Carbon insurance: Bigger than cyber?

The global voluntary carbon market (VCM) is expected to show “hockey stick growth” over the next few decades, representing a dramatic opportunity for the insurance industry.

“Look at the cyber market now in insurance — it’s the new big thing,” says George Beattie, head of innovation at CFC. “Carbon will be the same in a shorter period of time.”

VCMs are essentially decentralized markets in which individuals or organizations buy credits to voluntarily offset their carbon footprint, explains the International Federation of Accountants.

Beattie says the wider carbon space is broken down into two main areas: voluntary and compliance.

The compliance side appears to be the approach Canada is taking, in which the federal government places a price on carbon pollution. Those producing carbon emissions purchase credits annually from a shrinking pool of allowable credits, thus forcing those emitting carbon to change their practices before the pool of credits runs out. This approach has been criticized by some provincial leaders and citizens.

In contrast, in the voluntary market, organizations offset their emissions by purchasing carbon credits from projects that demonstrably reduce carbon emissions, as Beattie explains.

The global compliance carbon market is already worth $1 trillion, he says. The voluntary market was valued at $2 billion last year and will be $3 billion this year. It’ll probably be worth $30 billion by 2030 and $1 trillion by 2050, Beattie says.

By comparison, the global cyber market is estimated at more than $200 billion, according to various sources.

‘Runaway’ climate change

“Now, the reason there’s a hockey stick growth in this market is that…companies of all sizes, of all industries, in a lot of places around the world, are seeing what is coming down the tracks, which is runaway global warming causing catastrophes like we’ve never seen,” Beattie says. The public is also putting pressure on governments to “do something about it,” resulting in private industry regulation.

“The insurance market will have a fantastic role at quite an early stage in the market’s growth,” Beattie says.

To that end, last month CFC entered the VCM with the launch of a carbon delivery insurance product that safeguards the purchase of carbon credits, providing protection against potential non-delivery risks. The product covers physical and political risks faced by businesses purchasing voluntary carbon credits.

“Our target market is really companies that are willfully engaging in this for corporate governance reasons,” Beattie says. He adds that CFC has other carbon insurance products planned over time, and he predicts the compliance and voluntary markets will eventually merge into a global market.

“The long and deep bet we’re placing as a company is that the reason that carbon will be bigger than cyber in the future is that this market feels inevitable,” he says. “If you buy into this idea that human activity is aiding global warming and that we’re going to see worse catastrophes, the human pressure piece on government is inevitable.

“And one of the only things that government can do in response to that pressure is to regulate.”

The basis for regulation has already been teed up by the Article 6.4 of the Paris Agreement, which outlines the international or transnational sale of voluntary carbon credits, Beattie says. The article established an international carbon crediting mechanism and supervisory body.

Canada will have a large role to play in the VCM because of the country’s natural assets, including forests and soil. “Canada is where a lot of the action is going to be in the market,” Beattie says.

“So, the economic opportunity for Canada, and for your Canada-based brokers and underwriters, and everyone else is enormous,” he says. “It’s probably even bigger than cyber was because the activity will be happening on a primary basis in Canada.

“[Former U.S. secretary of state] John Kerry said the carbon market will be the biggest market the world’s ever seen. And a big piece of it will be Canadian.”

Feature image by iStock.com/Suphachai Panyacharoen