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Tuesday 26 April 2011
Author: Russell Group

The issue of carbon risk is set to be tackled by first ever insurance product to cover carbon credit eligibility risk.

Parhelion Underwriting has devised the product which will be underwritten by three Lloyd’s syndicates with the first client a major international bank.

Julian Richardson, CEO of Parhelion, said: “We are delighted to have been able to bring this important new product to market. It was developed following requests from a number of clients concerned about this risk. Since the carbon market is entirely dependent on regulation, the ability to manage and transfer regulatory risk is key to participants’ success. Working in partnership with our supporting insurers we have developed an innovative product to meet a market need”.

Developed under the Kyoto Protocol, Carbon credits or 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.

They can also be created from ‘green’ projects (such as renewable energy or emission reduction activities) that have been approved by the Clean Development Mechanism Executive Board.

European Union Emissions Trading Scheme (EU ETS) countries and companies within the EU can buy credits to offset their own emissions and contribute to meeting their reduction targets.

Institutional investors such as banks and trading house can also purchase carbon credits. These institutional investors would then look to on sell the credits at a later date at a higher price, generating a profit.

However, as demonstrated by the recent change in regulation by the EU deeming CERs from HFC23 and Adipic Acid projects ineligible for use within the EU ETS, there is a significant risk that credits from other project types may become ineligible, which can have a substantial negative impact on their value. This risk has reduced investor’s willingness to participate in this market and impacts liquidity. The new insurance product works to protect the value of the credits against this risk, thus improving market liquidity.

Alice Chapple, Director of Sustainable Financial Markets at Forum for the Future 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”.