The evolving landscape of carbon markets is bringing about fresh challenges and opportunities, especially with the implementation of Article 6 of the Paris Agreement. As countries navigate carbon credit transfers across borders, market participants face growing risks and uncertainties. Insurance products are increasingly becoming a critical component in addressing these challenges, helping companies manage exposure while fostering market confidence. This article delves into how innovative insurance solutions are shaping the future of carbon credits, offering protection against new and emerging risks.

The Growing Need for Carbon Credit Insurance

Article 6 aims to streamline international carbon trading, ensuring that every credit exchanged contributes to global climate goals. However, this complexity also presents risks. One key challenge lies in ensuring that credits meet rigorous international standards while avoiding double counting between nations. As market mechanisms develop under Article 6, companies are becoming more exposed to risks related to non-delivery of credits or the potential reversal of carbon reductions.

In response, several insurers have stepped in with products designed to provide much-needed coverage for these uncertainties. Market leaders like Oka, Kita, and CFC are offering innovative insurance solutions to cover various risks—ranging from the non-delivery of forward credits to the risk of reversal of previously issued credits.

Two Major Types of Carbon Insurance Coverage

Insurance products for carbon credits can be broadly divided into two types: coverage for non-delivery and coverage for reversal risk.

1. Non-Delivery Coverage: This type of insurance is crucial when forward contracts are in play. Companies often agree to purchase credits before they are officially issued, based on projects expected to deliver a certain level of emissions reductions. However, these projects may face unforeseen challenges, resulting in non-delivery. Insurance coverage helps mitigate the financial fallout in such situations, allowing buyers to proceed with confidence.
2. Reversal Risk Coverage: Projects that remove carbon from the atmosphere, such as afforestation or soil carbon sequestration, face the risk of reversal due to natural disasters or other unexpected factors. Reversal insurance ensures that if stored carbon is released back into the atmosphere, the financial loss can be covered—ultimately protecting both the buyer and the integrity of the market.

Bespoke Solutions for a Non-Standard Market

Unlike traditional insurance policies, coverage for carbon credits is far from one-size-fits-all. Due to the varied nature of carbon projects, insurers have adopted a bespoke approach to address each project’s unique risks.

Thomas Kelly, a senior associate at Howden Climate Risk & Resilience, explains that most carbon insurance policies are crafted on a case-by-case basis. “There are policy wordings that we and other insurance providers have developed as base templates,” Kelly says, “but there is always room for negotiation to adapt to the specific needs of each project.” The goal is for insurance to eventually become more commoditized as the market matures, enabling broader participation and easier access.

Among the products available, Oka’s “Corresponding Adjustment Protect” product stands out. It protects credit holders from the risk that a host country might fail to apply a corresponding adjustment—essentially a safeguard against a government reneging on its climate commitments. CFC, on the other hand, includes Article 6 coverage as a standard feature in its non-delivery policies, giving buyers a level of assurance that their credits will maintain eligibility under international agreements.

Why Insurance Matters for Market Confidence

The voluntary carbon market is a rapidly growing, yet still fragile ecosystem. Confidence is the key to its future growth. With high-profile cases of fraud and questions over the legitimacy of some credits, it is essential to build mechanisms that ensure transparency and trust.

By wrapping insurance coverage around carbon credits, developers can provide buyers with the confidence they need to make long-term commitments. Credits that come insured at the point of sale are often sold at a premium, not just because they carry less risk, but because they also come with a built-in assurance of credibility.

As more governments and corporations look to the voluntary market for compliance under the Paris Agreement, insurance is proving to be a critical instrument in supporting the integrity of the entire carbon trading system. The development of bespoke insurance solutions, along with standardized coverage options, is helping to de-risk investments and ultimately enabling the voluntary carbon market to scale.

Looking Ahead

As Article 6 provisions are further clarified and implemented, the role of insurance will only grow. Bespoke insurance products tailored to the specific needs of diverse carbon projects are already driving market confidence, but the future holds even more promise. As the carbon market matures, we may see these products become more standardized, paving the way for a more secure, transparent, and thriving global market.

For XGC, being on the forefront of these developments means not just contributing to carbon reduction, but also ensuring that our clients can participate in a safe and reliable market. With insurance products providing crucial risk coverage, the future of carbon trading is looking more stable than ever.