The Letter That Can Be Withdrawn

By Bay St. Clair, Associate, Entoro

Second in a series of three on authorization under Article 6.

The previous piece in this series argued that authorizing a mitigation outcome for international transfer is an economic decision by the host government, weighed against what that government needs to meet its own climate target.

But authorization is not necessarily a one-time risk decision.

The market often treats a letter of authorization as binary and permanent, a box that is either ticked or not. In practice, the position is more complicated. Authorizations can contain conditions governing their scope, duration and potential changes, while the projects relying on them may continue producing credits for years.

That mismatch matters most to whoever is financing future delivery.

Three Timelines, One Asset

Long-dated forestry and other nature-based carbon projects can extend across multiple national climate-target periods.

The authorization supporting those cash flows operates on a different timetable.

The first timeline is the national target cycle. Under the Paris Agreement, countries communicate nationally determined contributions every five years. Each successive target can change the amount and cost of mitigation a government needs to retain domestically. An authorization does not automatically expire when an NDC changes, but a long-dated project can span several periods in which the host country's incentives are materially different.

The second timeline is the authorization itself. The Article 6.2 rules clarified at COP29 in Baku established additional requirements around authorization processes, transparency and changes to authorizations.

The third is first transfer. Current rules distinguish mitigation outcomes that have already been first transferred from outcomes that remain prospective. As a general rule, later changes should not affect ITMOs already first transferred, although participating countries can agree otherwise under the applicable terms.

The distinction is economically important. An outcome already delivered and transferred can carry a different risk profile from credits expected to be generated years later.

A long-dated cash flow can therefore depend on a sovereign commitment whose value is shaped not only by the authorization signed today, but by the treatment of future vintages and future government policy.

What the risk looks like in practice

World Bank guidance identifies three ways authorization risk can materialize: authorization is obtained and later revoked or rescinded, authorization remains in place but the host government fails to make the corresponding adjustment, or the government later changes laws or policies in a way that prevents credits from being transferred.

None requires a dispute about whether the project actually reduced emissions.

Zimbabwe showed how quickly the policy environment can change. In 2023, the government moved to invalidate existing carbon arrangements and proposed taking half of project revenue. Revised regulations later allowed project proponents to retain 70 percent of revenue while imposing a 30 percent environmental levy for the first ten years.

From the eleventh year, the share of proceeds is to be renegotiated based on prevailing circumstances.

That provision captures the tenor problem unusually well: a regulatory renegotiation point sitting inside the life of the underlying asset.

The broader exposure appears elsewhere. Kenya has established a national ceiling on Article 6 mitigation outcomes authorized for international transfer through 2030, explicitly intended to help protect its national target from overselling. Papua New Guinea imposed a moratorium on new voluntary carbon-market activity in 2022 while it developed a regulatory framework. Indonesia effectively halted cross-border carbon-credit trading in 2021 before reopening international trading under a revised framework in 2025.

The policies and motivations differ. What they demonstrate is narrower and more important for an investor: the ability to transfer a tonne internationally remains exposed to sovereign policy while the underlying project can continue operating unchanged.

A letter can fail without being withdrawn

The quieter risk is administrative.

A letter of authorization begins a chain of tracking, accounting and reporting obligations that can continue long after the letter is signed. Early reviews of Article 6.2 reporting have identified inconsistencies and transparency gaps, while new reporting tools have been developed specifically to help host countries calculate and report corresponding adjustments.

That creates an important distinction between authorization and evidence that the accounting commitment has actually been performed.

An authorization can be legally valid while the corresponding adjustment remains a subsequent obligation of the host country.

The World Bank identifies that timing mismatch directly. A host government can authorize a transfer and still fail later to make the corresponding adjustment needed by the buyer.

So signature is not the end of the diligence process.

For a financier, the relevant chain runs from authorization through first transfer and ultimately into host-country accounting and reporting. Failure at any stage can affect the usability or value of the unit even where the underlying project performs as expected.

Where the remedies sit

The protections that exist address different parts of that exposure.

Article 6 cooperation occurs at the sovereign level, while private developers and financiers generally rely on separate contractual rights to protect themselves against host-government non-performance.

A sufficiently clear project, investment or authorization agreement can create enforceable commitments. The World Bank Group's Multilateral Investment Guarantee Agency has identified revocation of authorization and failure to honor corresponding-adjustment commitments as risks that may be addressed through its breach-of-contract guarantee framework where the necessary legally binding arrangements exist.

In 2024, MIGA launched a model Letter of Authorization intended to clarify legal rights and make Article 6 investments more insurable. The template is designed to establish enforceable host-government commitments, including compensation and dispute-resolution provisions.

Crediting programmes and insurers are developing additional protections for circumstances in which a promised corresponding adjustment is not ultimately delivered, including replacement, compensation and insurance mechanisms.

Each addresses part of the exposure.

None removes the basic mismatch between a long-dated carbon asset and a sovereign policy framework that can evolve throughout its life.

The Bottom Line

A letter of authorization is not the same thing as an irrevocable guarantee covering every future tonne a project expects to produce.

Outcomes that have already been issued and first transferred can carry one risk profile. Future vintages can carry another, shaped by the terms of the authorization, national policy, the host country's future NDC position and the government's ability to complete the accounting commitments associated with the transfer.

For a long-dated project, those future outcomes can represent a significant portion of expected value.

Structures that hold up will separate those risks rather than blending them. They will examine when and how an authorization can change, treat first transfer and evidence of the corresponding adjustment as separate milestones, and match contractual, insurance and replacement protections to the tenor being financed.

Which protections are available, and who ultimately stands behind them, depends heavily on the route a transaction takes under Article 6.

And the two principal routes are less alike than they first appear.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Entoro, LLC, or any of their respective affiliates. This article is provided for general informational and educational purposes only and does not constitute investment advice, a recommendation, an offer to sell, or a solicitation of an offer to buy any security, financial product, or investment strategy. The information presented is believed to be reliable but is not guaranteed as to its accuracy, completeness, or timeliness. Any forward-looking statements or opinions are subject to change without notice.

Author Bio: Bay St. Clair is an Associate at Entoro Capital, LLC, focused on structured finance, carbon markets, insurance, and renewable energy transactions. He supports financial modeling, due diligence, automation, and valuation work for climate finance and environmental asset securitization projects.

He plays a central role in expanding Entoro’s Natural Capital Securities platform and 1NatCap’s transaction infrastructure. He supports the origination, structuring, and execution of carbon and natural capital securitization projects through the development of Entoro’s automated processes for diligence frameworks, risk-assessment processes, and capital-markets systems required to move projects from initial evaluation through financing and commercialization.

Bay has supported Entoro Insurance Services by preparing research and presentation materials for various carbon credit insurance partnership initiatives. He also worked as a student consultant with CarMax, where he developed a financial and marketing strategy to enhance electric vehicle adoption.

He earned a Bachelor of Science in Commerce with concentrations in Finance and Management from the University of Virginia’s McIntire School of Commerce. He holds FINRA Series 3, 7, 24, 27, and 63 licenses and is a licensed Property and Casualty Insurance Agent in Texas.