In an uncertain market, voluntary carbon offset projects are exploring new security with political risk insurance. Projects in Cambodia and Nicaragua have successfully obtained risk insurance from the Overseas Private Investment Corporation (OPIC) and the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA) respectively. In addition to mitigating risk, project developer EcoPlanet Bamboo also saw lowered interest rates to access capital from political risk insurance.
This article was originally published in the V-Carbon newsletter. Click here to read the original.
6 September 2013 | While use of insurance in the carbon offset space to cover offset non-delivery and price risks is not new, it is only fairly recently that insurers have been expanding their scope to also cover political risk for carbon offset projects – with early movers largely representing projects in the voluntary space.
Beyond its work backing Terra Global Capital’s (TGC) investment in the Oddar Meanchey REDD Project in Cambodia – in what was the first instance of political risk insurance being used for a forest carbon project – the Overseas Private Investment Corporation (OPIC) is looking to support other REDD and sustainable forest management projects, including new prospects in Colombia, Brazil, and Indonesia. Forestry aside, OPIC has also insured solar and wind carbon offset projects as part of its broader focus on renewable resources.
The World Bank Group’s Multilateral Investment Guarantee Agency (MIGA) also offers political risk insurance,
“Once we had political risk insurance, you could take the risk argument away because the cost of capital would come down,” says Troy Wiseman, CEO and Co-Founder of EPB, noting that he was initially attracted to MIGA’s political risk coverage due to its ability to lower the interest rate at which EPB could access capital. “It came down for us by about 40%.”
As for the insurance itself, Wiseman notes that having MIGA on the contract reduces the risk that expropriation even occurs in the first place. MIGA underwriter Gloriana Echeverria says that’s partly because the Nicaraguan government is a shareholder in MIGA, which means it’s literally invested in its performance.
“This reduces the chance of expropriation because the government is unlikely to interfere with a project that has MIGA – and therefore the World Bank – as its partner,” she says. “We’ve gotten involved in over 100 cases where the investor has a certain problem with the government interfering. MIGA can mediate between the government and the investor to arrive at a solution that will make both parties happy.”
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