US: Third-party offset insurance yet to sell, but creator company optimistic

14 March 2014 18:00 Source:ICIS

Third-party insurance against the invalidation risk of Californian carbon offset credits has yet to sell, with buyers and sellers addressing the potential liability in other ways so far. While the company offering the product reports some initial interest from market participants, it expects demand to pick up as offset liquidity increases.

Parhelion Underwriting, a London-based insurance firm specialising in carbon markets, launched the product last year to address what is a particular problem for California carbon offsets (CCOs): such credits can be invalidated by regulator Air Resources Board (ARB) for up to eight years after issuance. Furthermore, if not agreed otherwise at the time of the deal, the buyer, rather than the seller, is liable.

“We haven’t completed any transaction yet, but we have a pipeline of around 20 offset projects with which [we] are under underwriting consideration, representing approximately 250,000 offset credits”, CEO Julian Richardson told ICIS.

The product is suitable for offsets issued under the ozone-depleting substances, livestock and forestry offset protocols.

“Offsets have been less liquid then expected because of low [Californian carbon allowance] CCA prices. As we see more offsets being traded, we expect higher demand for our product,” Richardson added.

Only 5.5m offsets have been issued so far to the market to date, data from regulator Air Resources Board show. Companies can use offsets to fulfil up to 8% of their compliance obligations, under the Californian cap-and-trade system rules.

Legal sources said that the insurance product could become attractive to large buyers such as Investor Owned Utilities, which under California Public Utilities Commission rules can only buy offsets for which the seller assumes the invalidation risk.

Different prices for different risk profiles

The ways in which invalidation risk and buyer liability is addressed by dealers has generated price spreads among credits with different risk profiles.

The most expensive credits are offsets for which the seller commits to replacement in case of invalidation, which the market refers to as “golden” CCOs.

At the opposite end of the price range are non-guaranteed credits, for which the invalidation risk remains with the buyer for the default invalidation risk period of eight years. This type of credits are known as a CCO8s.

The invalidation period can be cut down to three years if the project is verified a second time by a new verifier, which turns a CCO8 into a more expensive CCO3.

The insurance product would stand as a third way to deal with the risk at a lower cost as its price is “within the market spread between CCO3s and golden CCOs”, Richardson said.

With CCAs for delivery in December 2014 currently valued at $11.96/tonnes of CO2 equivalent (tCO2e), a golden CCO is worth around $9.85/tCO2e, a CCO3 $8.95/tCO2e and a CCO8 $8.85/tCO2e. Silvia Molteni

By Silvia Molteni