Carbon credit trading has emerged as a crucial strategy available to businesses seeking responsibility for their carbon footprint. Investing in projects and schemes that reduce or avoid emissions enables organizations to play a vital role in decarbonizing the economy.
Despite the significant role that carbon credits play, some organizations remain hesitant about using them. Much of this reluctance stems from persistent myths that obscure the true value and mechanics of carbon credits.
Gathered from recent conversations with market participants, the topics highlighted below clarify some of these misconceptions and help provide insight into the evolving role of insurance in this market.
1. “Carbon credits are a form of ‘greenwashing’”
Some people worry that buying carbon credits is just a way for businesses to “buy their way out” of cutting emissions. It is true that relying solely on offsets, while ignoring the need to reduce their own emissions, could be short-sighted. As climate policies tighten, the cost of carbon credits will likely rise, making them an expensive and unwise alternative to cutting emissions at the source.
Responsible businesses strike a balance by reducing their own emissions where they can and using offsets for the remainder they cannot yet avoid. When used properly, voluntary carbon credits are part of a broader, science-based approach to tackling climate change — not just a superficial fix.
2. “Carbon credits are only generated by planting trees”
While forestry projects, such as afforestation, reforestation, and avoided deforestation, are common and highly visible, carbon credits can come from a wide variety of activities. Examples include:
Direct Air Capture (DAC)
Technologies that remove CO₂ directly from ambient air.Enhanced Rock Weathering
Accelerating a natural chemical process that removes CO₂ from the atmosphere.Soil and Land Remediation
Improving soil health and sequestering more carbon in agricultural lands.Agricultural Methodology Innovations
Employing no-till farming and other practices that reduce emissions or capture more carbon.
The diverse range of solutions provides flexible pathways for companies seeking to offset hard-to-abate emissions.
3. “Past results of carbon credit projects indicate future performance”
Every decarbonization project is different and it is challenging to correctly forecast the amount of future carbon credits it will produce. Interfering factors could range from natural catastrophes, jurisdictional regulatory changes, developer negligence and fraud, or science-based methodology rollbacks.
Such issues can undermine the credibility and function of projects. This can result in fewer carbon credits being delivered than originally anticipated — posing financial and reputational risks to stakeholders.
4. “All carbon credits are the same”
Carbon credits are primarily segregated into two key forms: compliance carbon credits (CCC) and voluntary carbon credits (VCC). Each credit represents a reduction or removal of one metric ton of CO₂, or its equivalent, from the atmosphere.
CCCs are traded in government and regulator-led markets, with regulated pricing. CCC and compliance markets can differ depending on jurisdiction, but are generally driven by mandatory schemes.
VCCs emerged as an opportunity to support mandatory decarbonization efforts. VCCs are subject to varying degrees of verification oversight and customer protection. Entities acquiring VCCs can transparently demonstrate a commitment to sustainability, enhance their reputation, attract environmentally conscious consumers, lenders, and investors, while aligning with global efforts to combat climate change.
5. “Carbon credits don’t need insurance”
Insurance can play a vital role in transferring risks associated with VCCs. Coverage can provide invaluable protection for businesses against the unique risks inherent in carbon offset projects, which include:
Non-delivery of carbon credits
Carbon credits can be transferred late, or not at all, to a buyer. Non-delivery could occur if a developer defaults, or a project is damaged or interrupted before it can generate a specified number of credits.Carbon credit reversal
Greenhouse gases sequestered by a carbon project can be at risk of being released back into the atmosphere — negating its offset effect. Reversal could occur as a result of extreme weather, natural catastrophe events, or human activities such as logging or poor land management.Carbon credit invalidation
There is a possibility of issued credits being subsequently invalidated by a government, accreditor, or verification body. Beyond fraud or credit reversal, invalidation could also occur from methodology or accounting errors.
By transferring these exposures to an insurer, businesses can protect their financial and reputational interests, while reinforcing confidence in carbon credit transactions.
6. “Carbon credits do not actually reduce emissions”
Properly verified carbon credits represent tangible, quantifiable emission reductions or removals. Credible verification standards, such as the Gold Standard or VCS amongst others, ensure that projects meet strict requirements for additionality, permanence, and transparency.
Still, not all credits are created equal. The quality of carbon credits depends on the rigor of the methodology used, the verification process, and ongoing monitoring. It is crucial to ascertain if projects are adhering to standards and certification schemes that verify and validate the quality of the expected offsets.
7. “Carbon credits are only relevant to large, multinational organizations”
Carbon credits are relevant to companies of every size — from startups to global corporations — as every organization has a carbon footprint. In fact, small and medium-sized enterprises collectively account for a significant share of global emissions. For all organizations, carbon credits can be a valuable addition to their ESG programs.
By purchasing voluntary carbon credits to complement their direct emissions-reduction efforts, companies of all sizes can play an active role in tackling climate change and contributing to a net-zero future.
