economic benefits. The World Bank estimates that forests contribute to the livelihood of more than 90 percent of the 1.2 billion people living in extreme poverty around the world, and help nourish the agriculture and food supplies of nearly half the population of developing countries.
One of the newer tools for combating deforestation is REDD, Reducing Emissions from Deforestation and Forest Degradation, which uses market incentives to promote sustainable forest management. OPIC recently developed a new insurance product that will protect investors against political risk in REDD projects and in 2011 it entered its first contract for this insurance. The deal will provide $900,000 in political risk insurance to Terra Global Capital, an investor in a project that will protect large swaths of forest in Cambodia through the sale of offset credits in international carbon markets.
The project is expected to generate a 30-year income stream to help the government of Cambodia and local community groups fund activities – such as community forest patrols and water resource development projects – that reduce deforestation. As a result, it will protect 64,318 hectares (158,865 acres) of forest, sequester CO2 emissions, conserve endangered biodiversity and help local communities create jobs.
Insuring against "nesting regulations"
Terra Global said it purchased the political risk insurance in order to reduce its exposure to future changes in national and local governments and laws over the life of the project. It also said it expects that insurance against political risk in REDD projects will encourage more private-sector investment in this emerging sector.
OPIC’s political risk insurance protects investors against several unforeseen political developments that may impact an ongoing project in a developing country. Some of these risks include improper host government interference or confiscation, changes in taxation or other critical regulations, and property damage or loss of business income resulting from war, unrest or terrorism.