Insuring Pollution?

Business insurance can mitigate almost every risk faced by a business. What about pollution? Sure a business can insure against the effects of pollution with the proper policy, but can a business insure its "right" to pollute?

Well according to a report I read today, businesses can insure their "right" to pollute. Now, I should note that my comments here are a bit tongue in cheek. What I am talking about is a very innovative insurance product that allows a workable international market in carbon credits. Carbon credits are a currency of greenhouse gas emission rights created by the Kyoto protocol. Companies that create projects that generate a preset level of less greenhouse gasses are issued credits that can be sold to companies with projects creating more greenhouse gasses. The more polluting companies can use the credits to comply with emission limitations in their own countries.

One potential problem is that the companies and projects encouraged to produce cleaner projects are in developing countries and there is risk that the credits will never be delivered to the more established (but, dirtier) firms. Well, with some creative underwriting, some insurers are insuring the emissions credits in order limit the risk inherent in the transaction.

For example, Zurich Financial Services Surety, Credit and Political Risk group today announced it is providing trade credit insurance for a hydroelectric power plant in Chile. The hydroelectric plant project will generate about 50,000 Credit Emissions Reduction credits (CER's) annually from 2008 to 2012. CQuest Capital will provide funding for the project in return for delivery of the future CERs. Zurich will provide a trade credit insurance policy to insure against the risk of non-payment following non-delivery of the CERs for any reason, such as political upheaval or a natural disaster.

This allows a cleaner project to bring needed electrical power to Chile, while encouraging trade in CERs. CQuest will market the CERs to other firms in need of credits to meet emissions goals. In effect, allowing some other plant the "right" to be a bit more dirty than its target amount.