As the spotlight shines ever brighter on climate change, voluntary carbon projects have emerged as a key way for businesses and financial markets to work towards net zero—by purchasing carbon credits for environmental initiatives that offset their carbon emissions.
Like any ambitious endeavor, it’s possible for these projects to experience risks that result in the non-delivery of credits. But the bigger risk would be for past issues to deter future participation in a market built to do good for the world. Instead of abandoning the VCM, it’s time to focus on improving and derisking these vital initiatives, giving businesses the confidence to engage.
The nature of voluntary carbon projects
Designed to remove carbon emissions from the environment or prevent them from being released in the first place, voluntary carbon projects enable entities—be it corporations, government or individuals—to invest in initiatives from reforestation and land use to renewable energy and community-based projects. The challenges they face are as diverse as their nature, including geographical constraints, technological limitations and varying levels of stakeholder engagement. Projects also often rely on market demand and investor interest, adding another layer of complexity.
Learning from failures
In March 2023, concerns came to a head when South Pole, a leading seller of carbon credits, was accused of overestimating the impact of its main carbon project. Consequently, South Pole’s clients also overstated their own progress in reducing their carbon footprints, demonstrating how things can go wrong.
Yet as South Pole’s CEO pointed out, to avoid catastrophic climate damage we must improve and not abandon these solutions. Failures stem from a variety of factors—be it unforeseen environmental change, fraud or project mismanagement—and each instance can be used as an opportunity to develop more resilient offsetting strategies in the future, such as better measuring standards.
The bigger picture
While individual project failures are significant, they need to be viewed in the context of their broader success and impact. At present the VCM is the only way of rapidly scaling up resources for climate action, funding projects that might otherwise lack the financial support they need to get off the ground.
Already we’re seeing projects bear fruit, helping to preserve biodiversity, empower communities and advance sustainable practices. The market’s overall impact is overwhelmingly positive, driving global progress toward emission reduction targets and fostering a culture of environmental responsibility. Entities just need a way of tackling the risks unique to their projects.
Embracing complexity
The VCM is only at the start of its development curve. It takes time for any market to grow and strengthen, so it’s important not to judge the efficacy and value of voluntary carbon projects based on a few instances of failure. Insurance as an industry is well placed to step in and close the protection gap, lending crucial support whether it’s addressing weather risk in nature-based projects or overcoming due diligence challenges. This way, entities get the safety net they need to participate in the market with confidence—giving the VCM a solid foundation for it to grow and thrive.
The numbers speak for themselves. In a recent CFC survey, 96% of respondents said they’re likely to consider buying insurance to protect against the non-delivery of forward-purchased credits. While 83% said they’d be more inclined to forward purchase carbon credits if they could insure them against non-delivery risk, highlighting the opportunity insurance has to support growth in the VCM.
As we navigate the challenges of climate change, embracing the complexity and potential of voluntary carbon projects becomes not just a choice but a necessity for a sustainable future.
Learn more about how insurance can lend support and drive growth in this evolving industry in our new report, ‘An unmissable opportunity in the carbon market’.
