Insuring Corsia: What lies ahead?

Alexandra: Hello, and welcome to this carbon podcast from Argus Media. I'm Alexandra Luca, a reporter covering voluntary carbon markets in CORSIA. And today, I'm joined by Chris Slater, the founder and chief executive at Oka, the carbon insurance company. Hi, Chris.

Chris: Hi, Alexandra. Thanks for having me.

Alexandra: Great to have you on. So today, we'll be speaking about the role of insurance-backed carbon credits in the CORSIA market. And we'll look at the challenges facing insurers, where supply could come from next, and how demand is being shaped. And I think the best place to start here is by giving our listeners an overview of Oka, and [inaudible 00:00:38] in shaping supply for CORSIA.

Chris: Thanks for having me on, Alexandra. And we've been instrumental, I guess, in the initial stages of creating supply for CORSIA. Maybe just to take you back a couple of years ago, we'd stood up really to address the gaps within the climate transition where insurance just really hadn't played a significant role in taking risk off the table. Specifically to CORSIA, we'd actually built a product with a project developer addressing the double counting risk that was then surfaced as a key issue for ICAO in approving standards bodies for eligibility for the scheme.

So at the same time, we then spent really the last 18 months, 2 years with Gold Standard and Verra as the first standards bodies that had approved private insurers, really helping them understand how the insurance industry can play a role, what place it can play in taking that double counting risk off the table, how they as the arbitrator of effectively the eligibility for credits could integrate insurance and embed insurance within that ecosystem.

Lots of conversations both from the entire insurance industry participating in many conversations and workshops, really helping, as I said, those standards bodies understand what's the specific risk, how can the industry play a role. And then we were the first insurer to be approved in October with Gold Standard, and subsequently Verra in December last year. That really unlocked then the opportunity for developers to use insurance as a mechanism for getting CORSIA tagged for their labels and bringing those credits to market.

Alexandra: I remember clearly that insurance used to be a bottleneck before. The only supplier from CORSIA was from the J-REDD Guyana project. And then once Verra and then subsequently Gold Standard, or was it the other way around, approved insurance policies, then credit started flooding the market. So when did you successfully first bring credits to market, and how many of the supply pipeline...how much of the credits in the supply pipeline have you insured so far?

Chris: We've been active really over the course of about 18 months, 2 years with pipelines, so spending a lot of time with project developers, really helping build the capability to have their credits tagged. The key consideration for us was really an assigned LOA in an appropriate form that would allow us as an insurer to underwrite the risk and price the risk. So you will have seen through Gold Standard the first credits that were tagged eligible were BURN Manufacturing, and they were credits that we'd insured. Subsequently with Verra, first credits I think they had tagged with the Del Agua credits out of Rwanda. Again, they were credits that we insured.

So we spent time, in market building mode, so there was lots of sort of tripartite work between standards body, developer, and ourselves, just making sure all the pieces were in place so that when the credits were tagged, the confidence that could be given to the airlines, that this issue had been addressed, that the mechanisms were correct, the insurance policy was appropriately in place. And subsequently, since our sort of first tagging, I think we've either had tagged or in the process of getting tagged almost 8 million credits of the 35 I think that have come to market across a variety of different projects and project developers. But that really is just the start. There is a huge volume that is at various stages of the pipeline ready to come to the CORSIA market over the rest of this year.

Alexandra: I mean 8 million out of 35 million. So since Guyana is about 25 million of that, so it means you've insured like 80% of insurance route supplied to market, which is a very large chunk. And it's good to hear that you've got more in the pipeline as well. So can you give us a flavor of how does your supply pipeline look for Phase 1? How many credits from what regions and across what methods and projects are you going to supply?

Chris: Good question. I was looking this morning actually, I think we've got about 45 million credits that are in our pipeline, and we consider them in our pipeline if they have a signed LOA or an LOA in draft form. These are project developers that we've spoken to, and they are in the process of engagement with country representatives around getting the necessary documentations in place. I should say that there will be lots of other developers and projects that we haven't spoken to. So I think there's a conservative estimate from our side, lots of existing pipeline.

There's also lots of project developers that are considering, i.e. they are right at the start of the process of either financing a project, getting a project funded, kicking a project, or expanding the project into other countries. But we'll be right at the start of the conversation and recognizing that we're dealing with host countries here where the pieces, the LOA really is the end of a fairly substantial piece of work that a country must have done. They need to have done their own GHG emission calculations. They may have had to produce an initial report. They may have had to actually put the investment in place to both do their calculations, but also think about the projections over their own NDC, and how they are preparing their own commitments to allow then a project developer to export credits to courses. So a lot of work needs to have been done to get to a point where an LOA needs to be issued. Final question then was sort of like types of projects and regions.

Alexandra: Yeah, across what methods and projects?

Chris: Unsurprising to anyone who listen to the podcast or reading the literature you put out. Their main areas are cooking, water filtration, purification, methane detection, gas detection. Some nature-based are starting to come through as well as we're starting to see other standard bodies start to get approved where there will be other methodologies, but it's really in those three main buckets and predominantly because of those project types in Africa or Southeast Asia, they are most advanced, they are most committed, and also I think see the opportunity for inwards finance from CORSIA to help fuel fund investment into host countries.

Alexandra: So I can't help but notice across these three project types that you've mentioned, two of them have essentially almost been excluded or could be excluded by the European Commission if a draft proposal that it put out to its expert group on climate policy last week were to take part in the implementing act. So the EU, for our listeners, could adopt additional requirements on eligible CORSIA credits that would severely restrict supply because it would exclude high forest, low deforestation credits, and credits from many kinds of household devices projects that use some fraction of non-renewable biomass values that they deemed to be inflated. So I'm wondering how does this affect you, Chris, as an insurer? Would any airlines that have bought credits from the, say, IATA, Guyana auctions, could now they receive a unit replacement or financial compensation?

Chris: The news out last week, I think, just to...I mean, could be incredibly damaging, I think to the available supply. I mean, there's no getting away from the fact that, yes, project developers could then go through a process of recalculation, rebaseline on their fNRB, and then could then still provide supply, but it's going to be at a fraction to the credits that are either coming to the market today, or planning to come to market in the future.

I think it's one to watch. I think it could be incredibly damaging for the long term. I don't see, of course, because we are we are right in the foothills of a market building exercise here. The issue that existed has been around supply airlines haven't bought, haven't procured because there's been one project up until October last year. Now as we start to see portfolios of credits being able to come to market, opportunities for diversification, opportunities for airlines to procure credits local to the routes that they're planning, you know, it's a really exciting place where, okay, this compliance, quasi-compliance market that has been in the development for many years is now at the cusp of actually starting to deliver on its promise.

For the EU then to confirm what the draft form was last week, I think could be a serious setback for CORSIA. And I would hypothesize probably could kill it if that was the case, that the supply needs to come and the supply is coming from those project types you've just described.

Specific to the question on if an airline had bought a credit, maybe just a clarification point on how the insurance works. Really the insurance responds to a demand by the standards body to the developer. So we think about the cascade of responsibility. ICAO has said to the carbon market standards, if there's a double accounting risk, you need to resolve it so that the airlines can buy and retire confidently, and not have to deal with any of these issues. As they've cascaded it down to the standards bodies, they then cascaded this risk down to developers. So really the risk of double accounting sits with the developer.

If a corresponding adjustment is not made, the credits don't appear in a BTR, the standards body would look to the developer to replace those credits with other CORSIA eligible credits. And at that point they can make a claim. They would make a claim on our policy, and then be able to replace using the funds that we provide. So that's the sort of structural mechanism that's been put in place. And therefore, if from an eligibility standpoint, large volumes of these credits were suddenly made I guess irrelevant or ineligible, our policy wouldn't pay out because the trigger is the double accounting risk that the standards body has put into place.

Alexandra: That makes sense. So the airline would not be able to receive any unit replacement or financial compensation in this case. Although, I've just realized that the Guyana credits from J-REDD were actually not even insurance backed. The CA had been applied to them. So this would be strictly from an eligibility standpoint rather than, like you said, host country pulling back on its commitment kind of angle.

Chris: Exactly. And the airlines, just again to be clear, the airlines would at no point receive any compensation. They bought credits in the view that they are eligible. If an issue exists after the event, after purchasing and/or retiring, the carbon market remittances it by getting those credits to be replaced. So the environmental integrity of this credit has been used for a compliance purpose exported out of the country is made good by another replacement unit basically. So, yeah.

Alexandra: To go on to another geopolitical event that could impact CORSIA and CORSIA supply, because there's so many of them nowadays, what impact could the war in Iran have on insurance in the region? You know, even if the war ends soon, could that region essentially be blacklisted from CORSIA Insurance? Could credits still face difficulty coming to market?

Chris: They could if the project resides in the region. So I think if we look at the supply question, would credits be eligible? Would the insurance industry be happy to take some of the political risk? No, they wouldn't. But there's, as we know it, limited to no projects that are currently going through that process within the region. So I think on the supply side, it's a limited issue. I think the issue more exists on the demand side of the equation.

And how is the current conflict impacting airlines? I think it's in two ways. One, you know, reduced airline travel will mean that actually the number of units that will need to be retired, baselined against this year will be lower. Now, it's an issue for down the line. And the second more fundamental issue is the price of jet fuel. The price of jet fuel climbs, the strain on airlines' bottom line balance sheet is going to increase. And therefore the challenge for them to meet their CORSIA obligations is raised.

So where might we see lobbying activity by the airlines in lieu of the conflict? You could potentially see some issues come through. However, I was on a panel with the ICAO representative, I asked her [inaudible 00:14:03] representative a couple of weeks ago and there was no news. They are still very much committed to adhering to the compliance obligations that have been set forward by January 28. So I think probably one to watch, but on the supply side, limited impact on the demand, I think maybe some marginal impact.

Alexandra: I think this will also depend on how the conflict plays out and, you know, if flight routes will...how long they will be altered for, and how this will impact airline aviation emissions as well. So further on the insurance front, you know, if more and more developers are coming to market for insurance ahead of the BTR deadline in December '26, what is the capacity for insurance looking like? Could we face an insurance bottleneck if more and more developers are opting for this route?

Chris: And I've spoken for the last 18 months as the standards bodies have been going through the approval process that one of the issues that's less talked about is that insurance capacity availability. So, you know, we see ourselves as a catalyst for the market bringing ourselves, and now there are a couple of competitors also that have been approved, bringing capacity in to ride those risks. I think that, you know, for 150 million credits for the first phase, even at a $20 limit, if all of them needed to be insured, there would be a serious constraint.

I think that starts to get mitigated as this market builds. What the insurance industry is looking for is confidence in a market. And as this market builds, as the industry starts to see a viable source of premium flow, as they see a viable way of pricing the risk, which we're starting to model improve, then the capacity will flow. And I think it's just the case of, well, what might be the missing, over what timeline might that exist? Yeah, well, December '26 is an important point for us all as well, because clearly that's the first time we will see whether a double counting risk materializes and a claim needs to be paid.

Alexandra: So what would happen in December '26 if a lot of the countries either delay their BTRs or simply step back on their commitments? And what would it take for it to be a problem for insurance providers?

Chris: The process for both standards bodies really is that a grace period has been provided for developers to remedy. I think that's important.

Alexandra: To remedy the relation with the host country or... I see.

Chris: Exactly. So I think the two...there's either malfeasance, so sort of deliberate act by the country not to report the credits of their BTR, and I think more likely is the administrative era of issues of reporting. So sensibly the standards bodies have put in place a grace period. So we get to December '26, you expect to see the credits in the BTR. They're not in there. Work with the developer. We're working with them ahead of that as well to go, okay, can we make sure that the host country publishes, you know, maybe they annex after that, or they republish the BTR. So there's a grace period. If however, after that grace period, those credits have still not appeared, then a claim will come. We and our compatriots in the insurance industry will have to pay claims so that developers can replace those credits.

Alexandra: Right. And how long would this grace period last for?

Chris: Oh, that's a good question. I think it varies. I know it varies for Verra and Gold Standard. I want to say Gold Standard is 6 months and Verra is 12 months, but don't quote me on that. It's a period of time for each.

Alexandra: So even as we come closer to January 28th, surrender deadline, there could still be more and more supply anticipated coming to market. So it doesn't all end in December 26th.

Chris: It doesn't. And indeed, importantly, any credits that are getting issued in December...sorry, in '27, as well as actually credits that are in Q4 this year expected to be issued, the only route that they will likely have is insurance.

Alexandra: Yeah, because the next BTR is in December '28, right?

Chris: Exactly, which will have gone past the initial retirement requirements for January '28 for the airline. So, yeah, that credit volume and that supply, the only route they'll be able to go down is procuring insurance.

Alexandra: Of course, yeah. So that would be an interesting one to watch in December '26, of course. And I just have one final question as we come to the end of this podcast, and again, forward-looking. Are you seeing any interest for phase two yet? Any developers inquiring into...is your policy even eligible for phase two?

Chris: The policy is set up to be eligible for phase two. We've not had any conversations. I think everyone is very much focused in this initial market building phase. I would expect the standards bodies, we're spending a lot of time with them to also iterate their rules. They were very clear as they put guidelines out for this first phase that this was an initial stage and I would expect iterations to that. What that looks like in terms of things like price setting, or how the value of the stated value for credits is calculated, or who can ensure the credits. I think there'll be much more conversation before we even get to phase two around how that works. Obviously there are important dates in the calendar, the publication, ETS and the continued outside eligibility for CORSIA credits. I think this year will be important dates that we're watching to see how the market shapes out over the next 12, 18 months.

Alexandra: And I think everyone will be watching these key points that we've discussed today. Thank you so much for taking part in this episode.