EU's international carbon credit proposals highlight how insurance is mark of project quality

By Rebecca Delaney

July 2 - (The Insurer) - The European Commission proposed amendments to the EU Climate Law on Wednesday which will allow members to use international carbon credits to fulfil a share of emissions targets.

Insurance industry representatives said the move will give the sector an important tole in signalling project quality and integrity as the carbon markets expand across jurisdictions with varying regulatory maturity.

The amendments were based on the proposal of a legally-binding target to cut net greenhouse gas emissions by 90% by 2040 in the EU compared to 1990 levels, with the overarching aim to keep the EU on track for its core aim to reach net-zero emissions by 2050.

As part of this, the European Commission has proposed an EU climate target for 2040 that would allow countries to use carbon credits from developing nations to meet up to 3 percentage points of the 2040 target under Article 6 of the Paris Agreement.

To date, EU emissions targets have been based entirely on domestic emissions cuts.

The international carbon credits would be bought from other countries through a U.N.-backed market to reduce the effort required by domestic industries.

"The proposal sets out a way to reach the 2040 goal in a different way that has been done in the past. One central element is flexibilities that the Commission will consider in designing the future legislative instruments to achieve this 2040 climate target," said the European Commission.

"These include a limited role for high-quality international credits starting from 2036, the use of domestic permanent removals in the EU Emissions Trading System, and greater flexibilities across sectors to help achieve targets in a cost-effective and socially fair way."

The international carbon credits would be phased in from 2036, with the EU to propose legislation next year to set robust and high-integrity criteria and standards, as well as conditions on origin, timing and use of such credits.

Bilal Hussain, co-founder and CEO of Lloyd's carbon startup Artio, said the proposals would "put the spotlight" on carbon credit project quality and safeguards.

"There’s real reputational and regulatory risk if credits are sourced from less-regulated markets," he warned.

"However, standards alone aren’t enough. In a fragmented and fast-moving market, we need sharper tools to drive quality. That includes data, due diligence frameworks and critically, insurance. Insurance helps surface high-quality credits by using data-driven risk models to assess project integrity."

Hussain called on the commission to set clear eligibility criteria, establish robust oversight and cap the share of international credits allowed to ensure that local decarbonisation remains the priority.

James Kench, managing director, insurance at Kita, welcomed the proposals to introduce greater flexibility but similarly added that variance across jurisidiction's regulatory maturity and project standards may bring greater carbon project risk.

"We welcome greater flexibility for countries and companies to meet their climate goals; project-based carbon credits are an excellent tool to channel much-needed financing into high-quality projects across the globe," said Kench.

"Expanding into jurisdictions with varying regulatory maturity and project standards introduces delivery, reputational and counterparty risk. That’s where carbon insurance has a critical role to play to enable corporates to manage uncertainty with confidence and help build the trust for the markets to function."