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The Actuary The magazine of the Institute & Faculty of Actuaries

Kiln launches first carbon credit insurance product

Kiln, the international insurance and reinsurance underwriting group, has underwritten what it claims is the first insurance product to cover carbon credit eligibility risk.

The product, which was developed by Parhelion Underwriting Ltd - a carbon market and climate finance insurance specialist, was underwritten by Kiln for a major international bank last week.

Banks can purchase ‘options’ to buy carbon credits at a fixed, pre-determined price for ‘green’ projects (such as renewable energy or emission reduction activities) that have been approved by the Clean Development Mechanism Executive Board, under the Kyoto Protocol. These credits can then be traded at a later date, when the current market price is higher than the option price, generating a profit for the bank.

However, as demonstrated by the recent change in regulation by the EU regarding the eligibility of CERs from HFC23 and adipic acid projects, there is a significant risk that credits may become ineligible as a result of decisions made by the EU, which can have a substantial impact on their value. It is widely believed that this has reduced investors’ willingness to participate in this market and impacted liquidity, Kiln says. The new insurance product works to protect the value of the credits in these circumstances and improve market liquidity.

The carbon credit eligibility business line was developed alongside Parhelion by Kiln’s enterprise risks team.

Paul Culham, active underwriter at Kiln, said: "The protection this insurance cover provides could encourage other businesses to consider adopting carbon credits."

Commenting on the development, Alice Chapple of Forum for the Future, a not-for-profit organisation in the sustainability sector, said: "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. It is a great example of how imaginative approaches in the private sector can help to make carbon emissions reductions happen further and faster."

Carbon credits
Carbon credits developed under the Kyoto Protocol, which are also known as certified emission reductions (CERs), are financial assets that can be generated by companies when they remove harmful carbon dioxide emissions or greenhouse gases from the environment through adopting ‘greener’ practices.

Through the Protocol, 192 individual countries plus the European Union (EU) committed to work together to reduce their collective carbon and greenhouse gas emissions from 1990 levels. Countries that have signed up to it can buy credits to offset their own emissions and to contribute to meeting reduction targets under the European Emissions Trading Scheme.