Kita eyes ‘natural shift’ in carbon credit insurance market

By Rebecca Delaney

June 9 - (The Insurer) - The increasing deployment of capital at earlier stages of carbon credit projects by more sophisticated financial institutions has led to a “natural shift” in demand for insurance coverages, according to Kita’s James Kench.

Kita lifted its underwriting capacity by 450% for 2025 to insure transactions with up to 22.5 million pounds ($30.5 million) or 22.5 million euros ($25.7 million) in limit, and up to 10 years in policy tenor.

Kench, who serves as managing director for insurance at Kita, explained to Sustainable Insurer that this move was taken to better position the company to provide relevant coverage for traders, hedge funds and asset managers in the market.

“The main driver there was that we're seeing a lot more sophisticated financial institutions entering the space, and obviously they don't get out of bed for tiny sums of money, so we need to reposition ourselves to be able to cater for them,” he said.

“They're predominantly investing in Global South reforestation projects. The project timelines are very long, but they're deploying capital at quite early stages in the project and taking a lot of risk, and therefore it's been quite a natural shift for insurance.”

As the market matures, more sophisticated project finance structures similar to those seen in renewable energy are being applied to carbon projects, which will require greater syndication from the insurance market.

“The last couple of years have been more around the proof of concept stage and getting that product market fit with the first-of-a-kind deals and seeing what people actually want,” Kench continued.

“Now that's been done, it's more about repeating with clients that are happy with how insurance comes into play. Of course there will be some over the next coming months and years that need further refinement and evolution of how the policies have worked and are structured, but it's all trending in the right direction.”

As project finance structures mature, carbon underwriting teams increasingly require experience in structured credit risk.

At the beginning of the year, Kita appointed Alek Pillay to the newly created role of head of underwriting. Pillay joined Kita in January 2023 as a senior underwriter, having previously spent more than six years at credit and surety insurance firm Altradius.

“It's a very structured finance type of risk, and therefore we need experienced structured credit and structured finance expertise to underwrite each deal,” said Kench.

“It's wading through transaction documents and the financial statements of the project developer, as well as all the carbon elements of what the project is doing, its likelihood to succeed in sequestering, the carbon market methodology, and the policy perspective.”

MARKET UNCERTAINTY FOR US COMPLIANCE SCHEMES

The carbon credit market is recognised for the bifurcation between the voluntary and compliance markets, with Kench outlining that compliance schemes that allow contributions from carbon credits from a project-based market generally have naturally more risk, and therefore a greater direct need for insurance, compared to allowance markets.

Sector-wide emissions reduction schemes are notably led by the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), a global initiative by the International Civil Aviation Organization to address greenhouse gas emissions from international aviation.

Regionally, in December 2024, the EU Carbon Removals and Carbon Farming (EU CRCF) regulation was published as the first EU-wide voluntary framework for certifying carbon removals, carbon farming and carbon storage in products across Europe.

“Ultimately the EU CRCF, EU Emissions Trading Scheme and EU Green Claims Directive should all link up together, which will be really important to make sure that things are working in unison rather than in silos,” said Racheal Notto, head of carbon markets at Kita.

The U.S. compliance market is even more fragmented, with longstanding existing schemes including the cap-and-trade Regional Greenhouse Gas Initiative (RGGI) across the power sector in the Northeast U.S.

Elsewhere, California’s established cap-and-trade programme is part of the Western Climate Initiative (WCI), which administers the shared emissions trading market between California state and the Canadian province of Quebec.

Washington state’s cap-and-invest programme is currently in the process of joining WCI. However, on April 8, U.S. President Donald Trump issued an executive order against state climate programmes, including WCI and RGGI. Last Saturday marked the end of Attorney General Pam Bondi’s 60-day window to submit a case to dismantle the programmes.

CONVERGENCE

It is generally accepted by carbon project developers that the voluntary and compliance markets will increasingly converge over time as the compliance market expands to cover more sectors and regions, as well as increased regulation in the VCM.

“CORSIA is a good example where it's a compliance market, but allows essentially project-based carbon projects to contribute to or be eligible for the scheme. That's going to be a really interesting test case for the market,” said Kench.

“Our goal is to build products that have a bit more interoperability, (that are) a bit more transferable, a bit more agnostic as to how the compliance frameworks may fit in. It's all about understanding the underlying projects and the risks, how to insure that, how that feeds into which parties are bearing the risk, and therefore where the insurance should fit around.”

Notto added that, while portions of the VCM will be absorbed into the compliance market, it will not fully disappear.

“The VCM’s origins weren’t intended to exist forever. It was supposed to be a holdover until all governments globally, or at least the major emitters, got their policies and regulations in place to take over as a compliance action led by government rather than private-led action,” she explained.

“The VCM is still a really great place to test new methodologies and new project types to see if it actually has legs or not. Even as more of the VCM gets absorbed by the compliance markets, I don't think it will fully cease to exist because it's going to be a really great space to test out the brand new cutting-edge stuff that still needs time to mature.”

For example, the VCM is currently testing projects based on direct air capture, which is not yet included in many compliance schemes, while marine carbon dioxide removal is nascent even in the VCM, setting the stage for further expansion of insurance product suites going forward.