Trees to fight warming? Insurers ponder risks
Paying landowners to let forests grow is promoted by the United
Nations as a viable way to fight global warming, but experts first have
to puzzle out how to insure trees against going up in smoke.
Under U.N. plans, owners will get carbon credits to slow the
destruction of tropical forests. But fires caused by lightning - along
with other hazards such as storms, insects and illegal logging - are a
big risk for insurers and investors.
A new U.N. climate treaty to include granting forest owners tradeable
carbon credits will be discussed by about 190 nations in Poznan, Poland,
from Dec. 1-12. The credits could be worth billions of dollars for those
agreeing not to cut down trees.
Burning forests to clear land for farming releases about a fifth of
all the greenhouse gases blamed for causing climate change. If trees
die, the carbon stored as they grew would be released, rendering carbon
credits worthless.
"From a formal point of view insurance shouldn't be a problem," said
Wojciech Galinsky, who works on U.N. projects to promote green
investment in developing countries. "If Tina Turner's legs can be
insured, why not forests?"
But there is wide disagreement on how to assess the risks under the
new U.N. treaty, due to be agreed by end-2009.
Forest owners want full access to credits as fast as possible. But
insurers suggest that half be retained in buffer funds in case forests
vanish in a few decades. If a forest disappeared, the credits in the
funds would go to them.
"How much land-managers will see of the price is what the excitement
is about," said Frances Seymour, head of the Center for International
Forestry Research in Indonesia.
Placing a value on forests could give developing nations in Africa,
Latin America and Asia a big incentive to do more to slow rising
greenhouse gas emissions. But the economic slowdown may make rich
nations reluctant to take part.
One difficulty is that protecting a forest in one area of the Amazon
or the Congo can lead to more logging or burning of forests to clear
farmland elsewhere.
Demand for insurance to cover such forestry projects is not currently
very high, said Joachim Herbold, senior underwriter at Munich Re's
department for agricultural insurance: "We expect a rising demand in
future," he added.
The market could be huge. About 7.3 million hectares (18.04 million
acres) of forest - an area the size of Panama - vanishes every year,
according to U.N. data.
A European Union report last month said it would cost 15-25 billion
euros a year from now to halve deforestation rates by 2020, mainly by
paying people to safeguard existing trees.
Risks that forests will not be standing in a few decades mean that
forest carbon credits trade for just $2 to $3 a tonne on voluntary
markets, said to Phil Cottle, head of London-based ForestRe which
specialises in forestry insurance.
That is a fraction of European Union market prices of about 16 euros
($20.20) a tonne for industrial emissions.
Investors will only be interested in forest carbon if it is
interchangeable with industrial credits. If a factory or power plant
owner in Europe needs to buy carbon credits to offset domestic
emissions, forestry carbon has to represent real trees.
"If you can get insurance in place, it will help break down the
boundaries" that make investors wary of forest carbon compared with
other credits, Cottle said. He also suggested Europe could set up a fund
of 100 million pounds ($150.5 million) to back up private-sector
insurers.
An example of how such a scheme could work has come from the
Voluntary Carbon Standard (VCS), an organisation which earlier this
month launched forestry trading rules to unlock investments by holding
back perhaps half of all credits in a buffer fund.
Conserving trees in an area with an annual deforestation rate of,
say, 2 percent would lock up 4 tonnes of carbon dioxide a year per
hectare, on the assumption that a forest stores 200 tonnes of carbon
dioxide.
Half of that might be set aside in the buffer fund, leaving 2 tonnes
of tradeable credits.
Reuters
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