Kita’s vision for the voluntary carbon market

“At this stage of the climate crisis we need to use all the tools at our disposal…” – Natalia Dorfman, the Chief Executive Officer of Kita, the world’s first carbon insurer, deep dives into the critical role insurance plays in the global fight against climate change.

How is the role of insurance in the global fight against climate change set to evolve?

The insurance industry plays a central role in the global fight against climate changeboth in terms of its ability to help create solutions for the adaptation and mitigation of climate risks, and unfortunately the impact that climate change plays on insurability of various risks.

First, insurance provides a critical safety net for when things go wrong, enabling resilience and the ability to rebuild.  As climate impacts, such as severe weather, increasingly impact upon business and people around the world, insurance will be hugely important in enabling ongoing resilience.  On that point, I think a key area of evolution will be innovative insurance products that help close protection gaps for people who aren’t insured – for example small-holder farmers in developing countries. Parametric products and other data-driven innovations that lower costs and enable prompt claims payment will be key.

Second, insurance doesn’t only protect people when things go wrong.  Insurance can also help outline proactive risk mitigation that can help identify and mitigate risks before they occur.  There is a lot of space for evolution here in the form of new insurance products; for example, Kita’s focus is on developing carbon insurance that helps drive more financing to scale high-quality carbon projects.  We do this via proactively identifying key risks that could damage a carbon sequestration project and offering insurance to mitigate those risks.  The ultimate aim is to help scale an industry via reducing risk and enabling greater flows of financing.

Third, insurance is impacted by the increasing impact of climate change itself, with certain risks having the potential to become less ‘insurable’ over time – for example, flood risk to low-lying coastal real estate.  This is very challenging and indicative of the fact that we need to be focusing on progress and innovation in the areas of mitigation and adaptation, along with enabling new climate technologies and solutions, which will enable us to avoid the most severe consequences of climate change later this century.

What is the significance of the voluntary carbon market in driving the transition to net-zero?

To fight climate change, the world urgently needs to (1) stop emitting carbon dioxide, and (2) remove existing carbon dioxide from the atmosphere. An easy analogy is a flooding bathtub.  To stop the flooding, you can’t just turn off the tap.  You also need to drain the tub.  The carbon markets provide the proverbial ‘drain’.

The purpose of the voluntary carbon market is to drive financing to projects that either avoid/reduce additional carbon dioxide and other greenhouse gases from entering the atmosphere, or that remove and durably sequester carbon dioxide that is already in the atmosphere. Examples of avoidance projects include stopping deforestation, restoring degraded peatlands or providing clean cookstoves to replace wood burning stoves.  Meanwhile, removal projects range from nature-based solutions, such as planting trees, to more technological solutions like direct air capture, with the key aim being the removal of carbon dioxide from the atmosphere and durable storage of that carbon in multiple forms, such as trees, soils, rocks and other mineral deposits, underground reservoirs, the ocean, and long-lived products like concrete.

Each tonne of carbon dioxide avoided/removed/reduced equates to one carbon credit.  One of the key points of any carbon financing is that it should be ‘additional’ – i.e. the carbon project wouldn’t be able to take place without the financing provided.  Thus, the resulting carbon credits have the potential to be ‘offset’, or used by a company to help achieve its net zero targets.

There can be controversy around the carbon markets, with people arguing that carbon finance can act as a ‘get out of jail free’ card for companies in meeting their net zero commitments.  However, going back to the bathtub analogy, at this stage of the climate crisis we need to use all the tools at our disposal, and support of carbon projects are hugely important alongside other decarbonisation measures. It is very much a Both/And situation, rather than an Either/Or.

Where do the challenges lie in achieving scale for carbon removal?

For carbon removal specifically – i.e. the proactive removal and durable storage of existing carbon dioxide in the atmosphere – there are two core challenges.

First is the speed and scale at which we need to grow the industry.  Scientific assessments note we need to remove billions of tonnes of carbon dioxide from the atmosphere; to put this scaling challenge into perspective, we are removing around 2 million tonnes of carbon today against a projected 165 billion tonnes of cumulative removal by 2050. This growth will require trillions of dollars in investment. Kita co-authored a report with BeZero, a carbon ratings company, which outlines key hurdles to achieving this growth, including:

1. Transparency: publicly available data and information
2. Confidence: trusted forecasts and risk analysis tools
3. Safeguards: protections for investments when outcomes are not as expected prompt claims payment will be key.

The second overall challenge, which exacerbates the difficulties of the aforementioned challenge, is that it takes time to remove carbon dioxide from the atmosphere.  Nature takes time to grow/regenerate and new technologies need to be proven.  This creates what we call “carbon delivery risk” – carbon removal solutions require investment today to achieve scaling, however today’s investment might not generate verified carbon credits for multiple years.  This causes a risk to buyers and investors in carbon removal, and is the key challenge Kita is trying to solve with our Carbon Purchase Protection insurance product.

Overall, at Kita, we believe that insurance is one of the key underpinnings of the voluntary carbon market, that can help create the same market mechanisms and risk frameworks as those currently present in wider financial markets, and act as a stamp of confidence to greenlight institutional level investment and unlock growth.

In what ways is insurtech uniquely positioned to enable the next generation of climate innovation?

There is a huge amount of power within the insurance industry to act as an enabler in the fight against climate change, whether that’s via de-risking new climate technologies, improving capital efficiency for new investments, helping understand emerging climate risks to incentivise new behaviours, or providing a safety net to protect people and businesses when climate disasters strike.

The insurance industry can move slowly when developing new solutions for emerging markets such as carbon removal, which makes sense when considering that new markets start with small financial values and relatively high-risk. There is therefore great mutual benefit in insurtechs working together with more established insurance players, like the coverholder structure which Kita has. The insurtech has the ability to focus on a niche new space and develop an innovative solution, and the established insurance company can access a new market without taking on more risk exposure than it is comfortable with. I think these partnerships within the insurance industry are very powerful in driving innovation in the climate space.