Recently, there have been reports indicating that the carbon market has been plagued by misleading information, with even industry leaders being singled out. Last Wednesday, the global carbon trading giant "South Pole" saw its CEO step down after the group withdrew one of the world's largest forest conservation projects in Kariba, Zimbabwe. Earlier this year, the industry benchmark " Verra " certified carbon credits were also criticized as being practically worthless, as the promised carbon offset could not be achieved.
“Everybody wants to claim the receipt of carbon savings, but nobody wants to put their hand up if things go wrong,” said Vipul Shetty, director of energy transition at insurance brokerage Howden. “And when you’re in the business of risk, things go wrong.”
Eco-Business reports where investors see risks in buying carbon credits that might not live up to their promise, insurers are seeing opportunity. A market is developing globally for insurance related to carbon credits.
The Kuamut Rainforest Conservation Project is being developed as a forest carbon project in Sabah, Malaysia. (Photo: Wikimedia Commons)
Shetty discovered the global rise of carbon trading, especially welcomed by non-energy companies such as pharmaceuticals, real estate development, and banks. As improving energy efficiency has limited benefits in reducing carbon emissions, the other significant half still requires carbon capture, hydrogen energy, and carbon credits.
Demand for carbon credit insurance also extends beyond companies to include investors and carbon marketplaces, said Christopher Au, director of climate practice in Asia Pacific at global advisory, broking and solutions firm WTW.
“There is substantial growing interest from buyers,” said Au, citing more scrutiny and due diligence as the key reason. Much of this interest is aligned with forestry assets, partly because the insurance industry has a long history in the sector and underwriting capabilities in forestry. “We see interest in products that are either indemnity [indemnifying policyholders from an insured event] or parametric [paying out a fixed amount upon the occurrence of a triggering event],” he said.
Although the market is still in its early development stage, large international insurance companies and specialized startups have already begun promoting products and solutions related to carbon credit risks. Au states, " There is no shortage of interest from the supply side, and product innovation is moving in new ways."
One such startup is Kita, headquartered in London, which replaces problematic carbon credits with those from their own suppliers. And Oka Insurance stated that they will assist in replacing problematic carbon credits if they are affected by natural disasters, changes in methodology, or fraudulent issuing.
There are also more opportunities for insurance companies to provide coverage for Carbon Capture and Storage (CCS) activities, even as they involve more complex technologies and risks, with a broader scope of operations. Shetty describes it as massive risk because the construction of facilities alone can cost a multibillion dollar.
Shetty indicates that these challenges include constructing large buildings around water bodies since many Carbon Capture and Storage (CCS) facilities are offshore. For example, the Kasawari project of the Malaysian national oil company, Petronas, is located 800 kilometers off the coast of Bintulu, Sarawak. Additionally, the carbon capture technologies, such as liquefaction and compression, are also highly complex.
Shetty also provided an example of Chevron's Gorgon project in Australia. The carbon capture and storage facility at Gorgon experienced significant technical issues since 2017, with the discovery of valve erosion causing leaks. As a result, the captured carbon had to be released, and Chevron, along with its partners, was compelled to pay over 180 million dollars in carbon offset payments to compensate for the shortfall.
Howden believes that the insurance industry plays an active role in establishing carbon credit standards, especially in situations where regulations or national policies are insufficient. For example, the height of speed bumps that electric cars encounter can impact the overall value of the vehicles. Higher speed bumps may collide with the batteries underneath the vehicle, leading to damage and decreased vehicle value. Therefore, for insurance companies, the underwriting costs for electric cars in those areas should be higher.
Howden’s insurance coverage for electric vehicle assets extends beyond just vehicles and batteries. It also helps industry participants mitigate the risks associated with infrastructure activities, such as the installation of charging stations and connecting these stations to renewable energy sources or the electrical grid—all of which fall within the insurance coverage, said Jeffrey Chan, chief executive officer of Howden’s Malaysian operations.
“Traditionally, people perceive insurance as a contingency, only if something bad were to happen do you (turn to it),” said Chan. “But that narrative is changing — insurance today has become a catalyst, to enable certain things to happen.”