J001010 - Lycetts Newsletter Jan 2024 LR - Flipbook - Page 10
T H E BU I L DI NG
BLOCK S OF C A R BON
I NSU R A NCE
The world recognises that the removal of carbon from the atmosphere is essential in the 昀椀ght
against climate change. Kyoto set international goals and a future requirement of net zero
emissions for all businesses looks inevitable.
Edmund Sword
Divisional Director,
Yorkshire
Consequently, a carbon market is starting to emerge
dealing in two types of product. The first is carbon
credits. These provide a purchaser with the right to
generate a certain amount of CO2 emissions. The
second is carbon offsetting. This generates credits for
the removal of CO2 from the atmosphere, which can
then be sold. Carbon credits already have a monetary
value hence both buyers and sellers are starting to
enquire about insurance.
Voluntary carbon insurance markets are emerging
and here we look at some of the issues which will
need to be addressed before standardised policies
can be developed.
T R A N S PA R E N C Y, I N T E G R I T Y,
A ND V ER IFIC ATION
At present the means to verify the amount of carbon
extracted from the atmosphere by any one scheme is
in its infancy. The future use of new technology will
undoubtedly technology will undoubtedly improve
this. In some areas, such as commercial forestry, the
industry has created its own certification scheme
known as the Woodland Carbon Code. Producers
must adhere to the code and implement regular
inspections. Backed by Government this allows
buyers to purchase a recognised form of carbon
credit, which in turn has assisted in the creation of an
insurable option known as a Pending Insurance Unit
(PIU). This PIU is effectively a promise to deliver a
woodland carbon unit in the future based upon
predicted sequestration. Although not guaranteed, it
allows companies to plan how to compensate for CO2
emissions. It is vital that developing sequestration
schemes are transparent, easy to monitor and
understand if they are to succeed.
VOLUME
For the carbon market to trade successfully it needs
sufficient volume of a verified product. This is a
challenge in the UK, since many carbon sequestration
projects are small scale. The means to allow farmers
and landowners to combine the value of small
schemes to create volume is essential for insurers to
alleviate their level of risk.
PAR AMETRIC APPROACH
A recent development in the insurance market has
been the adoption of parametric covers. This involves
creating a scale (an index) based upon data relating to
the probability of an event happening. Should such an
event be triggered, payment is made within pre-set
parameters. It is probable that parametric insurance
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will play a part in some future carbon insurance
protection products.
EXPOSURE TO RISK
Although a worldwide market is developing for
carbon credits, most transactions are voluntary and
hence unregulated. The standardisation of trading
platforms alongside standardisation of units of
measurement would go some way towards helping to
mitigate this risk for all parties, buyers, sellers and
insurers.
CONFIDENCE
While in its infancy, and faced by so many variables, it
is difficult for insurers to have confidence in the
market and as with any new trading scheme it is
inevitable that some early models will fail.
CONTR ACTUAL LIABILIT Y
Producers want to be protected if they are unable
to create the number of anticipated credits. Buyers
on the other side of the contract want to be confident
that they are purchasing a tangible product that has
value. For value to be enhanced for both parties,
carbon contracts must have teeth, with consequences
for failure to perform. This is the area where
insurance will add value, with the potential to
indemnify either monetarily or in the credit traded. At
Lycetts we are working with both insurers and traders
to formulate a way forward.
IN CONCLUSION
Insurance policies such as Kita’s Carbon Purchase
Protection Cover do offer protection to buyers
against under delivery of carbon credits and such
cover will inevitably become more extensive as time
moves on. However, the inability of a supplier to
provide an agreed number of credits to a buyer
presents a more difficult proposition for an insurer.
Opportunities for farmers and landowners to
trade carbon credits generated by environmental
initiatives and schemes will inevitably develop
over time. However, agriculture accounts for a third of
global carbon emissions and it is important to
remember that rural businesses will also be required
to operate at net zero. Farmers should consider their
own carbon requirements and need to offset before
trading any surplus they might have.
For the time being the main message to clients is
– watch this space.
