London’s Parhelion Underwriting Is First to Insure California Carbon Credits

May 22, 2013 by Lynn Doan

Parhelion Underwriting Ltd. became the first insurer to offer a policy to protect companies from the invalidation of carbon offset credits sold as part of California’s cap-and-trade program.

Parhelion, based in London, will sell insurance for permits originally issued by the Climate Action Reserve, an independent registry in Los Angeles, the companies said in an e-mailed statement today. California holds the buyer responsible for the costs of a project that’s invalidated because it didn’t produce the emissions cuts that it was originally credited for.

Companies regulated by California’s carbon program, including BP Plc, Chevron Corp. and Exxon Mobil Corp., can use the credits to cover as much as 8 percent of their emissions in the state. Each certificate is for the release of a metric ton of carbon offset by emissions-reducing projects such as urban forestry and systems removing methane from manure.

“We hope to see, or we’re confident we’ll see, that those potential large buyers of offsets will now be able to participate in the offset market,” Parhelion Chief Executive Officer Julian Richardson said on a telephone call with reporters today.

Buyer Liability

Groups including the Western States Petroleum Association, which represents oil refiners in California, have warned that state regulations holding credit buyers responsible for invalidation could cripple the offset credits market.

“In the long term, this will result in a discount for offsets in the market, but buyer liability could also hinder growth of a strong and liquid market for offsets,” the Sacramento-based group said in Jan. 24 comments to the California Energy commission.

Contracts based on California offset credits were unchanged at $11.50 a ton, according to data compiled by environmental broker Evolution Markets, based in White Plains, New York. “Golden” offsets, which come with a seller guarantee to replace any invalidated credits, are down 5.2 percent from this year’s peak of $12.13 a ton on March 6, Evolution data showed.

California’s carbon cap-and-trade system is the largest of its kind in the U.S. and the second-biggest carbon market in the world, behind the European Union’s. Under the state’s program, emissions from power generators, oil refineries and other industrial plants, are capped and cut gradually to reduce emissions to 1990 levels by 2020.

Three Phases

Companies are required to surrender carbon allowances, each permitting the release of a metric ton of carbon, to cover their emissions in three phases, with the first running from 2013 through 2014, the second from 2015 through 2017 and the third from 2018 through 2020.

The California Air Resources Board is issuing allowances through a combination of free allocations and quarterly auctions and plans to shrink the total available to achieve emissions reductions. Those companies with more than they need can sell or trade the excess.

As an alternative to using allowances, companies can buy offset credits to cover as much as 8 percent of their emissions. The credits are generated through projects that have been verified by the air board to curb emissions.

Emissions Reductions

“We designed the cap-and-trade program to ensure the integrity of the emission reductions and had hoped and expected that the private insurance market would provide a solution to backstop our right to invalidate improper offsets,” Mary Nichols, the board’s chairwoman, said in the statement. “We are very happy to see that such a product is now available.”

Nichols said during a conference in San Francisco April 18 that the air board expects to be issuing the first carbon offsets as part of the state’s carbon program “soon,” declining to specify a date.

Parhelion’s insurance helps the Climate Action Reserve offer “a level of assurance and quality control” to its account holders, Gary Gero, president of the reserve, said in the call with reporters.

Futures based on California carbon allowances for 2013 were unchanged at $14.50 a ton, according to data compiled by CME Group Inc. The spread between allowances and credits has narrowed 33 percent since the beginning of February.

Editors: Margot Habiby, Richard Stubbe

©2013 Bloomberg News