Insurance has an important role to play in supporting carbon markets as the world continues its journey toward net zero. One report estimates that by 2030, insurance premiums could reach ~$1 billion and $10-$30 billion by 2030.
The report is a collaboration between Oxbow Partners and Kita, titled “Are Carbon Credits the Next Billion Dollar Insurance Market?”
Premiums with a purpose: the role of carbon credit insurance
The study emphasizes the important role of insurance in supporting carbon markets amid global efforts to combat climate change. It also provides a comprehensive overview of carbon market potential, providing valuable insights for industry experts.
According to the report, insurance could provide 4 key benefits to the carbon credit market:
- Balancing between traditional risk management practices and innovation – enabling better access to finance for large-scale carbon projects.
- Seal of confidence – Risk management and regulatory expertise, refined over decades, can instill confidence in the market and its participants.
- Detailed assessment of carbon project risk – highlighting areas of concern across markets and project types, where wider risk management improvements are needed.
- Encourage market participants to take risks – Insurers take responsibility when things go wrong, giving market actors the freedom to release capital and take the risks necessary to scale up carbon projects and their associated benefits.
Below are the risks identified in the report that the insurance market can mitigate.
Industry leaders, including major brokers and insurers such as Aon, Howden, Marsh, AXA XL, CFC, Chaucer and Fidelis, are optimistic about the market’s prospects, and see its expansion as inevitable. These industry veterans believe that the explosive growth of carbon credit insurance is not a matter of “if” but “when.”
Miqdad Varsi, head of the sustainability practice at Oxbow Partners, expressed optimism about the market’s potential. He particularly highlighted its importance in facilitating green initiatives while generating profits. While James Kench, head of insurance at Kita, said that:
“The insurance market is at the forefront of climate risk and uniquely positioned to help business and society recover from increasingly uncertain times. This report is a call to action for the insurance industry to adopt a vast new carbon risk pool with purpose.
billion dollar horizon
The report estimates that the total addressable market for carbon credit insurance will reach approximately $1 billion in annual gross written premium (GWP) by 2030, with an estimated growth of $10–30 billion GWP by 2050.
However, this estimate may underestimate the full-scale potential of the market. The calculations focus entirely on the voluntary carbon market (VCM), excluding the compliance market.
In 2023, the global compliance carbon market was worth more than $800 billion. These markets are closely linked to policy changes and geopolitical tensions, causing their size and growth path to fluctuate depending on external factors and the prevailing environment.
In 2022, VCM was valued at $2 billion. However, Abateable, a carbon intelligence and procurement platform, estimated that in the same year, deals worth $10 billion were executed. This implies that investment in the market was approximately 5 times the value of carbon credits issued.
According to Barclays Special Report, VCM could reach $250 billion by 2030. Various organizations have predicted VCM growth in 2030, with estimates ranging from $10 billion to $250 billion. The complexity, rapid growth and convergence of markets make forecasting the size challenging.
However, even the lowest forecasts project the market to grow 5x. Long-term predictions are optimistic, with some expecting the market to exceed one trillion dollars by 2050.
Currently, the VCM mainly covers credits sold by carbon dioxide removal (CDR) projects.
McKinsey estimates that the CDR market could reach $40-$80 billion by 2030, depending on the expected delivery of announced projects. As the CDR industry grows, which overlaps with VCM, this is likely to further fuel market growth.
Therefore, if the VCM and compliance carbon markets converge as expected, it will expand the market substantially.
Addressing risks in carbon markets
The GWP opportunity covers a broad spectrum of insurance needs within the carbon market sector. This includes specialized insurance for carbon credits as well as traditional insurance lines required for carbon projects and businesses operating in this sector. For example, construction, property, casualty, financial lines and marine insurance, among others.
Although the report’s long-term prospects for the insurance industry are optimistic, their approach was conservative in assessing the potential market opportunity.
The authors also ruled out regulatory mandates requiring insurance and the potential impact of a merger of the two markets. Their estimate was also based on the estimated annual carbon credit market, not on the additional investment required to produce these credits themselves. Factoring in the latter could potentially result in a multiplier of 3-5x if applied on top.
Indeed, rapidly evolving carbon markets present a complex landscape, characterized by unique risks and significant challenges. However, the presence of insurance in these markets is paramount to their rapid growth.
Introduction of insurance mechanism can effectively address the risks, increase confidence among investors and consequently encourage growth in investment. This, in turn, will enable markets to grow at the rate needed to align with global emissions reduction targets and effectively tackle climate change.
Source: carboncredits.com