Carbon insurance: What is it, and why does it matter?
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20-Nov-24
Carbon insurance: What is it, and why does it matter?
Over recent decades, most corporations have become increasingly aware - and concerned about - their responsibility towards the planet. Since at least the 1990’s, there has been a strong push globally towards sustainability, averting climate change and achieving “net zero” carbon emissions.
However, for many businesses, the releasing of some level of carbon during their operations is inevitable. In response to this problem, a new market has emerged, known as carbon offsetting.
The insurance industry has not been far behind, offering a “carbon insurance” to support this emerging sector. This new type of insurance has a number of challenges but is vital to the carbon offsetting model.
What is carbon offsetting, and what are carbon credits?
Finding ways to reduce and offset emissions is not a brand-new concept. Ways to stop climate change were discussed at the 1992 Earth Summit (from which the United Nations Framework Convention for Climate Change was born in 1994). The UNFCCC is now ratified by 198 Countries.[i]
The Paris Agreement of 2015 was an international treaty focused on stopping climate change. It has further led to countries developing targets and regulations. [ii]
In addition to legislation mandating that companies limit or offset any carbon that they produce, consumers are voting with their feet and are increasingly supporting businesses that are conscious of their environmental impact.
All this creates a situation in which businesses are both constrained to reduce and offset carbon emissions (through “compliance”) and are also often voluntarily going above and beyond even what legislation forces them to do (through “voluntary” offsets).
Often, regulations will mandate a “cap” on the amount of carbon that a company can produce. This can then create a situation in which companies trade carbon credits between themselves. Companies who are under their cap may sell carbon credits to companies that go over their cap. This cap-and-trade system is part of the compliance carbon market.
Companies can also voluntarily purchase something known as “carbon offsets” where the carbon that they produce is offset by an activity that reduces the amount of carbon in the atmosphere (such as, for example, replanting forests.) Carbon offsets can also be known as “offset credits.”[iii].
The risks
As with all industries where there is a product and trade, there is need for insurance.
CFC, an insurer specialising in emerging risks, has produced a report on insurance within the carbon sector. Their survey has established a number of interesting statistics.
76% of the survey respondents said that they may invest in projects which would deliver carbon credits in the future. On the other hand, and illustrating the risk of such a move, 64% of those respondents who purchase carbon credits, had experienced a loss by not receiving what was expected. [iv]
There are numerous risks around the industry; the risk of loss (for example if a carbon offsetting project fails, due to an incident such as a flood or fire); the risk around changing regulations; risks around fraudulent sales.
If a company has purchased carbon credits which are lost, this can have knock-on implications, such as failing to meet their compliance responsibilities. It can also affect a company’s reputation, in a world where there are often campaigns to boycott companies that are damaging to the environment.
The value of insurance
These risks create a market in which there is some level of mistrust; particularly in the voluntary carbon market which currently sees less regulation than the compliance market. However, in the pursuit of net zero, it is vital that the carbon offsetting industry be allowed to thrive and to grow quickly, and here insurance can make a big difference; adding a legitimacy to an industry that needs to be more stable.
Insurers are in a key position to be able to mitigate the risks of any potential losses, enabling companies to feel more confident about investing. Insurers are also ideally placed to offer advice around risk minimisation, with so much transferrable knowledge from other areas of Property and Casualty.
There are challenges to be overcome, but insurers who are willing to invest in this relatively new sector, may be able to enjoy the benefits of an early start within a market that CFC estimates could be worth more than $1 Trillion by 2050. [v]
This is a complex area for underwriters and brokers alike, as they try to navigate a relatively new market, with difficult-to-measure risks, and the potential for changing regulations to move the goalposts. For insurance businesses to offer policies within carbon insurance, they will need to work with proactive, forward-thinking employees. As a specialist insurance recruitment agency, Aston Charles is well placed to find job candidates with the skills and experience to work within this sector. Contact Aston Charles today if you would like more information.
A force for change
As the insurance sector injects its wealth of experience around risk mitigation into the carbon credits / offsetting sector, it will inevitably offer confidence and reliability to the schemes. Anything that can be done to make carbon offsetting easier and more dependable will, over time, have an impact on the global drive towards controlling carbon emissions. The insurance industry can be a real force driving positive change in this important market.
[i] What is the United Nations Framework Convention on Climate Change? (no date) United Nations, Climate Change. Available at: https://unfccc.int/process-and-meetings/what-is-the-united-nations-framework-convention-on-climate-change (Accessed: 10 August 2024).
[ii] The Ultimate Guide to Understanding Carbon Credits (no date) Carbon Credits.com. Available at: https://carboncredits.com/the-ultimate-guide-to-understanding-carbon-credits/ (Accessed: 10 August 2024).
[iii] The Ultimate Guide to Understanding Carbon Credits (no date) Carbon Credits.com. Available at: https://carboncredits.com/the-ultimate-guide-to-understanding-carbon-credits/ (Accessed: 10 August 2024).
[iv] An Unmissable Opportunity in the Carbon Market (2024) CFC. Available at: https://cmsadmin.cfc.com/media/uzgjfnfv/carbon-report.pdf (Accessed: 10 August 2024).
[v] An Unmissable Opportunity in the Carbon Market (2024) CFC. Available at: https://cmsadmin.cfc.com/media/uzgjfnfv/carbon-report.pdf (Accessed: 10 August 2024).
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