Insurance has a crucial role to play in supporting carbon markets as the world continues its journey to net zero. One report estimates that by 2030, insurance premiums could reach $1 billion in 2030 and $10-30 billion by 2050.
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 highlights the crucial role of insurance in supporting the carbon market amid global efforts to combat climate change. It also provides a comprehensive overview of the carbon market potential, providing valuable insights for industry experts.
According to the report, insurance can provide 4 main benefits for carboin the credit market:
- A balance between traditional risk management practices and innovation – enabling improved access to finance for carbon scale projects.
- A seal of trust – risk management and regulatory expertise, honed over decades, can bring confidence to the market and its participants.
- Detailed carbon project risk assessment – highlighting areas of concern across the market and project types where wider risk management improvements are required.
- Encourage market participants to take risks – insurers take responsibility when things go wrong, giving market players the freedom to take risks that are necessary to free up capital and scale carbon projects and their associated benefits.
Below are the risks identified in the report, which the insurance market can mitigate.
Industry leaders, including prominent brokers and insurers such as Aon, Howden, Marsh, AXA XL, CFC, Chaucer and Fidelis, are optimistic about the market’s prospects, seeing its expansion as inevitable. These industry giants think the explosive growth of carbon credit insurance is not a matter of “if” but “when.”
Miqdaad Versi, Head of the Sustainability Practice at Oxbow Partners, expressed optimism about the market’s potential. He particularly emphasized its importance in facilitating green initiatives by generating profits. While James Kench, Head of Insurance at Kita, added that:
“The insurance market is on the front lines of climate risk and is uniquely positioned to help business and society navigate increasingly uncertain times. This report is a call to action for the insurance industry to purposefully embrace a new set of carbon risks.”
Billion Dollar Horizon
The report predicts that the total addressable market for carbon credit insurance will reach approximately $1 billion in annual Gross Written Premium (GWP) by 2030, with a projected increase to $10-30 billion GWP by 2050 .
However, this estimate may underestimate the full-scale potential of the market. The calculations focus only on the voluntary carbon market (VCM), excluding the compliance market.
In 2023, global compliance carbon markets were estimated at over $800 billion. These markets are closely linked to policy changes and geopolitical tensions, leading to fluctuations in their size and growth trajectory depending on external factors and the prevailing environment.
In 2022, VCM was estimated at $2 billion. However, Abatable, a carbon intelligence and procurement platform, estimated that in the same year, $10 billion worth of deals were executed. This implies that the investment in the market was about 5 times greater than the value of the carbon credits issued.
According to a Barclays Special Report, VCM could grow to $250 billion by 2030. Various organizations have made predictions of VCM growth in 2030, with estimates ranging from $10 billion to $250 billion. The complexity, rapid evolution and convergence of markets make size predictions challenging.
However, even the lowest forecasts predict that the market will grow 5 times. Long-term forecasts are optimistic, with some expecting the market to exceed a trillion dollars by 2050.
Currently, VCM mainly covers credits sold by carbon dioxide removal (CDR) projects.
McKinsey estimates that based on the expected delivery of announced projects, the CDR market could reach $40-80 billion by 2030. As the CDR industry grows, which overlaps with VCM, it is likely to further stimulate market growth .
So if the carbon VCM and compliance markets converge as expected, this would lead to a significant market expansion.
Addressing risks in the carbon market
The GWP opportunity covers a wide spectrum of insurance needs within the carbon market sector. This includes specialist carbon credit insurance as well as traditional lines of insurance required for carbon projects and businesses operating in the sector. For example, construction, property, casualty, financial lines and marine insurance, among others.
While the report’s long-term outlook for the insurance industry is optimistic, their approach to assessing the potential market opportunity was conservative.
The authors also discounted the potential impact of regulatory mandates requiring insurance and the merger of the two markets. Their estimate was also based on the projected annual carbon credit market, rather than the additional investment required to produce these credits themselves. Factoring in the latter could potentially result in a multiple of 3-5x if applied above.
Indeed, rapidly evolving carbon markets present a complex landscape, characterized by unique risks and significant challenges. However, the presence of insurance within these markets is paramount to their exponential growth.
The introduction of insurance mechanisms can effectively address risks, increase confidence among investors and thereby stimulate investment growth. This, in turn, will enable markets to scale to the scale needed to meet global emission reduction targets and effectively combat climate change.