Carbon Trading Liability

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The differences in the CO2e market and physical commodities are significant. First, the market is, relatively speaking, immature when compared to other commodities. Second, while similar to physical commodities in the concept that the market is only so large, the total market volume for CO2e is specifically and deliberately planned to be reduced and constrained over time. Together, we feel these aspects of the CO2e market could lead to price volatility and delivery risk that some market participants will want to transfer. This concept is in discussion with a London Syndicate, Archer (Goldman Sachs), at Lloyd’s of London as the underwriter of this coverage. Some aspects of the insurance protection are:

  • Coverage will be structured to provide for financially firm trading of CO2e. Coverage will apply to the financial exposure arising from CO2e only – not physical damage, political risk, etc. The policy will attach regardless of what insurer is writing the other project risks. This will allow the coverage to be used in support of a specific trade involving environmental attributes. Insurance will protect the difference between a predetermined strike price and the market cost of replacement offsets or allowances.
  • Coverage can be structured to cover the failure to deliver offsets and address the difference between the contracted price for the offset and the market price for the offset prior to the time of delivery failure. Physical damage is not needed – the facility must have an unplanned outage or de-rate creating a shortfall in the production of offsets. Policy language limits “unplanned events” to those involving equipment or operations at the facility.
  • Coverage can also be structured to address the unplanned or unbudgeted demand for allowances beyond the forecast or budget. This exposure would likely result from market or system demand calling for unplanned operation and consequently, extra expense for additional CO2e allowances. Examples of event triggers are unusual weather patterns, or the unplanned outage at another facility that leads to the unplanned dispatch of the covered facility in addition to the price of CO2e being.

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