How to insure a tree against going up in smoke

How to insure a tree against going up in smoke

29 November 2008

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Global — 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 tradable 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.

Rising Demand

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 US$2 to US$3 a ton on voluntary markets, said to Phil Cottle, head of London-based ForestRe which specializes in forestry insurance.

That is a fraction of European Union market prices of about 16 euros (US$20.20) a ton 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 (US$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 organization 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 tons of carbon dioxide a year per hectare, on the assumption that a forest stores 200 tons of carbon dioxide.

Half of that might be set aside in the buffer fund, leaving 2 tons of tradable credits.

The U.N.’s focus so far is on protecting tropical forests. But owners of forests from Siberia to Scandinavia are interested in carbon credits.

Forestry cover

Insurance companies have long offered forestry cover – more easily calculated than carbon insurance because it is based on the value of wood, for instance as a building material, rather than the value of trees left to grow.

In Norway, Skogbrand offers insurance against fires, storms and pests for up to about 1 Norwegian crown (US$0.14) per 1,000 sq meters a year. In case of catastrophe, it would pay out 1,000 to 3,000 crowns per 1,000 sq meters.

The only reforestation project approved so far under an existing U.N. scheme is in the Pearl River basin of south China.

Under the plan, plantations will soak up carbon and the forest’s carbon store will be measured every five years to allocate temporary tradable credits. If the forest burns down five years later, no future credits will be issued.

That project does not include insurance, because southern China is wet. “There are regions in which the probability of forest fire is negligible,” said Galinsky, of the U.N. Climate Change Secretariat in Bonn, Germany.

But global warming may affect forests and increase the likelihood of fires. A report by the U.N. Climate Panel last year projected forecast “gradual replacement of tropical forest by savannah in eastern Amazonia” by 2050.

“As the climate changes, there is a greater risk of forest fires, due to hotter temperatures,” Seymour at CIFOR said.

ForestRe’s Cottle said insurers were likely to issue only short-term contracts because of the difficulty of predicting the climate over time.

“Unfortunately, despite what everybody wants, we won’t be getting into 50-year contracts. It will be five rolling years … perhaps rising to 10,” he said.


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