Page 50 - The Insurance Times February 2025

Carbon Credits and Insurance

New Frontiers in Climate Risk Management

Introduction 1. Project Development Risks:
The intersection of carbon credits and insurance represents Projects that generate carbon credits, such as refores-
a transformative frontier in climate risk management, tation or renewable energy initiatives, face risks like
where financial tools meet environmental sustainability. As natural disasters, regulatory changes, and project
global economies strive to meet ambitious net-zero goals, underperformance. Insurance provides coverage for
the burgeoning carbon credit market offers a promising these potential setbacks, ensuring that the projects can
mechanism for offsetting greenhouse gas emissions. At the meet their carbon reduction goals.
same time, the insurance industry is increasingly integrat- 2. Market and Transaction Risks:
ing climate risk considerations into its products, creating Carbon credit markets are subject to price volatility,
synergies that address environmental challenges while of- fraud, and delivery risks. Insurance products like price
fering financial stability.
protection and credit risk coverage help stabilize these
markets by protecting buyers and sellers from financial
This article explores how carbon credit markets interact with losses.
insurance products, their development, and their potential
to revolutionize climate risk management. 3. Long-Term Integrity Risks:
Carbon sequestration projects, such as forest preserva-
What are Carbon Credits? tion, must ensure that the stored carbon is not re-re-
leased due to events like wildfires or deforestation. In-
Carbon credits are tradable certificates representing one
metric ton of carbon dioxide (CO?) or its equivalent that has surers offer coverage for such "reversal risks," guaran-
been reduced, removed, or avoided. They are a core ele- teeing the long-term validity of the credits.
ment of carbon markets, which operate under two primary
frameworks: Development of Carbon Credit and In-
1. Compliance Markets: Governments or regulatory bod- surance Synergies
ies impose caps on emissions, and companies exceed-
ing these limits must purchase credits to comply. 1. Insurance for Carbon Offset Projects
One of the key developments in the interaction between
2. Voluntary Markets: Organizations voluntarily purchase carbon credits and insurance is the creation of special-
carbon credits to offset their emissions and meet
ized insurance products tailored to offset projects. For
sustainability goals.
example:
Performance Guarantees: Insurance ensures that
By enabling the monetization of carbon reductions, these
markets incentivize companies to invest in sustainable projects, a project will generate the promised volume of
such as renewable energy, afforestation, and carbon capture. carbon credits.
Natural Catastrophe Coverage: Protects refores-
Insurance in the Carbon Credit Ecosys- tation and afforestation projects from risks like wild-
tem fires, hurricanes, or pests, which could invalidate
the carbon credits.
Insurance plays a crucial role in supporting the carbon credit
market by addressing the risks and uncertainties associated Legal and Regulatory Coverage: Shields projects
with carbon reduction projects and transactions. Insurers from financial losses caused by regulatory changes
offer coverage to mitigate risks in three main areas: or disputes over land ownership.

The Insurance Times February 2025 45