Oka, The Carbon Insurance Company™ (Oka) recently welcomed industry pioneer David Antonioli to its advisory board. Two months into his role with Oka, we sat down to discuss his ambitious new vision for carbon markets and the mechanisms required to bring it to life.

Over a three-decade-long career at the forefront of climate finance, David Antonioli helped take carbon offsetting from nascent and niche to a $2 billion-dollar international market. In its latest projections, Bloomberg NEF estimates the voluntary carbon market (VCM) will swell to $1 trillion by 2050. 

But what of the broader economic, social, and environmental value of those dollars? 

It’s a question to which David returns in a newly published six-part report that sets out a new framework for carbon markets. As CEO of leading standard-setter and registry Verra, David was a driving force in developing and bringing integrity to carbon markets. Now, he argues, the VCM is due another realignment — a “new chapter that leads to even greater scale and climate impact.” 

“Carbon markets, and most of the rules governing carbon credits, were first designed when there was an understanding that climate change would eventually be brought under control through top-down regulation,” he says. “That world, however, never came to pass.”

In the absence of regulation, and as set out under the Paris Agreement framework, private companies gravitated towards bottom-up efforts, including carbon offsetting. The VCM has channeled millions of dollars towards — and spawned — “thousands of incredible projects” critical in combating climate change. Nonetheless, as David points out, the world continues to fall short of its annual emissions reduction targets. 

“The nature of the challenge has changed drastically,” he adds. “Without some extraordinary intervention, we are likely to overshoot the 1.5°C global heating target. Given the scale of the crisis, we need to reconsider the huge potential of carbon markets.”

Reimagined, Redesigned

In its current iteration, the VCM is perceived as an offsetting lever for companies seeking to compensate for unabated emissions. David makes the case for a bigger and bolder purpose. “The carbon market currently starts and ends with a ton… [but] carbon finance can be used as a tool for broader transformation,” he says.

“At the end of the day, carbon markets can only achieve climate impact at scale if they both address issues around integrity and establish a broader, more enduring and compelling objective.”

Today, innovative green projects must contend with a litany of “tremendous obstacles” to get off the ground. Chief among those is capital, with projects requiring significant upfront finance to stand a chance of reaching scale and profitability. David envisions the VCM as an instrumental source of early-stage funding, in turn reducing implementation costs, de-risking business models, and generating future liquidity.

“The financial services sector is critical to this,” he stresses. Integrating carbon finance and traditional financial vehicles, such as insurance, makes them more attractive to lenders and investors at the earliest stage of development. Policies that lower costs, build capacity, and de-risk investments may move the needle for risk-averse banks that would have otherwise shied away from innovative and unfamiliar business models. 

“If a farmer goes to their local bank to raise money for regenerative agriculture practices, making their farm more resilient to droughts and floods — that’s the kind of thing to which a bank should be willing to lend,” he points out. “But it won’t, in the first instance, because it’s too risky and the practices haven’t been demonstrated sufficiently. By using carbon finance to demonstrate the efficacy of the business model, we can overcome this impasse.”

Innovative technologies are inherently high-risk and usually high-cost. By reducing the former, insurance can unlock market access to a transformative volume of large-scale institutional capital. In that way, it serves as both bridge (between capital and carbon markets) and gateway (to a more evolved and efficient VCM). 

Towards Efficiency

Insurance is an important lever for developers even in the current market, says David, where its benefits are “just now coming to light.” Project reversal insurance, for instance, can reduce unnecessary operating costs incurred through buffer pools (which are — by contrast — “a pretty blunt tool”). 

“Insurance has the potential to be much more effective and cost-effective,” David points out. “Right now, some projects are overpaying. Ideally, insurance can make contributions more appropriate, so that money can be passed back to investors and developers, making the market more efficient.”

The unique benefits of carbon insurance do not end with operational efficiency. Even more significant may be its effects on long-term sustainable revenue — one of the most urgent challenges facing individual projects, according to David.

Insurance is a universally understood de–risking mechanism; as such, project coverage sends a strong message to customers — buy-side compliance and risk departments, in particular — about the quality and value of associated credits. Just as it helps developers attract (financially) risk-averse banks and investors to new projects, insurance also brings (reputationally and financially) risk-averse buyers to the market. That makes it a powerful catalyst for sales volumes and profit margins.

To mobilize private capital, carbon markets must do more to instill confidence among potential lenders and buyers. That means mitigating default and contract risk, respectively. Insurance is not the only way to de-risk and so scale climate projects, but it is one of the fastest. And given what is at stake — the “huge potential” of carbon markets to temper freewheeling global temperatures — speed, in this case, really does matter.