Emissions trading and Insurance
The instrument of emissions trading stipulated in the Kyoto Protocol was introduced for the first time on a broad scale when the EU's trading system was launched at the beginning of 2005. Munich Re has developed a concept to cover risk aligned with the generation of emission certificates.
Past experience with this tool suggests that the cost of avoiding emissions can be reduced with support of market economy mechanisms. Allowances that become available for particularly energy-efficient and environmentally sound performance can be bought by companies whose costs for necessary reductions (per ton of CO2 or other greenhouse gases) are above the market price for the respective emissions allowance. The transfer of emission allowances envisaged means that reductions can be made where the costs for these reductions are lowest.
The flexibility mechanisms of Joint Implementation (JI) and Clean Development Mechanism (CDM) are designed to promote reductions in emissions outside the EU too, in countries with reduction targets within the framework of the Kyoto Protocol (JI — from the beginning of 2008) or in countries with no reduction targets (CDM — from the beginning of 2005). These emission reductions can also be transferred and sold after an independent certification.
Munich Re keeps a close eye on the development of European emissions trading and emissions-reduction projects (CDM and JI) and on the associated demand for cover of risks. We expect demand to grow in the long term in the area of renewable energies in particular.
Based on our findings, we have developed a concept which will address institutions engaged in generating carbon credits, such as banks, funds, project sponsors and aggregators as well as compliance investors. Its objective is to compensate for the loss such an investor faces if carbon credits are not delivered according to plan and if at the same time the investor is obliged to deliver to a buyer in the secondary market or has to comply with reduction requirements himself. In contrast to what is commonly available in the market, the Munich Re Group strives to combine traditionally separated lines (e.g. physical damage, counterparty risk or country risk) by adopting a holistic approach. This "Kyoto Multi Risk Cover" will bridge gaps and provide a scope of cover unequalled in today's insurance industry. Each account is underwritten on its own merits and based on characteristics of the project portfolio, and coverage elements can be combined according to individual clients' needs.
Dr. Thomas Blunck, member of Munich Re's Board of Management, says: "Our approach will not only represent an enhancement for investors in carbon markets, but will also contribute to acceptance and feasibility of the Kyoto mechanisms and thereby underline the sustainability commitment of Munich Re."
The concept is flexible and will also be applicable to JI projects as well as extra-European abatement schemes to come.