As companies seek to meet sustainability goals and align with global climate targets, carbon credits have emerged as an important tool to help them offset emissions.
Carbon credits function as a form of “permission” to emit a certain amount of carbon dioxide, usually one metric ton per credit. Companies purchase these credits to offset emissions they cannot reduce through their operations, channelling funds into carbon-reduction projects such as reforestation or renewable energy installations.
However, the carbon credit market is fraught with challenges, including questions of legitimacy. The insurance industry has stepped forward with innovative solutions to help bolster investor confidence and catalyze growth in green energy initiatives.
But can an “old-school” insurance product primarily for mergers and acquisitions provide coverage for this new-age problem?
Warranty and indemnity (W&I) insurance policies cover financial losses from a breach of warranty or tax indemnity in a corporate M&A transaction. Insurance broker Howden has adapted the concept and applied it to carbon credits.
At the Insurance Innovators Summit in London this month, Howden’s head of carbon insurance Charlie Pool (pictured top) said the policy could be applied to other green economy markets, such as sustainable aviation fuel.
“As brokers, we see these challenges as opportunities to innovate within the carbon insurance space, providing solutions that enhance transparency and reliability in this market,” Pool said.
Warranties & Indemnity insurance for carbon credits
Carbon credits are produced by carbon projects, which Pool said fall roughly into two categories:
Each project must go through a full life cycle—from design and construction to ongoing monitoring and verification—before it can generate carbon credits. This life cycle entails various risks, which is where insurance becomes valuable.
Adapted from M&A transactions, W&I insurance covers the representations and warranties made by carbon credit sellers. It protects against the consequences of inaccurate representations and warranties in the sale agreement and can also cover unexpected issues that arise after the deal is completed, providing reassurance for all parties.
Applied to carbon credits, W&I can help companies feel confident that the credits they are purchasing are authentic and meet certain standards.
Howden placed the first W&I policy for a carbon project earlier this year with Mere Plantations, a UK-based firm that operates a teak plantation in Ghana, for the reforestation of degraded forest lands.
“If a forestry project claims to have verifiable credits, a buyer can purchase insurance that certifies these claims,” Pool said. “This provides buyers confidence that they are purchasing legitimate credits backed by thorough environmental and social due diligence.”
The growing market for carbon credits, however, has also attracted its share of negative attention, particularly due to “greenwashing.” Critics argue that some companies use carbon credits simply to offset emissions without changing harmful business practices.
The speaker acknowledges the criticism, observing that while greenwashing has occurred in a few cases, “carbon credits are usually voluntary. Companies aren’t legally required to buy them in most markets, so they generally do it because they see a real benefit.”
The broader problem, Pool suggests, isn’t with the concept itself, but with the market’s transparency and accountability. Carbon credits are, after all, an artificial construct; they don’t represent a tangible commodity, like oil or gold, but a promise tied to a complex set of environmental conditions.
One particular risk that has plagued the market is double-counting, which allows the same credit to be sold to multiple buyers. “I can sell you a carbon credit, then turn around and sell the same one again,” Pool said. “There’s not enough regulation to prevent that from happening.”
If a seller makes specific claims about the validity of a carbon project, they can now back those claims with W&I insurance, which transfers the risk to a third-party insurer, adding a layer of security to transactions that lack direct oversight.
This element of risk management, Pool believes, will become more valuable as the carbon credits market matures. “What we’re doing is essentially adding a governance layer to an unregulated space,” he said.
Despite its imperfections, the carbon market is becoming essential to scaling investments in nature-based and technological solutions to achieve global climate goals. By addressing the unique risks associated with carbon projects, Pool said, Howden’s approach allows investors to commit more confidently.
“Our approach represents a shift toward a sustainable green economy, where risk-transfer products can stabilize emerging markets like carbon credits, and we anticipate similar innovations to evolve in other sectors of the green economy in the years to come,” said Pool.
What are your thoughts on W&I insurance’s use in the carbon market? What innovations in insurance solutions for green technology are you most excited about? Please share a comment below.
