The ongoing California wildfires have devastated vast swathes of land, resulting in massive emissions and economic losses. The severity of these fires highlights growing climate risks, raising critical questions about the role of the voluntary carbon market (VCM), particularly the challenges of nature-based solutions (NbS), and what implications climate trends could have on market-based carbon pricing mechanisms.
Driven by unusually dry conditions and strong winds, the Los Angeles metropolitan area fires have killed at least 27 people. While largely contained, there is still a significant fire threat which poses a risk to millions of people in Southern California. As of 16 January 2025, AccuWeather estimated the economic costs of California’s recent fires to be USD 250-275 billion, with over 40,000 acres burned and emissions exceeding 100 Mt CO₂e.
Buffer Pools and Insurance
To protect against the risk of reversal, where the emissions benefit associated with a carbon credit is undone, buffer pools are utilized by registries and developers. Contribution to these pools is typically mandatory, and the percentage allocated is based on the reversal risk of individual projects. When a reversal occurs, each impacted credit is replaced by releasing the equivalent number of credits from the buffer pool.
The increasing scale and frequency of wildfire events raise concerns about the adequacy of these pools. If catastrophic reversals become more common, buffer pools could be depleted. This could lead to higher buffer contribution requirements for new projects, increasing costs for developers and potentially reducing the financial viability of certain project types. Increased reliance on buffer pools could also affect market dynamics and climate mitigation since these mechanisms have other drawbacks.
Supplementary mechanisms like project-specific insurance policies are emerging as an option for VCM participants in managing reversal risk. These insurance products, designed to cover unforeseen reversals, could complement buffer pools by providing an additional layer of protection. However, such solutions come with higher administrative and operational costs, which could further drive up the price of carbon credits.
Climate Change and the Worsening of Fires
The evidence is quite clear: Wildfires are getting worse, and climate change will continue to exacerbate its impacts. Wildfires are not only a consequence of climate change but also a major contributor to it. These fires act as a positive feedback loop, which releases vast amounts of emissions that continue to increase the chance of emissions released from future fires. The scale of these fires can be immense, as the emissions of Canada’s 2023 fires alone would have made it the fourth-largest emitter for 2023, just after India. The conditions that fuel these fires are here to stay, which has made some even say that some parts affected by wildfires should not be rebuilt and many areas might simply be uninsurable in the future, as now happens with Florida for a different reason, which is also tied to climate change.
As this concerning trend continues, it is expected to have various impacts on the VCM. Wildfire risk and the ability to mitigate that risk varies across countries. Regions such as the Mediterranean, Australia, and California could face increasing reversal risk, which could impact the future development of projects in those regions and increase the costs associated with those projects, impacting VCM supply and prices. Buyers who want to minimize reversal risk may also seek different projects in regions more insulated from increasing wildfire potential.
Potential Opportunities Driven by Wildfires
Advanced tools like satellite monitoring and AI prediction models could improve the management of wildfire risk and improve the permanence of nature-based projects. Innovation in this area significantly overlaps with measurement, reporting, and verification (MRV) technologies, which would help mature another key aspect of the VCM. Because of the growing permanence risk of NbS projects, market participants could look to tech-based removals instead. This might provide an additional push for maturing nascent carbon removal technologies.
Verra’s recent initiatives, such as the Methodology for Avoided Forest Conversion from Decreased Wildfire under development, exemplify how organizations could manage wildfire risk going forward. Registries also have the opportunity to improve risk assessment of projects to improve their accuracy. The emerging risk of fires could drive these advances, but they would also benefit the broader market.
The evolving risks posed by wildfires represent both a significant challenge and an opportunity for the voluntary carbon market. As reversal risks grow, nature-based solutions will need to evolve through improved fire management, resilient project designs, and the adoption of advanced technologies. These adaptations, along with innovations in risk assessment and market methodologies, will be critical to maintaining the integrity and relevance of the VCM. By aligning market mechanisms with long-term climate goals, the VCM can continue to play a vital role in global efforts to combat climate change.