Kiln launches first carbon credit insurance product

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A carbon credit insurance product developed by Parhelion Underwriting was underwritten by Kiln for a major international bank last week.

Carbon credits developed under the Kyoto Protocol, which are also known as Certified Emission Reductions, 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.

Through the Protocol, some 192 individual countries plus the European Union committed to work together to reduce their collective carbon and greenhouse gas emissions from the 1990 levels.

Countries that have signed up to it can buy credits to offset their own emissions and to contribute to meeting reduction targets under the European Emissions Trading Scheme.

Banks can purchase ‘options' to buy carbon credits at a fixed, pre-determined price for ‘green' projects (such as renewable energy or emission reduction activities) that have been approved by the Clean Development Mechanism Executive Board, under the Kyoto Protocol.

These credits can then be traded at a later date, when the current market price is higher than the option price, generating a profit for the bank.

However, as demonstrated by the recent change in regulation by the EU regarding the eligibility of CERs from HFC23 and adipic acid projects, there is a significant risk that credits may become ineligible as a result of decisions made by the EU, which can have a substantial impact on their value.

It is widely believed that this has reduced investors' willingness to participate in this market and impacted liquidity.

The new insurance product works to protect the value of the credits in these circumstances and improve market liquidity.

Paul Culham, active underwriter at Kiln, said: "This is a very exciting new product for Kiln which will provide substantial benefits to companies who are concerned about maintaining a stable balance sheet. The protection this insurance cover provides could also encourage other businesses to consider adopting carbon credits. Developing new and innovative products like this is a key part of Kiln's strategy to grow the business and the enterprise risks team is at the forefront of such developments."

Julian Richardson, CEO of Parhelion, said: "We are delighted to have developed this product and securing the support of Kiln has been incredibly valuable. The flexibility and commitment shown by their enterprise risks team to understanding a new and complex area of business has enabled this product to come to market. It is imperative that innovative solutions are brought to such markets in a timely fashion enabling them to run efficiently, and this can only be achieved through the flexible underwriting approach demonstrated here by Kiln."

Alice Chapple of Forum for the Future, a leading not for profit organisation in the sustainability sector, 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."

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