International insurance broker Howden has launched the first-ever voluntary carbon credit insurance. The aim is to limit fraud and negligence and increase confidence in the carbon market.
UK-based Howden Group is the largest European broker managing insurance for $10+ billion. Its key purpose in launching the carbon credit insurance product is to bring more confidence to the voluntary carbon market (VCM).
The product was developed in partnership with:
Respira International, a carbon finance business, and
Nephila Capital, an investment manager for reinsurance risk.
Parhelion, a climate risk finance firm, advised the partnership. While it was through Prince Charles’ initiative, the Insurance Task Force of the Sustainable Markets Initiative, that the product was created.
Added Layer of Security to the VCM
The broker believes that the VCM has a critical role in the world’s transition to a low-carbon economy.
Howden referred to various estimates suggesting that the market for carbon credits will grow from $20 billion to $50 billion by 2030.
The buyer of carbon credits (or carbon offsets) can emit a certain amount of carbon dioxide. One credit equals one tonne of CO2 or its equivalent.
The company also pointed out that the trading turnover of the VCM grew steadily over recent years. Last year, it recorded almost $2 billion in traded offsets.
That figure can grow even more as large companies are striving to reach their ambitious climate targets. This will significantly drive demand for carbon credits.
Yet, the VCM remains complex, particularly for new buyers.
Howden also said it doesn’t deliver consistent results of carbon reduction and removals projects on the ground.
In fact, there were a number of carbon credit scams in the market at the beginning of this millennium. In Britain alone, the High Court issued winding-up orders for 19 firms in 2016. They’re part of a fraudulent scheme involving over 5 million carbon credits.
Also recently, a couple in Taiwan were convicted for a carbon credit scam with fines and prison terms.
Plus, the market is still under-regulated. The quality of some of the sold credits remains questionable. This is why some entities are still not willing to invest in carbon credits.
So, Howden stated it’s vital for the VCM to put in place processes that improve the credibility and transparency of carbon credits.
It’s also crucial to have ways to distinguish verified, high-quality credits from unverified ones. This is to give buyers enough confidence in the market.
The first-of-its-kind VCM insurance product of Howden aims to add another layer of security for carbon credit buyers.
Carbon Credit Insurance for Integrity & Transparency
Insurers have been reluctant to offer cover for carbon credits. That’s mainly due to insufficient data on historic losses and weak legal systems for the VCM.
Howden’s carbon credit insurance provides cover for 3rd-party negligence and fraud. The product is from books of independently verified, high-quality carbon credits.
Charlie Langdale, Head of Climate Risk and Resilience at Howden, commented that:
“For the VCM to grow to $50bn by 2030, buyers need to be able to trust that the carbon credits they are buying are removing the promised volume of carbon from the atmosphere… The added layer of security provided by this product, combined with independent verification from established, reputable bodies will help buyers to purchase with confidence and should drive more buyers towards high-quality projects…”
Howden and its partners said they have a portfolio of verified credits and insured them as a bundle to diversify risk for the insurer.
In case of fraud or negligence after credit sale, Respira would be able to claim the insurance and compensate the buyer.
As per Respira’s CEO, Ana Haurie, the VCM is a vital element if the world is to reach net zero. So, the new insurance product will appeal to a lot of businesses that plan to buy carbon credits as part of their net zero pathways.
She also said that insurance backing for carbon credits “underpins the fact these are good quality projects if you can get them insured.”
And that will provide much needed capital for the integrity, transparency, and high quality of carbon projects on the ground.
The plan for the next months is for larger firms with diverse portfolios to secure their own carbon credit insurance.
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