A new financial product has quietly emerged in the voluntary carbon market: carbon credit insurance. Backed by major global reinsurers and operating through established insurance marketplaces, these products promise to "de-risk" carbon investments and "drive quality" in the market.
This investigation examines the structure, mechanics, and implications of carbon credit insurance. What emerges is not a story of market maturation, but a revelation of structural dysfunction, where failure has been transformed from a risk into an asset class.
Carbon credit insurance has emerged as a new financial product. Insurers now offer protection against project failure, reversal, non-delivery, and even buffer pool depletion. Claims can be paid in cash or replacement carbon credits.
The existence of these products is itself an admission.
If carbon credits truly delivered what the market promises, integrity, high-quality, verified, permanent, backed by robust buffer pools, accredited registries, insurance would be redundant. You don't insure outcomes you're confident will occur. You insure against outcomes you suspect won't.
This raises a fundamental question: why would anyone need insurance?
The answer reveals a structural flaw. One that is particularly severe for carbon removal projects.
Because, beyond the admission of market fragility, we have identified something more serious: a structural loophole that enables double compensation when projects fail. Two separate systems respond to the same failure event, neither coordinated with the other. The result is a market where failure can be more profitable than success.
Understanding Removal vs. Reduction Credits
Carbon credits fall into two broad categories:
The insurance products discussed here (reversal insurance, buffer depletion insurance, non-delivery insurance) are designed primarily for removal projects, where physical reversal is possible.
This is where the problem becomes most severe.
When a removal project fails, the carbon physically returns to the atmosphere. The original offset claim is not just financially impaired. It is atmospherically meaningless. The CO2 that was supposedly "offset" is back in the air.
Yet two compensation systems (i.e., double compensation) now exist for the same failure event:
These systems do not coordinate.
There is no mechanism requiring:
Under these conditions, a buyer can hold an original offset claim (backed by buffer accounting) AND receive replacement credits (available for future claims or sale). More claims than carbon. This is double compensation. Not automatic, but structurally enabled by the absence of coordination.
But here is the critical point: The atmosphere does not participate in these financial arrangements.
When a forest burns, the CO2 returns to the atmosphere regardless of buffer cancellations, insurance payouts, or corporate accounting. Financial compensation does not recapture carbon. Replacement credits from a different project do not undo the reversal. They represent a separate, future sequestration (if they work).
The original offset claim was rendered physically meaningless the moment the project failed. Everything after that is paperwork.
This changes everything about market incentives.
If failure triggers compensation, and that compensation can exceed the original value, then failure becomes profitable. The buyer's optimal strategy is to purchase the cheapest, riskiest credits available, insure them, and hope they fail.
If buyers prefer cheap junk credits (because failure is profitable), then:
This is insurance fraud logic applied to environmental assets. Except it's not fraud, because no one defined it as fraud. There is no law against hoping your carbon project fails.
Parts I through III explain these mechanisms in detail. Parts IV and V examine who benefits. Part VI reveals that even the buffer pools now require their own insurance.
Carbon Market Insurer X, operating as a coverholder at a major global insurance marketplace, offers several products:
Non-Delivery Insurance: Protection against projects failing to deliver promised credits.
Reversal Insurance: Protection against sequestered carbon being released back into the atmosphere.
Buffer Depletion Insurance: Protection against registry buffer pools becoming insolvent.
Political Risk Insurance: Protection against host countries revoking carbon accounting authorizations.
Counterparty Insurance: Protection against parties failing to fulfill contractual obligations.
Consider what this product list reveals. Each insurance category corresponds to a failure mode that the market's existing integrity infrastructure, registries, verifiers, accreditation bodies, buffer pools, is supposed to prevent.
Carbon Market Insurer X offers clients a choice: receive insurance payouts in cash, or in replacement carbon credits.
Replacement credits are sourced from a "Carbon Supplier Pool", a network of carbon credit providers (Provider X, Provider Y, Provider Z, and others) who have agreed to supply "like-for-like" credits when claims are triggered.
This mechanism raises immediate questions:
If a project fails and the buyer receives replacement credits from an entirely different project, what happens to the original offset claim? What happens to the buffer credits the registry already cancelled? How many claims now exist against how much actual sequestration?
Carbon registries require projects to contribute a percentage of issued credits (typically 10-20%) to a pooled buffer. When a reversal occurs, a forest burns, a project fails, the registry cancels credits from this buffer to maintain the aggregate accounting claim that total issued credits represent real sequestration.
Critical point: Buffer pools do not compensate individual buyers. They maintain the registry's environmental accounting. The buyer who retired credits from a failed project is not notified, not compensated, and not required to adjust their offset claims. The buffer operates silently in the background.
Insurance operates differently. When a project fails:
This is individual compensation to the specific buyer for their specific loss.
When both mechanisms trigger for the same failure event:
| Layer | Action | Outcome |
|---|---|---|
| Registry Buffer | Cancels buffer credits | Registry accounting "maintained" |
| Insurance | Pays replacement credits | Buyer receives new credits |
The buyer now has:
More claims than carbon.
Every insurance payout that settles in replacement credits injects new credits into circulation. These aren't reserved credits held against this risk. They're fresh credits from entirely different projects, now entering the market to compensate for failed sequestration elsewhere.
The market now contains:
More paper. Same atmosphere. Less actual sequestration.
Year 1:
Year 2 (Project Fails):
What does the honest company do?
An honest company would:
Cost for honest company:
What can the less-than-honest company do?
A company that doesn't disclose could:
Cost for non-disclosing company:
There is no enforcement mechanism connecting:
The systems do not talk to each other.
Consider the economics more carefully.
Scenario A: Project Succeeds
| Item | Cost |
|---|---|
| 100,000 credits @ $10 | $1,000,000 |
| Insurance premium @ $1.50 | $150,000 |
| Year 2 credits @ $10 | $1,000,000 |
| Total for 2 years | $2,150,000 |
Scenario B: Project Fails (Honest Buyer)
| Item | Cost |
|---|---|
| 100,000 credits @ $10 | $1,000,000 |
| Insurance premium @ $1.50 | $150,000 |
| Replacement credits | $0 |
| Total for 2 years | $1,150,000 |
Even the honest buyer saves $1,000,000 when the project fails.
Scenario C: Project Fails (Strategic Buyer)
| Item | Cost |
|---|---|
| 100,000 cheap high-risk credits @ $4 | $400,000 |
| Insurance premium @ $2 (higher for risky projects) | $200,000 |
| Project fails, receive "high-integrity" replacements | $0 |
| Sell replacement credits @ $20 | -$2,000,000 |
| Net position | +$1,400,000 profit |
The strategic buyer:
The buyer's optimal strategy is to purchase the cheapest, riskiest credits available, insure them, and hope they fail.
In a functioning market:
In this market:
The insurance product has inverted the market's incentive structure.
| Actor | Benefits from Project Success | Benefits from Project Failure |
|---|---|---|
| Atmosphere | ✓ | |
| Honest buyer (naive) | ✓ | |
| Strategic buyer | ✓ | |
| Non-disclosing buyer | ✓ | |
| Supplier pool members | ✓ | |
| Project developer | ✓ (already paid) | |
| Registry | Ambivalent (fees either way) | |
| Insurance company | Moderate, predictable failures | |
| Monitoring technology firms | ✓ (see Part V) |
Count the actors who unambiguously want projects to succeed:
Count the actors who profit from failure:
The system selects for participants who benefit from its dysfunction.
Carbon Market Insurer X's replacement credits come from a Supplier Pool. These are not neutral credit warehouses. They are vertically integrated market participants:
When a claim triggers, the insurer purchases replacement credits from these suppliers. More failures = more replacement demand = more revenue for suppliers.
The suppliers profit from the failures they may help detect.
Consider Carbon Management Firm X, which offers:
And simultaneously sits in the insurer's Supplier Pool.
Scenario: Firm X monitors a forest project for a buyer who has insurance
Firm X touches every node:
They are selling both the diagnosis and the cure.
| Actor | What They Know | Incentive |
|---|---|---|
| Project Developer | Ground truth | Hide failures |
| Registry | Buffer cancellations | No proactive notification |
| Verification Body | Status at audit time | Paid by developers |
| Monitoring Firm | Near real-time satellite data | May profit from failures |
| Insurance Buyer | Only what they actively monitor | Usually nothing |
| Atmosphere | Everything | No voice |
The entity with the most complete, real-time information (monitoring firms) has financial incentives that may conflict with accurate, timely disclosure.
No independent actor has both complete information AND aligned incentives.
No one needs to set a fire.
The structure selects for failure through passive mechanisms:
Reduced Monitoring: If you profit from failure, why invest in fire prevention, early detection, or rapid intervention?
Selection Bias: Supplier pool members preferentially source from projects likely to succeed, protecting their own inventory. The riskiest projects flow to direct buyers, who then claim insurance. Quality routes to suppliers. Risk routes to the insured pool.
Information Hoarding: Supplier pool members have deep market intelligence. They know which projects are struggling before anyone else. They can position accordingly.
Methodology Gaming: Support methodologies that create high issuance but high reversal risk. More credits issued = more credits to fail = more replacement demand.
The incentive isn't to burn forests. It's to let them burn.
Carbon Market Insurer X offers a product called "Buffer Depletion Insurance", insurance for registry buffer pools themselves.
From their own materials:
"All buffers face a risk of outlier loss that diminishes their solvency and ability to meet outlined expectations for buyers of carbon credits. It is possible that an extreme number of losses could deplete the buffer past its ability to perform its function."
This is an admission, from within the insurance industry, that:
The integrity mechanism (buffers) now requires its own integrity mechanism (insurance). The stack becomes:
Each layer is a bet that the layer below will fail. Each layer extracts premiums. No layer guarantees atmospheric outcomes.
Insurance models assume uncorrelated failures. Fire in Brazil doesn't correlate with fire in Indonesia doesn't correlate with policy changes in Country A.
But climate risk is correlated:
When correlated failures cascade:
The insurance doesn't eliminate risk. It concentrates it at higher levels while distributing the appearance of safety.
When correlated failures exceed insurance capacity, losses flow upward:
The corporations that made offset claims? They keep their claims.
The atmosphere? Still holds the CO2.
The companies that "achieved net zero"? Still on the sustainability indices.
The only losers are financial actors who bet wrong on timing. The environmental outcome was never at risk, because it was never the point.
Those who remember 2008 may recognize this architecture:
| 2008 Housing Crisis | Carbon Markets |
|---|---|
| Mortgages of questionable quality | Carbon credits of questionable additionality |
| Bundled into MBS/CDOs | Bundled into portfolios and registries |
| Credit default swaps "insuring" the bundles | Carbon insurance "de-risking" the credits |
| Rating agencies blessing it all | Integrity councils and accreditation bodies |
| "Housing prices always go up" | "Verified sequestration is permanent" |
| Correlated failure when housing dropped | Correlated failure when climate impacts hit |
The innovation is not environmental. It is financial engineering that creates:
In 2008, the question was: "Who knew, and when did they know it?"
In carbon markets, the answer is already clear: Everyone knows. The insurance products prove it. The premiums price it. The supplier pools profit from it.
The difference is that in 2008, people lost houses. In carbon markets, we lose decades.
There is no law requiring:
There is no definition of fraud that covers:
The system was built without the legal infrastructure to recognize what it does.
This is insurance fraud logic applied to environmental assets, except it isn't fraud, because no one defined it as fraud.
In any other context, we would recognize this pattern. In carbon markets, we call it "risk management" and "market maturation."
Carbon credit insurance has securitized disappointment. The underlying asset is failure itself.
Return to the opening question: If carbon credits represent real, verified, permanent sequestration, why would anyone need insurance?
The existence of these products is proof that:
Carbon Market Insurer X's marketing claims that insurance "drives quality" and "builds confidence." But the product structure reveals the opposite: it creates a market for failure and rewards participants who seek it.
If you work in the carbon market, consider:
About your organization:
About your counterparties:
About the market:
About the system:
The voluntary carbon market was built to channel finance toward climate solutions. Carbon credit insurance reveals what it has become: a system that profits from the gap between environmental claims and environmental reality.
The question is not whether this system will produce bad outcomes. It is whether it will be reformed before or after it has been used to justify decades of continued emissions.
This investigation examines publicly available information about carbon credit insurance products and market structures. It does not allege illegal activity by any party. It questions whether a system that makes failure profitable can deliver environmental outcomes.