One potential solution to this challenge is a political risk insurance (PRI) product such as breach of contract. For example, if the Host Country Agreement explicitly commits in a legally binding way to undertaking a corresponding adjustment, the host country’s failure to do so could be treated as a breach of contract.
One of the primary benefits of such a product is the potential for the PRI provider to resolve disputes before an actual breach occurs. In the event that a breach occurs, the PRI provider could compensate the buyer of the ITMOs for the amount of an arbitral award, up to a specified maximum liability amount. Furthermore, in order to facilitate greater liquidity in secondary markets, the PRI could potentially be structured such that it can be transferred with the ITMO upon completion of necessary due diligence and required approvals by the PRI provider.
It is important to note that PRI products may require a form of investments that can be covered, such as equity or loans. This may require further structuring of the transaction to ensure that the PRI product can cover the ITMO transaction. With calls for greater climate action, the development of such products will be critical to building greater trust in markets as a mechanism for supporting NDC implementation and increasing ambition.