Insurers hope new policies covering carbon credits will restore trust in a battered market – GWC Mag

Cloverly, a digital carbon credit marketplace, has started selling credits covered by insurance that covers “unforeseeable and unavoidable post-issuance risks.”

A carbon credit is a financial instrument that measures how much carbon dioxide an initiative such as reforestation or mangrove restoration or direct air capture will remove from the atmosphere over time. Each credit is equivalent to cutting one metric ton of CO2 or an equivalent greenhouse gas. Companies buy credits to “offset” their emissions.

The reputation of the carbon market took a hit in 2023 after whistleblowers reported that many credit schemes greatly inflated their environmental impact and some credits were bogus. Insurance is essential for restoring trust and attracting new capital, said Natalia Moudrak, head of the North America climate practice for risk management consulting firm Aon Climate. “The biggest benefit is greater confidence in helping entities put capital into these projects where they would otherwise be on the sidelines,” Moudrak said.

Expect to pay more

Oka, a carbon-credit insurance startup in Park City, Utah, is providing the coverage for Cloverly’s “premium” credits. The credits are from two “significant” but undisclosed nature-based projects, said Chris Slater, Oka’s founder and CEO. The insurance triggers under two conditions, he said.

1. “Reversals”: A natural or human-induced event that could cause a project to fail to deliver the number of credits originally promised. Triggering events could include a wildfire or flood or other natural catastrophe that compromises a reforestation project or the discovery of illegal logging within project boundaries. 
2. “Invalidation”: This refers to scenarios in which project validation exposes fraud, such as overcrediting by a developer or misleading information about land ownership.

The price premium on the Cloverly credits was not disclosed. Generally, the cost of this sort of insurance will range from 3 to 8 percent of the credit’s annual base price, depending on the project, said Slater. The average price of a carbon credit last year was $6.97, according to data from Ecosystem Marketplace. “Insurance is an opportunity to create liquidity, safety and security,” Slater said.

Protection against fraud, delivery, political risk

Carbon credit projects verified by standards bodies such as Verra or Gold Standard already come with a basic form of insurance called “buffer pools.” The pools contain credits that aren’t sold to buyers. Instead, they’re held in reserve and only issued to compensate buyers whose credits are invalidated.

Oka’s insurance would work in collaboration with those pools, Slater said. Oka, which has about $7 million in seed investment, is closing its next funding round to expand its offerings. Details weren’t available at publication.

Carbon insurance providers are emerging to create policies that address three concerns:

1. Fraud and negligence, relating to how companies can disclose claims against their corporate commitments and meant to protect brand reputations. 
2. Political risk, such as regulatory changes which affect who can use offsets. For example, when a government decides offsets should be used against its own pledges or can’t be “exported” or accounted for elsewhere. 
3. Issuance failures, when a project fails to deliver credits within a certain timeframe.

Kita, a two-year-old, U.K.-based insurance startup with seed funding of $4.3 million, offers a product for fraud and negligence, and is developing one for political risk, said Natalia Dorfman, co-founder and CEO. Kita’s insurance caters to “high-quality” afforestation, biochar and advanced rock weathering approaches. It plans to add coverage for direct air capture, she said. 

“One of the challenges is that insurance can be slow to address new markets,” Dorfman said. “We don’t really have the time to wait for insurance to catch up.” 

One goal of insurers is to help expand the overall market for credits linked to carbon dioxide removal or emissions avoidance, which isn’t growing quickly enough to meet anticipated future demand, according to some predictions. Transaction values could be worth $10 billion to $40 billion by 2030, according to the Boston Consulting Group. At the end of 2022, the voluntary carbon market was worth close to $2 billion, according to Ecosystem Marketplace. Transactions values fell dramatically last year, the data show, to an estimated $343 million at the end of November.

More certainty for investors

London-based Respira International, which arranges financing for project developers and sells credits to corporate buyers, teamed with London-based insurance broker Howden to define a policy which includes nature-based carbon sequestration solutions such as mangrove or wetland restoration.

“If you can write a policy around an asset, that matters. Insurance underwriters don’t underwrite rubbish,” said Ana Haurie, co-founder and CEO of Respira. The policy, introduced in September 2022, is meant to reduce the reputational risk of buying carbon credits that are later shown to be low-quality.

Insurance will help attract new capital as the market recovers from last year’s project failures and fraud allegations, said Charlie Pool, head of carbon insurance for Howden. “There is no shortage of investors that want to participate, there’s loads of capital that people want to deploy into decarbonization,” he said.

Howden is working on a “shopping list” of policies that it will introduce this year, to make projects more bankable. “Investors are used to buying insurance, it’s not a big leap of imagination,” he said.

While interest in insurance is still low among corporate buyers, it will become an important “forcing function” to help the voluntary carbon market grow, said Brennan Spellacy, co-founder and CEO of Patch, a San Francisco-based venture that facilitates credit purchases by corporate buyers. “There are a lot of things that could happen post-transaction,” he said. “A lot of corporate buyers haven’t felt the pain of not being insured yet.”