Two executives with CQC Impact Investors, a developer of carbon credit projects, have been indicted for alleged fraud by the U.S. Attorney for the Southern District of New York. Such cases are rare, but they raise questions for carbon credit buyers — how can they have confidence that their investments will help reduce greenhouse gas emissions? What should they do if a project goes wrong? Carbon credit insurance can provide an answer.
Buyers can insure their carbon credits with specialist policies. As more options come to market, sustainability teams will soon need to decide: Is carbon credit insurance the best choice for their business?
Many companies, however, know little of these policies. For many, navigating the carbon markets is already a challenge. To help business leaders understand this emerging option, here are lessons from experts in the United Kingdom, where the market for carbon credit insurance is more advanced than in the U.S.
Origins of carbon insurance
While new insurance options are becoming available for carbon credits, a form of coverage already exists. One carbon credit is not sold for every ton of CO2 a carbon project removes from, or prevents from entering the atmosphere. Rather, between 10 and 30 percent of the credits a carbon project issues are typically set aside.
These credits, known as the buffer pool, are held by the registry (for example, Verra) in case carbon that was meant to be stored or captured by the project is accidentally released into the atmosphere. Buffer pools exist to reduce the chances that a buyer offsets its emissions using carbon credits that do not represent one ton of CO2e removed or reduced from the atmosphere.
Insurance in a mainstream sense arrived in the carbon markets in 2013, but specialist insurers have launched in earnest only in the last three years. Some policies cover fraud and negligence (if the carbon project is not delivering what it claims), purchase protection (if the buyer agrees to purchase more carbon credits than are issued from a project) and buffer depletion.
Much of the activity to date has taken place in the United Kingdom.
“London’s been almost the birthplace for carbon insurance,” said Chris Slater, CEO of Oka, a carbon insurance specialist. While its policies are available in the United States, Oka, like many other providers, is a Lloyd’s of London Coverholder.
Regulation lacking in the US
Established insurers are also beginning to offer carbon credit policies. “We’ve seen a lot of clients who are struggling with their decarbonization so it felt like a great time to formally enter the space,” said James Bosley, head of carbon at Gallagher, an Illinois-based international insurance broker with offices in the U.K.
A country’s environmental policy landscape influences a company’s carbon insurance decisions, said Racheal Notto, director of carbon markets engagement at Kita, a specialty carbon insurer: “In the U.K., there is more rigor around how carbon credits are allowed to be used … in the United States, we don’t have good regulation or federal policy to push corporates to do much. It’s all focused on public pressure and understanding what their clients want to see the corporate do.”
Understanding carbon insurance
Certain industries, such as aviation, operate in compliance carbon markets. Airlines are mandated to purchase from a pool of specific, eligible credits. Here, insurance will likely be a requirement.
Companies in other sectors, such as hospitality and retail, buy credits voluntarily. In voluntary carbon markets, insurance is not currently a requirement. “I would say over 99 percent of the interest that we receive is for the voluntary carbon market, but technically we can do compliance markets,” Notto said.
Analysts disagree over the percentage of U.K. credit buyers currently holding insurance. Responding to one survey that asked companies if they insured their credits, 51 percent said “yes.” Others believe this figure to be much lower.
Pre- and post-issuance
Carbon credit insurance is typically issued either prior to issuance or after. Pre-issuance insurance protects a company if the credits it has agreed to purchase are not issued — for example, if something goes wrong during project development.
Post-issuance insurance covers carbon credits after they have entered the market. A chief sustainability officer (CSO) could buy carbon credits from a project and then insure against unforeseeable risks, such as the CQC Impact Investors fraud case.
“It’s so much simpler if the project developer buys the insurance, but the beneficiary of the insurance is their customer,” said Charlie Pool, head of carbon insurance at London-based Howden Insurance.
The problem is that developing carbon reduction or removal projects is expensive. Costs for project development, verification and regular auditing quickly stack up. Pre-issuance insurance places additional fees, and risk responsibility, on the shoulders of developers. “Whilst the buyers should be bearing that risk, I don’t think in the market currently, they typically do,” Slater said.
To insure or not to insure?
Respira International, an intermediary buying and selling carbon credits, insured its credit purchases with Howden in 2022. “We wanted to hedge our exposure, but also give comfort to institutional investors to make allocations in what is a relatively young market,” said Ana Haurie, CEO of Respira.
Another benefit is indirect reputational protection. “If somebody is putting their balance sheet at risk to insure them [carbon credits], then that’s a decent quality signal,” said Oka’s Slater.
The very existence of carbon credit insurance serves as a sign of assurance, said Haurie: “That you can get insurance coverage on these projects should give comfort. Insurers aren’t in the market to lose money.”
Some buyers forego insurance, relying on their own expertise and on project quality data from agencies such as BeZero and Sylvera.
“The reasons they always give is that they think that they understand the [carbon] project better than we do and that they trust their due diligence,” said Pool.
The US frontier
Ultimately, the decision to purchase carbon insurance comes down to a company’s risk tolerance, and CSOs should weigh the cost of a policy against that of purchasing replacement credits.
As U.S. companies develop their emissions reduction strategies, the American market will expand. For now, London remains the center of innovation, but carbon insurance products will scale rapidly across the Atlantic.
“It’s a very different regulatory space in the United States and a more complex environment to innovate in insurance,” Slater said. “But in time I would imagine it’ll dwarf the U.K. and European market.”
