Cloverly, which manages a digital marketplace for carbon credits, said this week that it is the first to market with a new brand of insured carbon credits for the voluntary carbon market.
A carbon credit is a financial instrument that measures how much carbon dioxide an initiative such as reforestation or mangrove restoration or direct air capture will remove from the atmosphere over time. Each credit is equivalent to cutting one metric ton of CO2 or an equivalent greenhouse gas. Companies buy credits to "offset" their emissions.
The reputation of the carbon market took a hit in 2023 after whistleblowers reported that many credit schemes greatly inflated their environmental impact and some credits were bogus. Insurance is essential for restoring trust and attracting new capital, said Natalia Moudrak, head of the North America climate practice for risk management consulting firm Aon Climate. "The biggest benefit is greater confidence in helping entities put capital into these projects where they would otherwise be on the sidelines," Moudrak said.
Expect to pay more
Oka, a carbon-credit insurance startup in Park City, Utah, is providing the coverage for Cloverly’s "premium" credits. The credits are from two "significant" but undisclosed nature-based projects, said Chris Slater, Oka’s founder and CEO. The insurance triggers under two conditions, he said.
- Reversals: A natural or human-induced event that could cause a project to fail to deliver the number of credits originally promised. Triggering events could include a wildfire or flood or other natural catastrophe that compromises a reforestation project or the discovery of illegal logging within project boundaries.
- Invalidation: This refers to scenarios in which project validation exposes fraud, such as overcrediting by a developer or misleading information about land ownership.
The price premium on the Cloverly credits was not disclosed. Generally, the cost of this sort of insurance will range from 3 to 8 percent of the credit’s annual base price, depending on the project, said Slater. The average price of a carbon credit last year was $6.97, according to data from Ecosystem Marketplace. "Insurance is an opportunity to create liquidity, safety and security," Slater said.
Protection against fraud, delivery, political risk
Carbon credit projects verified by standards bodies such as Verra or Gold Standard already come with a basic form of insurance called buffer pools. The pools contain credits that aren’t sold to buyers. Instead, they’re held in reserve and only issued to compensate buyers whose credits are invalidated.
Oka’s insurance would work in collaboration with those pools, Slater said. Oka, which has about $7 million in seed investment, is closing its next funding round to expand its offerings. Details weren't available at publication.
Carbon insurance providers are emerging to create policies that address three concerns:
- Fraud and negligence, relating to how companies can disclose claims against their corporate commitments and meant to protect brand reputations.
- Political risk, such as regulatory changes which affect who can use offsets. For example, when a government decides offsets should be used against its own pledges or can’t be "exported" or accounted for elsewhere.
- Issuance failures, when a project fails to deliver credits within a certain timeframe.
Kita, a two-year-old, U.K.-based insurance startup with seed funding of $4.3 million, offers a product for fraud and negligence, and is developing one for political risk, said Natalia Dorfman, co-founder and CEO. Kita’s insurance caters to "high-quality" afforestation, biochar and advanced rock weathering approaches. It plans to add coverage for direct air capture, sh
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