Carbon insurance

There carbon market has two sides:

1. In the compliance carbon market (CCM), regimes trade and regulate mandatory carbon allowances on a national, regional or international level

2. In the voluntary carbon market (VCM), people and organizations trade carbon credits of their own volition

The CCM has been in the making since the late 1990s, and in 2023 was valued at $800 billion. In contrast, the VCM has been challenged by a range of factors, such as a lack of liquidity, standardization and price explainability. These issues were compounded by constantly emerging regulations and a lack of historical data, as well as a chilling sense of distrust across the market, caused by a minority of bad actors with fraudulent intentions. However, in the last five years a huge cross-disciplinary effort has been undertaken to resolve these issues. The credibility of the market is rising as science, regulation and professionalism fuel sustainable growth in the VCM, which has exploded into life and in 2022 was valued at $2 billion.

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In 2022, the voluntary carbon market was valued at $2 billion. However its valuation is predicted to skyrocket, the earliest estimate of it hitting $1 trillion coming as early as 2037. 

Insurers are guaranteed to play a vital role in accelerating this process, empowering market participants to overcome the risks inherent in their decarbonization activities.

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The voluntary carbon market (VCM) is fueled by corporates’ commitment to net zero, which in turn reflects expanding environmental conscientiousness among consumers, as well as investors’ growing demand for organizations to decarbonize their activities and offset their unabated emissions. 

Unlike the compliance carbon market (CCM), the VCM is unregulated, instead guided by nongovernmental standards which vary dramatically between regions and nations. Organizations can voluntarily purchase carbon credits on the VCM to mitigate their unabated emissions.

The risks associated with the VCM are low-frequency but high severity, and can materialize at any stage of a carbon project’s lifecycle. At present these risks are mostly transferred from one market participant to another. For example, an actor might manage delivery risk using contractual agreements, and mitigate reversal risk via buffers. These more traditional means make sense, but they often lack efficiency, place risk on a party ill-suited to bear it and even raise barriers to entry in this emerging market. 

Carbon projects can also be directly affected by a multitude of external factors such as natural catastrophes (such as fires, floods or hurricanes), fraud, crime and corruption, seller bankruptcy and government intervention (such as export bans), and legal and regulatory changes.

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Investors seeking exposure to carbon as an asset class, and companies buying allowances to offset their residual emissions.

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Carbon credits (or carbon offsets) are produced by any activity that lowers or removes emissions. This can be through nature-based solutions, like reforestation and the protection of natural high-carbon-stock assets like peatland, or technological innovation, including carbon capture storage (CCS) and direct air capture (DAC).

1 carbon credit = 1 tonne of CO2e (carbon dioxide equivalent) which has been reduced, avoided, or removed from the atmosphere 

Carbon credits allow a company to emit a certain amount of CO2 or other greenhouse gases. It gets a set number of carbon credits, which decline over time, but any excess credits can be sold to another company.

Through the carbon credit system, emission reductions can be measured and verified, which contributes to a meaningful lowering in the amount of CO2 and greenhouse gases in the atmosphere.

Carbon credits are an effective mechanism for incentivizing organizations to reduce their emissions. Those unable to do so are still able to operate, but inevitably at a higher cost.

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