The carbon credit insurance market presents a ‘really exciting’ opportunity – especially as it could be worth up to £24bn by 2050

The modern business world is changing. Faced with growing regulatory and societal pressures, businesses across the globe are striving to align themselves with country specific sustainability targets and green ethoses.

Chief among these greener goals is a drive towards achieving net zero carbon dioxide emissions. To achieve this, many companies are turning to carbon credits as a way to offset their greenhouse gas emissions.

According to Investopedia, carbon credits – also known as carbon offsets – “are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases”.

It explained: “Companies that pollute are awarded credits that allow them to continue to pollute up to a certain limit, which is reduced periodically. The company may sell any unneeded credits to another company that needs them.”

Organisations can purchase additional credits if its emissions exceed its current credit cap. Each credit equates to one ton of carbon dioxide or greenhouse gas.

Aiming to financially incentivise carbon dioxide reduction, the market around carbon credits is still relatively young and there are a number of risks associated with purchasing carbon credits.

Whether this be carbon credit providers going insolvent, projects being abandoned, or natural disasters wiping out a forest – to name just a few – businesses are exposing themselves to the risk of contracts failing to deliver the requisite reduction in carbon that they purchased.

Enter carbon credit insurance.

“Carbon credit insurance plays the role that it needs to, which is to transfer the risk away from the person who’s buying the carbon credits into the insurance and capital markets,” explained Miqdaad Versi, partner and head of the sustainability practice at Oxbow Partners.

Carbon credit insurance is still in its early days, but there are high hopes for growth in this market.

The worldwide drive to net zero is expected to lead to a rapid expansion of the global carbon credit insurance market and, if risk transfer propositions can penetrate just a small percentage of this market, then the opportunities for insurers are huge.

For example, research published by Oxbow Partners and carbon insurance business Kita in February 2024 estimated that the carbon credit insurance market could be worth as much as $1bn (£800m) globally by 2030, increasing to between $10bn (£8m) and $30bn (£24bn) by 2050.

Cyber parallels

George Beattie, head of innovation at CFC Underwriting, said this trajectory shows some real parallels with the cyber insurance market at the turn of the millennium.

“The reason that cyber was a great bet back in 1999 was that people could see the direction of travel towards a technology-based future in which computers and data were going to be central,” he explained.

“If you look at the carbon market, you can see a future in which natural catastrophes are only going to get worse and the impact of that is pressure on the government to do something about it.

“The outcome of that is regulation.”

This, in turn, means that carbon offsetting is expected to become part of day-to-day business operations.

“It won’t just be companies seeking to hit net zero [that purchase carbon credits]. It’ll be a legal requirement that companies participate in this market and people are starting to wake up to that,” Beattie continued.

For Beattie, this convergence between firms voluntarily buying carbon credits today and there being a future compliance obligation to do means that carbon credits will become the norm for companies of all sizes and industries, whether that be a shipping firm or a financial services company.

For this to be achieved in practice, however, insurance will need to facilitate higher quality products within the carbon credit market – something that Versi believes will come naturally as the market grows.

“If you’re an insurer, you’re not going to be insuring any old carbon credit – you’re only going to be insuring the credits you think are of sufficient quality that you’re not going to have to pay out on,” he said.

“So, you’re going to create a subset of the overall carbon credit market, which is the insurable carbon credit market.

“This helps improve the standards of these multicarbon credits and strengthens the overall market.”

Product design

However, there is still much to learn about carbon credit cover and insurers at the cutting edge of designing these products face a number of challenges.

James Kench, head of insurance at Kita, said that getting a better grip on new products should start with a fundamental understanding of the carbon credit market itself.

“The first step is understanding the carbon markets, which is tough enough because they’re moving so fast at the moment,” he explained.

“Step two is then understanding the risks and which existing insurance products could be tailored to the carbon space.

“Then, you get to which new products need to be developed and invented in order to cover the risks that cannot be covered by existing insurance products.”

The good news is that much of the knowledge needed for new carbon-related products is already out there in the insurance market.

Beattie said: “[Carbon credit insurance] feels new right now, but the strands that form how you underwrite it and where that value lies are really recognisable.

“It’s all about political risk, natural catastrophe risk, credit counterparty risk – all that diligence is stuff that the insurance market has been doing for a long time.

“So, this is actually more of a question of adapting existing [products rather] than developing wholly new [products] from an underwriting perspective. And that’s really exciting because the market should be able to get involved faster.”

For Beattie, this means the potential for the carbon credit insurance market today is even greater than it was for the cyber market at its genesis.

“[In five years’], the carbon market will be bigger than the cyber market was five years on [from 2000],” he said.

“If we treat 2023 as the real genesis of the carbon market, then by 2028 the carbon market will be bigger than cyber was [in 2005].”