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Voluntary Carbon Credits

The Voluntary Carbon Market (VCM) will play a vital role in our transition to a low-carbon future. Explore the solutions that can give confidence in this growing market.

Carbon Credit Fundamentals

One credit = one token representing a ton of carbon or equivalent greenhouse gas removed or avoided.

Carbon offsets may be used for residual emissions once an organization has taken action to reduce their emissions to as close to net zero as possible and, additionally, while they are taking action.

There are two key markets that trade carbon-related financial instruments: the Compliance Carbon Market (CCM) (sometimes known as the regulated market) and the Voluntary Carbon Market (VCM). Compliance markets are government- and regulator-led.  They have regulated pricing. Credits in voluntary markets (the focus of this website) are unregulated. VCCs are subject to varying degrees of verification oversight and customer protection, so the market can be complex to navigate.

New insurance solutions are being developed to protect different parties in the value chain.

The risks associated with VCCs can be complex. Marsh can help you to navigate the VCM landscape.

Explore our glossary

$30bn

projected size of the carbon insurance market in 2050

82%

increase in the price of VCCs from 2021 to 2022

4,916

registered projects within the VCM in January 2024

*All $ amounts in USD

Types of carbon offset

The different types of carbon offsets can be split into more nature-based versus more technology-based, and either removal or avoidance and reduction:

  • More nature-based: projects that use natural processes to generate carbon offsets
  • More technology-based: projects that use technology or engineering-based solutions
  • Avoidance: projects that prevent the emission of carbon in the first place
  • Reduction: projects that actively reduce the volume of carbon emissions to the atmosphere
  • Removal: projects that remove carbon from the atmosphere

Risk Overview

Project fraud is any deliberate misrepresentation or manipulation of carbon removal projects, causing a subsequent delivery risk or instance of invalidation by the verifier. Credits stored digitally on registry platforms could also be subject to theft by hackers or be subject to a cyberattack resulting in a data loss.

The risk of credits being issued and validated, and subsequently invalidated, by an accreditor or verification body. Invalidation could occur from methodology or accounting errors, project fraud, or a reversal.

Physical Damage refers to the risk of damage or loss to the project itself, resulting in the loss of its insured value. Projects are at risk of damage by natural catastrophes or extreme weather events, like wildfire or drought, as well as political violence or vandalism. Business Interruption is the risk that a credit’s future value is lost from damage to, or suspension of, business operations. Stakeholder businesses in the VCM landscape can be impacted by a wide range of systemic risks such as cyber hacks, jurisdictional action, or regulatory change.

The risk that the greenhouse gases sequestered by a carbon project are released back into the atmosphere, mitigating 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.

The risk that pre-agreed carbon credits are not transferred or transferred late to the buyer. Non-delivery could occur if a project developer defaults, or if a project is damaged or interrupted before it can generate the necessary number of credits.

Land-based projects are subject to political risks such as confiscation, expropriation, nationalization, and deprivation (CEND), changes in law, or other state-level intervention (especially for projects in emerging markets). Politically motivated violence or war can also destroy nature-based projects and invalidate the associated credit.

The risk of financial loss arising from breaches of representations or warranties regarding the validity, authenticity and quality of carbon credits being transacted between parties.

Solutions

selected option

1. Operational risk, as a result of developer underperformance or insolvency could lead to loss of their future income.

Insurance solutions to support include:

  • Project non-performance insurance (specialist VCC insurers)

2. Investors can also be subject to regulatory change, in case changes in awarding standards affect the validation and quality of their credits. This could lead to credit invalidation and potential financial loss.

Insurance solutions to support include:

  • Invalidation insurance (specialist VCC insurers)

1. Destruction or damage to the carbon credits can lead to non-permanence. 

           Insurance solutions to support include:

2. Destruction or damage to the carbon asset can also lead to non-permanence. 

             Insurance solutions to support include:

3. Confiscation, Expropriation, Nationalisation and Deprivation (CEND) and Political Risks could cause Invalidation or Reversal.

             Insurance solutions to support include:

  • Political risk insurance (specialist VCC insurers, existing markets)
 

Credits can be bought and sold multiple times before being retired. Offtakers include buyers looking to trade or sell credits, such as commodity traders and trading platforms

1. Destruction or damage to the carbon credits can lead to non-permanence

Insurance solutions to support include:

2. Under/non-delivery of credits 

Insurance solutions to support include:

  • Delivery insurance (specialist VCC insurers)
  • Credit insurance

3. Price risk due to fluctuation in credit market value

Insurance solutions to support include:

  • Surety insurance

Case Studies: Insurance in action

The Project: Deforestation and forest management project in Brazil

Risk Taker: The Developer

The Situation: Credits generated by the project are suspended by the global standards organization following a police investigation into suspected land-grabbing and illegal deforestation by the project owner.

Possible scenarios:

  • The title to the land hasn’t been properly obtained and the issuing registry invalidates the credits. In this scenario the risk taker could be the project developer or possibly the offtakers. A specialist voluntary carbon credit insurance policy could help to cover the risk. 
  • The developer provides incorrect information which isn’t sufficiently audited, causing invalidation. In this scenario the risk taker would be the offtaker, and the insurance cover to suit would be a specialist voluntary carbon credit insurance policy or a fraud policy.
  • Deliberate misrepresentation to gain a financial advantage, causing invalidation. The risk taker in this scenario would be the offtaker, and insurance could be provided by a crime policy.

The Project: The manufacturing of biochar and a production facility in Oregon.

Risk Taker: The Buyer

The Situation: Credits generated by the project are invalidated by the global standards organization.

Possible scenarios:

  • Credits are reversed because the biochar linked to credits is improperly dispersed in soil or repurposed as fuel degrades at a faster rate than accounted due to wildfire events or unexpected soil temperatures where biochar is applied. The reversal leads to subsequent invalidation by the standards agency.
  • Credits are invalidated of carbon credits when sub-standard manufacturing of the biochar leads to adverse impacts on the land or water systems where the biochar is applied.

Marsh is the partner to help you navigate the voluntary carbon market

Carbon market acumen

Our dedicated team of in-house climate and sustainability specialists have been involved with the voluntary carbon market since inception. We have an in depth understanding of the carbon market, it’s mechanics, and the solutions available to the risks it poses clients.

Global reach, local solutions

As the world’s largest insurance broker and risk advisor, our global reputation allows us to drive change at the forefront of the voluntary carbon market. With placement specialists in every region, our global reach gives us a uniquely powerful perspective on emerging risks.

Unrivaled breadth of expertise

As Marsh McLennan, we bring a uniquely connected approach to our work within the carbon markets. Our modelling, advisory, actuarial, and analytical work is enhanced by bringing together climate experts from each of our global businesses – Marsh, Guy Carpenter, Mercer, and Oliver Wyman.

To understand our full suite of capabilities, please contact:

Ryan Bond

Ryan Bond

Head of Climate and Sustainability Insurance Innovation

Steve Forrest

Steve Forrest

Managing Director, Climate and Sustainability

Lara Whitmore

Lara Whitmore

Project Manager, Climate and Sustainability

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