Insurers essential to voluntary carbon market

Insurers have a key role in the development of the voluntary carbon market in measuring the quality of projects, according to the head of innovation at CFC.

George Beattie tells Insurance Day insurers could help improve the quality of what is still a largely unregulated market by handling much of the due diligence for smaller businesses looking to offset their carbon emissions.

He adds that CFC is placing a long bet on a future where tougher regulations on emissions will make the buying of offsets commonplace for businesses of all sizes.

CFC made its first move into the carbon offsetting space last month with the launch of its carbon delivery product, which protects buyers of credit forwards if a credit is not delivered.

The product offers cover for a broad range of risks depending on the carbon project being insured, including political risk and natural catastrophe. 

“If you put $1m into a project and you get 50% of the credits you expect – for any cause – we refund you $500,000. No deductible, no performance franchise,” Beattie says.

The underwriter can write up to £5m ($6.2m) of exposure per project and provide cover for multiple projects under a single policy.

Confidence to invest 

In the first instance, Beattie says the hope is the product will support the growth of the voluntary carbon market by giving buyers of carbon forward contracts the confidence to invest.

But he also envisions a future where buyers of carbon forwards will be reluctant to put money down on projects that are uninsurable. “You'll have a super high-quality end of the market which is insurable, and you'll have everything else,” he says.

“If a corporate is looking at a project and they can’t get it insured, they will want to understand why that is, so the diligence that insurers do can feed into a real quality dynamic for this market, which is critical.”

Beattie is adamant the voluntary carbon market is a vital way to transition to net zero. Unlike compliance carbon markets like the EU’s "cap-and-trade" emissions trading system, voluntary credits are generated by projects that avoid or remove carbon from the atmosphere.

This means each credit corresponds to a "real-world" tonne of carbon that has been avoided or removed.

However, while compliance carbon markets tend to be heavily regulated, the voluntary market lacks any central oversight and finding high-quality carbon bonds that deliver on their promise is a challenge.

Rapid growth

This has been exacerbated by the rapid growth of the sector, which Beattie forecasts will grow from $2bn this year to $30bn by 2030. This hockey-stick growth has attracted bad actors, he says, creating an oversupply of poor-quality credits at one end of the market, while at the high-quality end there is an undersupply.

Buying carbon forward contracts is not the same as buying futures on tangible goods such as steel or oil, explains Beattie, because a carbon credit is not fungible in the same way. There are standards for products like steel, but a voluntary carbon credit cannot be easily replaced by another.

“It's not the case that if I've invested into a basket 1,000 [carbon] projects, I don't care where the credits come from. That's not the zeitgeist,” says Beattie. “Although a carbon credit is a tonne, there is a big difference between the projects.”

"If a corporate is looking at a project and they can’t get it insured, they will want to understand why that is, so the diligence that insurers do can feed into a real quality dynamic for this market, which is critical"

^{George Beattie
CFC}

There are a lot of potential stumbling blocks for buyers of forward contracts, who often do not know their counterparty’s reputational or credit risk.

“Are they still going to be here in a year? Some sellers are highly prestigious, but relatively unknown to those outside of the industry... These kinds of problems are slowing down and gumming up the market,” Beattie says.

By de-risking this aspect of carbon forward contracts, CFC hopes to speed up deal-making by allowing buyers to focus on other aspects of the projects they are looking to invest in, such as whether they are a good ethical or strategic fit.

The carbon market has had an “imperfect start”, Beattie concedes, but one that was made in good faith. “We need it to succeed because we need to protect our natural assets,” he says, arguing it is an important economic incentive to prevent the exploitation and destruction of vital natural resources.

Regulation

Tighter regulation is also a big part of CFC’s bet on the voluntary carbon market. “In the future, there won’t be a [separate] voluntary market and compliance market. It will be one regulatory regime where everybody has to participate: every industry, every size of company,” predicts Beattie.

While the largest players such as energy companies already have sophisticated internal teams conducting due diligence, “in the future the little guy is going to want to use insurance – not as a rubber stamp... but as a proxy for quality,” he says.

CFC has already seen sellers of voluntary credits recognising the role insurers can play. “We have a lot of project developers approaching us and saying: we know we're not the target policyholder, but if CFC can underwrite our project and can offer coverage to our potential buyers, it'll speed up the deal making process,” Beattie says.

For CFC, carbon delivery is the first of what could become a suite of products across the carbon credit supply chain, with carbon cancellation insurance likely to be the next. This would protect businesses in the event a credit is cancelled after delivery – for example, if a forest that has been planted later burns down.

Beattie says there are another three to six similar products CFC would like to launch in the next couple of years.

Of the voluntary market, Beattie says, “Yes, it's complicated, but it's an honourable mission that the market is trying to achieve.”.

He concludes: “We want to be part of that and make sure the market grows in a sustainable and ethical way, and in the right direction towards proper value add, proper science and proper carbon removal improvement.”