Howden, a London-based insurance intermediary group, has launched the first carbon credits warranty and indemnity (W&I) insurance policy. This policy covers the sale of carbon credits for Mere Plantations’ reafforestation project in Ghana, which rehabilitates degraded forest lands. A leading managing general agent underwrites the policy.
This milestone is pivotal for the voluntary carbon market, as it significantly boosts trust in the quality of carbon credits. It can potentially attract more investors into the market.
Insurance’s Role in Climate Finance
The insurance sector, one of the largest pools of non-governmental capital globally, is crucial for funding infrastructure projects. In 2017, insurance companies faced $140 billion in climate-related infrastructure losses.
A climate policy expert, Dr. Leah Stokes projected that the US alone would incur $500 billion in climate disaster costs in 2021. Lloyds of London reported that sea level rise increased Superstorm Sandy’s New York insurance losses by 30%.
Additionally, over $500 billion of US coastal property could be underwater by 2100. These risks call for sector reform, redirecting trillions towards climate impact reduction. Without a carbon reduction plan, assets may not qualify for insurance coverage.
Additionally, the global economic losses attributed to weather and climate change are exploding. As seen below, it reached almost $1.5 billion between 2010 and 2019 timeline.
The financial world is now recognizing the value of insuring climate-related projects. In 2022, Howden launched the first-ever carbon credit insurance to boost confidence in carbon markets.
The largest European broker believes the VCM has a vital role in the world’s transition to a low-carbon economy. It just announced its first carbon credits Warranty and Indemnity (W&I) insurance policy for the forestry project of Mere Plantations. The UK-based company manages a teak plantation with 3+ million trees in Ghana, West Africa.
By employing insurance as a governance tool, the W&I policy enhances the credibility and value of carbon credits. Mere Plantations can now assure buyers that their credits meet stringent environmental, social, and financial standards, supported by an insurance policy that guarantees their authenticity.
Charlie Pool, Head of Carbon Insurance at Howden, emphasized that insurance guarantees the credibility of carbon credits, attracting higher values and encouraging further project development. He further remarked that:
“The carbon markets are the best tool we have for putting a price on emissions. Traditionally held back by poor governance, the voluntary market can now be improved using market-based mechanisms.”
Leveraging Underwriting Expertise for Green Projects
The policy also allows project developers to leverage the underwriting expertise of the M&A insurance market, ensuring confidence in their carbon credit projects’ methodology and implementation. Recognizing this added protection and the high quality of the credits, buyers are willing to pay a premium compared to other reafforestation projects.
Uniserve, a UK-based logistics company, is the first to purchase these credits.
This development follows other Howden-led initiatives, including the first voluntary carbon credit insurance product in 2022. It has also an insurance product covering carbon dioxide leakage from commercial-scale carbon capture and storage facilities in January 2024.
Mark Hogg, CEO of Mere Plantations, highlighted their mission to make reestablishing degraded forest land a viable commercial enterprise without aid or government intervention. He noted that this insurance offer unlocks the carbon market’s potential, aiding their mission.
Gary Cobbing, Uniserve’s Group Chief Commercial and Operating Officer, expressed confidence in the partnership with Mere Plantations, saying:
“Mere Plantations shares Uniserve’s commitment to sustainability and integrity, making them an ideal source for our investment in carbon credits as part of our ongoing carbon reduction plan.”
The Growing Carbon Credit Insurance Market
Howden isn’t the only big player in the burgeoning carbon credit insurance space.
A UK-based carbon credit insurance startup Kita Earth offers policies for carbon removal credits. And market experts foresee new players joining soon propelled by the projection that it will become a billion-dollar market.
According to an industry report, the carbon credit insurance market could reach around $1 billion in annual Gross Written Premium (GWP) by 2030, potentially growing to $10-30 billion by 2050.
However, this may underestimate the market’s potential as it focuses only on the VCM and excludes the compliance market. In 2023, global compliance carbon markets were valued at over $900 billion, influenced by policy changes and geopolitical factors.
The VCM was valued at $2 billion in 2022, but Abatable estimated $10 billion worth of deals that year, suggesting investment was 5x the value of issued carbon credits. A Barclays Special Report predicts the VCM could grow to $250 billion by 2030, although estimates vary widely from $10 billion to $250 billion.
The report suggests that insurance can offer four key benefits to carbon markets:
- Balancing risk and innovation,
- Boosting confidence,
- Assessing project risks, and
- Encouraging risk-taking.
Indeed, the rapidly evolving carbon markets present a complex landscape with unique risks and significant challenges. Introducing insurance mechanisms like that of Howden’s W&I policy can effectively address these risks, enhance investor confidence, and stimulate increased investment. This will enable the markets to scale at the necessary rate to align with global carbon emission reduction targets.