Insurance Firm Oka Confirms Specifics on ‘Political Risk’ Products

24 May 2024

Quantum Commodity Intelligence – Carbon insurance specialist Oka has given details about products aimed at protecting against the risk of an authorised carbon credit losing its eligibility for the UN’s Article 6 and Corsia aviation decarbonisation markets if key accounting procedures are not made by the host country.

The products aim to insure the project developer, or buyers when credits are sold on, in the event of non-delivery if a host country has failed to deliver or revoked a a so-called Corresponding Adjustment (CA).

“The failure to apply CAs is a very real threat for Corsia customers. It would catalyse heavy losses both financial (in the form of their failed investment, plus the cost of new credit procurement) and reputational (in the form of potential greenwashing accusations),” Oka said in a blog this week.

CAs are a carbon accounting procedure that classify host countries’ emissions reductions as permissible for use in international carbon trade under Article 6, rather than for domestic use to meet goals set out in countries’ Nationally Determined Contributions under the Paris Agreement.

Oka’s blog said the lack of CA for a carbon credit is also a serious risk on the sell-side, because the eventuality is to a large degree out of the hands of market participants.

The threat to CAs is thought to arise if countries fail to deliver on commitments to issue a CA, or revoke one that has already been issued and instead use emissions reductions to meet domestic climate targets.

The threat is seen as most likely in countries that experience volatile swings in political leadership or are at risk of coups.

Under rules for Corsia, which is a UN scheme that requires airlines to buy carbon offsets known as eligible emissions units (EEUs) or source sustainable aviation fuel to meet decarbonisation targets, the carbon credits have to be backed by CAs.

The launch of a Corsia-specific policy has come as registries Verra, Gold Standard and ACR have indicated that project developers wanting to sell credits to Corsia buyers will need a third-party guarantee mechanism to qualify.

That communication from the standards has come after the International Civil Aviation Organization (ICAO), the UN’s aviation body, in March only gave conditional approval to Verra, Gold Standard and ACR, prompting updates to the applicant supplier programmes’ protocols referencing insurance as providing that guarantee.

This indicates that “most, if not all, credits destined for Corsia will require insurance”, Oka’s blog points out.

The A6 insurance product and the Corsia-specific policy allow those taking insurance to replace credits deprived of a CA with an Article 6-authorised credit, so that buyers of credits can maintain compliance with the relevant carbon market rules.

Furthermore, the product aims to give confidence to the insured that their carbon investment has not been double claimed.

A loss is triggered in three specific ways, Oka said in information notes on the insurance products:

• the host country fails to submit a CA as part of its annual report or ‘biennial transparency report’ to the UN’s climate arm;
• the host country revokes the letter of authorisation (LoA) it has issued to the carbon developer that signals a CA will be applied; and
• a voluntary carbon market registry informs the relevant account holders that the CA has not been made within the appropriate time frame or that the LoA has been withdrawn and removes the credit’s Article 6 authorised label.

The policy will pay out the stated value per credit times the number of insured credits, less a retention.

Meanwhile, “the developer or the holder of credits can easily adjust stated values
during the life of the policy through a simple endorsement process”, Oka added.

The insurance provider said that an additional premium may be required if the stated value of credits increases, or the premium might be returned if the stated value was to fall.

However, the product does not pay out the current market value of the credit, with Oka explaining that it must ensure that it has sufficient capital reserves to pay out claims for all policies that are in force.

“Given the volatility in carbon credit prices, we cannot take market risk. The stated
value mechanism provides the stability needed to meet insurance regulations while also providing a reasonable insurance cost to the insured, since it allows them to update the stated value periodically as market prices change,” it said.

Once a claim process begins, the credit holder will surrender the compromised credit to the insured – if they are different parties – which will surrender it to Oka.

In turn, Oka replaces it with the stated value of the credit as defined in the policy, and following that, the insured will then use the payout to buy a replacement credit.

In the event that the compromised credit has already been retired, the insured will retire the replacement credit, and if the compromised credit has not been retired, the insured is required to provide the replacement credit to the original credit holder, Oka pointed out.

©Quantum Commodity Intelligence – used with permission.