'World's first' carbon credit insurance launched

Underwriter Parhelion has launched what is says is the first insurance policy protecting the value of carbon credits should the projects generating them be deemed ineligible by regulatory bodies.

Parhelion said that the product was created in response to its clients increasing worries over regulatory risk in the carbon market, and is the latest in a flurry of green insurance policies following offerings from Munich Re and Aviva.

Under the UN's Clean Development Mechanism (CDM) and the EU's Emissions Trading Scheme, countries and companies can buy credits known as Certified Emission Reductions (CERs) to offset their own emissions and contribute to meeting reduction targets. Institutional investors also purchase credits to sell on at a higher rate.

These credits are generated by emission reduction or renewable energy schemes approved by the CDM executive board under the Kyoto Protocol.

But Parhelion said that investors were unnerved by the EU's decision to outlaw credits from projects destroying industrial gases like HFC23 and the subsequent drop in value of those CERs.

The company said there was a significant risk that other credits could become ineligible as a result of decisions made by the EU, which damaged investor willingness to participate in this market.

Its new product, developed with insurance and reinsurance underwriting group Kiln, protects the value of the credits in these circumstances, which Julian Richardson, chief executive of Parhelion, said would improve market liquidity.

"This important new product ... was developed following requests from a number of clients concerned about this risk," he said. "Since the carbon market is entirely dependent on regulation, the ability to manage and transfer regulatory risk is key to participants' success."

Alice Chapple, director of sustainable financial markets at think-tank Forum for the Future, added that mitigating the risk of regulatory changes would encourage more participants in the market and therefore increase rates of emissions reduction.

"Policy uncertainty is one of the main barriers to investment in carbon emissions reductions. By reducing the policy risk, an innovative insurance product of this kind will give confidence to the buyers of CERs and support projects that are critical to the fight against climate change," she said.

"It is a great example of how imaginative approaches in the private sector can help to make carbon emissions reductions happen further and faster."