CFC’s Beattie: Carbon insurance market approaching 'proof point'

By Rebecca Delaney

Aug 14 - (The Insurer) - As the carbon markets continue to scale and evolve, lender requirements for carbon credit projects are beginning to demonstrate the first “proof points” of insurance as a facilitator of climate capital, as the carbon insurance market also moves past the “rapid prototyping” phase.

Earlier this month, CFC underwrote its carbon delivery insurance cover for Chestnut Carbon, a New York-based nature-based carbon removal developer that has a long-term agreement with Microsoft Corporation, which earlier this year committed to purchasing seven million tonnes of carbon credits as part of its $1 billion off-take.

A carbon project developer must go out to market and secure debt financing to improve their creditworthiness and to finance its operations until production is realised and the credits can be issued under the agreement.

The Marsh-placed policy therefore supports Chestnut’s closing of a non-recourse project finance credit facility of up to $210 million, led by JP Morgan and other lenders.

“We've been trading different insurance products for the carbon space for about 18 months now, and it's been a really rapid prototyping phase of trying to work out what the carbon market needs,” George Beattie, head of innovation at CFC, told Sustainable Insurer.

“We've been waiting for that product market fit proof point. Until you get the deals going, because we work in a for-profit industry, it becomes difficult to prove that what you're doing is really worthwhile.”

The carbon delivery insurance policy provides protection in the event that Chestnut does not produce as many credits as anticipated (which would mean they cannot be monetised and sold to Microsoft) and may be unable to repay the loan. The policy would repay Chestnut an agreed amount per credit that is not produced below a certain threshold.

It marks the first time that carbon credit insurance has been explicitly mandated by a lending panel as a term of the deal.

“It's a really interesting example of deal facilitation. A dream of everyone in insurance has always been that insurance is not viewed as a tax, but as something that actually helps business to happen,” said Beattie.

“We feel this transaction is very illustrative of the idea that insurance can be a facilitator of climate capital and blended finance for the climate. Hopefully it gives rise to lots more deals that are waiting or unable to proceed because this added weight of insurance has not been added into the mix.”

He continued that the role of insurance is to support “version 2.0” of the carbon market – which means that insurance coverage will not be available to all carbon projects.

“This is about insurance being provided in relation to only the most high-quality projects that we can find. The dream for us is not only facilitating deals, but creating a bifurcation in the market where to be high-quality you have to be insurable, and that becomes a key proxy for quality,” said Beattie.

“What we don't want to be is a rating agency; we don't want to rubber-stamp anyone. Differentiation through the availability of insurance is an ideal outcome for the insurance market, where the quality of the project has been our aim in getting our capacity out there.”

‘VOLUNTARY’ MARKET IS OUTDATED

Beattie outlined three buckets of carbon project types: nature-based solutions (afforestation, avoided deforestation); hybrid solutions (biochar, enhanced rock weathering); and technological projects (direct air capture and other technologies).

“The majority of the volume comes from nature-based solutions. We're medium-agnostic, which means we don't mind what the carbon sequestration medium is, except for the fact that, morally, we feel an inclination to support super high-quality nature-based solutions,” he explained.

“Unless we provide an economic model that protects natural assets, the trend for their loss is going to continue until we don't have any left. The carbon market, at its best, provides an alternative route to landowners realising the asset that they have.”

Beattie continued that the term “voluntary market” is increasingly outdated as buying pressure is now driven by projects, leading to a new label of the projects-based carbon market.

Elsewhere, in the cap-and-trade market, a reducing amount of available allowances each year will make purchasing allowances more expensive for companies that are mandated to participate in the scheme but have not reduced their emissions.

As the cap-and-trade system reduces, the project-based credits market will begin to replace the allowance market.

“Logically, it's much better for a company to be obliged to buy a unit that requires some kind of carbon capture than to buy a unit that just gives them permission to emit,” said Beattie.

“Our house view is that in future, compliance systems around the world will probably use project-based credits that are sufficiently high-quality as a carbon unit of currency. That's the direction of travel.”

Other jurisdictions, such as Singapore, have a tax scheme in which surrendering eligible project-based credits allows a tax rebate for emitters, in order to create an economic incentive to purchase carbon credits.

“We're going to see more of that around the world. The point is that these entities are buying these project-based credits, not because of an altruistic sense of duty, but because the law allows them to gain a tax rebate,” Beattie added.

“This is pragmatism. It's capitalist. A dollar spent on a project-based carbon project on the ground doesn't make a difference if it comes from an oil major or from an NGO. Anything that incentivises the expenditure of money on these credits is very good news.”