Tokio Marine Kiln (TMK) announced on Monday it has partnered with Kita, a carbon credit insurance specialist and Lloyd’s cover holder, to provide Political Risk insurance for developers and investors in carbon credit projects.
The new cover aims to reduce financial risks related to political instability that could affect the sale and export of carbon credits. It provides protection against traditional political risk and contract frustration perils, as well as bespoke coverage for carbon delivery failure.
In a statement, TMK said it was one of the first to implement this type of policy on the Lloyd’s market.
Risks covered by the solution include confiscation, nationalisation, forced abandonment, licence cancellation, and political violence. It also covers losses if a host country revokes agreements, enabling credits to count towards external offsetting strategies.
“For example, should a host country either revoke a project’s Article 6 authorisation or fail to apply a corresponding adjustment as promised, insurance would cover the costs and prevent wider financial impact that may inhibit progression of the project and its success,” explains James Kench, Head of Insurance at Kita.
James Kench
Head of Insurance at KitaA ‘critical juncture’
The global compliance-linked carbon market is valued at approximately €230bn (approx US$250m) annually according to power firm Eon, while McKinsey estimates the voluntary carbon market reached US$2bn in 2021.
However, with political volatility rising in many regions, carbon credit projects face increased risks from geopolitical developments that impact their ability to sell credits.
“We are at a critical juncture when it comes to offsetting strategies,” said Ed Parker, Head of Special Risks at TMK. “They could not be more vital as the world tries to move at pace towards net zero, but increasing political instability is impacting projects designed to produce carbon credits.”
Parker says that the partnership with Kita will provide “much-needed security against these risks” and make the development of carbon projects more sustainable long-term.
Kench added that political uncertainty is holding back the necessary financing of high-quality carbon market projects.
“Political Risk insurance has the potential to significantly mitigate the risks associated with correspondingly adjusted credits and protect anyone investing or operating in politically uncertain environments,” Kench concludes.
