Can you afford not to invest in carbon credit insurance?

Miqdaad Versi, partner at Oxbow Partners, discusses the opportunity offered by the nascent carbon credit insurance market, with projections that the addressable market could reach more than $1trn by 2050.

When you think about how insurance can support the decarbonisation needed to hit our national targets, you typically think of insuring the big renewables: wind, hydroelectric and solar. And rightly so. But as this decade progresses, insuring carbon markets will – in our view – join the elite club of commanding over $1bn in premium.

Carbon markets are used to manage and reduce emissions from high-emitting industries and drive capital towards carbon credits that fund removal, reduction and avoidance projects. The carbon markets don’t, by themselves, solve the problem – but they create a price incentive to decarbonise and help invest in solutions that pave the way towards net zero. You could consider them the main market alternative to a “carbon tax”.

The voluntary carbon markets are still comparatively tiny ($2bn last year) – however, they are required (and expected) to scale significantly as the world accelerates its decarbonisation journey. Estimates vary between $10bn-$250bn by 2030 and over $1trn by 2050. These figures are so large because carbon markets are an integral part of any solution for the world to transition to a low-carbon economy.

And when there is this scale of investment (and it’s even more if we include the compliance market, currently valued at $800bn), there is a need for insurance.

Just imagine: if you are a CFO of a large corporate and you have made a public commitment to be carbon neutral and need to buy carbon credits, would you spend millions of dollars without any insurance? What happens if you buy a carbon credit from a carbon project and the company goes bust? Or if there is political instability which halts the issuance of credits? Or, the forest which your carbon credits have funded is nationalised? Or there is a wildfire which destroys the project?

All of these risks (invalidation, reversal, non-delivery, counterparty, reputational and political) can be effectively managed through insurance.

Wouldn’t it be great if when you invest £100,000 in carbon credits, you could buy insurance to cover these risks for say 3-10 percent of your investment? You would then have heightened confidence in your investment because an insurance company has put its capital behind these carbon credits. It would make a real difference.

The question is not if this will happen. It will – and the report we have published this week has interviews with the world’s leading experts, from brokers to carriers, all speaking of its inevitability.

The question is when this market will develop. There is a lack of data, issues of confidence in the carbon credits (especially following problematic reporting in national newspapers), and the need for market education.

However, as the market develops and clients find it easier to buy insurance, confidence in carbon credits will increase, trust will return, and there will be a tipping point. And at that inevitable tipping point, there will be an exponential increase in the usage of carbon credits and the need for risk transfer through different forms of carbon credit insurance.

So as demand develops, the insurance industry has to be ready: we need the sector to step up, create the risk management tools and innovative products needed, and build the risk transfer capacity to meet this challenge.

This represents one of these rare solutions for the insurance industry: one that is not only green, sustainable and purposeful on the front line in the fight against climate change, but also one that will be meaningful and profitable as the market develops.

The future for the carbon credit insurance market is bright, and only going to get brighter.