As new risks associated with environmental initiatives materialize, the insurance market is adapting to better address these exposures. One notable development is the introduction of carbon credit insurance solutions, designed to help mitigate the specific risks faced by companies engaging in the voluntary carbon market (VCM). The VCM is a decentralized marketplace where each carbon credit represents one ton of carbon dioxide (or equivalent greenhouse gases) either removed or avoided. Carbon credit insurance may help transfer some of the risks associated with buying, investing, or selling carbon credits within this unregulated environment, with the goal of providing greater security and confidence for market participants.
The growing market for carbon credit insurance
Companies can face numerous risks when purchasing carbon credits to offset their emissions. These include the invalidation of credits due to fraud, changes in accounting methodologies, or other reasons that lead to the withdrawal of credits previously issued and validated by accrediting bodies. Additional risks include late delivery of credits by project developers and the potential for reversals, where sequestered carbon is re-released into the atmosphere, often due to natural disasters or other unforeseen events.
Reversal is a particularly significant risk, especially in regions prone to natural catastrophes. Forest-based offset projects are especially vulnerable; wildfires, for example, can destroy trees that have sequestered carbon, resulting in the release of stored emissions back into the atmosphere. If a company relies on these offsets to meet regulatory or voluntary commitments, such reversals could have serious consequences, including reputational damage, financial penalties, or loss of credibility.
While the VCM remains largely unregulated, the potential impact of reversals underscores the need for risk mitigation. Insurance products are emerging to provide coverage against these events, offering companies potential financial protection should a reversal occur. This may allow organizations to repurchase credits or receive indemnity for their investments, with the intent of helping to maintain confidence in their offsetting strategies.
