD+ projects, enabling private capital to flow.
3. Diversification
Investors can reduce exposure by:
-Spreading across geographies (Africa, Asia, Latin America).
-Investing in multiple project types (REDD+, ARR, Blue Carbon, Cookstoves).
-Combining removal and avoidance projects.
4. Strong Governance and Benefit Sharing Agreements (BSAs)
-Regular audits and reporting build trust with investors and buyers.
5. Buffer Pools and Reversal Mechanisms
-Many registries require a portion of credits to be set aside in a buffer pool.
-These credits cover losses from unexpected reversals like fires.
-Increases confidence in permanence.
6. Technology and dMRV
-Digital MRV (dMRV): Remote sensing, drones, and AI improve accuracy and reduce costs.
-Blockchain Solutions: Enhance transparency in credit tracking.
-Mobile Apps: Engage local monitors and communities in data collection.
Case Studies
Kenya – Solar Irrigation
SunCulture combined carbon credits with results-based finance. Insurance products helped attract investors by guaranteeing credit delivery.
Mozambique – REDD+
Projects faced land tenure challenges. Transparent BSAs and community involvement reduced conflict and built trust.
Peru – Reforestation
A buffer pool was used to manage permanence risk. Despite political uncertainty, diversified investor participation kept the project stable.
The Role of Investors and Donors
-Investors: Demand transparent risk disclosures and insist on insurance.
-Donors: Provide catalytic capital to de-risk early-stage projects.
-Corporates: Should prioritize high-integrity credits that use best-practice risk management.
The Future of Risk Management in Carbon Projects
Risk management is becoming more sophisticated:
-Insurance markets are expanding with carbon-specific products.
-Standardization under ICVCM is improving integrity.
-Article 6 frameworks are adding compliance-grade safeguards.
Technology is reducing MRV-related risks.
Still, challenges remain. Climate change itself increases environmental risks like droughts and fires, making robust safeguards even more critical.
Conclusion
Carbon projects in emerging markets offer enormous potential, but they face real risks — political, financial, environmental, and social. Ignoring these risks is not an option. To unlock the billions in climate finance needed, projects must adopt strong governance, leverage insurance, and use innovative tools like dMRV.
Mitigation is not just about protecting investors. It’s about ensuring that projects deliver lasting benefits for people, ecosystems, and the climate. With the right safeguards, carbon projects can move from fragile experiments to trusted pillars of the global carbon market.
About Anaxee: Anaxee drives large-scale, country-wide Climate and Carbon Credit projects across India. We specialize in Nature-Based Solutions (NbS) and community-driven initiatives, providing the technology and on-ground network needed to execute, monitor, and ensure transparency in projects like agroforestry, regenerative agriculture, improved cookstoves, solar devices, water filters and more. Our systems are designed to maintain integrity and verifiable impact in carbon methodologies.
Beyond climate, Anaxee is India’s Reach Engine- building the nation’s largest last-mile outreach network of 100,000 Digital Runners (shared, tech-enabled field force). We help corporates, agri-focused companies, and social organizations scale to rural and semi-urban India by executing projects in 26 states, 540+ districts, and 11,000+ pin codes, ensuring both scale and 100% transparency in last-mile operations. Connect with Anaxee at sales@anaxee.com
Benefit Sharing Agreements (BSAs): Building Trust with Communities
Introduction
Carbon projects are not just about trees, emissions, or credits—they are about people. At the heart of every forest, mangrove, or clean energy initiative are the communities and Indigenous Peoples whose daily lives are most affected by project activities. Without their support, even the most ambitious projects risk collapse.
This is where Benefit Sharing Agreements (BSAs) come in. A BSA is a structured way to distribute the financial and non-financial benefits of carbon projects to local communities. Done well, it builds trust, ensures fairness, and strengthens the durability of carbon projects. Done poorly, it can lead to disputes, loss of credibility, and even project failure.
In this blog, we’ll explore what BSAs are, why they matter, the different models used, challenges in implementation, and best practices for designing fair and transparent agreements.
What are Benefit Sharing Agreements?
Benefit Sharing Agreements are formal arrangements that define how revenue and benefits from carbon credits are shared between project developers, governments, and communities. They cover:
-Monetary benefits: A share of revenue from the sale of carbon credits.
-Non-monetary benefits: Jobs, healthcare, infrastructure, training, or ecosystem services.
-Governance mechanisms: How decisions are made, who participates, and how disputes are resolved.
The idea is simple: communities that help protect or restore ecosystems must receive a fair return. This not only rewards them for their stewardship but also ensures long-term sustainability.
Why BSAs Matter
Community Buy-in: Projects cannot succeed without the support of Indigenous Peoples and Local Communities (IPLCs). BSAs create trust and cooperation.
Fairness and Justice: Communities often bear the opportunity costs of conservation, such as giving up land-use options. Benefit sharing compensates them fairly.
Sustainability: Projects with equitable benefit-sharing are more resilient, reducing risks of leakage, conflict, or non-compliance.
Investor Confidence: Transparent BSAs enhance the credibility of projects, making them more attractive to buyers and financiers.
Types of Benefit Sharing Models
Benefit sharing can take different forms depending on context:
1. Fixed Payments
-Communities receive a guaranteed annual or periodic payment. -Provides certainty, but may underrepresent future credit value.
2. Revenue-Sharing Percentage
-Communities receive a fixed percentage of credit revenue. -Aligns incentives but exposes communities to price fluctuations.
3. Hybrid Models
-Combines fixed payments with revenue-sharing. -Provides stability with upside potential.
4. In-Kind Benefits
-Communities receive benefits in non-cash forms: schools, clinics, roads, or water systems. -Useful in areas with weak financial infrastructure.
5. Community Development Funds
-Revenue pooled into a fund managed by community representatives. -Funds projects like livelihood programs, health, or education.
Key Principles of Effective BSAs
Based on the Carbon Finance Playbook and global best practices, effective BSAs should:
Fairness: Ensure equitable distribution of benefits.
Engagement: Involve communities in agreement design.
Transparency: Clearly communicate revenue flows and decision-making.
Long-Term Commitment: Support communities beyond initial project years.
Flexibility: Adapt agreements to changing market or community conditions.
Challenges in Implementing BSAs
Despite their importance, BSAs face challenges:
-Power Imbalances: Developers or governments may dominate negotiations.
-Lack of Legal Clarity: In some countries, carbon rights are not well defined.
-Capacity Gaps: Communities may lack financial literacy to manage funds.
-Monitoring Difficulties: Ensuring benefits actually reach all households can be difficult.
-Corruption Risks: Without transparent governance, funds may be misused.
Case Studies
Mozambique
Mozambique’s carbon projects have pioneered community benefit-sharing, often directing 50% of revenues to local communities. While promising, challenges remain in ensuring transparency and equitable distribution.
Kenya – Cookstove Projects
In Kenya, improved cookstove projects share benefits through lower household fuel costs, health improvements, and a share of carbon revenues. Community organizations play a central role in managing funds.
Indonesia – Forest Conservation
Indonesian REDD+ projects often use hybrid BSAs combining direct cash payments with community development programs, such as schools or livelihood projects.
Tools to Strengthen BSAs
-Participatory Governance Models: Involve communities in boards or decision-making bodies.
-Third-Party Audits: Independent verification of revenue distribution.
-Digital MRV (dMRV): Technology to track benefit distribution in real time.
-Legal Frameworks: Clear recognition of carbon rights at national and local levels.
-Capacity Building: Training communities in finance, governance, and monitoring.
The Role of Donors and Investors
Donors and investors can strengthen BSAs by:
-Providing early-stage grants for capacity building.
-Supporting independent monitoring systems.
-Requiring transparent BSAs as a condition for funding.
-Offering insurance or guarantees to protect community benefits.
The Way Forward
For carbon projects to achieve credibility and long-term impact, benefit sharing must move from tokenistic gestures to structured, transparent systems. Communities need to see tangible improvements in their lives for projects to endure.
Future improvements will depend on:
-Integration of BSAs into ICVCM’s Core Carbon Principles.
-Greater alignment with Article 6 frameworks.
-Adoption of digital tools for transparency.
-Recognition of IPLC rights in national legislation.
Conclusion
Benefit Sharing Agreements are not optional—they are essential. They ensure that communities who are stewards of forests, land, and ecosystems are fairly compensated. Beyond fairness, BSAs are about building trust, reducing risk, and making projects sustainable.
For developers, BSAs mean stronger projects. For investors, they mean credibility and risk reduction. For communities, they mean justice and opportunity. And for the world, they mean that carbon projects can truly deliver both climate impact and social equity.
About Anaxee:
Anaxee drives large-scale, country-wide Climate and Carbon Credit projects across India. We specialize in Nature-Based Solutions (NbS) and community-driven initiatives, providing the technology and on-ground network needed to execute, monitor, and ensure transparency in projects like agroforestry, regenerative agriculture, improved cookstoves, solar devices, water filters and more. Our systems are designed to maintain integrity and verifiable impact in carbon methodologies.
Beyond climate, Anaxee is India’s Reach Engine- building the nation’s largest last-mile outreach network of 100,000 Digital Runners (shared, tech-enabled field force). We help corporates, agri-focused companies, and social organizations scale to rural and semi-urban India by executing projects in 26 states, 540+ districts, and 11,000+ pin codes, ensuring both scale and 100% transparency in last-mile operations. Connect with Anaxee at sales@anaxee.com
Introduction: What is Carbon Finance and Why It Matters
In the fight against climate change, money matters. Without reliable and scalable sources of funding, even the most innovative climate solutions cannot reach the ground. This is where carbon finance comes in. Carbon finance refers to financial instruments and investments that are directed toward reducing greenhouse gas (GHG) emissions. It works by assigning a value to carbon reductions, making it possible to invest in projects that cut or remove emissions, and then monetize those impacts through carbon credits.
With the Paris Agreement now shaping global climate action, a specific part of the treaty- Article 6 has become the cornerstone of how international carbon finance will evolve. Understanding Article 6 is critical for project developers, investors, and governments alike. This blog dives into how Article 6 transforms carbon finance, what mechanisms it enables, and what challenges and opportunities lie ahead.
Section 1: A Quick Recap of the Carbon Market
Before we dig deeper into Article 6, it’s useful to recap how the carbon market works:
Carbon Credits: When a project reduces or removes GHGs, it can issue carbon credits (usually one credit = 1 tonne CO2e).
Voluntary vs Compliance Markets: Voluntary markets let companies and individuals offset emissions on their own terms. Compliance markets are regulated by laws or treaties.
Standards and Registries: Projects are certified under standards like Verra or Gold Standard, which ensure that credits are real, additional, and verifiable.
Traditionally, these credits have been bought and sold in a fragmented system, often limited to voluntary efforts. Article 6 changes that.
Section 2: What is Article 6?
Article 6 is a part of the Paris Agreement that lays out how countries can cooperate to meet their climate targets. It introduces new flexibility mechanisms to support emissions reductions through international collaboration.
There are two key parts:
– Article 6.2: Allows bilateral or multilateral cooperation between countries. One country can transfer emissions reductions to another country to help meet its Nationally Determined Contributions (NDCs).
– Article 6.4: Establishes a centralized UN-supervised mechanism to generate carbon credits from verified mitigation projects, replacing the old Clean Development Mechanism (CDM).
Both mechanisms are meant to ensure environmental integrity and avoid double counting. The key innovation is the corresponding adjustment—a system that ensures only one country (either the host or the buyer) can count a specific reduction toward its NDC.
Section 3: How Article 6 Enables Carbon Finance
Article 6 isn’t just about rules; it unlocks entirely new pathways for climate finance. Here’s how:
Credibility and Demand: Authorized credits with corresponding adjustments become more attractive for buyers who want to make robust climate claims.
Compliance-Grade Voluntary Credits: Companies under pressure to meet Science-Based Targets or use only “high-integrity” credits are now looking at Article 6-aligned units.
Public-Private Collaboration: Governments can now partner with private developers, using the finance from credit sales to support national climate plans.
Premium Market Access: Some markets (e.g., airlines under CORSIA or entities under Singapore’s carbon tax) accept only Article 6-authorized credits, increasing the price and volume potential.
With the right legal agreements and transparent registries, carbon finance under Article 6 becomes more scalable, trustworthy, and strategic.
Section 4: The Mechanics of Carbon Finance Under Article 6
Let’s break down how a carbon finance transaction under Article 6 typically works:
Project Development: A climate project is identified—say, reforestation, methane capture, renewable energy, or energy efficiency.
Host Country Engagement: The project developer applies for a Letter of Authorization (LOA) from the host government.
Standard Certification: The project is validated and verified by an independent standard (e.g., Verra, Gold Standard).
Issuance and Labeling: Upon verification, credits are issued with a tag noting whether they are authorized under Article 6.2 or 6.4.
Corresponding Adjustment: The host government adjusts its own emissions inventory to avoid double counting.
Sale or Transfer: Credits are sold to another government, a company under a compliance market, or a voluntary buyer.
Revenue Use: Funds can support the project itself or be channelled into broader climate and development goals.
The financial value here isn’t just the price per tonne; it’s also the reputational, strategic, and long-term investment appeal of credits that are aligned with global rules.
Section 5: Key Opportunities in Carbon Finance via Article 6
Mobilizing Large-Scale Investment: Governments and multilateral banks can blend public funding with private carbon finance to scale interventions.
Sovereign Climate Deals: Bilateral ITMO (Internationally Transferred Mitigation Outcomes) deals like Switzerland-Thailand open the door for structured cross-border climate investments.
Finance for Hard-to-Abate Sectors: Article 6 could channel finance into sectors like agriculture, cement, or shipping, where mitigation is expensive but necessary.
Tech-Enabled Verification: Satellite monitoring, remote sensors, and blockchain registries make tracking Article 6 credits more efficient, reducing MRV (Monitoring, Reporting, Verification) costs.
Section 6: Real-World Examples and Progress So Far
While COP 28 ended without finalized guidance on 6.2 and 6.4, several pilot projects and deals show strong momentum:
– Thailand-Switzerland ITMO Deal: The first publicized trade under Article 6.2, covering climate-smart infrastructure and transport.
– Singapore’s Carbon Tax Policy: Allows domestic companies to use Article 6 credits from approved standards for part of their liability.
– Gold Standard Authorized Credits: Credits from projects in Rwanda and Malawi have been labeled as Article 6-authorized, setting precedents for cookstove and energy access projects.
These examples show that, even as rules are finalized, the practice of carbon finance under Article 6 is already underway.
Section 7: Risks, Gaps, and Governance Challenges
Carbon finance under Article 6 is not without its problems:
Legal Uncertainty: Different interpretations of rules and lack of standard LOA formats.
Capacity Gaps: Many developing countries lack institutions to manage Article 6 accounting, registries, and authorization.
Price Volatility: With overlapping voluntary and compliance demand, pricing can fluctuate.
Equity Concerns: Will benefits flow to frontline communities, or just intermediaries?
Double Counting Risk: Poor registry integration or weak reporting can still allow abuse.
Addressing these requires harmonized frameworks, technical assistance, and possibly a global coordination body.
Section 8: What to Watch for in 2025 and Beyond
The next 2-3 years will be crucial. Here’s what stakeholders should track:
– COP 29 and COP 30 Outcomes: Final guidance on Article 6.4 and detailed MRV protocols.
– National DNA Roll-Outs: Countries will clarify how to apply for LOAs, what projects qualify, and how corresponding adjustments will be reported.
– Emerging Buyers: CORSIA airlines, ESG-driven investors, and Asian governments will shape demand.
– Registry Interoperability: Digital infrastructure to connect national registries with international standards.
– Price Signals: Watch auctions, bilateral deals, and spot-market platforms for real-time prices on authorized credits.
Conclusion: The Decade of Carbon Finance Has Begun
Carbon finance is no longer just a niche part of climate policy. With Article 6 laying the foundation for international cooperation, it becomes a primary tool to direct money where it matters most. For governments, it’s a way to attract investment and exceed national targets. For businesses, it offers verified and credible ways to contribute to global goals. And for the planet, it means real emissions cuts, financed faster, and tracked transparently.
The next wave of climate action will be funded not just by philanthropy or aid, but by smart, rules-based carbon finance. Article 6 is the rulebook. Now it’s time to play smart.
Partner with Anaxee to Unlock Article 6 Finance
Ready to turn these insights into real‑world climate impact? Anaxee’s Tech for Climate team combines 50 000 on‑ground Digital Runners with cutting‑edge data tech to help projects secure Article 6 authorization, verify results, and access high‑value carbon finance. Schedule a call with Anaxee as sales@anaxee-wp-aug25-wordpress.dock.anaxee.com
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